Avoid the cost trap: get moving on decarbonisation

High time for trade and industry to make the switch to renewables
Dekarbonisierung jetzt starten

Companies are also required to step up, before things get really expensive. After all, the community of nations agreed in the 1997 Kyoto Protocol to put a price on greenhouse gas emissions and implement emissions trading. The Paris Agreement then followed in 2015, with a commitment to limit the rise in global temperature to well below two degrees of the pre-industrial level. The aim is to avoid costs. In 2006 already, former World Bank Chief Economist Nicholas Stern advocated spending one percent of global GDP on combating climate change. He reckoned the alternative would be far more expensive, quoting figures of five to 20 percent of the respective GDP per annum. No wonder, then, that countries are stepping up their actions against the climate-destroying emissions and asking polluters to pay. This is now having an impact on companies’ day-to-day business – and the effect is growing each year.

Illustration of ways to reduce CO2

Funding is becoming more expensive

This is no longer simply a matter of environmental protection for companies – their very existence is actually at stake. “Many businesses have not yet realised this, but they’re going to find it much more costly if they don’t decarbonise”, says Florian Huber, partner at consultancy firm EY Parthenon and co-founder of EYCarbon. This is already evident today when raising capital as well as when seeking to borrow money or issue new shares. Huber has noted that companies that are not moving swiftly on decarbonisation are having to pay a premium of one to two percentage points on loans: “This gap will grow in the years ahead until eventually they simply won’t get credit.” After all, banks have to put aside more risk capital for non-green loans. In Huber’s opinion, a company that chooses not to do anything is making a kamikaze move.

Shift away from fossil fuels

However, decarbonisation is a misleading term. According to Andreas Kuhlmann, CEO of the German Energy Agency (dena), decarbonisation does not mean moving away entirely from carbon: “In many cases, there are no alternatives to using carbon in production.” Around 15 percent of crude oil in Germany is used as a material and not to produce energy. The German chemical industry alone currently needs around 17 million tonnes of carbon a year. Therefore, Kuhlmann prefers to talk about defossilisation, the move away from fossil sources for carbon, both in production and energy generation.

Need for significant investment

The transition will be costly. KfW Development Bank estimates around five billion euros of investment will be needed in Germany. Jürgen Landgrebe, Head of the Climate Protection, Energy and Emissions Trading division at the German Environment Agency (UBA), warns that failure to decarbonise would be considerably more expensive: “The carbon price should already be EUR 195 per tonne today if we were taking into account the damage occurring right now as a result of climate change.” Society is still carrying the cost of the difference from the actual price. The intention is to pass on more and more of these costs to the polluters in the coming years.

Illustration compass with focus on decarbonization

The path to decarbonised business

Consultant Florian Huber has identified six decarbonisation approaches, plus one interim solution. To decarbonise properly, every step needs to be tackled.

1. Greater efficiency and effectiveness: 

Huber refers to this as “classic optimisation”. In other words, the things businesses should be doing all the time in any case. For example, a temperature of 60 degrees may still be sufficient in production under certain circumstances instead of the 80 degrees used to date. But it’s also about changing behaviour within companies. Less flying, more working from home.

2. Power and heat: 

When it comes to a company’s carbon footprint, switching to electricity from renewable sources is a small step with a big effect. But Stefan M. Büttner, Director of Global Strategy and Impact at the Institute for Energy Efficiency in Production (EEP) at the University of Stuttgart, warns: “Industry taking all of the green power would represent a zero-sum game for society. After all, the average electricity mix for all other consumers would then be fully based on fossil fuels.”

Companies that continue to obtain conventional power or heat have another option they could consider. “By buying renewable energy certificates, they can become carbon-neutral on paper”, explained Huber.

The third and most effective approach is in-house generation of electricity from renewable sources.

The topic of heating is often overlooked compared with power. Büttner has observed, “If you consider the fact that almost two-thirds of industrial final energy consumption is needed for process heat, far too little has been done to address this potential to date and the valuable waste heat produced is hardly being used.”

3. Technological innovation: 

Companies can often make changes to workflow processes. Switching to advanced technology reduces emissions. “In Germany, process emissions account for around one-third of total emissions”, said Büttner, by way of example.

4. Business model innovation: 

Countless business models could be changed to ensure fewer emissions are produced along the value chain. “This can give rise to many creative ideas, such as renting out Christmas decorations each year”, said Huber.

5. Circular, not linear: 

More and more products are simply being made available instead of being sold. “Companies are just selling the added value through on-demand and as-a-service models”, explained Huber.

6. Reduce in-house value creation and buy green: 

According to Huber, the principle is simple: “I buy products from third parties and demand that those suppliers have green practices in place.” Suppliers to the automotive and chemical industries are already very familiar with this approach.

Plus 1 - offsetting: 

If complete decarbonisation is unachievable, there is still the option of purchasing certificates coupled to projects that absorb CO2 or other greenhouse gases. But the capacities are finite. Huber makes clear: “A normal company has to get down to zero.” Moreover, the trend in the price of emission allowances being traded already shows today that this strategy can be an expensive one.

Act fast, take advantage of funding

The transition will be expensive for companies. But there are often subsidies available to cover part of the cost – much more than half in some cases. The European Union has launched several programmes for this. Anyone interested can check the Enterprise Europe Network to find an initial point of contact. Countries, regions and local authorities also frequently support industrial and commercial enterprises. Business associations, consultants and – in Germany – chambers of industry and commerce can help to optimise funding as well.

It’s important to begin addressing this now and take advantage of the first-mover effect. After all, the later a company starts to tackle decarbonisation, the greater the risk of hitting a roadblock when it comes to one important factor – as Huber states, “There simply isn’t the number of engineers, cranes and workers that we need for this transition.”


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