- A company will need to know their carbon footprint.
- Understanding GHG protocols defining the accounting for carbon are helpful.
- Determine how to best position your company to benefit from the transformation to a decarbonized steel industry.
Globally momentum is building to address CO2 emissions in an industry that accounts for roughly 7% of global green house gas emissions. The original Paris Agreement in 2015 stipulated a mid century limit to global temperature increase of 2 deg C and in the years to follow focus has become 1.5 deg C. 2022 and the coming years will be transformational for the steel and metals industry. Now is the time to consider how you want to position your company to either take advantage of the opportunity, or at a minimum, not fall behind.
SO, WHERE DO YOU START?
It should be pretty obvious you need to know your carbon footprint. Or more specially, the GHG emissions generated from the commerce of your business. Only then can you determine how best to address.
The Greenhouse Gas (GHG) Protocol helps to establish global standards to measure and manage greenhouse gas emissions from private and public sector operations, value chains and mitigation actions. The Protocols arose in late 1990s when World Resources Institute (WRI) and World Business Council for Sustainable Development (WBCSD) recognized the need for an international standard for corporate GHG accounting and reporting. Large corporate partners such as BP and General Motors, in conjunction with WRI, subsequently identified an action agenda that included the need for standardized measurement of GHG emissions.
Regardless of your process or place in the supply chain GHG Protocol classifies emissions as follows:
GHG emissions, while scope 3 emissions quantification is not required. And yet, scope 3 emissions can often represent the majority of an organization’s GHG emissions. This is where we will see considerable debate amongst primary (integrated) steel producers and secondary (EAF based) steel producers. So for example, a fully integrated steel producer has scope 1 emissions through smelting their own ore and yet an EAF producer may not count scope 3 emissions represented by their purchased pig iron and DRI. One can expect that
SCOPE 1 EMISSIONS
Scope 1 emissions are those emissions from directly owned or controlled sources. These are going be the emissions from your process. They could also be the emissions from your company travel our controlled outbound freight as examples. In your own business you will first want to address efficiency in your operation as best possible to reduce these emissions. Scope 1 emissions can then be covered by carbon offsets. You may find carbon offsets to be more economical than capital equipment investment as low hanging fruit so to speak still exists in the developing world.
SCOPE 2 EMISSIONS
Scope 2 emissions are those emissions resulting from purchased electricity, heating and cooling, etc. If you are powered by your very own wind farm or solar panels, you are in good shape. But if you tap in to an existing, operating grid supplied by a wind farm, that brings up the concept of leakage. We don’t need to go there right now, but suffice it to say it might not count against your carbon emissions. Renewable Energy Credits (RECs) and Virtual Power Purchase Agreements (VPPAs) are examples used to cover scope 2 emissions.
SCOPE 3 EMISSIONS
Scope 3 emissions are where things get interesting. This is a company’s indirect supply chain emissions both upstream and downstream. The emissions created in the production of your purchased raw materials are scope 3 emissions. According to the GHG Protocols, all organizations should quantify scope 1 and 2 emissions when reporting and disclosing
investors will increasingly expect scope 3 emissions to be addressed as part of expectations around sustainability. Scope 3 emissions ultimately need to be accounted for to ensure industry emission targets are met.
Of interest in understanding scope 1 emissions is that once these are reduced or offset, they are considered reduced and offset throughout the supply chain. In other words, reducing your scope 1 emissions means the reduction of scope 3 emissions for your customer. In the metals industry this becomes relevant for service centers, processors and end users. Do you simply purchase your steel (or aluminum and other metals) already neutral or offset and maintain a distinct inventory? Or will it be better to offset specific products in inventory as demand requires? This is a critical component of determining how you will want to position your company.
Further, it is critical to understand when determining the return on capital potentially being invested, is there a component for understanding carbon liability? Ultimately there will be a price for carbon that is set either in the voluntary markets or in the compliance market via regulations. RECs too will be setting a price for carbon associated with energy consumption. The higher Capex associated with a green project could be more than offset when considering cost of carbon at $35/tonne or even higher in the future. This concept becomes clear when considering integrated steel makers building new EAFs vs. relining old blast furnaces.
It’s a pretty safe assumption that in the years to come participants in the industry will have investors wanting to understand sustainability and customers specifying carbon neutral steel. Start today with understanding your company’s potential liability and then your options to address. Or even better, opportunities to position your company to take advantage of of this transformation to a carbon neutral world.
