5.1 Climate change and greenhouse gas emissions
6 min read•july 30, 2024
Climate change and greenhouse gas emissions are critical environmental issues facing businesses today. Companies must understand the science behind climate change, its impacts on ecosystems and society, and how to measure and report their own emissions.
Effective greenhouse gas accounting and reduction strategies are essential for organizations to mitigate their climate impact. This includes setting science-based targets, implementing emission reduction measures, and assessing climate-related risks and opportunities for the business.
Climate Change Science and Impacts
Earth's Climate System
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- The Earth's climate is determined by a complex system of interactions between the atmosphere, oceans, land surface, ice, and living organisms, driven primarily by energy from the sun
- Greenhouse gases, such as (CO2), (CH4), (N2O), and water vapor, trap heat in the Earth's atmosphere, leading to a warming effect known as the greenhouse effect
- Anthropogenic activities, such as burning fossil fuels (coal, oil, natural gas), deforestation, and industrial processes (cement production, chemical manufacturing), have significantly increased the concentration of greenhouse gases in the atmosphere since the Industrial Revolution
- The increase in greenhouse gas concentrations has led to a rise in global average temperatures, with the last decade being the warmest on record
Impacts on Ecosystems and Society
- Climate change impacts ecosystems by altering species distributions, phenology, and interactions, leading to changes in biodiversity and ecosystem functioning
- Rising temperatures and changing precipitation patterns can cause shifts in the geographic ranges of species (poleward and upward in elevation), leading to the extinction of some species (polar bears, coral reefs) and the expansion of others (invasive species, disease vectors)
- Changes in the timing of seasonal events, such as flowering (earlier spring blooms), migration (altered bird migration patterns), and breeding (mismatched timing with food availability), can disrupt the synchrony between species and their food sources or pollinators
- Climate change has significant societal impacts, including increased frequency and intensity of extreme weather events, sea-level rise, and threats to food security and water availability
- Extreme weather events, such as heatwaves (Europe 2003, Russia 2010), droughts (California 2011-2017, Australia 2019-2020), and floods (Pakistan 2010, Germany 2021), can cause loss of life, damage to infrastructure, and displacement of communities
- Sea-level rise threatens coastal communities and infrastructure (Miami, Venice, Maldives), leading to increased flooding, erosion, and saltwater intrusion into freshwater resources
- The economic impacts of climate change include costs associated with adaptation and mitigation measures, as well as losses due to reduced agricultural productivity (crop failures, livestock losses), damaged infrastructure (roads, bridges, buildings), and disrupted supply chains (transportation, energy, manufacturing)
Greenhouse Gas Emissions Reporting
Greenhouse Gas Accounting Standards
- Greenhouse gas accounting involves quantifying and reporting an organization's emissions of CO2, CH4, N2O, and other greenhouse gases
- The Greenhouse Gas Protocol () is the most widely used international accounting tool for understanding, quantifying, and managing greenhouse gas emissions
- The GHG Protocol categorizes emissions into three scopes:
- Scope 1: Direct emissions from owned or controlled sources, such as fuel combustion in company vehicles (fleet) or facilities (boilers, furnaces)
- Scope 2: Indirect emissions from the generation of purchased electricity, steam, heating, and cooling consumed by the organization
- Scope 3: All other indirect emissions that occur in the value chain of the reporting company, including both upstream (suppliers, business travel) and downstream (product use, waste disposal) emissions
- Organizations should follow the principles of relevance, completeness, consistency, transparency, and accuracy when calculating and reporting their greenhouse gas emissions
Calculation and Reporting Methods
- To calculate greenhouse gas emissions, organizations must collect activity data (fuel consumption, electricity usage) and apply relevant emission factors to convert the activity data into CO2-equivalent emissions
- Emission factors are derived from scientific studies and represent the amount of a specific greenhouse gas emitted per unit of activity data (kg CO2 per liter of gasoline, kg CH4 per kWh of electricity)
- Organizations can use various tools and resources to assist with greenhouse gas calculations, such as the GHG Protocol calculation tools, national emission factor databases (US EPA, UK DEFRA), and life cycle assessment (LCA) databases (ecoinvent, GaBi)
- Reporting of greenhouse gas emissions should be done in accordance with recognized standards, such as the GHG Protocol Corporate Standard or ISO 14064-1, to ensure comparability and credibility
- Organizations should disclose their greenhouse gas emissions through corporate sustainability reports (CSR reports, ESG reports), carbon disclosure platforms (CDP), and regulatory reporting frameworks (EU Non-Financial Reporting Directive, US SEC climate risk disclosure)
Greenhouse Gas Reduction Strategies
Emission Reduction Measures
- Greenhouse gas emission reduction strategies can be categorized into four main areas: energy efficiency, renewable energy, low-carbon transportation, and carbon sequestration
- Energy efficiency measures aim to reduce the amount of energy required to perform a given task, such as improving insulation in buildings (double-glazed windows, green roofs), using energy-efficient appliances and equipment (LED lighting, Energy Star products), and implementing energy management systems (ISO 50001)
- Renewable energy sources, such as solar (photovoltaic panels, concentrated solar power), wind (onshore and offshore wind turbines), and hydropower (dams, run-of-river), can replace fossil fuel-based energy sources and reduce greenhouse gas emissions associated with electricity generation
- Low-carbon transportation strategies include the adoption of electric vehicles (battery electric, plug-in hybrid), the use of biofuels (ethanol, biodiesel), and the promotion of public transportation (buses, trains) and active mobility (cycling, walking)
- Carbon sequestration involves the capture and storage of CO2 from the atmosphere, either through natural processes (reforestation, soil carbon sequestration) or technological solutions (carbon capture and storage, direct air capture)
Science-Based Targets
- Science-based targets are greenhouse gas emission reduction targets that are in line with the level of decarbonization required to meet the goals of the – limiting to well below 2°C above pre-industrial levels and pursuing efforts to limit warming to 1.5°C
- The Science Based Targets initiative (SBTi) is a collaboration between CDP, the United Nations Global Compact, the World Resources Institute, and the World Wide Fund for Nature that provides guidance and validation for companies setting science-based targets
- To set a science-based target, organizations must first establish a base year and calculate their baseline emissions, then determine the scope of their target (Scope 1 and 2 only, or including Scope 3)
- Organizations can choose from several target-setting methods, such as the Absolute Contraction Approach (reducing absolute emissions by a fixed percentage each year) or the Sectoral Decarbonization Approach (setting targets based on sector-specific decarbonization pathways), depending on their sector and specific circumstances
- Regular monitoring, reporting, and verification of progress towards science-based targets are essential to ensure that organizations remain on track to meet their emission reduction goals
Climate Change Risks and Opportunities
Climate Risk Assessment
- Climate-related risks can be categorized into two main types: physical risks and transition risks
- Physical risks include the direct impacts of climate change, such as damage to assets and infrastructure from extreme weather events (hurricanes, floods), sea-level rise (coastal erosion, saltwater intrusion), and changes in water availability (droughts, glacial melt)
- Transition risks arise from the process of adjusting to a low-carbon economy, such as policy and legal changes (carbon taxes, emission regulations), technological shifts (renewable energy, electric vehicles), and changes in market preferences (consumer demand for sustainable products)
- Organizations should conduct a climate risk assessment to identify, analyze, and evaluate the potential impacts of climate-related risks on their operations, supply chains, and financial performance
- Climate risk assessments should consider both the likelihood and the magnitude of potential impacts, as well as the organization's vulnerability (exposure, sensitivity) and adaptive capacity (ability to cope with and adapt to impacts)
Climate-Related Opportunities
- Opportunities associated with climate change can include the development of new products and services, such as low-carbon technologies (energy storage, carbon capture) and climate adaptation solutions (resilient infrastructure, weather monitoring systems), as well as cost savings from improved resource efficiency (energy, water, materials) and reduced exposure to future carbon prices
- Organizations can use scenario analysis to explore the potential impacts of different climate change scenarios on their business and to inform strategic decision-making and risk management processes
- Scenario analysis involves considering a range of plausible future states, based on different assumptions about climate change mitigation (global temperature increase, policy stringency) and adaptation efforts (resilience measures, societal preparedness), and assessing the implications for the organization under each scenario
- Disclosure of climate-related risks and opportunities is becoming increasingly important for organizations, as investors, regulators, and other stakeholders seek to understand and manage the financial implications of climate change
- Frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) provide guidance for organizations on how to effectively disclose climate-related risks and opportunities in their financial reporting, covering four main areas: governance, strategy, risk management, and metrics and targets
Key Terms to Review (22)
Board oversight: Board oversight refers to the responsibility of a company's board of directors to supervise and ensure that the organization is operating effectively, ethically, and in compliance with regulations. This involves reviewing financial performance, risk management, and strategic direction while also being accountable for environmental and social governance aspects. Effective board oversight is crucial in guiding organizations through challenges such as climate change, integrated reporting practices, compliance strategies, and the use of predictive analytics.
Carbon dioxide: Carbon dioxide (CO₂) is a colorless, odorless gas that is naturally present in Earth's atmosphere and is produced by various human activities, particularly the burning of fossil fuels. It plays a significant role in the greenhouse effect, trapping heat in the atmosphere and contributing to global warming and climate change.
Carbon footprint: A carbon footprint measures the total greenhouse gas emissions caused directly and indirectly by an individual, organization, event, or product, typically expressed in equivalent tons of carbon dioxide (CO2e). This concept connects to various aspects of sustainability, including energy consumption, resource management, and corporate social responsibility, emphasizing the need for transparent reporting and effective strategies to mitigate climate change impacts.
Carbon neutrality: Carbon neutrality refers to the state of achieving net-zero carbon dioxide emissions by balancing the amount of carbon released with an equivalent amount of carbon offset or removed from the atmosphere. This concept is crucial in the fight against climate change, as it aims to minimize greenhouse gas emissions while promoting sustainable practices, such as renewable energy use and carbon offsetting strategies like reforestation or investing in carbon capture technology.
Climate resilience: Climate resilience refers to the ability of a system, community, or individual to anticipate, prepare for, respond to, and recover from adverse climate-related impacts. This concept emphasizes adapting to changing climate conditions while minimizing vulnerabilities and enhancing the capacity to cope with disturbances, such as extreme weather events and rising sea levels, which are often driven by climate change and greenhouse gas emissions.
Community Impact Assessments: Community Impact Assessments (CIAs) are systematic evaluations that measure the potential effects of proposed projects or policies on local communities. They focus on various aspects including economic, social, and environmental factors, helping stakeholders understand how changes can affect the well-being of residents and their surroundings. These assessments are crucial for making informed decisions and ensuring sustainable development that aligns with community needs and values.
EU Emissions Trading System: The EU Emissions Trading System (EU ETS) is a cap-and-trade program aimed at reducing greenhouse gas emissions across the European Union. It operates by setting a limit, or cap, on the total emissions from various sectors, allowing companies to buy and sell emission allowances to meet their reduction targets. This market-based approach encourages businesses to invest in cleaner technologies and lower their emissions over time, which is crucial for addressing climate change and managing greenhouse gas emissions.
GHG Protocol: The GHG Protocol is a widely recognized international accounting tool used to measure and manage greenhouse gas emissions. It provides standards and guidance for organizations to quantify their emissions, allowing them to track their performance over time and set targets for reduction. By promoting transparency and consistency in emissions reporting, the GHG Protocol plays a crucial role in addressing climate change and its impacts.
Global warming: Global warming refers to the long-term increase in Earth's average surface temperature due to human activities, particularly the emission of greenhouse gases like carbon dioxide and methane. This phenomenon is a significant driver of climate change, as rising temperatures can lead to severe weather patterns, melting ice caps, and rising sea levels, which pose serious risks to ecosystems and human societies worldwide.
Methane: Methane is a colorless, odorless gas that is the primary component of natural gas and a potent greenhouse gas. It is released during the production and transport of coal, oil, and natural gas, as well as from livestock and other agricultural practices, landfills, and the decay of organic matter. Its impact on climate change is significant due to its ability to trap heat in the atmosphere much more effectively than carbon dioxide over a short time frame.
Nitrous Oxide: Nitrous oxide (N₂O) is a colorless gas with a sweet odor, commonly known as laughing gas. It is classified as a greenhouse gas and has a significant impact on climate change due to its ability to trap heat in the atmosphere, being approximately 298 times more effective than carbon dioxide over a 100-year period.
Paris Agreement: The Paris Agreement is an international treaty aimed at addressing climate change and its impacts by reducing greenhouse gas emissions. Adopted in 2015, it seeks to limit global warming to well below 2 degrees Celsius, with an aim to limit the temperature increase to 1.5 degrees Celsius above pre-industrial levels. This agreement represents a crucial global effort to combat climate change, connecting to broader sustainable development initiatives and underscoring the importance of collective action among nations.
Physical Risk: Physical risk refers to the potential for damage or loss due to climate-related hazards, including extreme weather events and long-term changes in climate patterns. This type of risk can impact assets, infrastructure, and overall operational performance, especially in sectors vulnerable to environmental changes, thus linking it closely to climate change and greenhouse gas emissions, which exacerbate these risks.
Renewable energy transition: The renewable energy transition refers to the process of shifting from fossil fuel-based energy systems to systems that predominantly use renewable energy sources like solar, wind, and hydroelectric power. This transition is crucial in reducing greenhouse gas emissions and combating climate change by replacing carbon-intensive energy sources with cleaner alternatives, thereby promoting sustainability and environmental health.
SASB Standards: The Sustainability Accounting Standards Board (SASB) Standards provide a framework for companies to disclose sustainability information that is financially material to investors. These standards focus on the environmental, social, and governance (ESG) issues that are most relevant to specific industries, enabling stakeholders to assess a company's long-term performance and risk management strategies.
Scope 1 Emissions: Scope 1 emissions refer to the direct greenhouse gas emissions that occur from sources owned or controlled by an organization. These emissions primarily come from activities such as fuel combustion in company-owned vehicles and facilities, and are a crucial aspect of corporate sustainability reporting, as they directly impact an organization's carbon footprint and contribute to climate change.
Scope 2 emissions: Scope 2 emissions refer to the indirect greenhouse gas emissions that result from the generation of purchased electricity, steam, heating, and cooling consumed by an organization. These emissions occur at the facility where the energy is produced rather than at the organization's own operations, highlighting the impact of energy consumption on overall greenhouse gas emissions and climate change.
Scope 3 Emissions: Scope 3 emissions are the indirect greenhouse gas emissions that occur in a company’s value chain, both upstream and downstream, which are not directly controlled by the company. This includes emissions from sources like the production of purchased goods, transportation, waste disposal, and product use. Understanding scope 3 emissions is essential for businesses aiming to comprehensively measure and reduce their total carbon footprint, as they often represent the largest portion of a company’s overall greenhouse gas emissions.
Stakeholder Mapping: Stakeholder mapping is a strategic tool used to identify, prioritize, and analyze the relationships and influence of different stakeholders on an organization’s decisions and operations. It helps organizations understand who their key stakeholders are, what their interests and expectations may be, and how best to engage with them effectively.
Sustainability Reporting Committee: A sustainability reporting committee is a dedicated group within an organization responsible for overseeing and guiding the development, implementation, and dissemination of sustainability reports. This committee ensures that sustainability practices align with organizational goals and regulatory requirements, providing transparency about environmental, social, and governance (ESG) impacts. Its role is crucial in addressing climate change and greenhouse gas emissions by setting measurable targets and promoting accountability.
TCFD Recommendations: The TCFD Recommendations refer to the guidelines set forth by the Task Force on Climate-related Financial Disclosures to help companies disclose climate-related risks and opportunities in a consistent and comparable manner. These recommendations emphasize the importance of transparency regarding the impact of climate change on financial performance and the potential effects on investments, thereby aiding investors, stakeholders, and companies in understanding climate-related financial risks and opportunities.
Transition Risk: Transition risk refers to the financial and operational risks that companies face as they adapt to a low-carbon economy, particularly in response to climate change policies and market shifts. This can include regulatory changes, technological advancements, and evolving consumer preferences, all of which can impact a company's assets and liabilities. Companies need to be aware of these risks as they may affect their financial stability and long-term sustainability strategies.