Sustainable Business Series 2022: Decarbonisation...Is carbon trading the future?

Green Liquidity

This blog post has been produced for the Greater Birmingham Chambers of Commerce as part of the 2022 Sustainable Business Series.

The Sustainable Business Series seeks to help local firms understand the role that they play in progressing to net zero, as well as the opportunities and challenges that may arise from the net-zero transition. Through an expansive range of blogs, webinars, events and podcasts, the Sustainable Business Series offers useful information to businesses interested in adopting a sustainable business approach.

See the Sustainable Business Series webinar’s and events here.

Reducing greenhouse gas emissions, such as carbon dioxide, is a key element in the fight against climate change. One way governments and companies are trying to reduce their emissions is through carbon trading.

Carbon trading is a market-based system that aims to provide economic incentives to encourage organisations to reduce their environmental footprint. Unlike voluntary offsets, where consumers can choose to pay to compensate for their carbon footprint, carbon trading is a legally binding scheme.

Calculated by individual governments and policymakers, it aims to put a price on CO2 following the principle of caps and trade. The government sets a limit, or cap, on emissions permitted per industry.

Looking at the bigger picture of decarbonisation, which is connected to all domains, carbon trading is just one piece of the puzzle. Companies must consider their Scope 1, 2, and 3 carbon emissions, which describe their direct and indirect emissions – those that the company is indirectly responsible for, up and down its value chain.

Managing Scope 1 and 2 emissions is already a challenge due to the lack of data and the consequent need to use assumptions for reporting. This may work for now, but the sheer amount of data will be unmanageable in the future. New approaches are needed, particularly to handle the even more complex Scope 3 emissions.

“Scope 3 emissions are a headache for many companies for a variety of reasons,” explains Richard Philcox, Product Area Lead and Chief Product Owner, Commodity Management Solutions at SAP. “First, they fall outside of a company’s direct ownership, which makes them difficult to control. Second, it’s challenging to collect the necessary data and third, it’s not clear who in the supply chain is responsible for these emissions and thus for reducing them.”

Of course, the focus on these efforts depends heavily on the industry. The energy transition cannot be reduced by switching production from fossil fuels to hydrogen or other, greener resources. It affects the energy consumption of plants and operations along value chains. In any case, companies that have decided to become carbon neutral by applying science-based targeting are aiming for a very different scope of transformation. They have chosen a transformation that is unique. Unlike companies that offset emissions, these companies are undergoing a complex, costly and time-consuming process to truly transform their operations. This means avoiding emissions in the first place rather than offsetting them.

But what about Carbon trading coming to the rescue short term? Neither digitalisation nor sustainability can be mastered with technology and software alone. Skills are required and the use of ecosystems and networks is imperative. As-a-service business models are successful because they combine skills and knowledge.

In the future, we will see many more start-ups and businesses adopting an even broader understanding of as-a-service. Instead of buying software licenses, companies will increasingly buy the service as a deliverable, for instance, 'decarbonisation-as-a-service’.

However, this will not be the case anytime soon, as companies will have to grant access to their data and deep insights into their operations first. Over time, transparency will pick up speed. Being green is not enough, becoming greener will be at the forefront of buying decisions.

With carbon trading options, the ultimate goal of businesses will no longer be to sell goods by any means necessary. As CO2 pricing increases, sales and customer service will make the decision to sell or not to sell based on the total company costs.

Dave Rowlands
Managing Director – Green Liquidity

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