Efficiency and Effectiveness

Carbon Intensity

Emissions of CO2 and other greenhouse gases need to be reduced drastically to limit the impact of climate change. Agricultural companies have a big role to play in reducing the other greenhouse gases, e.g. by limiting methane emissions from livestock, and reduction of N2O emissions from fertilizer use. CO2 emissions are predominantly caused by burning of fossil fuels for electricity generation, heating & cooling, and transport. The first step is to decrease the energy consumption through efficiency measures (see resource efficiency). The next step is to reduce the carbon intensity of the remaining energy requirements.

The carbon intensity of energy use can be lowered in two ways. First, by switching to fossil fuels with a lower carbon content, e.g. using natural gas instead of coal for electricity generation. Ultimately, however, to achieve environmental sustainability, all our energy must be generated using renewable resources (see table below).

Renewable energy technologies

Companies have two options to expand their use of renewable energy. The first option is to invest themselves in new generation capacity. Examples of investments in on-site renewables are solar panels on roofs of large buildings like warehouses, which has been done by several retailers in sunny parts of the USA (Walmart, Kohl’s) and in Southern Europe. In these cases, the capital investments are usually funded by energy service companies, who conclude long-term power purchase agreements with the retailers. Other companies invest in wind energy, e.g. Heineken, who build wind turbines next to their bottling plants.

Direct investment in renewable energy is far from straight-forward, though. First of all, in most cases arranging its own energy supply is not part of the company's core business. Furthermore, companies investigating the options for deployment of renewables are often confronted with two main stumbling blocks:

  • Unfavorable and/or uncertain economics. Most forms of renewable energy are still more expensive than energy from fossil fuels. Scale and experience are driving the costs down, but it is uncertain when cost-parity will be reached, without subsidies or tax breaks. Furthermore, some technologies require incremental investments. For example, electric vehicles are most expensive to buy because of the cost of the batteries. Even when the total cost of ownership are lower, the additional financing requirements can present a problem for companies.
  • Lack of supply. Most renewable technologies are in the development stage, and therefore not yet widely available. Examples include electric vehicles and second generation biofuels.

The case example below serves as an illustration of these issues.

Financial impact case example

In these cases, where direct investment in renewables is not attractive or possible, companies can resort to the second possible option: purchasing renewable energy from specialized energy suppliers. These companies have the scale, access to subsidies, favorable locations, etc., that enable them to offer renewable energy at competitive rates (or a slightly higher price but fixed for a long time period, effectively providing a shield against rising oil prices).

There is a third possible route, which is essentially a combination of the first two methods: several companies, including Ikea as a prominent example, have chosen to invest directly in renewable energy, but to do so by taking a stake in recently established wind farms located elsewhere, rather than or in combination with on-site renewables such as solar panels.

Emissions Trading
The European Emissions Trading Scheme (ETS) covers some 11,000 power stations and industrial plants across 30 countries. The ETS is a ‘cap-and-trade’ system, i.e. a cap is set on the total amount of emissions, and emission permits are issued that can be traded among the participants in the scheme. The advantage of a trading scheme is that it encourages investment in the cheapest emissions reduction options. However, the system only works well if emission rights are scarce and therefore valuable. In the current situation, too many allowances have been issued, with a low carbon price as a result. This means that for some companies, it is cheaper to buy allowances rather than to invest in reduction of their own emissions.

However, given the imminent need to drastically reduce emissions of greenhouse gases, the system will have to be improved or replaced by other mechanisms such as a carbon tax. Therefore, the only business strategy that is viable in the long term is to actually reduce the level of own emissions.