Carbon emissions and pricing influence every business strategy
Carbon is not just a major driver in climate change, it is also a resource which influences the business decisions of nearly every industry around the world. With 37 billion metric tons emitted in 2024 its future impacts on the global ecosystem are hard to quantify but climate scientists paint a dire picture, especially regarding to rising global temperatures. To combat the emission of carbon in an uncontrolled matter, governments around the world implemented carbon pricing mechanisms, which usually take form in carbon emission trading or a carbon tax. These market mechanisms have shown to be an efficient way of reducing carbon and other greenhouse gas emissions. They force companies to deal with their emissions and to implement them in their business strategy or face higher costs or fines. In the past sustainability was more of a personal brand decision but with these legislations it has become an essential part of every business’s bottom line.
Why do businesses need a carbon management strategy?
The growing importance of sustainability
Depending on the sector, the management of carbon emission costs might prove vital to the long-term success of your company. In emission intensive industries like steel production the costs for CO2 certificates make up an ever-increasing share of production cost which makes them impossible to ignore. On the other hand, reducing CO2 output comes with the competitive disadvantage of upfront cost which would have to be recouped by the reduced emissions cost. But if these solutions have been implemented successfully the savings in the long run could be worth the short-term strain considering emission prices are set to rise in the future.
Competitive advantage and compliance
While pricing is still the main focus of consumers sustainability concerns influence purchase decisions more and more. A study done by pwc shows a up to 9,7 % higher willingness to pay for sustainable products, which is projected to rise even more. Sustainable business practices promote trust not just in your products but also your brand image. This development is more seen in younger people which will make up the future consumers, so positioning your brand on the sustainable side of public image is becoming ever more important. The potential for cost savings should not be underestimated either, as the table below shows. Maximising efficiency by reworking older practices, technologies or supply chains can have huge impacts on operating costs.
Steps to develop a carbon management strategy for your business
The three most important steps for a successful CMS are outlined below:
Step 1: Assess your Carbon Footprint
At first the companies’ current carbon footprint needs to be evaluated. If the needed emissions data is available, an online carbon calculator can be used to estimate the carbon your company produces but most of the time outside expertise is needed. In that case there are carbon auditing companies which help you determine the emissions of your products or services.
Step 2: Set clear carbon reduction goals
After estimating the carbon emissions, the business needs to assess their potential for carbon emission reduction. SMART goals are a good way to design the wanted changes, which are illustrated by an example below.
The Company GreenMeals is a restaurant chain and wants to reduce its CO2 emissions following SMART goals:
Specific – Reduction of CO2 Emissions across all operations by 20 %
Measurable – Tracking of procurement routes and electrified transport, waste generation and its usage as biomass, efficiency of cooling equipment and origin of the electricity.
Achievable – Choosing shorter routes and using more electric vehicles, implementation of a recycling program for organic and non-organic waste and using green electricity.
Relevant – Locally grown food is well received by customers, which helps offset the extra costs; electric vehicles reduce fossil fuel usage and make upkeep cheaper, while long term green electricity deals give security in terms of energy prices.
Time-bound – Achieve the target goals until 2030.
Following smaller, clearly defined goals is often more effective than overly ambitious goals which cannot be met. The idea is that upscaling is cheaper and faster than repeatedly redefining the goals.
Step 3: identify carbon reduction opportunities
Depending on the sector the company is operating in the opportunities for carbon reduction can differ strongly. For a producing company the measures that can be taken look very different to the ones for a service-oriented company. Correctly identifying these differences is crucial for successful implementation and should be done in a scientific and measurable way.
Implementing carbon reduction initiatives
Energy efficiency measures
The first step that should be taken is tracking energy efficiencies and if the used technology is the most efficient in terms of energy usage, emissions and cost for the desired task. Electrification is already changing the future of energy usage in all sectors, be it heating, lighting or smelting of metal. Delaying the switch to electricity-based systems can lead to even higher emission costs in the future.
Switch to renewable energy
Increased electrification is perfectly complemented by renewable energy production. Instead of importing fuels and/or electricity with attached emissions the electricity can be produced, stored and consumed on site. Falling battery storage costs make small scale renewable production more economically viable for more and more businesses while reducing their carbon emissions.
Green supply chain management
Nearly every company depends on parts or commodities which have been produced off-site. Calculating these pre-products’ emissions as not your own is misleading and doesn’t help with reducing the carbon emissions over your products’ whole lifecycle. That’s why it is crucial to look at the whole supply chain from cradle-to-cradle, which means from the first produced part until the disposal and looking for inefficiencies. Everything else is just a trick that will cost consumers’ trust and possibly fines when uncovered.
Tracking progress and reporting
1. Monitor carbon reduction progress
The collection of data regarding these implemented strategies should be seen as just as important. Without monitoring the effects in carbon reduction there can be no long-term strategy. We must keep in mind that carbon management systems are here to stay for decades so one should strive to keep developing them, for both ecological and economic reasons.
2. Reporting and transparency
To maximise the positive impact of carbon reductions for your brand they should be publicised as much and as transparent as possible. Greenwashing is still very prevalent but with more and more information available to consumers it can also create a major risk for your public image. So better stay on the safe side and try to reach as many customers as possible with honest ambitions.
This can be done using frameworks like the Global Reporting Initiative (GRI) and the Carbon Disclosure Project (CDP), which rate and publicise your efforts to a big audience of journalists, investors and customers which reduces the risk of your efforts going unnoticed.
Carbon management strategies are an important and sometimes mandatory part of operating a business today with many implications regarding long-term success. As outlined before, there are upfront costs associated with it which have be recouped. But the rapid technical advancements in areas like power generation, industry processes or transport should be a good indicator for the business case of sustainable alternatives. Of course, these technologies could be cheaper in the future but delaying emission management systems comes with the guaranteed opportunity cost of rising emission costs.
In summary
The balancing of short-term costs with the long-term benefits is the major deciding factor for most businesses. The current economic situation hampers big sustainability investments but ignoring them could spell disaster down the road.
Some industries like steel or ceramic production are harder to effectively decarbonise and the challenge to stay competitive with other global actors, which might have lower or no emission cost, would require international regulation or a concept like “emission import taxes”.
Consumer demands spell a clearer picture here: There is a willingness to buy more sustainable products even for higher prices. Looking at the demographics this effect is going to increase in the coming years and decades. Customers are going to less and less rely on or build a brand connection with products they think are harmful for the environment.
These two developments alone, rising emission costs and environmental consciousness among customers, illustrate the economic opportunities that carbon management systems can offer to every company, no matter how big or small.
