GETTING TO NET ZERO

The Complete Guide to Decarbonizing Businesses

and Supply Chains

David Steven Jacoby

Published by David Steven Jacoby
1740 Broadway
15th Floor
New York, NY 10019

Tel: +1 (617) 593-2620

E-mail: [email protected]

Copyright © 2023 by David Steven Jacoby

All rights reserved. No part of this publication may be reproduced, stored in

a retrieval system, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise without the permission
in writing from the owner of the copyright.

Editor: Leigh Quan

All enquiries regarding this book should be directed to David Steven Jacoby
at the above address.

Great care has been taken in compiling this book. This being said, the
material herein is presented solely for educational purposes, and no
responsibility can be accepted by the author, publisher or editors for the
accuracy of information presented or for any losses incurred as a result of
reliance on the recommendations, advice, descriptions or methods. Where
opinion is expressed it is that of the author. The reader should consult the
services of specialists for legal, accounting, tax, investment planning,
management consulting, and similar professional advice. Furthermore,
although the author has exercised due diligence in assuring attribution of
sources throughout the manuscript, the reader is kindly encouraged to notify
the author via the contact information above should any oversights be
discovered.
“Getting To Net Zero is a timely and essential resource for navigating the
pressing challenges of climate change.

It provides a holistic approach to decarbonization of businesses and supply

chains, offering a comprehensive roadmap to address Scope 1, 2 and 3
emissions.

Crucially, this guidebook demonstrates how sustainable manufacturing,

transportation and distribution practices can be employed throughout the
entire value chain in a profitable and growth-inducing way.

By highlighting success stories and showcasing the positive impact that

decarbonization can have on the bottom line, it is an invaluable guide for
corporate sustainability leaders.

I sincerely hope that it will engage, enable and empower you to lead your
organization’s decarbonization journey.”

– Ms. Irina Gorbounova, Vice President M&A and Head of

Xcarb Innovation Fund, ArcelorMittal Ltd.

“Packed full of interesting information on corporate planning, especially on

difficult supply chain issues.”

– Dr. Peter Fox Penner, Energy Impact Partners, and Senior

Advisor, Brattle Group

“A good read even for someone working in this space deeply.”

– Ms. Lea Souliotis, Senior Vice President of Commercial,

Strategy & Planning, Santos Ltd.
Contents
Acknowledgments
Preface
Introduction
1 Getting Off the Ground – How to Organize for Your Decarbonization
Initiative
2 How to Calculate Your Baseline Carbon Footprint
3 How to Reduce “Scope 1” Emissions – Introduction
3.1 How to Align Net Zero with the Business Strategy
3.2 How to Engage Adaptive Behavior
3.3 How to Establish Net Zero Goals, Objectives, Targets, Metrics and
Standards
3.4 How to Shift to Clean Energy Operations
4 How to Reduce Scope 2 Emissions – Introduction
4.1 How to Reduce Power Consumption by Decreasing Energy
Intensity and Increasing Energy Efficiency
4.2 How to Reduce Fuel Emissions and Cost Through Transportation
Optimization
4.3 How to Reduce Building Emissions Through Green Building Design
4.4 How to Access Clean Energy Offsets and Credits
5 How to Reduce Scope 3 Emissions – Introduction
5.1: How to Design Products and Services to Minimize Lifecycle
Carbon Footprint
5.2 How to Manage the Portfolio of Products and Services to Minimize
Lifecycle Carbon Footprint
5.3 How to Source to Minimize CO2 in Global Supply Chains
5.4 How to Incentivize Supplier Collaboration
6 Compiling the Net Zero Plan – Introduction
6.1 How to Get to Net Zero – Breaking Down the Carbon Take-Out and
the Financial Payback
6.2 How to Make the Business Case for Net Zero
6.3 How to Construct a Realistic Program Schedule
6.4 How to Document the Plan
6.5 How to Present the Plan
Conclusion
List of Abbreviations
List of Figures
Index
About the Author
Also by David Steven Jacoby
Acknowledgments
Many industry-leading interviewees contributed their experience, wisdom
and opinions about the hard questions that net zero poses, shared their
intellect, passion, and vision in our one-on-one interviews, and for that are
owed deep respect and thanks. The contributors to this book include but are
not limited to:
Ranjith Powell, of the Public Investment Fund, Saudi Arabia, on
governance
Alok Gupta of Boston Strategies International, on carbon
footprint
Tensie Whelan, Clinical Professor for Business and Society at
NYU’s Stern School of Business, on ESG trends
John Foote of Revchain LLC, on energy technology
Bernard Arrateig of UltiWatt, on energy intensity
Giles Taylor of Trans-Solutions, on transport
Tom Cook of Blue Tiger International, on logistics
Fritz Troller of Therm Solutions, on energy intensity, energy
efficiency, and green building
Jacob Knowles of BR+A Consulting Engineers, on green
building
Julia Salant of Ecovadis, on incentivizing suppliers
George DiRado of Revchain LLC, on modeling costs and
benefits
The support of my colleagues at Boston University and New York
Universities who lent a hand, either directly or indirectly, in supporting
progress toward low-carbon supply chains, was invaluable. Their vision and
competence are responsibly leading us toward a low-carbon world. These
include but are not limited to:
Dr. Peter Fox-Penner, Chief Impact Office, Energy Impact
Partners and Senior Advisor, Brattle Group
 Dr. Benjamin Sovacool, Director of Boston University’s Institute
for Global Sustainability
Rebecca Pearl-Martinez, Executive Director of Boston
University’s Institute for Global Sustainability
Heather Quinlan-Baron, Director of Finance at Boston
University’s Institute for Global Sustainability
Dr. Justin Ren, Professor at Boston University’s Questrom School
of Business
Dr. Michael Gevelber, Associate Professor at Boston University’s
Engineering School
Dr. Batia Weisenfeld, Professor of Management at NYU’s Stern
School of Business
Dr. Pavlos Mourdoukoutas, Director of NYU Tandon School of
Engineering’s Master of Technology program
Dr. Aric Meyer, Director of Academic Operations at NYU’s
Tandon School of Engineering

The wisdom and persistence of John Koon, George DiRado, and Leigh
Quan in curating and refining supporting materials and assuring their
quality and relevance to companies on their decarbonization journey, was
remarkable. This extraordinary team was competent, creative, collegial, and
passionate. They are examples of the type of extraordinary progress that can
be made with intention and teamwork. Special thanks to Leigh Quan for
extraordinary attention to detail in editing the manuscript. Thanks also to
Amit Sharma for web development; Alok Gupta for support on the carbon
measurement chapter; Georgio Nasr for helpful technology research, Henri
Kassis for digital production and marketing, Issam Danho for gathering
industry feedback, as well as Mike Gourd, Kedar Patel, Gautier Poittevin,
Alex Blunt, St. Claire Gerald, Kedar Patel, Karan Shetty, Sansaptak De, and
Somphors Tann, just to name some of the other team members who played
a role in developing the content for this book.

Finally, thanks to the students in my Operations Management, Supply

Chain Management, and Decarbonizing Global Supply Chains courses at
NYU for your spirited and insightful classroom debates regarding all topics
related to sustainability in supply chains in general and decarbonization of
supply chains. These debates are inspiring in their articulation of idealistic
and realistic considerations, and their creativity in developing ways to
achieve the impossible. Bravo! You are capable, competent, creative and
entrepreneurial. And you are poised to achieve great things both
individually and collectively.
Preface
Based on research in my earlier book Reinventing the Energy Value Chain:
Supply Chain Roadmaps for Digital Oilfields through Hydrogen Fuel Cells
(PennWell, 2021), Alok Raj Gupta and I codified a roadmap for
operationalizing supply chains for clean energies.

Combining this energy transition supply chain roadmap together with

consulting experience in industry and government, I developed a Master
Class that helps companies in any industry learn how to map a profitable
pathway to “Net Zero” emissions in eight to ten weeks. The Master Class,
called REVchain™, provides frameworks, examples, and templates to assist
you in evaluating and deploying clean energy technologies like electric
vehicle batteries and hydrogen fuel cells.

The online learning program at rev-chain.com consists of 30 lessons

organized into six courses to guide you toward net zero emissions
throughout your supply chain. It is an online learning platform that includes
video classes, guest interviews and accompanying templates. Students can
go at their own pace and come back to the videos and the templates
throughout their decarbonization journey.

This book can be used as a workbook to accompany the class, or as a step-

by-step net zero planning and implementation guide independent of the
course.

Whether you are joining for a read or enrolled in the class, I look forward to
sharing these valuable techniques that will help you achieve a zero-
emissions supply chain and map your net zero pathway in the form of a
plan that you can share with suppliers, customers, employees and investors.
Introduction
Every company can have a profitable path to net zero. The goal of this book
is to help you map your organization’s net zero pathway and establish a
solid business case for the initiative. Whether you read it in conjunction
with the REVchain™ asynchronous online class or independently of the
class, you can develop your net zero plan at your own pace, quicker or
slower than the time it takes to read the book or complete the course. At the
end of either the book or the class you will have the tools to develop your
own customized plan to achieve net zero, which includes your carbon
baseline and a reduction plan for scope 1, scope 2 and scope 3 emissions for
your organization. You will also have a project schedule and a financial
evaluation including an assessment of the return on investment of your
initiative toward low carbon or net zero, however you choose to define your
initiative. This introduction will give you a brief overview of the program
and an idea about the net zero plan as well as format and structure that you
will have at the end of either the book or the class.
The Decarbonization Imperative
Many organizations are being pressured to start the process of
decarbonization either by investors or government management mandates.
Over 73 asset managers holding $32 trillion in assets have pledged net zero
portfolios by 2050. The impact of this on any publicly traded company is
enormous. Whereas in the past these companies used to simply put together
a capital investment plan and other typical elements of the 10K report, now
investors also want to see your ESG progress and net zero plans They want
to see it in your PR messaging. They want to have it evaluated, and they
may also want to see a third-party assessment of your carbon footprint as
well as your net zero progress, particularly if it can increase their return on
investment. Therefore investor pressure is really creating pressure to
progress to net zero.

Figure 1: Emissions Reduction Forces Requiring a Net Zero Plan

As a result, over 2,200 CEOs have pledged to reach net zero emissions and
3,300 others have committed to taking carbon reduction actions toward net
zero. Moreover, the numbers continue to rise.[1] Usually the commitment
dates are around 2030, 2040, or 2050. There's a real need to back up those
pledges with operational realities and good planning.

Even if you are not swayed so much by investors or those CEOs, you may
be influenced by government mandates and directives as well as what may
be coming up in the future as carbon-related taxes, incentives and reporting
requirements. In terms of current mandates in the United States, the EPA
has various reporting requirements for carbon disclosure, and that varies by
industry. If you are in one of the more carbon intensive industries, you are
probably already familiar with those carbon reporting requirements. If you
are in the UK, there are similar reporting regulations. Transparency is
required as part of being a company operating in high energy-consuming
sectors. And it is not only public companies, in many cases private
companies too. The EU has set a target of carbon neutrality by 2050. In
addition, it has also announced an end to carbon emission allowances,
banned internal combustion engines, and may institute a carbon border tax.

Almost every company needs to have some scheme to achieve net zero
relates to the technologies that may be required with the relative investment
that may take place over a period of time, and how they are going to have to
work with their supply chain partners to make that happen. The role of the
decarbonization plan is shown in the context of other regularly updated
corporate plans in Figure 1.

Decarbonization is a journey. We need to establish some baselines and have

a target. Most, but not all, of the companies that have set a target have
determined their baselines. The baseline needs to be correct. You need to
have what I call “a lot of footnotes”, proof that you did your homework. I
have examined a lot of carbon footprint numbers, and many of them are
meaningless unless you really understand what they are measuring.
Benefits of a Net Zero Project
As you will see in this book, decarbonization is not only possible but if
done as prescribed in this book it can save 8% of operating cost and add up
to 20% in equity valuation. Figure 2, which is a preview of Figure 70,
shows how the steps described in the chapters of this book can enable
removal of all the carbon in an example organization and its supply chain.
The breakdown of the specific carbon reductions is detailed in chapter VI.1
How to Get to Net Zero: Breaking Down the Carbon Take-Out and the
Financial Payback.

Figure 2: The Net Zero Waterfall Chart – Category-wise Breakout of GHG

Emissions Reduction Potential by 2050

Since many of the steps that reduce carbon are based on efficiency
improvements, operating cost can be reduced while carbon is taken out.
Efficiency gains average 8% of operating cost, as described throughout the
book and summarized in an example of a fictitious but realistic company.
While you are reducing GHG emissions, you are also saving money in at
least half of the areas where you will have to spend money. In a simple
example, six of nine initiatives produce cash benefits. In some cases, the
benefits reduce the cost of goods sold, and in other cases reduce Sales,
General and Administrative expenses.

Figure 3 illustrates how these benefits are reflected on the profit and loss
statement (P&L) of a sample company. The company is fictitious, but the
numbers may resemble those in your company. Let's assume that the
company has a hypothetical revenue of a billion dollars, a COGS of $400
million and a gross margin of $600 million, fixed costs of $200 million, a
net margin of $400 million, and SG&A expenses of $180 million. Based on
these figures, it turns a net profit of $220 million and pays $55 million in
taxes, netting $165 or 16% profit margin after tax.

Figure 3: How Efficiency Gains Can Self-Fund Your Net Zero

Transformation

If you apply the rates of savings that are presented in the last section to the
COGS and the SG&A, you end up with Year 1 savings of $24.6 million to
the COGS and $3.5 million to the SG&A costs for a $28.1 million benefit.
And if you applied one expert to each of the areas we discussed, divided the
$28.1 million cash flow improvement from year one by 14 experts, you
would have a budget of $2 million per expert. That would make the project
self-funding or better yet, a profit center, depending on the complexity and
the consulting costs and the precise savings potential in each of the areas.

And while capital investment will be required in most cases, especially in

energy technologies, this book will demonstrate that the needed capital is
available to most companies through tax incentives and valuation premia
associated with having a sound net zero plan.

The needed investments and the specific tax incentives that are available to
fund them are discussed in multiple chapters including VI.1 How to Get to
Net Zero: Breaking Down the Carbon Take-Out and the Financial Payback.

In addition, investors reward sustainable equities, and the stock price

premium associated with a compelling net zero plan could potentially pay
for any required investments and expenses related to the program – and
maybe a lot more. At the beginning of 2021, sustainable equities were
priced a little bit lower than the US equity market, and during the year they
tracked a bit lower. But at about the middle of the year sustainable equities
began to overtake conventional equities. At the end of 2021 they were
priced 3% higher than non-ESG equities. That trend reflected a very broad
basket of equities put together by Morningstar.[2] If you are committing
resources and managing a multi-year strategic program to drive carbon
down in your company, where investors are willing to reward by paying in
3% more capital, that is worth capitalizing on. In fact, that valuation
premium might pay for any required investments and expenses related to
the program – and maybe a lot more.

Studies by Bank of America show that disclosure and net zero targets each
command a premium in the stock market. The bank found that companies
that had below median emissions had a price to book ratio of around five,
whereas companies that have no emissions disclosure had a price to book
ratio of around four. That is a 20% higher stock price (as a ratio to book
value) because of disclosure and targets. By this measure, carbon disclosure
and smart carbon planning is well worth the effort. Figure 4 shows that
companies with a net zero target have a 65% higher forward price earnings
ratio than companies without a net zero target. This should be a significant
motivator for you to develop your net zero plan.

Figure 4: Price/Earnings Ratio of Companies with Net Zero Plans

Source: Source “Pledging to go green doesn’t just help

corporate brands. It boosts stocks. By Matt Egan, CNN
Business. April 22, 2021. Last accessed April 15, 2023.
https://www.cnn.com/2021/04/22/investing/net-zero-pledge-
companies-stocks/index.html

Moreover, when you look at the valuation of companies according to a

measure called price to book, which is the stock price of all the shares
divided by the accounting value of the company, the companies with
emissions disclosures have 20% higher price to book ratios than those with
high emissions today, as shown in Figure 5. This also establishes that a
credible net zero plan that informs your investors and makes them feel
comfortable with it is a “must do” for any publicly traded company.
 Figure 5: Price/Book Ratios of Companies with Net Zero Plans

Source: “Pledging to go green doesn’t just help corporate

brands. It boosts stocks. By Matt Egan, CNN Business. April
22, 2021. Last accessed April 15, 2023.
https://www.cnn.com/2021/04/22/investing/net-zero-pledge-
companies-stocks/index.html

Specifics of the potential market valuation uplift are described in chapter

VI.2 How to Make the Business Case for Net Zero and summarized in
Figure 74: Routes for Increasing Company Valuation Through Your Net
Zero Program.
Stages of The Journey
Generally speaking organizations will make concentrated initiatives to
reduce their scope 1 carbon footprint first. That's what I call “inside the four
walls.” And then they will try to reduce their scope 2 footprint, which is the
purchase of fuel and power, which may be done concurrently with scope 1.
And then they will routinely address scope 3, which has to do with the
carbon footprint of purchases through suppliers as well as customer usage
of whatever they sell. This pathway takes quite a long period of time. It is a
journey, and we are just at the beginning, as shown in Figure 6.
 Figure 6: The Net Zero Journey

This book is designed to help you anticipate and lay the groundwork for a
viable plan for achieving net zero. By “groundwork” I mean the plan needs
to be flexible because it is going to change. The plan is going to change at
least every year. As you evolve, your organization goes through all sorts of
experiences and changes while technology evolves. This plan and the
framework as well as tools associated with it will allow you not only to
create, but also to update your carbon footprint baseline and
decarbonization plan over time as technologies emerge and economics
change.

With the help of this structured program, you will develop a tailored plan
for your organization to reach net zero carbon emissions. The information,
tips and techniques as well as templates that you will access in this book
will provide a compelling approach and allow you to generate a baseline
carbon footprint and plan your scope 1, 2 and 3 carbon reduction. It will
give you the tools to demonstrate how carbon reduction can be a profit
center for your company and guide you to calculations of the financial
benefits and costs, as well as plan the timing of your journey to net zero.
Online and Offline Resources
If you subscribe to rev-chain.com you will have access to market data,
templates, advice and even scientific lab work to help you solidify your
plan as shown in Figure 7. A number of templates are included in each
course. The online program at rev-chain.com is designed to take under ten
weeks, as shown in Figure 8. You would want to allot more time if you are
building your net zero plan in parallel to this. But if you are primarily
interested in absorbing the information and providing insight and
information, you can zip through the curriculum and return to parts you
want to focus on.
Figure 7: How to Access Market Data, Templates, and Scientific Research
to Bolster Your Plan
Ready, Set, Go!
Whether you’re reading this book or taking the online class I am excited to
start this journey with you. Let’s get going!

Figure 8: Sample REVchain™ Course Calendar (Asynchronous Version)

1 Getting Off the Ground – How to Organize for
Your Decarbonization Initiative
“You’ve got this on the one hand, this “stretch target” by most
reengineering assumptions. Most people don’t exactly know how to get
there, yet they’re setting a target out and then challenging themselves to
meet it. You have to administer a project and you’ve got two conflicting
things going here. You’ve got an artist’s studio of creative people who each
think independently and whose brilliance will be essential to reaching the
goal. And on the other hand, you’ve got time, a budget, and a schedule to
manage. It comes down to a clear program management process and stage
gates.”

--- Ranjith Powell, Saudi Public Investment Fund

This chapter will help you structure the rules and responsibilities of
executive and non-executive stakeholders. Getting to Net Zero will
require the support, collaboration, and guidance of a cadre of executives,
advisers and specialists from strategic partners, government regulators or
policy makers, suppliers and employees. Enlisting them and authorizing
them to play a part in the project will ensure that your project thrives
despite the inevitable obstacles and speed bumps.

Let’s first address the key roles and responsibilities required to make a
program of this importance go smoothly. Figure 9 demonstrates a typical
program organization chart for a large and/or strategic project. Normally,
the organization is headed by a Steering Committee. Then there is a
program manager or a program director. This is the key person who
manages and prepares the key decisions as well as coordinates the work
streams, making sure that any issues are resolved and budgets are adequate.
There is frequently a program office or a PMO (Project Management
Office). Below the project manager or the program manager, functional
departments are normally represented. Supply Chain and Procurement will
be important in executing the Scope 3 decarbonization initiatives. Health,
Safety, Environmental (HSE) and Regulatory are important collaborating
departments due to the need to align with certain regulatory imperatives.
For example, certain types of refrigerants are being phased out by
government and mandate in different environments. That information is
essential towards your timing to achieve net zero. Engineering will be
crucial in architecting and/or approving changes in technology in new
product design, manufacturing, maintenance and customer service. Staff in
these roles will be impacted and their contribution to the net zero program
will be critical. Business Development or Sales, and to some degree
strategic alliance and partnership functions, will need to be involved
because of the need to communicate with and align with stakeholders such
as industry associations or consortia and customers, about their potential
responsibilities in helping reduce their carbon footprint of your product or
service. Human Resources (HR) should be involved because job
descriptions and incentives are likely to change and key performance
indicators may evolve, which makes it a good idea to have people with
these job responsibilities, skills and capabilities on your net zero team. Each
of these roles and departments will be detailed in this chapter.

Figure 9: Program Organization Structure

The Steering Committee
The Steering Committee should be chaired by a C-level executive in your
organization who has the credibility and the leadership profile to guide the
program. This individual should be influential and supportive of the
initiative. Within that Steering Committee there is frequently a senior level
mentor or champion. Sometimes project managers, program managers and
champions of certain initiatives launch programs within their companies
without a Steering Committee. They believe they have the social and
intellectual capital and can bootstrap enough funding to run the initiative
without a formal Steering Committee. That is not a good idea, in my
experience. Since any net zero initiative is transversely important to the
whole company and will have long-term impact, a Steering Committee
should be in place. Sometimes it’s hard to coalesce top level support around
the initiative, and sometimes it takes a long time, but if you don’t do it the
chances of long-term success will be at risk.
The Program Management Office and the Program
Manager
The Project Management Office, or the Program Management Office
(hereafter simply referred to as the program office for the sake of
convenience), generally serves as the steward of the program budget, which
is customarily authorized by the Steering Committee. Well-established
controls and procedures, a predictable budget cycle, and procedures for
additional budget authorization allow the project to maintain continuity and
visibility. In contrast, if each budget authorization is a one-off request
without an established timeframe or procedure for processing the request,
the project can become bottlenecked in a “pending authorization” queue, or
even derailed. Among the engagements that I have led, those with very
strong program offices have been extraordinarily successful. One
engagement had a fully active program office that spanned a whole floor of
an office building with about 80 people and was directed by one of the
strongest managers in the company. The project was fully implemented and
became highly successful and profitable. The program office or project
office was vital to its success. In a different case one individual from the
client hired the consultants who worked in a remote team. The project saved
a lot of money and had a solid payback, but it wasn’t transformational. It
would have been a lot more impactful if there had been a project office and
a formal Steering Committee.
The Role of Advisors
External advisors such as management and strategy consultants, and
internal advisors, play vital roles in major projects like this one. In addition
to making specific and defined contributions, they often unite sometimes
disparate interests, assuage concerns about the project, and provide critical
communication links to external stakeholders.
The Role of the Carbon Economist
We will start with carbon measurements since this is one of the first
activities that need to occur for the baseline activity. And it is also a key
role as the program unfolds and various people in operations, supply chain
and elsewhere interface with the carbon measurer to gauge how much
carbon various initiatives and ideas will actually take out. This person
assumes a central role.

The purpose of the carbon measurement expert is to provide an independent

evaluation of baseline carbon footprint and estimate the impact of changes.
You might note the word independent. It is a good idea to engage an outside
firm for this exercise but there still needs to be somebody inside to do a lot
of adaptation and validation of the carbon footprint, a large number of what
may be very detailed and validation exercises, gather inventories of gas
footprint GHG, greenhouse gas footprints of different facilities and different
types of equipment. Most companies employ an external firm to help with
these, but you do need someone inside who can undertake many of that
very detailed work. The qualifications are generally someone with an
economics background and they can be people with degrees in
sustainability or ecological economics or environmental studies. Each of
them is slightly different but they are all related. Good candidates for this
role can have a range of different backgrounds that cut across those lines.

It helps if the carbon footprint person has some experience in operations or

energy procurement because they will be in the position of evaluating and
ascertaining the carbon footprint impact of different options. Some of those
operations improvement ideas and suggestions might either be tricky to
understand because they involve some degree of mechanical or operational
engineering, or might be a bit involved in production systems, and how
various production technologies and process technologies fit together. The
person with the appropriate background will have a much quicker time
getting up to speed and understanding what is going on.
Just a little parenthetical on what I mean by “systems.” We all operate in a
supply chain. Often when you start playing with one variable you affect a
lot of others, maybe even inadvertently. And the person in charge of carbon
measurement needs to understand those interrelations and interactions. For
example, if you change the speed going through a system you also affect the
inventory. The rate of flow in and out of the inventory changes the stock of
inventory. Manufacturing then drives inventory which in turn drives
warehousing requirements, creating a secondary impact on the building
footprint in terms of its construction as well as its heating ventilation and air
conditioning. The more background these individuals have to draw on, the
quicker they are going to be able to adapt to and understand the incremental
impact of these different suggestions. They may also possess a certificate
from certain professional training programs for carbon footprint which
could be awarded by several organizations, including non-governmental
organizations in carbon footprint such as the Global Reporting Initiative or
the Carbon Disclosure Program, to name just two.

The initial duty of this role would be to generate an accurate carbon

footprint baseline, as shown in Figure 10, because your baseline is the
springboard from which you conduct everything else. While it is not
uncommon to adjust a carbon footprint baseline later on once you get down
the road a bit further and you adjust the baseline based on some revisions in
the methodology, this person should pretty much certify the carbon
footprint baseline. They should also be the ones to estimate the incremental
impact of changes proposed by the team. Note the word estimate – all the
proposed changes involve estimations. They are not cast in stone. The
carbon footprint impact depends on many factors such as the degree to
which the technology performs as expected, the time frame in which it is
implemented, and the degree to which stakeholders adopt the new
technology or technologies. With all estimates the person needs to be fairly
proficient at managing ambiguous data and ambiguous projections, as well
as making projections with ranges of estimated confidence levels. And they
should also document the carbon footprint portions of the net zero plan. At
the end of this program, you should have enough information to actually put
together a net zero plan. And the carbon measurement person would
practically be the responsible party for making sure that carbon footprint
part.

Figure 10: Carbon Measurement Team Member Responsibilities

Normally this person would report to a project or program manager on a

dotted line and directly to a boss in a department like Finance or perhaps
Sustainability. They could come from a variety of different areas depending
on the structure of the organization. These would be the most common
affiliations for reporting relationships. During the course of the Net Zero
program they will be interfacing with many departments, primarily
operations, procurement and supply chain. The reason being that as you
look at ways to identify potential takeout of carbon, a lot of them have to do
with operations, procurement or supply chain in one way or another. It is
quite likely they will also be liaising with Marketing, Sales, After-Sales
Service and Manufacturing.
The Role of the Operations Manager
The Operations Manager is primarily in charge of identifying and
implementing the operational improvements that reduce carbon footprint,
developed from the efforts and time invested into this program. This person
or persons will preferably have experience in the operations of this
particular company. They could be recruited from outside and learn about
the company, but the more they understand your business the quicker and
more effective they are going to be at proposing changes that could actually
make a difference in reducing carbon.

They mostly report on a dotted line to the project or program manager in

charge of the net zero program or whatever definition this company may
have: low carbon, decarbonization or something to that effect. They should
probably have a solid line report to Operations or Manufacturing. If they are
the Chief Operating Officer, of course they would report to the CEO. They
will interface with the carbon measurement expert as well as people in risk
management, health safety, environment (HSE) and all sorts of other
departments that operations have synergy with.

They are responsible for evaluating and identifying opportunities for

decarbonization in all internal operations that may cut across the boundaries
of what may be functionally called operations, as shown in Figure 11. In
other words, we might expect them to also identify carbon reduction
opportunities in other areas such as distribution or sales and marketing
which are although operational in nature but fall outside the Operations
department. We would also expect them to evaluate opportunities to reduce
scope 2 and scope 3 footprint, which means they need a working knowledge
of power and fuels, customers and suppliers’ activities and how they affect
the company.

Figure 11: Operations Team Member Responsibilities

The Role of the Procurement Manager
Procurement is also an important role in the context of a decarbonization
program. The purpose of having a procurement person on the team is so
that they can identify and implement supply chain changes that could
reduce carbon footprint. To that end, just as with the operations people it
would really help if they had experience working with the company
suppliers as well as credibility and stature because they will be responsible
for evaluating opportunities to reduce carbon footprint through changes in
supply. They will also be evaluating and implementing changes in
procurement procedures and systems as shown in Figure 12.

Changes in suppliers can be transformational, can rock the boat and can be
difficult. And when we are talking about trying to achieve these very
substantial objectives, we might actually rock the boat quite a few times in
different directions. Therefore, this person needs to be willing to overhaul
procurement procedures and systems. They need to feel comfortable with a
red pen to scratch things and write over them, and to “rock the boat” with
significant changes.

They also report to the Net Zero program manager on a dotted line basis
and perhaps report to either Procurement, Operations or Manufacturing on a
solid line. They would interface with the carbon measurement expert in
addition to suppliers, which is presumably their main job.

Figure 12: Procurement Team Member Responsibilities

The Role of the Product Manager
The team needs representation from product design, R&D, and engineering.
Those things go together in the context of this program because the purpose
is undoubtedly to identify and implement changes in product or service
design that could reduce carbon footprint. They could be changes in product
design, research and development or engineering. In many cases, these
activities overlap, but not always, especially in larger companies. There are
various activities in engineering that have nothing to do with R&D or in
product design, or product design that have nothing to do with engineering,
for example, pure conceptual design. But generally, it could be any one of
these areas.

Ideally this person should have some experience with the customer. If they
have had some “voice of the customer” experience or some focus groups or
have spent a lot of time with the customers, they would be in a better
position to correctly gauge the reaction of the customers to whatever is
being proposed or might be proposed. It also helps if they have some
manufacturing engineering experience in the sense that the design changes
will impact manufacturing or production and everything else, as is clear in
the body of knowledge surrounding DFM (Design for Manufacturing, or
Design for Manufacturability), Design for Distribution, Design for
Reassembly, Design for Reuse, or whatever other “DFx” acronym you want
to use. The reality is by the time the design stage is finished, you have
pretty much predetermined about 80% of the whole cost of the life cycle of
the product. Because the way it is fixed in this design limits and constrains
all other activities after it, such as manufacturing, warehousing, distribution
and customer use. Hence it helps if this individual is familiar with
manufacturing, engineering and downstream customers.

Ideally this person should also be experienced in conducting a value

engineering study. I call this the House of Carbon study because it is
modeled after a “House of Quality” framework, which is a tool used in total
quality management, or TQM that I have adapted to low carbon design.
This position is also responsible for identifying and evaluating potential
actions that could be commercialized in the near and medium term as well
as actions that would be needed in the longer term. So, when they start
classifying the different potential opportunities to reduce carbon, there will
be a number of them falling clearly into the near and medium-term
categories: this can be done today and that can be done within a few
months, and so on. Others are pretty much like hard science development
that involves pushing the edge of the frontier. Let’s say we are not sure
whether we could develop this chemical transformation in a different way
to make a sustainable textile product, and it may need to go through lab
testing and through some R&D stages, therefore it is not sure how long that
would take to come out. I have worked on these types of studies where we
have classified these types of improvement initiatives into buckets. In one
case we chose two years as the commercialization time frame for the near
term, and in another we looked out over ten or more years. These were
different early-stage development projects often found in academia or
laboratories.

This person will be responsible for classifying the initiatives and stratifying
them into these different categories as shown in Figure 13, and will, as
usual, report to the Project or Program Manager for the Net Zero initiative
and probably direct line to Marketing or whatever home base they have.
He/she will also be responsible for interfacing with the carbon measurement
expert and with Engineering, Production and Procurement (and suppliers).

Figure 13: Product Design / R&D / Engineering Team Member

Responsibilities
The Role of the Marketing Manager
The next person on the team should be someone from Marketing. This is a
really important role because of the need to maximize the shareholder and
stakeholder value from the Net Zero program which could be realized in
many different forms. On the one hand, a net zero program will increase the
shareholder value by telling investors that this company has its affairs in
order, that there is a viable plan. Broadly speaking, that makes shareholders
happy and the stock price goes up. Hence in terms of communicating,
whether through investor relations or some other channel, this person is
effectively the mouthpiece of the net zero program to the public and the
investors.

The Marketing person will be responsible for communicating with

stakeholders of all kinds: employees, suppliers, contractors, customers, and
other groups as shown in Figure 14, so being a good communicator is
undeniably important. They should also have some solid experience with
digital marketing communications. While some of the communications will
be in person or through media such as television, quite a lot of stakeholders
might find out through social media or through news and digital ads. The
marketing person will be responsible for engaging customers regarding the
programs, initiatives and results. The word engage is important here since
the objective of the communication should be customer engagement. The
marketing team member should promote the benefits and successes of the
program and competently handle critiques about the drawbacks or the costs
of any unpopular decisions that are announced. During a net zero program,
it is likely that there will be some relatively unpopular decisions. There are
a lot of trade-offs that need to be made and some of them may be made in
ways that do not please all the stakeholders, so the marketing and
communications person will play a very important role in shaping the
message and shaping the perception of those relatively more controversial
decisions.

The Marketing person will also need to convert the goodwill and the “price
uplift” opportunities, to the extent that some of these program decisions
could result in price increases. I mean this in a positive way – it may be
possible to realize an increase in the gross margin if customers are willing
to pay more for, say, a clean, green and net zero product. Those revenue
gains flow through to the financials, and if price increase opportunities are
missed, some of the effort that that is put into the program could be lost.
Marketing therefore plays a key role in the net zero program.

Customarily the marketing person will of course report to the net zero
program or project manager. But then they will also report on a solid line
basis to the VP of Marketing or the Chief Marketing Officer. Or if they
currently report to the CEO, they will interface with just about everybody
on the project team because they will have to understand all the different
points of view as well as the timing of the different decisions that are
coming out.

Figure 14: Marketing Team Member Responsibilities

How to Set Operational and Financial Stage Gates
Every project goes through stage gates. Ordinarily the stages of a major
project involve a step where the idea is produced or created to be followed
by a scoping or planning phase, moving on to a development and
engineering phase, a procurement phase and ultimately a commissioning or
launch phase. Stage gates are yes/no, go/no-go decision points. They should
be preceded by checkpoints to make sure that conditions are healthy at
these important stages. Figure 15 shows stage gates for a sample project,
starting with conceptual design, going through an engineering phase, then a
procurement stage, and finally construction.

Figure 15: Stage Gate Framework

If you jump a stage, often you will find that there are pieces missing –
research or analysis that you should have done, perhaps because overseers
like Board Members or investors are looking for them but they are not
there. If a banker doesn’t see that the project passed the stage gates, they
may not back your program. Hence even though your program might be
correctly based on all the right premises, some of the stakeholders may not
put their weight behind it if they don’t see the evidence of the stages
happening.

While living in France I had to take the driving test. The driving test in
France is very specific and much more rigorous than the driving test in most
other countries. There are two components to it: a written test and a
practical test where you actually go out on the road and drive the vehicle.
When you take the practical test and you are turning a corner, one of the
things they coach you to do is make sure you move your head in the right
direction. The examiner’s job is to make sure you have driven safely, for
example by checking in the rear-view mirror before you turn so you need to
physically move your head in the direction of the mirror to demonstrate to
the inspector that you’ve looked in the mirror. That way he or she can check
the box and say “yes, he checked in the mirror.” If you are turning, you
want to be sure that you turned your body or your shoulder in the direction
that you’re turning, to make sure that the inspector observed that you were
following the procedure written in the manual. It’s a silly example but the
point is that even if you are certain you can skip a stage because it’s in your
head and you know how to do the work, often there are other parties
involved who will want to see evidence of the various steps. Hence it is
important to go through them methodically on a major initiative that has
long term impact for the company.

Some of these stage gates should be “funding gates,” indicated by triangles

in Figure 15. That means if you do not certifiably pass the gate, including
either a literal signature or the “blessing” of the relevant advisor, funding
for the next stage will not be released. The stage gate process can be pretty
rigid, but it is genuinely important. Essentially if you haven’t passed a stage
of analysis or evaluation or technical evaluation, you should not move on to
the next step. And if you do there should be a mechanism in place to limit
the funding you can get before you achieve the validation of certain steps. It
is a relatively simple concept but when the projects are large there can be
seventy to a hundred steps and sub-steps.
Establishing a Program Management Budget and
Cost Management Procedures
At the early stages the program budget may consist just of staff costs and
some overhead for administering the project. As the project scope becomes
clearer the budget will increase to cover the necessary capital and operating
expenses. Project cost estimates increase in accuracy as you progress
through the stage gates. From a concept study to a Front-End Engineering
and Design (FEED) study to a development phase, the project budget has a
percent error somewhere around plus or minus 40% which is technically
higher on the negative side than on the positive side – for example, + 50% /
- 30% – because projects more frequently come in over budget than under
budget. As shown in Figure 16, those brackets get smaller as you go
through the stages of cost estimation, as the level of confidence increases.
The level of variance to that estimate should shrink to the point where when
you are actually ready to break ground or construct something or get
started, software code or whatever you develop, your cost estimates should
be plus or minus about 2%. If you sign construction contracts, there should
be almost no variance from the eventual realized capital cost. It will then
become an important issue of contract management because we have all
signed contracts where the contractor has gone over budget. It is a critical
aspect that needs to be managed at that stage. There are famous studies of
major capital projects that systematically go over budget on the order of
30% to 200%.

Discipline and rigor of the cost estimation process at each stage helps
minimize budget variance. It is a good idea to learn formally about project
management and cost estimation or hire good cost estimators for this
exercise. Some companies are superb at running projects this way,
especially companies that have many megaprojects like ExxonMobil,
Chevron and Total, as well as Engineering, Procurement and Construction
(EPC) firms like AMEC and Technip. Petrochemical companies also tend to
be extraordinarily good at this. Some of the companies that need
improvement in this area are, in my experience, product or discrete
manufacturing companies, for example, in the automotive industry.

Figure 16: Major Capital Project Stages

Knowing What You Don’t Know
Since the net zero program has potentially very broad implications for any
organization, there are some big questions which you should be asking
before you lock in detailed roles and responsibilities. This book is designed
to help you answer these questions. For example:
Is it best to target net zero by a certain date?
Should one have a series of superordinate and subordinate targets,
such as 30% by one date and 50% percent by another date?
Is the right name for this project the “net zero” project? Or should
the operative word be “low carbon”? Or should it be “carbon-
neutral?”
What kind of team and resources there should be?
What kind of project management office should there be?
How many staff should there be?

There are important decisions to be made. This stage of the process should
be exciting and interesting, and should engage many lively discussions.
Project Governance: An Interview with Ranjith
Powell, Public Investment Fund, Kingdom of
Saudi Arabia
David: Ranjith, It’s a pleasure to be with you today to talk about how to
organize a governance structure for major capital projects and how that
relates to net zero programs. We’re privileged to have you as a guest
speaker. Before we get started, why don’t you briefly explain a little bit
about what you do at the Public Investment Fund (PIF)?

Ranjith: Absolutely. I’m an investment director in Public Investment Fund

of Saudi Arabia. What we do is essentially invest in international
investments as a sovereign wealth fund, to make sure that the money is
utilized in a commercially effective way. My sector is ports, and we do
international investments pretty much everywhere in the world, mainly in
Africa and the Middle East. These can be relatively small investments of
$100 million, up to extremely large investments of $1 billion plus. The
other thing that we do is design business cases to build up the logistics
ecosystems. This is probably the most exciting part because it gives us a
chance to get involved in the infrastructure of a country and really develop
that country. And if we can do it in a non-emissions way, in a green way,
then that’s all the better.

David: Thank you. That’s fantastic. As you work with stakeholders who are
involved in long-term multifaceted capital infrastructure projects, how do
you make sure that the stakeholders are all aligned when you progress
through the various stages? Are there stage gates and how do you set up the
governance structure?

Ranjith: Well, first let’s backtrack to the stakeholder, which I think is where
an effective governance structure really starts. As you move up into board
level structures, governance structures, it becomes more and more
important not to follow a prescriptive list or checklist of different
stakeholders. You really need to think about it proactively. Where do you
potentially see issues or problems or obstacles that need to be overcome?
And you need to proactively reach out to those stakeholders and engage
with them, sometimes years ahead of the actual project going into place. In
2006 when DP World from the United Arab Emirates wanted to buy P&O,
which was a very large shipping and ports company, P&O had ports all over
the world, including six ports in the US. And this was a deal which got
derailed in the end in relation to the American ports, primarily because of a
lack of stakeholder management. DP World, perhaps a little bit naively,
thought that the checklist of the process to get approvals for foreign
acquisition support was simply about applying through the CFIUS
[Committee on Foreign Investment in the United States] process, which is
basically the process for foreign investors to invest in strategic assets in the
US.

DP World followed that checklist, but various senators in the US at the time
were receiving phone calls – “what do we do about this Arab investor that
wants to invest in the US?” And the relevant senator said, I don’t know, I
haven’t heard about it. So going back over, what should have happened is
DP World should have been reaching out to all those senators’ offices, even
though there was no need within the actual process, the defined process, to
do that. And that would have resulted in a much, much cleaner deal for DP
World. As it turned out, those particular ports had to be sold because the
stakeholders who got involved rejected the deal even though the formal
process allowed them.

David: That’s an interesting example. Do you make a map of the anticipated

potential problems that you have in stakeholder buy in, or do you just do it
by intuition?

Ranjith: I think the key is scenario planning and bringing in many different
minds into that discussion over where the potential rocks in that water could
be. I don’t think this is one person trying to envision all the obstacles in
their own mind. It’s very important to have diversity to really understand
where you’re going to find these problematic stakeholders. So, in the DP
World example, one of the issues actually was the union involvement in
ports in the US. A significant stakeholder was the union – not the ports
which DP World was operating – but other unions in other ports around the
US. Looking back, the union should have been consulted very early in the
process.

David: So, do you use consultants and in what way do you use consultants
in a major project like that? How often do you find that consultants and
advisors are involved?

Ranjith: It’s very common in very large capital projects, particularly

strategic projects, strategic infrastructure projects. There are different types
of consultants. First of all, there are commercial consultants, which are
focused on the general market conditions and the commercial feasibility,
especially evaluating the demand for the project. Then there’s the financial
consultant, who’s really focusing on the numbers. And particularly in an
infrastructure project, there’s a very detailed technical report from a very
reputed engineering consultant. So, you would have at a minimum of three
different cohorts of consultants. Now, if we look at an M&A deal, on the
counterparty side, you will have a minimum of another three consultants.
Any infrastructure deal, before you even consider the lawyers, is going to
have six different consultants. So this can really get out of hand very
quickly in terms of consultants. And just recently we were working on a
deal looking at ports within Saudi Arabia where almost every consultant in
the world who knows ports was somehow involved in the deal, which is
very good for consultants, but really hard to manage. And it goes without
saying that each consultant has their own scope of work.

David: In this kind of an atmosphere where they all have a role, does it
sometimes lose clarity about roles and responsibilities of each specific
consultant?

Ranjith: Very much so. You need a very tight responsibility matrix and keep
each of the consultants to that scope. What’s important in this is not to let
the consultants run loose. They need to be very clearly directed and that’s
the responsibility of the program manager. That’s where the office of very
large projects goes out of control.
David: A long time ago, the Wharton Alumni magazine interviewed me for
an interesting article. I think it was called Managing with Ambiguity. And
the question was how do you control all these people when you don’t have
direct authority over them? And so that’s my question to you – where are
the direct and the indirect lines of authority?

Ranjith: The general answer is that the program manager does not have
direct authority. This is about managing through influence, not through
controlling these people. These are very, very smart individuals who have a
very clear idea of what they think should be the outcome of the project. The
program manager is there to guide them all in the same direction and take
their input critically and possibly redirect the project based upon what the
consultants and advisors are saying. A perfect example being what happens
with DP World is with the US ports. Perhaps DP World could have found
consultants to think about these other stakeholders. So the program manager
needs to dive and swoop. They need to be able to come up, take a 30,000-
foot view, and then they need to be able to dive into the weeds when
necessary, in order to really understand what the consultants are proposing.

David: You mentioned these people who are very smart and self-directed.
That raises the question for me about net zero initiatives. Net zero is like a
very aggressive target. It requires thinking outside of the box. So how do
you engage creativity in that process and still administer a program to
schedule? They sort of seem like almost two conflicting objectives, right?

Ranjith: This is sort of characteristic of the whole net zero initiative. You’ve
got this on the one hand, this “stretch target” by most reengineering
assumptions. Most people don’t exactly know how to get there, yet they’re
setting a target out and then challenging themselves to meet it. You have to
administer a project and you’ve got two conflicting things going here.
You’ve got an artist’s studio of creative people who each think
independently and whose brilliance will be essential to reaching the goal.
And on the other hand, you’ve got time, a budget, and a schedule to
manage.

David: How do you see those two things interrelating?

Ranjith: Yeah, it’s an interesting one. It comes down to a clear program
management process and stage gates. It’s a long process. If we look at a
classic infrastructure investment process, it starts off with a conceptual
design, which is where the creatives get their chance to really, really explain
how to out of the box think. But that happens very early on in the
conceptual design. And at the conceptual design stage, there’s a very, very
large chance that a lot of these initiatives won’t succeed and won’t pass all
the stage gates. But it doesn’t matter. It’s a chance to get them out in the
open and then to start narrowing down on what the solution is and then the
schedule accordingly. But once you go into the front-end design process,
you narrow down the schedule and the budget much, much more tightly and
have a much clearer scope of work. And that’s when it becomes more about
the technical execution rather than about the brainstorming.

David: How do stage gates work? How many stage gates are there typically,
and how often do projects actually get suspended or stopped for failing to
meet stage gate criteria?

Ranjith: Let’s look at a typical M&A transaction rather than an engineering

infrastructure build. The first stage gate is the desktop review. It’s
essentially a very broad overview of what the project is about, what the
potential benefits are, and what the potential threats are to the execution of
the investment. At that point there’s a very, very high chance of failure. But
conversely, most projects get through that first stage gate. I would argue
that it’s not very thorough at that point. And you could probably argue that
more projects should fail at the initial desktop review. But having said that,
it’s also the chance to make sure that every project is given its due and that
it has a chance to be reviewed properly in the next stage gate.

Ranjith: Then we move into the more detailed stage gate, which in
particular is the commercial case, and it’s backed up by a financial or DCF
[discounted cash flow] modeling exercise. At that point it’s much, much
more specific what the advantages are in the project. It’s quantified, it’s
very clear whether the project is going to make a return on investment or
not. And it’s at that point that the most thorough filtering of projects usually
happens. If it gets through that stage gate, which is usually only about 10%
of M&A transactions, then we move on to the technical due diligence,
which we can think of as engineering due diligence. It can be a lot more.

And then there’s the legal due diligence. These are the additional filters that
happen after financial due diligence. It may be that from a legal point of
view, there may be a politically exposed person in the transaction, in the
governing party, and it means that the transaction actually would not go
ahead despite the financial feasibility of the whole transaction. So by the
time you get through that final stage gate of the legal due diligence in
M&A, it’s usually about one in a hundred projects that actually finally pass
that stage. There’s a lot of filtering that goes on in the whole process. And,
you know, the ones that make it are usually in infrastructure anyway,
because of the large amounts of investment, they usually are very, very
successful projects.

David: Let’s transpose this to a net zero initiative environment. If 99 out of

100 acquisitions eventually drop out of the process at some point along the
way, and you’re in charge of managing another type of major project called
net zero or low carbon initiatives, would it be realistic to say that companies
that start off with this major ambition might very well be confronted with
the realities of not meeting the various stage gates along the way?

Ranjith: I think that’s the whole purpose of stage gates, whether it’s related
to infrastructure or whether it’s related to a net zero project, ultimately the
project needs to be evaluated on what its returns are. Now, it may be that
not all the returns are quantified or financial returns. There may be other
externalities, for example, that need to be taken into account, but those
should be clearly defined and outlined. And that’s the whole purpose of
stage gates – to force the sponsors of the project to really understand
explicitly what the returns are from the project.

Ranjith: Let’s use an example of hydrogen, which is a topical issue at the

moment. There are a number of different ways that hydrogen can be used
for generating energy. And I think it would be fair to say that there’s been
no clear judgment at the moment as to what form the hydrogen should take
when it’s transported to the end user. It could be ammonia, it could be
liquefied hydrogen, it could be a pipeline. There’s a number of different
ways to get the hydrogen to where it’s used. Now, the point of the stage gate
is to force the sponsor to decide very explicitly whether they are going to
propose an ammonia transport solution versus a liquefied hydrogen
solution. This does not really come out until you specify this in the business
case.

And I would argue that’s exactly why there’s so much discussion of

hydrogen as an energy source at the moment, but very little project which
are actually in the execution phase because there’s still a lot of work to be
done on, one, the conceptual design, and two, the front-end engineering
design. And in my view, it’s actually a validation of the entire stage gate
system that we haven’t begun the actual implementation of hydrogen
projects until we truly understand what is the most technically and
financially feasible way to move.

David: When you start looking at those conceptual designs and the
economic forecasts, a lot of it is based on future projections? In fact,
probably most of it, I would suppose, because whether you transport it in
terms of ammonia or liquefied hydrogen or whatever, you have your current
costs and then you have your current sales revenues that could be received
because of a project. But then most of the future streams of cash would
seem to be based on what’s going to happen in the future regarding the sales
price of hydrogen. And that in turn depends on the adoption rates by
segment, whether for power usage and for transport and all those sectors.
So how much weight are you actually able to place on those projections?

Ranjith: The projections in and of themselves will be wrong. Guaranteed,

they will be wrong. But the point of doing the projections is if you fail to
plan, you plan to fail. You are using the projections in order to give you a
structure, the bones of the project. What happens over time will be very,
very different from the bones of the project, but at least it gives you a
reference point for some of the outcomes of the project. Now, what happens
with a good DCF is it’s not that there’s a single outcome in terms of return.
There are multiple scenarios. And what you’re really doing is using those
scenarios to force the decision makers to think about what the different
options might be, including some very unrealistic options, and then using
that to come up with a consensus of not even what is the most likely
scenario, but what is the outcome of all of those. Scenarios. And one way to
put it in technical language is Monte Carlo analysis. It’s looking at the
overall outcome of all those scenarios with different probabilities besides to
each of those scenarios. So this is really a thinking exercise. It’s an
intellectual exercise. It’s not that you take that final number and say, this is
the number, and we will proceed with the project because of this number.
It’s just a way to force relevant investment fees to think about what might
happen and the likelihood of each scenario.

David: That’s interesting. During most of this discussion underlying a lot of

what you’ve been saying is that there are hurdles related to profitability.

Ranjith: I think that’s been kind of understood among everything that we

do. And yet in net zero programs, a lot of the program could be based on a
premise, perhaps, of government mandates, regulations or requirements. In
the EU, for example, all these requirements are there will be no more
internal combustion engine vehicles after like 2035, I believe. Net zero by
2050. All the support for the fossil fuel industry is being removed
progressively and there are mandates for disclosure. It’s a very constrained
environment, as forcing a way forward may or may not be profitable, I’m
supposing.

David: When you’re involved in these deals and there are government
actors, to what degree and in what situations would profitability take a
backseat to some other objectives?

Ranjith: I would argue that there’s different functions of the private sector
and the government sector, and the government is actually looking for the
private sector to provide solutions that are commercially viable within the
parameters of those mandates. The government has set some broad
parameters, and now it’s up to relevant investment companies or investment
funds to solve those parameters to still come up with a commercially viable
project. One example, and this is an example that’s true in most of the
world still, is with the take-up of electric vehicles. The governments are
having a very, very difficult time putting together the case for the charging
station, the public charging stations. So, what the governments have done is
a mandate that there will be x percent of electric vehicles by 2030. But now
it’s up to the various private sector organizations to work out a
commercially viable way to provide the charging infrastructure. For
example, in some countries in the Middle East, the private sector has been
looking at ways to work with the road toll companies in order to provide
toll-free access for electric vehicles and used the proceeds of that company
to subsidize the charging stations. All the innovation and the out-of-the box
thinking has to happen in the private sector. And the government expects
that. To be honest, they don’t want to be continually subsidizing public
charging stations just because they set a mandate for introduction of electric
vehicles by a certain time.

David: Yeah, that’s interesting. I was speaking a while ago with the
president of a major power utility about his company’s net zero program
and it turns out that his company is fundamentally assuming that the rates to
the consumers have to stay the same. There is no allowance for the rates to
increase. And we also see this on other projects. So, can the whole economy
transition?

Ranjith: I think it’s a game at this point of trying to figure out which
innovations come from which stakeholders to make this all happen and
happen profitably. We’re probably in for a very, very interesting period of
innovation and dynamism. The key here is to not narrowly define
profitability. It’s about the various externalities that are not being captured
today and including those within the calculation. So, for example, with
electric vehicles, are we including the pricing of those carbon emissions? I
would argue in most countries in the world, we still really aren’t pricing
those carbon emissions. Once you price in those carbon emissions, then
very rapidly you can develop a value case for implementing electric
vehicles or other types of non-internal combustion engine vehicles. So, the
out-of-the-box thinking needs to happen.
Ranjith: Investment funds are very good at solving for whatever the
parameters are. It doesn’t matter what the parameters actually are, but they
need to be clearly defined so that someone can quantify how you are able to
meet those parameters and still achieve a return to your investors. And I
think most governments, no matter what they say about wanting to have a
very clear target to go green, still expect it to be done in a way where the
government is not subsidizing those projects indefinitely. A perfect example
is those charging stations – not many governments are willing to pay for
those charging stations. They’re expecting either car manufacturers to do it
or a private sector solution.

David: Well, this is very exciting. From prior experience, I know as a

consultant, if there’s a stretch goal set, it kind of forces innovation, it forces
people to think outside the box, and it forces commercial solutions. And
with this major mega-stretch goal set of net zero, I think we’re in for an era
of innovation that is something we haven't seen before. And with folks like
you making the major project investments and guiding them into the future,
I feel very confident we're going to get there in a creative and productive
and profitable way. Ranjith, thank you very much for your time.

Ranjith: It's always a pleasure talking to you.

2 How to Calculate Your Baseline Carbon
Footprint
“If you are disclosing your carbon footprint or environmental or ecological
footprint to an agency like CDP, which is Carbon Disclosure Project – CDP
is a platform where you as a company could disclose your carbon footprint
and even showcase to the world and your stakeholders how you are making
efforts to reduce the carbon footprint over a period of time – you may have
to disclose to the CDP your level of confidence in your exercise and
normally the acceptable error in which you must claim should not exceed
5%.”

--- Alok Raj Gupta, Boston Strategies International

• This section teaches you how to calculate your carbon footprint and
identify where significant reduction opportunities may lie.
• If you are taking the REVchain™ online course, you will find
templates that you can use to define your company’s carbon footprint
boundaries, calculate your baseline carbon footprint, validate your
baseline carbon footprint, and estimate your CO2 reduction potential.
The templates are customized to your industry whether you are in a
process industry like oil & gas, petrochemicals or power generation,
a discrete manufacturing industry like automotive or parts &
equipment, distribution transport or logistics, and services like retail.
• In addition, Course 2 of the online program features advice from
Alok Raj Gupta, a leading environmental and ecological economist
and co-author of Reinventing the Energy Value Chain.
• Start your net zero journey on the right foot, with an accurate
understanding of your current carbon footprint!
Introduction
This chapter introduces carbon footprints. After the introduction you will
move on to define your carbon footprint boundaries, calculate the baseline
carbon footprint in your organization, know how to validate your baseline
carbon footprint against industry benchmarks and where to find those, and
finally, learn how to analyze the carbon reduction potential in your
organization and in your supply chain. After this chapter, you will proceed
onto scope 1, scope 2 and scope 3 carbon reduction initiatives, laying out a
plan for what can really succeed in your organization and have the most
bang for the buck, the most benefit. At the end you will document your net
zero plan.

This chapter will review the history and context of carbon measurement,
which is important if you are in the role of making decisions about
resources, timelines and methodology. We are going to review the key
actors involved and understand which ones are the preeminent
organizations that have put forth major methodologies, major resources,
major templates and so on. This is not to say that there are no others besides
those we cite here but these are some that you should become familiar with.
We are also going to explain some important carbon footprint concepts that
everybody involved in a net zero program should be aware of. Finally, we
are going to look at some carbon measurement frameworks, examples and
templates for different industries.
Historical Context
Measuring Carbon footprint is one thread of a stream of environmental
practices, protocols and regulations that have been emerging since about
1970. 1970 was a landmark year because of the creation of the United
States Environmental Protection Agency (EPA). The EPA today monitors,
controls and legislates to a large degree carbon mandates, carbon-related
regulations and carbon oversight requirements. In the EU this type of
oversight is provided by the European Commission. From 1976 through
about 1992, many more new regulations emerged, particularly in the United
States, surrounding toxic and hazardous substances. Major ones include the
Resource Conservation and Recovery Act (RCRA), the Toxic Substances
Control Act (TSCA), the Superfund Amendments and Reauthorization Act
(SARA) and Material Safety Data Sheets (MSDS) sheets – informational
disclosures that specify and document potentially hazardous substances.
The Basel Accord set some ground rules so developed countries would not
ship their toxic wastes to less developed countries.

In 1997 the Kyoto Protocol limited carbon dioxide (CO2), methane (CH4),
nitrous oxide (N2O), hydrofluorocarbons (HFCs) perfluorocarbons (PFCs),
sulfur hexafluoride (SF6) and nitrogen trifluoride (NF3). Then in 2003,
2004, 2005, 2006 and 2007 there were many new chemical legislations and
accords, many of which were centered around disposal of electronics
equipment due to the rise of consumer electronics including computers and
phones, such as The Restriction of Hazardous Substances (RoHS). Europe
mandated the Registration, Evaluation, Authorization and Restriction of
Chemicals (REACH) to ensure documentation and guardrails regarding the
contents of potentially harmful substances as they are sold throughout the
value chain. There were also some important accords on biodiversity.

Starting in about 2015 more of the legislation and protocols began to

pertain to carbon. The United Nations announced the Sustainable
Development Goals (SDGs) in 2015, which included SDG 13, which urged
action to combat climate change. In 2016, the Paris Accord clearly and
explicitly recognized climate change and put in place climate change
prevention and mitigation measures. The Kigali Amendment, an
amendment to the Montreal Protocol on Substances, represents the
convergence of carbon awareness, legislation and protocols regarding toxic
substances because the Kigali amendment pertains to substances that
deplete the ozone layer. And then the IPCC, the United Nations
Intergovernmental Panel on Climate Change (IPCC) put out reports
documenting the current state of climate change and actions to combat it.
Key Actors
Non-governmental organizations (NGOs) play a very important role in
carbon measurement and carbon reduction, as shown in Figure 17. The
Greenhouse Gas Protocol (GHG) has issued many very important and very
specific methodologies for measuring carbon. The Intergovernmental Panel
on Climate Change (IPCC) also measures climate change and promotes
tools and information about climate change, including carbon measurement
and carbon adaptation. The International Energy Agency (IEA) has
programs related to clean energy and the transition to renewable energy.
The Carbon Disclosure Project (CDP) plays an important role in assisting
and encouraging organizations, especially private sector companies, to
voluntarily disclose their carbon footprint. Science Based Targets is another
association of governments, agencies and organizations that are committed
to disseminating accurate information about climate change and about
carbon impact. These are just some examples; there are many others.

Figure 17: Government Agencies and NGOs Involved in Measuring Carbon

Footprint
In the private sector some heavy carbon emitters are actively working on
reducing the carbon footprint of their industries and their own operations,
such as steel producers like Arcelor-Mittal, cement manufacturers like
Lafarge and glass companies like St. Gobain. Most large industrial
companies have programs in carbon measurement and management. In the
transport sector, companies like Maersk have been promoting a lot of
information about carbon change, carbon footprint and making major
forward-looking capital investment decisions based on carbon impact, for
example, buying fleets of vessels that operate on renewable energy. In
logistics, there is a Global Logistics Emissions Council (GLEC) aimed at
informing and measuring the carbon footprint of the transportation network.
The Zero Emissions Vehicle Alliance consists of various actors in the
transportation sector that are working toward zero emissions vehicles as its
name implies.

Many investment management companies are committed to

decarbonization. As shown in Figure 18, the Net Zero Asset Owner
Alliance is a group of investors that acknowledges the role that net zero
pledges should have on their portfolio holdings. Stock ratings firms like
Morningstar and Sustainalytics measure the carbon footprint of their
portfolio companies and across other sectors as well for investors. Moody’s,
Standard & Poor’s and other companies that do traditional stock rating are
in carbon measurement to varying degrees to support their stock-rating
methodology. Conventional equity analysts and ESG specialist financial
service data providers like Sustainalytics are also measuring carbon
footprint.

On the academic side, some large entities are doing a lot of work on climate
change. One is Boston University’s Institute for Global Sustainability. In
New York you have Columbia University’s Center for Global Energy
Policy. Stanford, UCLA and others all have huge amounts of resources
behind this. That should just give you a quick idea of some names that you
might want to track or be aware of as you become immersed in this space.
And this is just one small slice of the pie. It is not a comprehensive view.
Figure 18: Selected Investors and Academics Active in Carbon
Measurement
Greenhouse Gases and Global Warming Potential
When we measure our carbon footprint we are talking about a lot more than
CO2. The primary gases and substances contributing to global warming fall
into three categories: hydrocarbons, hydrofluorocarbons (HFCs) and
chlorofluorocarbons (CFCs) as shown in Figure 19. Among the
hydrocarbons, carbon dioxide, or CO2, is the big one that everybody talks
about, but methane and nitrous oxide are also emitted to varying degrees in
agriculture, oil and gas, transportation and other industrial processes. Those
three are habitually measured in great detail in most carbon footprinting
initiatives. There are quite a few different hydrofluorocarbons; this box only
shows two. Refrigerants are a particularly “bad actor” in this case because
these hydrofluorocarbons tend to be much more damaging to the ozone
layer than the hydrocarbons are. Then there is a third group,
chlorofluorocarbons (CFCs), which are also detrimental. Figure 19 lists just
two of them but there are many more. This simplified chart may just give
you a three-part lay of the land from where to start in understanding their
impact.

Figure 19: The Principal Gases Contributing to Global Warming

Each of these substances has a different carbon footprint impact. Some are
much more severe than others. The way we deal with that is by assigning an
indicator called Global Warming Potential, or GWP, which is an
equivalence whereby CO2 is 1.0 and all the others are multiples or fractions
of that. Because these common greenhouse gases have radically different
GWPs, it is important to know which substances you are dealing with.
Small emissions of some of these dangerous substances are far, far worse
than a large emission of some others. If you talk about HFCs and CFCs,
especially refrigerants, depending on what you are using. You cannot
measure everything just in tons. Figure 20 shows the GWP figures for
major substances sorted by the lifetime of the substance. As you can see,
the Global Warming Potential in some of these is in the thousands or tens of
thousands, compared to the number one (1.0) for CO2.

Figure 20: Global Warming Potential (GWP) Factors for Common

Greenhouse Gases

Source: Greenhouse Gas Protocol[3]

Scope 1, 2, and 3
Another concept that you must be aware of is scope 1, 2 and 3 emissions.
The Greenhouse Gas Protocol categorizes emissions into direct, indirect,
and lifecycle. Those are my category labels, not theirs. They call them
Scope 1, Scope 2 and Scope 3 emissions. As indicated in Figure 21, Scope
1 carbon footprint measures carbon inside your company's facilities. I call it
“inside the four walls.” Scope 2 is the indirect carbon footprint that comes
from purchased electricity, heating and cooling. Although you are not
making electricity, you may be buying it and using it. Although you may
not consume or burn the coal which resulted in the electricity when you flip
on your light. But you do flip on your light, so you are indirectly causing
the use of CO2 by drawing in that source. That is an important source. Then
there is all the indirect use of carbon that you consume which is not inside
the four walls of your company or your entity and is not electricity that you
purchase. It's called Scope 3. Scope 3 can be upstream or downstream,
customers and suppliers. Hence in carbon footprint you are really looking at
the whole value chain. Here are some definitions that accompany those so
you can be more precise. Scope 1 is direct emissions from owner-controlled
sources. Scope 2 is indirect emissions from generation of purchased energy;
that can be any kind of energy. Scope 3 is all other indirect emissions up
and down the value chain.

Figure 21: Working Definitions for Scope 1, 2 and 3 Carbon Emissions

Throughout this book I will organize carbon footprint and the associated
reduction opportunities into Direct, Indirect, and Lifecycle, or scope 1,
scope 2 and scope 3 without the capital letters, to signify that they may not
correspond exactly to the carbon economists’ definitions.

Essentially, scope 1 emissions are those in your direct control. There are
further definitions which I will cover but for shorthand scope 1 is what is
directly around you and what your organization directly controls. Scope 2
emissions are those that are produced by your heat and power suppliers.
Presumably most companies and organizations buy electricity and heat.
Those two things are usually produced using fossil fuels, natural gas
primarily, but also coal and any number of other sources that may or may
not be considered renewable, such as nuclear, wind and solar power. Scope
3 emissions are pretty much all the rest, including especially any emissions
produced by any of your suppliers or customers. Assuming you go out and
buy $100 worth of something from a supplier and that supplier produces a
carbon footprint. By buying from the supplier, you are inherently and
implicitly producing a carbon footprint. You are not producing it directly,
but you are purchasing something which is causing a carbon footprint to be
produced. Similarly, scope 3 emissions include the carbon emissions
produced by your customers use of your products over their lifecycles. Let's
say that you produce a printer of some kind of electronic device and then
your customer uses it. During the use of the product your customer turns it
on, uses electricity, and at the end of its life perhaps discards a piece of
electronics which degrades and creates some emissions and toxic waste.
The emissions part of that could be related to fossil fuel carbon footprint to
the extent that they are among the emissions described in the previous
chapter.

Let's look at scope 1. Let's consider these to be direct emissions from

owned or controlled sources. What does that mean for a boundary? It means
that you can draw a line around your activities within your organization's
control. Control could be on site fuel combustion and manufacturing or
many more things. Just like in legal terms, control is a slightly ambiguous
word that needs to be parsed and clearly defined. There are rules and
guidelines in the carbon footprinting business about the definition of
control. For example, do you wholly own a subsidiary that produces carbon
footprint? Do you have a joint venture in which you own 49%? Does that
count? There are all kinds of parsing definitions about what control means.
For our purposes I think the simple rule is if you own a majority share in
some business, whether it is active or passive, then that must be counted in
your scope 1 emissions. If you produce or generate electricity, heat or
steam, that's scope 1 for your company and scope 2 for your customers. For
example, if you are an oil and gas company or if you are a power company
burning coal or burning gas, that is scope 1 emissions for you. If you
physically make chemicals or do other processing operations, whatever you
do in the scope of that activity that produces carbon emissions is scope 1. If
you have an onsite generator that you use to produce power for your
operations, that is scope 1. Fugitive emissions are scope 1 emissions that
leak out.

Scope 2 refers to indirect emissions from the generation of purchased

energy. Energy in this case is electricity, heat or steam, primarily utilities.
This is the classic definition of scope 2: emissions from sources purchased
from third parties such as cooking gas, heating and electricity. It is pretty
much what you write a check or transfer money to the local utility for,
whether it is gas or power. There is one important caveat to note here which
is that REVchain™ considers transport fuel to be in scope 2. Most
traditional carbon economists would consider transportation of a fleet, even
if it is for freight or for people passenger, to be in scope 1 emissions
because you are moving the trucks or the cars around and they are within
your control. But from a procurement point of view, I consider both fuel
and electricity to be purchased energy. Thinking in terms of procurement,
most companies manage their operations using category management,
meaning that they buy similar things according to the same internal
policies, procedures and methodologies. Therefore, it is more intuitive for
me to consider transportation fuel scope 2 whereas scope 1 is more
production and manufacturing. So be aware if you are dealing with carbon
footprint experts, that the definitions in this book do not necessarily
conform to the standard industry definitions of scope 1, 2 and 3.

Scope 3 is all the indirect emissions that occur in the value chain and are
not included in scope 1 or two. And that can go upstream, downstream and
sideways. Upstream is your suppliers and downstream is your customers.
By sideways I mean that over time, not just the distribution to your
customer today, but what your customer does over the product or services
lifecycle. Scope 3 is emissions that are outside an organization's own
operations and are not counted in scope 1 or two. These could also include
employee commuting and business travel, outsourcing, transportation,
disposal of carbon emitting, waste and water consumption. The GHG
Protocol, which issues a lot of useful technical guidelines for cutting
carbon, publishes diagrams about scope 1, 2 and 3 boundaries that you
might find helpful.

For the Revchain process we are not really hung up on technical definitions
of scope. It does not matter to us operations management and supply chain
management professionals because our objective is to take carbon out of the
operations, regardless of whether they are in scope 1, 2 or 3. A theoretical
carbon economy economist might take a very different view. And if you
have a compliance reporting requirement, which is more likely if you are in
Europe, you probably need to be very careful about what you categorize
into scope 1, 2 and 3. But an American company does not have such
reporting requirements. If you are trying to look at it from more of an
operations point of view, then the Revchain methodology might be better
suited to you.

Conceptually, the definition of scope 1, 2 and 3 carbon footprint boundaries

are the same regardless of industry even though the lexicon, data sources
and the data aggregation methodologies vary to some degree by industry.
Mapping Your Carbon Footprint Boundaries
If you are in the oil and gas business, the value chain view shown in Figure
22 may help. If you circle: 1) your activities, and 2) your suppliers and your
customers’ activities, the inner circle should represent your scope 1
activities, and a subset of the outer ring would generally represent your
scope 2 and 3 boundaries.

Figure 22: Generic Oil & Gas Value Chain

In the context of a scope 1 boundary, often oil & gas companies are
integrated, which would make a large scope 1 boundary. But for the sake of
argument let's say that you do exploration and production including some
gas processing and you operate a fleet of tankers that ship the product. Then
you might contract some tankers and you may own some tankers. In scope
1, you will include anything directly under your control in the exploration
and production categories. For the tanker part, you will have to decide
whether that is in your control or not for the purposes of scope 1. If you
contract some tankers and operate some of your own tankers, chances are
that that activity is in your scope 1 depending on the nature of it. If you
contract out tanker operations, your scope 1 emissions would not include
that business. If you are doing transportation, for example, pipeline and rail
activity, the pipeline activity might be a separate company, but you have
some equity or profit-sharing participation in the pipeline company in
which case you will need to determine whether the nature of your activity
or your participation in the pipeline company is a controlling interest or not.

Your financial accountants have already been through these decisions

regarding what is in your control and what is not for reporting on your
financial statements such as your annual report, 10K report, or other
financial filings. They can probably provide you with the guidance to define
your scope 1 boundary correctly and consistently with the way the
organization has been defined elsewhere.

If you are in the power generation, transmission or distribution business,

your scope 1 boundary will vary depending on which activities in the value
chain you control. Often in the power business, power generation is a
separate, discrete industry, separate from power transmission and power
distribution. However, many companies that are in the generation business
also have transmission operations, and they may also have local
distribution, although in the United States that often falls to a regulated
entity. Thus the regulatory environment may shape which parts are in your
scope 1 boundary. Figure 23 below lists sub-activities in the power industry
that might help you understand more specifically what should be counted in
your scope 1 boundary, where you purchase heat and power (scope 2), and
where your customers and suppliers lie (scope 3).

Figure 23: Generic Power Generation, Transmission & Distribution Value

Chain
If you are in a manufacturing industry Figure 24 may help you
conceptualize your carbon footprint boundary. You may have raw material
suppliers, component manufacturing activity, a first market with original
equipment, or maybe a subsystem manufacturer and an assembly process.
There may be some service and distribution or dealer network, and
sometimes a broker network or sales network. There may be a wholesale
market in parallel to the original equipment market, and there may be
installers. Either way those channels also end up in the hands of your end
customer. These templates are on rev-chain.com for you to use.
 Figure 24: Generic Manufacturing Value Chain

If you are in a distribution business, you can refer to Figure 25. You could
be a transportation provider that delivers product from a supplier's factory
to a port which could be an airport or a seaport in an export value chain.
You could be a customs consolidator or shipping company, or maybe an
integrated company that includes a lot of these activities. This can get a
little bit tricky based on my work at companies like UPS, FedEx and others
in the shipping business. While they definitely offer a lot of services like
deconsolidation and customs brokerage, they do not necessarily do them
under their own roof. They frequently use a lot of contract relationships.
Getting a product from one side of the earth to the other side of the earth
involves many hands. Fuel purchase would be scope 2 and customer and
supplier relationships would be scope 3.

Figure 25: Generic Distribution Value Chain

So that was an introduction to scope 1, 2 and 3 carbon footprints and where

to draw your scope boundaries. Scope 1 boundary for a small company
could be ultimately very simple. You may have an office or facility, or
maybe a set of facilities. You may have a production operation and a few
warehouses. But if you are a large company with a multinational footprint, a
lot of holding companies, joint ventures, leases and contracts, then defining
your scope 1 boundary might take some discussions.

Please remember to view the interview with Alok Raj Gupta on the rev-
chain.com website. The next session involves how to calculate the baseline
carbon footprint. We will be looking at the details of the computations.
Calculating your Carbon Footprint
This section will provide some methodological guidance for calculating
your carbon footprint in four sectors: oil & gas, power generation,
manufacturing and distribution. Manufacturing covers a broad range of
industries. Distribution could be used as a basis for transport, logistics,
retail and services industries.

The oil, gas and power industries are relatively self-contained. For purposes
of carbon footprinting, the manufacturing example is more of a sector
definition than an industry definition – if you are in the steel or the glass
industry, the automotive industry, electronics industry and so on, there are
specific carbon calculation, calculators and methodologies. For
demonstration purposes of this chapter, we are lumping them together as
manufacturing and as we delve deeper you will see that there are a lot of
similarities. If you are looking for a specific carbon calculator that relates to
your industry, you may want to locate more specialized carbon footprint
tools. Similarly, distribution industries cover, broadly speaking, distribution,
retail and service industries. It represents companies in the distribution and
logistics industries such as FedEx and UPS, as well as trucking companies
and logistics companies, and it can be adapted to include any company in
the distribution or retail sector.

Power, oil and gas are scope 1 to themselves but scope 2 to most other
companies that buy power and use fuel. Manufacturing industries use
distribution so manufacturing would be scope 1 to itself and distribution
would be potentially scope 2. Distribution would be consuming all the
above manufacturing power as well as oil and gas to distribution. Retail
industries frequently have a small scope 1 footprint but a large scope 3
footprint.

The framework we are using is the GHG emissions framework issued by

the IPCC (the Intergovernmental Panel on Climate Change) and the GHG
Protocol. This accounts for emissions of carbon dioxide, methane and
nitrous oxide as well as the CO2 equivalents and the total or aggregate sum
carbon footprint of those. As is common in the industry, we start off by
dividing the value chain activity into upstream, midstream and downstream.

Carbon Footprint Methodology for the Oil & Gas Carbon

Industry

In the oil industry upstream generally consists of exploration, production

and upgrading. Midstream consists of storage and transportation.
Downstream consists of refining and distribution. If you have a specific or
unique definition of what you include in midstream, upstream or
downstream, you can easily adapt the carbon footprint calculator tool to
your business. Although usually oil and gas are explored and produced
together, sometimes they are separate and managed differently which will
impact the exact type of data you gather for the carbon footprint. Even if
you separate them and gather data separately, gas upstream generally still
includes gas exploration, production and gathering (which includes the
feeders that extract the gas from the ground into the processing facility).
Gas midstream is transmission (larger pipelines), storage and processing,
while gas downstream is distribution (smaller pipelines).

For each stage we can calculate emissions for approximations according to

formulas where possible.

A relatively simple approach to upstream can be calculated by multiplying

the fuel combusted for stationary and mobile sources of power by the
distance traveled, times whatever emissions factor is applicable to the
distance loss from fuel and adding fugitive emissions. In scope 1 you have
fugitive emissions due to leakages, flaring and venting. If you have flaring
operations right now, we can safely assume we will plan to eliminate that
flaring in the decarbonization plan.

For upstream you would want to include direct fuel consumption from any
power applications (this will be scope 2), motive power and non-motive
power based on how much fuel you burn in the rotating equipment,
generators and other types of power for all the upstream activities. If you
are doing oil sands processing, oil sands upgrading would be included in
scope 1.

In the midstream we also apply a “weight x distance” approach to the direct

fuel consumption based on the weight of the load and the distance covered,
applying an index or a factor to the emissions from the transport of the
transport midstream activity. The weight x distance approach is a simplified
way of doing this. You could also go back and look at actual emissions from
specific facilities at the source, meaning the compressors at the compression
stations, any generators or motors involved and so on. And you could
measure this at the equipment level if you prefer using the weight x distance
formula. Fugitive emissions come into play in midstream based on
emissions from loaded trucks, rail car and tanker ships, whether from the
top or from loading and unloading.

In downstream, you should include emissions that emanate from activities

such as asphalt blowing, calcination, anode production, vents and flaring.
You will be looking at methane emissions from all sorts of facilities
including storage tanks, blowdowns, asphalt blowing, equipment leaks and
water treatment. And anywhere you have cooling towers, there is probably
some degree of emissions because of the refining process, catalytic
cracking, reforming, delayed coking and so on. There will be emissions in
most cases. On the downstream side during distribution, aka for anything
you transport, you will have the possibility for fugitive emissions of those
refined fuel products. If you are working in natural gas you have a similar
situation but adapted to gas. For upstream scope 1 you will be looking at the
unconventional gas and the conventional gas net of flaring. On upstream
gas gathering, you will want to divide that into onshore and offshore, be it
gas or coal bed production, and include the gathering activity. On the
midstream, you will be looking at processing of the natural gas as well as
sour gas.

For the gas transmission and storage, you want to include direct fuel
consumption from both stationery and mobile sources (this will be scope 2).
Once more we apply a factor which hopefully will be accurate enough for
your case. And downstream gas distribution must include both the gas
distribution and any kind of storage location including the town or local
distribution of the gas.

For scope 2, always inventory the electricity, steam and heat used in each
stage of the process.

BP does a good job of reporting its scope 1 emissions in its ESG Data Sheet
as shown in Figure 26.[4] It converts GHG into metric tons equivalent of
CO2 and it separates out the total greenhouse gases from the carbon dioxide
and methane. In 2020 the total was 41.7 million tons of CO2 equivalent
(MtCO2e), of which most was carbon dioxide and a small amount was
methane. And they compute the methane intensity percentage, which is
helpful because that is a very harmful by-product. BP also lists some of the
reductions that they are working on and have achieved, which they report as
scope 2 or indirect emissions. They further subdivide the carbon footprint
into upstream, downstream and other, from which it is clear that upstream
and downstream are relatively evenly split. Further they calculate the
greenhouse gas intensity, represented in tons of carbon dioxide equivalent
per 1000 barrels of oil equivalent (BoE).

Figure 26: BP’s GHG Report

Source: BP, ESG Datasheet, 2020.

These kinds of metrics and ratios of an intensity are handy because if you
are in this business, you can use those ratios to sanity check your own
numbers and see how you come out relative to some of these majors. BP
also reports scope 2 emissions which they further divide into upstream and
downstream. For BP most of their emissions are scope 1. Scope 2 only
comes out to 3.8 MtCO2e under operational control and 4.2 MT CO2e under
equity interest. As a result they produce about ten to twenty times as much
scope 1 as scope 2 emissions, which is not unusual for an oil and gas
company. BP also lists the energy consumed in millions of gigajoules and
provides an energy efficiency ratio, which they label at 91.5.

The oil and gas carbon footprint templates at rev-chain.com have an input
table and a data workbook that is both at the summary level by fuel and at
the detailed level by activity and emissions. Additional supporting input
tables are also available through rev-chain.com.
Carbon Footprint Methodology for the Power Industry

If you are in the power industry, you will be largely concerned with fuel
delivery and power generation. The fuel delivery is basically how you get
the fuel to the power generating plants whereas power generation is the
combustion of the fuel with power turbines. It can be carbon intensive to
transport the fuel to the plant. Scope 1 includes stationary and mobile
sources of direct power and fugitive emissions while scope 2 includes
electricity, steam and heat. The formula for total greenhouse gas emissions
is the same as for oil and gas. Scope 1 includes transport of the fuels to the
plant and the actual power generation from the feedstock fuel through
combustion.

Rev-chain.com has a template for the power industry greenhouse gas

emissions. One section of the worksheet includes the quantity used of
different fuels in the production process. We apply Global Warming
Potential and other factors to those by units to get to the greenhouse gas
emissions and subdivide it into fuel delivery and power generation. You
will need to gather your inventory of equipment and assets, and then
attribute the greenhouse gas to specific assets and certain equipment.

In the power industry, Pacific Gas & Electric (PG&E) offers an instructive
emissions report.[5] They break out emissions by generating station, as
shown in Figure 27, which is a very useful way to do it because you can
then see where exactly this is coming from. And because they break
emissions out by megawatt hour of production it is clear that some of the
stations generate a lot more emissions per megawatt hour than others,
which is useful for carbon reduction analysis. And PG&E also classifies the
sources of its emissions from outside the power generating plants,
specifically compression stations, fugitive emissions and customer usage.

Figure 27: PG&E’s GHG Report

 Source: PG&E, Sustainability Report, 2021.

Customer natural gas usage is scope 3 emissions. In this case the actual
generation of the power did not emit too much carbon dioxide equivalence
but the customer use of it emitted at least 20 times as much GHG as the
actual production and distribution of the gas when the customers did burn it.

As you embark on your net zero journey, this raises the important question
of whether you are going to try to control your scope 1 emissions and
maybe scope 2, which are directly in your control and which in this case is
about 5% of the total emissions, or whether you are going to make an
attempt to control scope 3 emissions which are 20 times your own internal
emissions and which actually stem from your customer use. It is an
essential strategic decision which has a bearing on how you define your
decarbonization program. If you look at how different entities and countries
have defined their net zero target, there are very important nuances here.
Some oil producing countries have declared net zero targets, which would
lead one to believe that they have decided to wean off oil. Instead, they may
have decided to achieve net zero in their own operations (scope 1) and
maybe scope 2 but not scope 3. They do not usually, in the cases I can think
of, commit to not selling oil or gas or power because their scope 3 is all
outside their direct control, since it is from the consumers who use the oil,
gas or power. If their customers do not decide that they produce power
using fuel cells and hydrogen instead of using burning coal, for example,
the oil, gas and power producers will have satisfied their net zero
commitment while their customers may still be burning all of the gas and
using all of the electricity that they produce. You can then have a situation
where in the case of natural gas, a natural gas company could become
carbon-neutral while the scope 3 emissions from that production could still
be enormous.

Carbon Footprint Methodology for Manufacturing Industries

Let's now turn to manufacturing industries. The carbon footprint

methodology considers the delivery of raw materials, the fuel consumed
during the manufacturing process, and the distribution of finished goods.
Here we consider the fuel combustion and the distance traveled for
transportation. And this would be estimated according to factors unless you
have a detailed inventory of equipment, facilities and mileage, in which
case you can more accurately account for the fuel consumed during that
process. Distribution is also part of your manufacturing industry carbon
footprint. REV-chain.com has a template for manufacturing industries that
follows this kind of value chain schematic. It has input tables you can use to
add up your carbon footprint from the different sources of carbon emissions
in each stage of the value chain. We are practically converting, in this case,
the amount of material you have into weight and miles, and then applying
factors to the amount of carbon per ton-kilometer of transportation.

Toyota, a manufacturing company, does a relatively good job of reporting

its carbon footprint.[6] As shown in Figure 28, they include scope 1 and
scope 2 emissions. They do not present their scope 3 emissions which
would be very high, similar to the power case, because most of the carbon
footprint of a vehicle comes from customer putting fuel into the vehicle
over the life cycle of the product. But from the point of view of
manufacturing the product, what Toyota does is list the different regions
and calculate their carbon footprint for each region. They include CO2
emissions per vehicle, which could be a useful benchmark. If you are in a
similar manufacturing business, you can refer to that benchmark and see
how you come in with respect to that. They then further break out their
carbon footprint by source fuel.

From this it can be seen that electricity is their largest source of carbon
footprint from manufacturing operations. Next is gas, both city and natural
gas, and other minor energy sources. What is notable about Toyota’s
reporting is that if you were to look at their scope 3 emissions here, they
would probably dwarf their scope 1 and scope 2 emissions that they are
reporting in the distribution and retail operations. On rev-chain.com there is
a template for distribution industries that classifies and calculates carbon
footprint by site, by fuel usage and fuel type.

Figure 28: Toyota’s GHG Report

Source: Toyota, Environmental Report, 2020.

Carbon Footprint Methodology for Distribution and Retail
Industries

Let's look at an example of a company that reports its carbon footprint in

the distribution business.

FedEx does a great job of reporting its carbon footprint based on its 2021
Sustainability Report.[7] It reports a lot more than its carbon footprint such
as toxic waste and many other sustainability metrics. First, it starts off with
its direct energy consumption, which includes both jet fuel and fuel for
vehicles. You can see very clearly where the fuel usage comes from, which
is measured in terajoules, so they are measuring the actual energy content,
not the gallons or the liters. They are trying to get to how much energy their
operations consumed in reality. They applied the same exercise to facilities
and looked at their total indirect energy which would be their purchased
electricity; all of that would be scope 2.

They have scope 1 in one part, scope 2 for the indirect energy consumption
in another and their total energy consumption in terajoules. We are not yet
in carbon reporting, but we are getting close. It also itemizes GHG
emissions in metric tons of CO2 equivalent for the jet fuel of the vehicle.
They have really done a nice job by starting off with energy use because
that is a good place from which to study for potential reduction of energy
intensity.

FedEx also reports the greenhouse gas in metric tons of CO2 equivalent.
This shows clearly that jet fuel has the most damaging greenhouse gas
effect as compared to the ground operations – about five times as much.
Their indirect emissions sources comprise about 10% of that and they have
itemized it all. This gives a net zero manager some quality information to
start off that describes the business and where the greenhouse gas impact is
coming from.

They further break their GHG footprint out by greenhouse gas: carbon
dioxide, methane and nitrous oxide which are also divided into scope 1, 2
and 3. So now you have a crystal clear representation of the scope 1 and 2
emissions as well as which greenhouse gas is producing it. You can see that
they have carbon dioxide as the clear source of most of their greenhouse gas
emission in metric tons of CO2 equivalent. They do a beautiful job of
looking at the energy and emissions intensity. Notably, one of the things
that is not in their reporting is scope 3 emissions. They have a ratio which
relates to scope 3 emissions but it is not possible to derive scope 3
emissions.

Beyond carbon counting, FedEx explains their energy saving initiatives,

quantifies their impact on the carbon footprint, and divides that impact into
energy saved versus emissions avoided. As with all savings calculations,
there is a debate about whether to count avoidance as savings. FedEx does
count avoidance, but they juxtapose that against actual savings. Although
they have avoided a lot of emissions, you can see that the actual saved
compared to the avoided is very small.

They also do a nice job of communicating the benefits and their activities
related to carbon footprint through these numbers. You also have more
information about their facilities, the number of LEED certified buildings
and the number of certain types of designations of facilities, which are quite
useful. We are going to talk more about this as we get into the other
chapters that involve scope 2 and scope 3 emissions. Further they include
information on their packaging materials, paper and other operational
materials.

Overall, FedEx has produced a phenomenal communications vehicle in this

report. They have summarized a lot of complex information into a relatively
small number of tables that can be easily analyzed and interpreted. They
also examine hazardous waste and other sorts of environmental compliance
issues that go beyond the carbon footprint which forms a part of their
sustainability report.

Now you have the opportunity to calculate your carbon footprint using the
tool at rev-chain.com if you are a subscriber. Figure 29 shows an indicative
view of one of the templates.

Figure 29: Sample Baseline Carbon Footprint

Validating Your Carbon Footprint
Now you have defined your carbon footprint boundaries and calculated
your baseline carbon footprint. You have got through all those steps, and
you are wondering, “well, I've got numbers, how can I check those
numbers?” Are they right or not?” Below I will describe techniques such as
triangulation and benchmarking that you can use to validate your baseline
carbon footprint calculations. This will help you determine if your baseline
is reasonable compared to outside reference points. This is important since
scope 1, scope 2 and scope 3 numbers are very different from one another
and there is no “single source of truth” where you can check your numbers.

There are three main ways to validate your carbon footprint. The first is by
checking the tons of CO2 equivalent versus benchmark companies. The
second is evaluating the rate of intensity by emission type. The third is
getting expert help, either online or through a conventional consulting
engagement.

Benchmarking Carbon Usage

We will get started on checking tons of CO2 equivalent versus benchmark

companies. Publicly traded companies’ sustainability reports provide a lot
of information that will give you an idea of whether your numbers are in the
ballpark. Large publicly traded companies that are responsible to their
shareholders have gone fairly far, especially in the oil and gas industry,
because these companies also have a quasi-public interest in taking the lead
in sustainability and lowering their carbon emissions. As a result, they have
arguably put the largest effort into defining and measuring carbon footprint,
and their sustainability reports are independent of their annual report.
Furthermore, they have been doing this for quite a long time now so you
can get years’ worth of information from many companies at this point.

For example, BP published its greenhouse gas emissions in quite a lot of

detail, as shown in Figure 26. Even if BP is a lot bigger than your company
you may be able to relativize some scales and get the numbers to your size
level by using some ratios based on how much bigger BP is than your
company. Of course, not everything is linear and proportional, especially
when it comes to engineering systems but some aspects of carbon emissions
per a given unit of measure might be useful as a benchmark.

BP breaks it into companies over which it has operating control and where
it has an equity interest. There is so much detail that you may be able to
guess which companies are represented in here, and those companies may
be relevant benchmarks for you. They further break it down into scope 1
and separate out CO2 from methane. Even at the level of the individual
greenhouse gas, that might be useful to you depending on your objectives
and what kind of business you are in. They also break it down into
upstream, downstream and other areas. Consequently if you are in the
downstream business, this particular line might be useful for benchmarking.
And if you are in a completely different business, this other might even be
useful if you can figure out what other is in the context of a specific
sustainability report. They even have business in Petrochemicals which can
show you what the greenhouse gas emissions are for that.

BP also reports energy efficiency indexed to 2010 and they have compiled a
five-year time series. So, if you take previous reports and continue to look
backward by five-year spans you could have a long history, and the time
series alone could give you some years of potential direct correlation. But if
you can't correlate their numbers to your numbers, you could look at the
change in their numbers compared to the change in your numbers year on
year, which might be of value even if you do not use the actual emissions
figures. There is substantial you can get out of benchmarking with large
companies that have a lot of detail in their sustainability reports.

Pacific Gas and Electric (PG&E), as shown in Figure 27, provides some
benchmarks of a power company. PG&E breaks down their GHG reporting
by generating station which provides rich information if you are in the
power business. They also give you three years of information about
specific generating stations. Depending on what type of generating stations
you and they have, here are some numbers that might be quite relevant for
you. Further they give you the rates of discharge in pounds of emissions
per megawatt-hour produced by generating stations, which might be
relevant to compare against your own generating stations. Should those
plants be a different size than yours you may be able to make some
informed assumptions about emissions at plants of different scales. PG&E
also publishes non-power producing benchmark information such as
emissions from natural gas compressor stations, fugitive emissions and
customer natural gas use.

If you are not in the power industry you can look to a company in your
industry that reports like this. Major consumer packaged goods companies
tend to have very detailed sustainability reports. It is very important to them
to have a sustainable brand identity so most companies such Nike and
Starbucks have sustainability reports from which you can glean quite a lot.
If you are in a manufacturing business, you can look up competing
manufacturers or factors that fall into a similar category. I break
manufacturing into two types: discrete manufacturing and process
manufacturing. Discrete manufacturers make parts and components, which
then are assembled and sold. This includes electronics, automotive, and
many other segments of the manufacturing sector. Process industries
involve liquid transformations of oil and gas, petrochemicals, paper, glass
and cement (among other products), which are produced continuously
rather than in batches. GHG emissions benchmarks for discrete
manufacturing industries would generally be incomparable to the GHG
benchmarks of process industries since the underlying production
technologies, processes, energy sources and energy intensities tend to be
different.

Toyota, as shown in Figure 28, break their emissions out by company and
region. Region is another breakout that might be useful to you – they offer
regional differences. Toyota's regional differences might not be the same as
your regional differences but if you look at a few of them and you will
notice that their regional differences have parallels to your company that
might be useful. For example, if you are based in Europe and looking at the
European data from Toyota and the European data from General Motors
and Peugeot, the regional distinctions might be relevant and useful
benchmarks for you. Toyota also provides emissions data by type of fuel or
power source for a three-year period. That might also be relevant especially
if you take this and make some kind of activity-based ratio out of it. How
many vehicles did they produce? How much electricity did they use per
vehicle? How much LNG did they use per vehicle? If it is not per vehicle,
you might be able to apply ratios as well as reasonable and informed
assumptions. There is quite a lot of information to work with.

Figure 30 shows an example from a distribution or consumer products

goods perspective. Like BP, Unilever gives you a long stretch of data. They
show a six-year period from 2015 to 2020. They include scope 1, scope 2
and scope 3. It is interesting to observe how big scope 3 is compared to
scope 1 and scope 2. They then break GHG down by ingredients,
packaging, and they further break down packaging into primary packaging
and secondary packaging. They have provided all these beautiful details on
inbound transport. You can glean and slice this data in a way that is relevant
to you. They have also given you the information about their footprint by
distribution versus retail so you can separate them.

Figure 30: Unilever’s GHG Report

Source: Unilever, Sustainability Performance Data

If you are in the retail business, you may find their itemization of retail
greenhouse gas emissions useful. Even in the consumer area they have split
the scope 3 carbon emissions between consumer use and consumer
disposal. You can dig into that disposal figure. If it has something to do
with disposal of the consumer goods after use by the customers, such as
disposal of soap or detergents that might be useful for constructing some
insights into disposal impacts for your product. Unilever also breaks out
their manufacturing energy use and GHG emissions by renewables and
other energy sources, by type of gas as well as by indirect and direct use for
that same six-year period. This is just one example.

As you can see, there are many ways to use benchmarks to determine
whether your carbon footprint is on the mark or not. It might take a bit of
time, effort and analysis. You might have to build some scenarios, but you
can get there. You could probably also ask these companies what is in their
numbers and there is a decent chance they will tell you even if it is not
published.

Applying Rates of Carbon Intensity

Let's now discuss the second way that you can validate your carbon
footprint – by comparing rates of intensity by emission type. The online
curriculum of REVchain™ includes a carbon footprint worksheet that goes
down to the activity level. The activity could be anything; the categories
vary by industry. In oil and gas an activity might be, for example,
exploration, production, upgrading, transport, refining or distribution. The
categories vary by industry. If you know and use those activity levels, you
can back into an activity factor: what is the rate of emissions per unit of
activity? There are many publicly available studies within specific
industries about GHG factors and GHG emissions per activity level. Those
factors give you a significant benchmark opportunity to see whether you are
emitting at the same rate, or factor, as other companies.

The IPCC has a public emissions factor database. You can drill down into
the industry and sub-industry that you work in, and sometimes the sub-sub-
industry. They have broken it down into activities and sub-activities as well
as sub-sub-activities. And they also break out a factor for emissions by
GHG type. By the time you get way down there, you are looking at very
specific benchmark emissions metrics. This database is for all industries. It
also includes fugitive emissions from fuels, CO2transport and storage and
all kinds of industrial processes, as well as agricultural, forestry and other
land use, as well as waste and waste treatment. Consequently the amount of
publicly available data through the IPCC is quite extraordinary and it is a
great way to check your carbon footprint analysis.

By reviewing your figures against benchmarks and using “traffic light color
coding,” you can end up with a visually informative worksheet wherein
green means the data is fine; it is internally consistent and reconciles with
external benchmarks. Yellow means it falls in a range that requires
verification or checking because it is a little bit off the mark; something
might not be right and you have to check. Red means something is way off
and needs to be fixed. By color coding, or call it conditional color coding in
Excel, your GHG intensity by type of activity you can rather quickly
identify where your errors might be and fix them.

Conditional color coding helps to identify and reconcile large carbon

footprint discrepancies by emissions type. For example, methane emissions
or specific leaks through refrigeration systems could be generating a huge
amount of GHG emissions particularly if the global warming potential, the
GWP of a specific GHG greenhouse gas is sky high, and you could end up
with astronomical numbers all of a sudden in one specific category from
just a tiny volume of emission. These kinds of aberrations are not
impossible. They could be actual and true. The conditional color coding
allows you to color-code methane emissions differently, and map or chart a
verification path to make sure you are correct, or reconcile any
inconsistencies and question marks, as well as minimize distraction from
variances that have clear explanations and can be anticipated.

Engaging Expert Review

The third way that you can check your emissions footprint, your carbon
footprint, is by getting expert help. Rev-chain.com offers tools and expert
support from specialists, as shown in Figure 7: How to Access Market
Data, Templates, and Scientific Research to Bolster Your Plan. The online
learning platform is designed as a self-guided program that you can follow
at your own pace. Further, if you have questions, as the Master instructor I
am there to help you. So do not hesitate to reach out to me if something is
not really working for you, whether you are not sure about your data
accuracy or your benchmarks are inconsistent, and so on so forth. If
scientific questions arise, for example if you are evaluating clean power and
fuel options trying to determine the engineering and financial impact of
some potential changes, my faculty colleagues at New York University and
Boston University may be helpful.

Most of the large consulting firms and many boutique consultancies offer
carbon footprint services. Using their service could take some of the
guesswork out of the process and reduce the internal resources required to
get your company’s carbon baseline.

If this is feeling overwhelming, do not worry. You are not alone.

Decarbonization is a journey and there is lots of data and support out there.
Carbon Footprint: An Interview with Alok Gupta,
Economist, Boston Strategies International
David: Welcome, Alok. It's really great to speak with you about carbon
footprint, an area in which I know you're an expert and it's so wonderful to
have your advice and guidance on it. For the record, Alok Gupta was until
recently a Partner and Chief Economist at Boston Strategies International,
and an expert in so many ways. So, Alok, we're going to talk about carbon
footprint today. And we'll cover several aspects. We'll go into what is net
zero. How do you calculate a carbon footprint? What are some of the
pitfalls? And then how to do scenarios with carbon footprint? And finally,
how to embed carbon footprint methodology and thinking in people's
minds? I hope that's all good with you. And maybe it would be a good idea
if you just gave some background of who you are so everybody knows
where you're coming from?

Alok: Thank you so much, David, for having me on this discussion. It's
always a pleasure to speak with you on these subjects. And specifically,
talking about matters pertaining to carbon footprint and strategies that can
help institutions, government and corporations, to reduce their
environmental footprint is always an interesting discussion. I am
academically trained in environmental and energy economics, and over
more than a decade I have been consulting in the field of energy and
sustainability, and I specialize, of course, in measuring carbon footprint,
and the implications and strategies we can execute once we have measured
the carbon footprint or ecological footprint, and what economic
implications could be associated with these numbers. These are the areas I
investigate.

David: Terrific! You're the right person for this discussion, obviously, and
so to kick it off, maybe you would help by explaining what is carbon
footprint and what is net zero?

Alok: Sure. I think that's the most important question to start off the
discussion. I think everybody knows about the issue of climate change. It is
the most dangerous challenge facing mankind. And I think today we stand
the risk of extinction of so many species. We are likely to lose land mass
because of the rising sea levels. The primary cause behind climate change is
something called greenhouse gases. It's the GHG emissions which are
behind global warming. Carbon footprint is nothing than a measurement of
how much greenhouse gas has been emitted into the atmosphere because it
is that GHG gas, the most important of which is carbon dioxide, methane
and so on, which create this envelope around the earth's surface and create
this greenhouse gas impact that leads to global warming, which further
leads to climate change. Carbon footprint is a method by which we measure
how much of each of the greenhouse gases has been emitted. We calculate
that number and then we also equate that in terms of carbon footprint
equivalent or CO2 equivalent, in terms of kilos or tons. And that gives us an
indication as to what the environmental footprint of any company or a
country is. Similarly, another term that we've been hearing a lot lately is net
zero. Net zero refers to net zero carbon footprint. Let's say you as a
company, your carbon footprint is 100 tons of CO2 equivalent and you
deploy some new technology, or you make some efforts to reduce the
carbon footprint all the way down to zero, then you have achieved the net
zero target. So that's what net zero essentially.

David: Great. Very interesting. So, on the term net, what's the difference
between a zero-carbon footprint and a net zero carbon footprint?

Alok: If you are the manufacturing unit or if you have a production facility,
to just have zero carbon footprint or zero emissions may be difficult. So net
zero implies that while you may have little bit of carbon footprint, you may
be adopting certain activities which help you to offset carbon from the
atmosphere through some other activity. If you are facilitating the
deployment of solar or wind farm somewhere else, then an equivalent
amount of carbon or carbon credit offset could be adjusted in the carbon
footprint that your company has. So therefore, altogether, we say that the
net carbon footprint should be zero.
David: Good. I think we're going to follow up on that later on. I'll ask you
more about offsets and credits, but for the time being, let me just ask this
broad question. Is it realistic for companies to get to net zero? This sounds
like a stretch target in many ways. I mean, the example you just gave of a
company producing 100 kilos or metric tons, whatever it was, of carbon per
year, getting that down to zero. Even if you take an offset, let's say you buy
20% of it through offsets and 80% of it through direct carbon CO2
equivalent reduction, is this even feasible? Because I have done many,
many process improvement initiatives over 30 plus years of consulting, and
generally our benefit ratios turn out to be anywhere from like 13% to 27%.
A high benefit in something would be like 33%. Obviously, we get 70%
improvement in costs or whatever, but usually that's on one item or
category or something. And if you look across companies as a whole at the
sort of level at which they report their financials in a consolidated way,
getting more than 20% or 30% change involves a very profound
transformation in a company that takes, in my experience, decades, at least
years, for changes to happen in the business model. And closing the gap
between 20 plus percent at those companies to 80 or 90%, even if you
supplement your effort with some offsets, is it feasible? Is it realistic for a
company to really take out, like, 80% of their carbon footprint?

Alok: If you had asked the same question to me five years ago, my answer
would have been, absolutely not. I mean, that's not realistic. And businesses
don't look at, you know, just utopian numbers. They want to see how
economically and financially feasible these targets would be. But if you ask
this question today, when of course net zero is very aspirational, it's
important to start the dialogue or setting those aspirational targets. Reaching
for the moon is important so that we get to some point, right? Today it is
definitely feasible that you take a lot of carbon out of your value chain to a
large extent. And I'm saying that feasibility exists because the technology to
do that has evolved significantly and that has become a lot cheaper. If you
look at the levelized cost of solar power comparing today's cost with what it
was ten years ago, it has dramatically come down. Now 90% of the carbon
footprint is hidden in the energy consumption of these companies and their
operations. So, switching to renewable energy is going to be a very big
source of carbon reduction to begin with.

Alok: There are times when it's costly to make process improvement where
the best you could achieve is 10%, perhaps 12-15 percent. But when you
see that there is enough room for investing in renewable energy to power
your operations and if the payback is less than five years, then by all means
a company is going to look at it. Many companies are going for renewable
energy powered operations and many of them to be honest, are not even that
pro-environment or pro-“planet Earth.” As such it's totally a business
decision because they realized that they would be reaping the benefits of
switching to renewable energy in the near future. So I think in today's time
even if you do not understand climate change and if you are not falling in
the ambit of any kind of compliance requirement, the business case for
renewable energy or reducing carbon footprint is getting stronger by the
day. So that's the biggest motivation. And companies have started today. On
average companies have started incorporating renewable energy almost to
the extent of 30% to 50%. That's not unheard of. And of course, it's not hard
to understand that these are larger corporations today. But as the technology
gets cheaper, I would expect even mid-size companies will switch to
renewables, thereby reducing their carbon footprint significantly as well.

David: You're such an inspiration. I'm glad to hear that. Now, to continue on
that line of thinking, let's say an organization is planning on reducing its
carbon footprint by adopting new energy technologies as you've alluded,
whether it's through battery storage, electric vehicles or something having
to do with solar powering their plants or whatever. How do they know how
much difference that project will make on their carbon footprint?

Alok: Before they get to that point, it is extremely important that they have
a baseline study done to begin with. Every company must initiate a baseline
carbon footprint study, so they know that in the existing operation, using the
existing technology, what their baseline ecological footprint or carbon
footprint is. Because any future improvement will have to be pitted against
the baseline numbers, and the methodology to calculate emissions will
remain each time. It's just that after you've initiated any kind of new
technology or process improvement, you estimate the numbers again and
you compare that to the baseline. Now, when we talk about estimating it,
we're essentially talking about scope 1, scope 2, and scope 3 emissions. And
as I mentioned earlier, this emission inventory or estimation of carbon
footprint is an accounting of how much GHG emissions are going into the
atmosphere by the entity. It could be an organization, company,
government, country, any entity or even an individual. At the base of it all,
most of the time, it is the energy that we consume.

Alok: Are there other sources of greenhouse gas emissions? Refrigerants

are very important greenhouse gas emissions as well. So the idea of GHG
emission estimation is to record or have the data of how much energy you
have consumed. That is the fundamental idea. You're not talking about
hiring a bunch of scientists and putting them on the roof of the factory and
having them measure exhaust gases. I mean, that's not the way we're going
about estimating the carbon footprint. No, thanks to the efforts of a lot of
those scientists over a period of time today it's become a lot simpler than
one would imagine calculating these carbon footprints. Although it's a very
serious job, so I wouldn't oversimplify and say that it could be done by
anybody or how it used to be initially done. There was this practice that
some HR folks would just put some numbers together, then calculate, and
then realize that they're totally skipping the nuances and they don't
understand the concepts well. There is a set of rules, regulations, guidelines,
and nuances that an individual needs to understand before they start
gathering the data and carrying out the calculations.

David: What kind of data inputs do you need to feed into the carbon
calculators?

Alok: That depends on what you are calculating, whether you are focusing
on calculating scope 1 emissions, scope 2 emissions, or scope 3 emissions.
Before I dive deeper into that, let me briefly explain what each of these
scopes are. Now, there are key bodies such as GHG Protocol or United
Nations Framework on Climate Convention (UNFCC). The UNFCC has
defined scope 1, scope 2, and scope 3 to begin with. Now, scope 1 refers to
greenhouse gas emissions, which are taking place in a direct fashion, direct
consumption of energy. If you're running a [generator set] at your facility,
which is consuming diesel, that's direct consumption. If you're burning coal
in your facility to produce electricity for some turbines, then that is a direct
consumption of energy. These things will come under the ambit of scope 1
emission. Direct consumption of energy is scope 1. Scope 2 is indirect
consumption of energy. For example, if you're purchasing electricity, then
you're not producing electricity. The power plant is producing electricity
and then sending that power to your facility for electricity consumption. So
that indirect consumption of energy would be scope 2, for example. And
scope 3 would entail all indirect sources of energy that you have not
covered in one and two from the value chain, the entire supply chain where
you don't have control. You have vendors, you have third parties, all of
whom are part of the entire value chain that you're concerned with. And that
entails scope 3.

David: So if you are calculating either scope 1 or 2 or all three of them, that
will determine what kind of data you need. And that data collection, it all
boils down to how well that data is maintained, recorded, and captured to
lead to the next step of calculation. Let's take just an example. Suppose I
run a small company, just for simplicity, and the company makes a product
like ceramic mugs. And they distribute these across pretty wide areas. So
you've got a nationwide distribution of ceramic arts, you know. What would
be their scope 1, 2 and 3 in emissions and what would be the data that they
would need to calculate those?

Alok: They most likely have a shop floor where the actual manufacturing or
production is taking place. So they are, let's say, melting the ceramics and
they have a mold which places on top of a furnace. And the furnace is using
x amount of either natural gas or coal. So that amount of coal or natural gas
or whatever source of heat there is. If you are consuming coal, natural gas
directly, to burn it essentially for combustion purpose, that data would entail
scope 1 with the company. Let's say the next step in the value chain would
be polishing it using a device which is run by electricity. That electricity
would also be used in various lights and plants and systems at the facility.
That electricity consumption would entail scope 2 for the company and the
vendors or distribution companies. Let's say once the manufacturing or
production is done, then it is sent to another facility where the packaging is
done. And from one facility to another facility, a carrier transports those
cartons or those packages to another facility where, let's say, a packaging of
six ceramic mugs is done, or further beautification or those kinds of steps
are involved, then all the subsequent steps are outside the production
facility. What is taking place either by the company or by other vendors
which are engaged by this company would all be entailed in scope 3
emissions for the company.

David: That's really helpful, Alok. So it sounds like you need to gather
some data some of which might be at hand, very easily accessible, like the
amount of coal that you stoked into the furnace or amount of fuel or
electricity that you purchased. Some of it might be a little more difficult in
terms of scope 3 if you don't know what your vendors are doing, et cetera.
So how long does it take to do a carbon footprint study?

Alok: For an oversimplified example, the one that we were discussing for a
ceramic mug manufacturing company, is a small-scale company, the
complexities would increase as a scale increases, or we're talking about a
process which is a lot more complex, like oil and gas petrochemicals. So as
the complexity in the value chain increases or the operation increases, the
time taken to estimate and collect the data also increases. For a small
company, if the data is ready or it has been well maintained, it could
probably take a couple of days to estimate, then verify or validate. But
when you're talking about a larger company, whether it's a distribution
company, consumer packaged goods (CPG), or oil and gas, there are so
many steps involved. You have to make sure that you've got the right data.
And that's where a lot of companies make this mistake by simply estimating
the numbers. And if they do not pay attention while they're collecting the
data and simply estimating, that's where they could underestimate or
overestimate the numbers. So it is important that the whole data collection
and data recording process is extremely meticulous. They've got to have the
right template to do that.

Alok: And even before that, larger operations will have to define their
boundaries, their operational boundary, the organizational boundary, all
these things are extremely important and they may take time initially. And
as such, as I'd mentioned earlier, baseline study if the company is initiating
this kind of a study for the first time, of course, is going to always take
more time. But once the process is in place, the total time consumed to
carry out the exercise would be less, because this is the kind of exercise one
has to repeat almost every quarter, every year, so that you're able to
compare the growth trajectory to keep a track of the growth trajectory in
terms of your carbon footprint reduction journey. Once the process is
defined, once you are on track, after the first couple of iterations, setting the
system in place, the amount of time could come down to even 20% of the
initial time. The first iteration, when you conduct the baseline study, takes a
lot of time for a big company. It could even take a few months for a big oil
and gas company or a group company, who may have many subsidiaries
and many operations, multiple sites. So those could entail a lot of time,
most of which would go into collection of data.

Alok: Now if you look within scope 1, 2 and 3, scope 3 normally takes
almost 60% to 70% of total time, and scope 1 and scope 2 are relatively
easier and more direct to estimate.

David: That's very helpful guidance. Do companies find that they usually
report some degree of accuracy with what they submit? Let's say our carbon
footprint is 100 metric tons per year in aggregate. Do they often say like,
well, we think it's 100 tons but it could be 120 with 100 plus or 95% level
of confidence or something like that, or is it just a number?

Alok: Unfortunately today no kind of black and white accuracy test exists
except that if you are submitting numbers to some validating agencies you
may have to disclose what you think is the accuracy level. For example, if
you are disclosing your carbon footprint or environmental or ecological
footprint to an agency like CDP, which is Carbon Disclosure Project – CDP
is a platform where you as a company could disclose your carbon footprint
and even showcase to the world and your stakeholders how you are making
efforts to reduce the carbon footprint over a period of time – you may have
to disclose to the CDP your level of confidence in your exercise and
normally the acceptable error in which you must claim should not exceed
5%.

Alok: These are all guidelines at this point, and we still don't have a gold
standard that would comment or pinpoint that this is not matching the data
based on a central database of some kind. Some countries are trying to build
a central database but right now it's still a little subjective. And it's also
because the emission factors that we consider vary from one country to
another. And there's some nuances that's relevant. Because let's say, how
much emission a thermal power plant entails may depend on the power
plant efficiency which could be different in the United States as compared
to India or China, right? So the emission factor could be different for
different countries in certain areas, certain key areas. Therefore, comparing
total emissions of one country to another could lead to some error or
misjudgment at this point. A standardized number which is acceptable to all
parties, does not exist as of yet.

David: That's very interesting. The devil is in the details, as you point out.

Alok: And obviously, the larger the company and the more complex the
operations, the value chain, the more room there is for error and for
estimations to be off, which might be different than error.

David: In your experience, how many companies hire consultants to do

this? Or is this something that they do in-house?

Alok: Increasingly, companies, as companies have started to identify the

importance of this entire exercise, they have started hiring specialized
consultants engaged in carbon footprint estimation and its implications for
developing a roadmap as to how they can reduce the carbon footprint. I
think the number of these consultancy exercises has increased exponentially
over the last two or three years. That is because estimating the carbon
footprint number alone is an incomplete exercise. I mean, if the complexity
is more, if the operations are more, if there are multiple sites involved, then
as I mentioned earlier, if you don't have the in depth understanding of the
process, a layman or a generalist could make a lot of mistakes, may lead to
overestimation or underestimation or error in calculation. So that's one part
of the game.

Alok: The other aspects entail, once you have calculated the number, how
are you going to interpret that number and identify how you are going to
reduce it? And consultants are also required to report these numbers to
validating agencies. Now, all these efforts require a lot of nuances and
documentation and reporting. A consultant would understand your value
chain well, would understand the process well, and totally try to bridge the
gap between the two. And increasingly the demand for this kind of
consultant is rising.

David: If you use external consultants for the carbon footprint, isn't there
then a sort of black box mentality that you have two different and
potentially disconnected activities going on? On the one hand, you have the
carbon footprint awareness and technical counting, and on the other hand,
you have all the internal operations which maybe don't have carbon
footprint on the mind. I'm thinking like a lean manual manufacturing
person, which means that you're trying to engage continuous improvement
inside the company to improve. In the case of carbon footprints you're
trying to get people to have carbon on their minds when they make day-to-
day decisions. I need to buy some paper today, which vendor am I going to
use to buy it from? More and more over time, the people in your company
will have a mindset of carbon footprint in everything they do to actually
drive those numbers down.

Alok: David, I think it's a very valid point and concern that you raise
through this question, and I think the answer lies in the stage at which the
company is operating. Climate change and carbon footprint awareness have
been around for a while, but they have just started getting to the boardroom
discussions and being taken seriously only lately, either driven by investors
interests or government compliance. As these things are picking up, it's
gradual and it has its own gestation time, it's gradually getting or seeping
deeper into the supply chain or value chain of the company. Now, before
that happens, a lot of these exercises are fresh for a lot of companies to
begin with. So these consultants would essentially necessarily be required
to initiate the process and set the template for that particular organization.
Once that has happened, the next goal for the company would be to see how
they can embed the carbon footprint sensibility in the workforce and embed
it deeply in the value chain of the company. Now, that exercise would
definitely go beyond these carbon footprint consultants. That's a longer-
term exercise, that essentially would be a supply chain exercise and a value
chain exercise, which I totally agree with you, but I don't see them as
conflicting, I see them as requirements that would come about stage-wise or
phase-wise.

David: Brilliant. I see how it all connects. You have the value chain and
then you have the economics and the supply chain connected to the carbon
footprint. It seems like a cycle, like you need to map it all and then put
numbers on it and then keep on going back where you were before, almost
in a full circle, to close the loop and say, “I have now ascertained my carbon
footprint and here's what I'm going to do to reduce it.” And then you
continue to measure it and reduce it and measure it and reduce it and
measure it and reduce it.

Alok: Right. I can think of a good analogy, David, how financial analysts or
financial experts like Certified Public Accountants (CPAs) and Chartered
Financial Analysts (CFAs), would look at the financial health of the
company and the top lines, bottom line margins, free cash flow, profit
margins, et cetera. And once those numbers are on the table, the board of
directors and top executives of the company would look at those numbers
and do a backward engineering as to how we want to work or engineer our
supply chain and value chain in order to achieve certain targets. I think
carbon footprint or GHG emission numbers are quite similar in that context.
Once those numbers are on the table, then they have to do all sorts of
backward sort of integration as to how we can reach those numbers,
whether it's 50% reduction, 10%, or even net zero. So I think it's very
important to have those numbers by specialists to begin with and then have
the relevant experts to work in different stages of the supply chain to align
those efforts that would add up and help you achieve the target, whether it's
financial target or sustainability targets.
David: I love the analogy and it makes me even think about how investment
bankers work. M&A analysts may start counting carbon and constructing
M&A transactions that might in fact be driven by carbon footprint. They
might say, which companies have a carbon footprint that could help our
company in the aggregate lower our carbon footprint by the amount needed
to achieve the goal?

Alok: Right. David, you're hitting the bullseye in a very sweet spot with this
remark that you just made because it's already beginning to happen. And it
gives me so much joy because the way I look at this entire climate change
problem is that this sort of problem has emerged because of capitalism. And
we cannot seek a solution in socialism. The solution will have to come from
the same framework and therefore we cannot expect stakeholders or
investors or capitalists to become altruistic, and they find themselves one
day waking up to save the planet or save herbs or our environment. I think a
real solution would lie when we create the right incentives. So if investors
or private equity players and if all these stakeholders are really creating this
as a factor or a function making the entire business a function of many
things, including sustainability, then this would drive the real change.

David: We’re already seeing carbon footprint disclosure increasingly

considered by investors under the ESG umbrella. It sounds like we're on the
cusp of a big new era. Almost ready to reinvent the energy value chain, as
they might say, to quote the title of our joint book. I love you're a luminary
in the field, and I love hearing you talk and appreciate your brilliance and
insight and vision. So thank you so much for spending some time with me
today.

Alok: Absolutely, David, it's always a pleasure.

3 How to Reduce “Scope 1” Emissions –
Introduction

• This section will guide you through an evaluation of Scope 1

emissions reduction potential, which for some companies may shine
light on the most impactful operational improvement and clean
energy technologies for emissions reduction.
• It contains expert advice on laying the right organizational, cultural,
policy and procedural foundations to support your long-term
success.
• It provides frameworks for evaluating the carbon reduction potential
from transitioning to clean energy technologies such as electric
vehicles and hydrogen in your operations.

This introduction to Scope 1 emissions reduction routes will introduce the

“Scope 1” chapters and the key concepts, including how to align net zero
with the business strategy, how to engage adaptive behavior, how to
establish and implement net zero standards as well as how to shift to clean
energy operations.

The first set of practices and tools that will be covered in this section deals
with how to align the net zero program with the business strategy. It is
critical that the net zero strategy and plan are consistent with the business
strategy and that you do not sacrifice operational efficiency or strategic
value or operational and supply chain advantage in order to achieve net
zero, or if you do you clearly understood the impact and make conscious
decisions about how much of that advantage you are willing to put at risk.
Most likely it will go the other way around – the net zero strategy will
engender strategies, plans and operations that improve your operational
efficiency. In any case, make conscious choices and do not sacrifice your
core business and differentiation in the marketplace in developing your net
zero plan.
The second set will have to do with how to build a culture of responsibility
and related to that how to engage adaptive behavior. What is the difference
between the two? The culture of responsibility has largely to do with
engaging people's minds and setting up parameters, guidelines and KPIs
around which they can understand the value of practices, tools, habits and
techniques that lead to net zero results. The second part – how to engage
adaptive behavior – has to do with continuous improvement and day-to-day
activities. While there can be an intellectual appreciation for net zero
objectives, there also needs to be a constant and predictable set of
incentives so people change what they do on the job every day.

I’ll also give you some tips on shifting to clean energy operations. There is
potential for a significant decrease in carbon footprint using technology in
operations – whether those are in production or in retail facilities, in an
office environments or warehouse environments or whatever they may be –
there are different technologies for each one and we will review what they
are and how to make the transition.

Next, I will cover how to embed net zero standards into Key Performance
Indicators (KPIs). These KPIs will cover production standards, emission
standards and other types of standards that are built underneath a set of top-
level KPIs. We will be reviewing how to use a system of KPIs collectively
to drive a lower carbon footprint “inside the four walls” by which I mean
inside your operations themselves.

Finally, this section will provide guidance on transitioning to new energy

technologies. What are the main emerging technologies? How can they help
reduce carbon footprint? Where can they be used?
Respecting the Core Business Drivers
When I was writing the book Guide to Supply Chain Management for The
Economist, I read over 140 different books on supply chain management.
Ninety-five percent of them focused on the tactical day-to-day aspects of
supply chain management. They were full of buzzwords. What I found was
that except for one or two, or a maximum of three or four all this
operational jargon did not really explain what the value is to the
shareholders and stakeholders. What is the financial connection between all
these supply chain management practices and the financial statements of the
company? Why would a CEO care about a lot of these things? One of the
challenges of supply chain management since its inception is that it is often
perceived as an operational “after-effect”. In other words, top management
decides on some policies and then operations execute it. As such, operations
tend to be perceived as fundamentally driven with an objective to minimize
cost, that it doesn’t require creativity or brains, and consequently that it can
be done by anybody. And that is not at all the case, in reality.

If you look at the ways that supply chain, and more broadly operations,
contribute to the company's financial performance form, there are four ways
that it can create financial value, as shown in Figure 31. The first is through
rationalization. There is the traditional route. How can we cut costs out of
vendor relationships, out of operational efficiencies, out of overhead and
burden, etc.? That is a rather big route there in many cases toward adding
shareholder value. The second strategy is synchronization, which is about
optimally aligning demand with supply. The third way to add value through
the supply chain is through customization, which often involves
enhancements to the customer interface or allowing the customers to
customize their products. You have probably heard of “mass customization”
before; this is customization for all the customers, which is a relatively new
operational practice. And the fourth strategy is innovation, which is
increasing the velocity of new product introductions. Each of these adds
value to shareholders to different degrees and there is an increasing
leverage effect as you progress from rationalization all the way to
innovation. Innovation drives much higher shareholder value than
rationalization.

Figure 31: Operations and Supply Chain Strategy Impact on EVA

Source: Jacoby, David Steven. The Guide to Supply Chain

Management (The Economist, 2009)

As you contribute shareholder value in this way and you embark on a net
zero program, it is crucially important to be able to understand how the net
zero initiative may affect the operation’s contributions to shareholder value.
For example, if you decide to slow down operations in order to conserve
energy, that will quite possibly reduce your ability to satisfy customer
demand through synchronization and customization, so you may end up
dissatisfying customers because you are not in sync with their demand
expectations. You may in fact find that by slowing down everything, maybe
they cannot successfully customize their product. Imagine the experience
you have when your internet connection is slow. Right? So, if you are
positioned as the low-cost provider and your customers accept the fact that
they are willing to pay less in exchange for that, they will get fractured or
low performance which could be acceptable. But if you are differentiating
and charging a high price, or if you are servicing the higher end of the
market in which you should be more responsive than the others, then that
net zero approach would really cut at the core of your value added in the
marketplace place and you would probably not want to do it.

This fundamental understanding of the supply chain strategy and more

broadly of the operations strategy is critical and you must clearly define
your operational value added from the outset. Don't sacrifice value critical
to your business model.

Related to that, it is important to align the replenishment trigger with the

demand patterns. I know this may sound a bit technical but it really is
important as you decide how you are going to fulfill customer orders. There
is a classic paradigm that maps variety against volume. And for any
combination of variety and volume, there is an appropriate production
process strategy. If you have high volume and low variety, you are
essentially going to run a production line or an assembly line. On the other
hand, if you have low volume and high variety, you are going to be running
what is called a job shop handling any job that comes in the door. And the
way you staff that operation and lay it out as well as the salaries that you
pay, the overhead and the capital investments that you make are very
different. It may be tempting to change the organization pattern in some
ways that affects the process strategy, but if you misalign the process
strategy you are likely to be contributing negative shareholder value.

Suppose you come up with the idea that that you could cut transportation
costs by putting 3D printers at your customers and have them produce the
product that you are currently selling to them. That is a massive change in
the process strategy. And while it may sound very attractive and according
to your calculations it may reduce carbon footprint dramatically, it may not
align with the most efficient or effective way to get your products, services
and solutions to the customer. If you are currently running a high volume
and low variety production operation to manufacture consumer packaged
goods of the type that are in a drugstore like shampoo or hair products, the
production economics depend on high-volume production which is not
going to work out very well on a 3D printing basis. That is a really simple
example but you can imagine that every product and service falls into a
matrix or a place on the volume-variety matrix. If you start changing the
positioning of the products with respect to their optimal production
processes, then you are at risk of undercutting your efficiency, your
effectiveness, or both. Therefore it is important to understand where the
demand pattern is and how you are configured to respond to it before you
start tinkering with your operation.
Building a Culture of Responsibility
This chapter further examines how to build a culture of responsibility. You
can design jobs to incentivize net zero behavior and there are a lot of ways
to do that. In terms of job design, there is a concept called job expansion
and another one called job enlargement.[8] These are ways in which you
make the job appealing to people while still getting the job done. In job
expansion you want to give people more responsibility and to empower
them to do what they can do within their constraints, for example. Within
that construct of job design you can embed net zero elements to the job
description in a way that aligns with their job satisfaction. Each job has
incentives and KPIs; the teamwork that goes on within the operations and
inside the four walls frequently has certain agendas, routines and patterns.
Net zero (or low carbon, 2% carbon and whatever target you set) behaviors
need to be embedded into the work stream, work process, workflow and the
KPIs in order to be effective.

There are also psychological components to effectuating change. I did a lot

of work at both FedEx and UPS. At FedEx, a Bravo Zulu award was a
special recognition for great work. That same tool can be applied for net
zero objectives and achievements, including carbon reduction of all kinds.
There is really a need to review the overall incentives and culture of
responsibility for attaining net zero and consider how it permeates all
aspects of people's jobs related to that. There is a lot of work to be done to
empower net zero behavior at the individual level. There exist many
different principles and philosophies of empowerment that need to be
harnessed within the organization in order to achieve actual day to day
consideration for net zero. And the leverage that will have on the successful
implementation of your initiative is hard to overstate. The different types of
carbon intensive wastes need to be identified and built into people's
consciousness, awareness and their job design so that their day-to-day
efforts make a real difference. Daily habits such as maintenance and upkeep
practices may need to be changed. At a high-level principles, guidelines and
philosophies need to be transferred to the mindset of the employees, and at
a more granular level very specific behavioral practices need to be
identified to empower people to act upon. Laying the foundation will
require an examination of many aspects of the workflow and the job
descriptions, and it will probably involve quite a bit of on-the-job training
including classroom training and some supervisory monitoring and
updating.
Setting Metrics and Measurements
That brings us to the next topic which is whatever your carbon target is,
“you get what you measure”. If it is built into key performance indicators,
you will then likely achieve it. If it is not, you won't. People work toward
what they are measured on so there are a lot of different KPIs, many units
of measure and progressive target dates for different KPIs to consider
implementing. Be realistic. After you get through a preliminary analysis
and evaluation you may decide that scope 1 and 2 emissions are the ones
you want to focus on. Then metrics of scope 1 and scope 2 emission need to
reflect top-level KPIs and sub KPIs. I call them “results metrics” and
“process metrics”. Results metrics track what you have actually achieved.
Process metrics indicate what you have done in order to try to achieve those
things. If process metrics go in the right direction the results metrics should
theoretically go in the right direction, perhaps with a lag. If you do the right
things, in a little time you usually get the results you want.

When measuring factors related to energy efficiency it will be important to

accurately measure the productivity per unit of energy input. However it
can be tricky to measure productivity and energy efficiency. Sometimes you
can very clearly calculate the efficiency of a unit, say, power generation.
You can calculate the efficiency or even read it off the nameplate of a gas
turbine or a steam turbine. But when you enlarge the environment to a
whole plant where there are multiple turbines, power sources and fuels, as
well as different shifts and production levels it can become harder to
measure power generation efficiency. Net zero will depend on energy
efficiency and energy productivity, which will need to be embedded in
metrics. Energy intensity could be a very useful place to start in terms of
identifying what your improvement potential is.

Recycling of internal waste is one way to reduce scope 1 footprint. To what

extent do we recycle? What types of products do we recycle? Are we
focusing on recycling inside our four walls or outside the four walls at the
customer site after the customer uses the product? In the context of scope 1
emissions, the use of recycled materials may reduce the carbon footprint.
How much raw material has been recycled could impact your carbon
footprint as well as your hazardous materials footprint.

There is a core group of KPIs that everyone should consider. In this section
I will propose KPIs and organizational schemes, and you can decide which
ones apply the most to your organization and which way you want to use
them. I would be happy to provide advice based on my experience with
other organizations similar to yours.
Transitioning to New Energy Technologies
New energy technologies may be able to provide a “step-change”
improvement in your organization’s carbon footprint. There are a lot of new
technologies out there related to fuel cells, green hydrogen and clean fuels
such as low carbon fuel, even ethanol blends of traditional fuels or natural
gas. You also have some blended gases with different types of, say
hydrogen in them or other blends that would have a lower carbon footprint.
New energy storage technologies can lower total power usage. Energy
technology is a rich area for discovering carbon reduction opportunity. If
you are running a fleet of vehicles, electric vehicle technologies and fuel
cell vehicle technologies can make a large difference in carbon footprint.
And if you are in a service organization, like accounting or consulting, your
carbon footprint may in great part relate to your air travel, car and truck
travel. This then turns back into the area of clean transport technologies and
by doing that you might have the biggest impact on your direct carbon
footprint. Similarly in retail and commercial applications, if you are in the
retail business, for example, you probably have a lot of CO2 emitted in your
facilities. There are ways of reducing that both through smart grid
application, temperature optimization, smart algorithms to control
temperatures, and pooling power with adjacent buildings. There is a very
rich vein of opportunities to reduce carbon footprint through clean and
smart energy technologies. Energy technologies for production will be
covered in this section and energy technologies for transportation
applications will be covered in the next section.
3.1 How to Align Net Zero with the Business
Strategy

This chapter gives you the tools to check for misalignments between your
company’s business strategy, mission, vision, business model and
operations strategy on the one hand, and your carbon reduction plan on
the other. The chapter is an insurance policy against handicapping your
business strategy or core competence by making premature or ill-advised
technology shifts.
Introduction
Let's say that in order to reach net zero you cut carbon, but in the process of
doing so you sacrifice quality, product design or delivery speed. In this case
you could degrade the capabilities and performance that made your
company competitive in the first place. Missteps with process changes have
the potential to harm the company's quality, reputation and even
performance. How is that competitiveness determined? It is in the eyes of
the customers. An important balance is currently and always in play
between core competencies and operational performance and profitability.
You don't want to mess up the “magic sauce.”

Before engaging in any process change you must correctly and precisely
understand your company's business strategy and the associated operations
strategy. This chapter provides helps you to articulate key aspects of your
company's business and operations strategy to make clear the principles and
premises that should not be compromised in any effort to get to net zero. Or
if they are to be compromised the changes should be implemented
transparently so everybody, including shareholders and other stakeholders,
is aware of what compromises are being made to ensure acceptability of the
consequences. In the case of some public entities negative consequences
might be more tolerable than within privately-owned companies.
Key Definitions
A company's mission statement is essentially a statement of purpose. It
usually aligns with what the investors and customers would agree with and
want to hear. It sometimes plays off current events in terms of positioning
the company with respect to certain megatrends. It sometimes refers to the
organizational history and draws on the company's philosophy and values.
The statement of purpose should be independent of any obstacles or
challenges or real-world considerations that the company must deal with,
including gaps and shortages – funding, skills and production capacity,
barriers to entry, and so on. The mission should cater to investor
expectations and customer needs at a very fundamental level, maybe current
events, the history, the organization, where it has been and where it is
going, the company philosophy and values, as well as the needs of
stakeholders such as community and employees.

The mission statement is often very compelling and brief. Even though
there are a lot of factors involved, sometimes just a few words that convey
everything make the ideal mission statement. If you can succinctly capture
the spirit and purpose of the company in a very short statement and it is
clear, then bingo! Ideally, a mission statement aligns diverse stakeholders,
motivates and inspires people. Mission statements provide a tone for the
company to guide its day-to-day activities and it may even have some
attitude. This is all important because in your net zero program you do not
want to contradict or undermine the mission of the company.

A vision is a specific achievement toward the mission if you have no

constraints. It is what you almost see with your eyes. I mean that if you
imagine success at achieving the mission, what does it look like so
frequently in your mind's eye or in the mind's eye of everybody who reads
the mission statement? You may develop a vision of what it is, and that
picture in your head of the ultimate success can be extremely inspiring.
There is a whole science around manifesting these days and if you are
familiar with self-help movement, manifesting is essentially imagining or
looking at an image enough times and with enough intensity that you
actually believe it will become your reality. I believe that if you can create
an accurate and correct image or vision for where you want your company
to go, it can help everyone in the organization get there.

A strategy is a way to achieve the mission in the face of real-world

constraints like competition, barriers to entry, investment requirements,
skills requirements and so forth. The strategy provides a much clearer view
towards how you intend to achieve the mission, specifically how you intend
to navigate around the obstacles to achieve the vision.

A business model is an integral combination of target customers, products

and services, pricing, operations, delivery, cost and scale that creates
sustainable wealth generation and sufficient cash flow. You can find more
academically correct definitions on the internet but for me this describes it.
If you can draw a line through, or like a rotisserie put a skewer through the
middle of, all those things, and if it spins around and remains in balance,
then you have a business model that works. If it falls out of balance, the
business model is flawed and won't work. If the pricing is misaligned with
the target customers, it won't work. If the products and services do not line
up with the scale economies, if either two of those things do not line up, it
won't work. Many companies spend years after years perfecting their
business model until they get it right. Many of the companies that we know
as phenomenal success stories today went through early years trying to
tweak with the wrong business model and adjust it, as well as pivot, change
and adapt it until they got all the ducks in in a row, aligned and the whole
rotisserie balanced. If you like cars, you can think of balancing the wheels
on a car. If you have ever done that there are little weights that you put on
the wheel to make sure that when it spins around, it spins around in perfect
and total balance. It doesn't go left or right at all. And that is what you
should do with a business model.

The revenue model is the integral combination of product, unique value

proposition and prices that assure sustained revenue. How can you keep the
revenue flowing? The revenue model is a component of the business model.
If the revenue model is not working, the business model will fail. There is
in addition the cost model, where operations strategy comes in. We will talk
more about that as we dive deeper into the chapters of this section.
The Three Operations Strategies
How can operations make those statements of value delivery to the
stakeholders happen? The business strategy should drive the operational
priorities. In other words, the operations strategy should hang from (depend
on) the business strategy. You have a corporate strategy and perhaps a
business unit strategy, under which you have a marketing strategy,
operations strategy, finance strategy and other functional strategies. The
operations strategy should align with the business unit strategy. It may
sound really simple, but it is not so easy to get right in real life.

There are three types of operations strategies, at least according to some

academics, chiefly: low cost, differentiation and response.[9] Within that
there are subcategories. For example, within differentiation, there is
differentiation via customization or innovation. Response can focus on
speed or flexibility.[10]

Functional operations should be configured to support the overall

operations strategy. Product design and launch, quality management, quality
control, quality assurance, quality management, production processes,
location choice, layout mapping, human resource policies, job design,
network design, supply chain design, inventory management, scheduling,
and order fulfillment should be set up differently for a company pursuing a
low-cost operational strategy versus a response strategy or a differentiation
strategy.

Going back to the “rotisserie” concept, if you have an overall business

mission and a business strategy that requires a low-cost delivery, but your
operations are set up to satisfy or cater to a differentiation strategy, you will
have a misalignment between your operations strategy and your business
strategy with probably eventual consequences such as cost overruns and
incompatibility of customer requirements with service levels. Many other
problems might pop up since operations strategy further unfolds into sub-
strategies.
Low-cost operations are evident in companies historically like McDonald's,
Walmart, and Southwest Airlines. McDonald's pioneered the standardized
menu. Standardization is a key element of low-cost delivery. That doesn't
mean it was cheap – it means it was designed explicitly to be inexpensive.
Walmart certainly pioneered a low-cost strategy by sourcing from China. It
had a unique approach at the time. It was not just cutting costs – it was
finding a new way of delivering products at a lower cost than before. The
big box store was unique. Everything about it, the store and the logistics
etc. was designed for it. It was really a breakthrough. Southwest Airlines
also has a paradigm of a special configuration that allows it to deliver low-
cost air tickets, which has to do with the way its whole network is set up
with short hauls from a secondary airport. As you can clearly see, the
operations strategy and network configuration are integral to the business
model. If you were to change the strategy you would need a different
network. If you were to change the network, it wouldn't work with the
strategy. If you are a top-tier airline and decide to reduce carbon by
replacing long-haul flights with shorter routes with more connections, that
might backfire with customers.

Let's look at a few companies that have a differentiation strategy. One of

them is Vistaprint. This might be a little bit of an outdated example now,
but Vistaprint completely revolutionized the gift industry by allowing
customers to create their own logos and designs, and order customized gifts.
Dell Computer got its start by allowing customers to specify their particular
devices and customizing order fulfillment operations to deliver the
customized product. That was new at the time and was a differentiation
strategy. If a net zero plan replaces customization with standard products to
reduce energy intensity, for example, and if your company’s operations
strategy is based on differentiation, that misalignment could suck the wind
out of your sails.

The response strategy could be represented by FedEx and UPS. FedEx

exemplifies a fast response strategy and UPS exemplifies a reliable
response strategy. Amazon has recently joined this ranking as well, and
many other companies in the distribution sector excel in responsiveness.
Throughout the net zero program, you want to make sure that whatever you
say as you develop ideas, pilot programs, demonstration projects and bold
thinking, you are adding to and not detracting from the corporate strategy
and the business unit strategy in executing those plans. Specifically, identify
your company's strategy according to the different dimensions of operations
that we walked through earlier, such as product definition, quality
management, production processes, location and the layout of the facilities.
That could be human resources strategy, supply chain strategy, inventory
and scheduling, production, warehousing, etc. This might take a little while;
it would be time well spent. Because once you have this down in writing, it
can serve as a benchmark for you later when you might decide that you
want to do some edits and corrections. It is good to have a baseline. That is
what I wanted to discuss regarding how to align net zero with the business
strategy.
3.2 How to Engage Adaptive Behavior

This chapter will help you leverage the power of your organization to
succeed in decarbonizing. It helps you create a learning organization
around sustainability and carbon neutrality, and it suggests clear values
and principles to support the journey to net zero, as well as tools and
techniques for managing the mindset and embedding net zero decision-
making in the culture to unleash continuous improvement and carbon
reduction on a daily basis.
Introduction
This chapter is about how to make sure the foundation laid for the net zero
program “sticks”. If people's incentives are misaligned with whatever
program you intend to roll out, it is not going to work. Rolling out a net
zero program involves making organizational decisions about how to
communicate the program, including precisions, clarifications and nuances
about how the program translates into people's job descriptions,
motivations, incentives and workplace environment. The chapter is divided
into four parts: the definition of net zero, how to instill net zero principles,
creating a net zero mindset, and reinforcing the net zero culture.

The first part which I call “what do you mean by net zero” may sound like a
rhetorical one but it is a real question, and this is the right place for it.
Before you start thinking about how to lay the foundation for net zero in
your organization, getting too deep into analysis or laying down
communication, wordsmithing documents and getting into the details, it is
worth spending some time to ensure there really is a clear and unified
understanding of what you mean by net zero. Your definition may not be
what the industry says or what the economists say. It is important that you
make your own definition of what it is for you.

The second part is about how to instill net zero principles. These principles
come from various places in management and my own experience. I will
propose a number of principles that you can use to guide the development,
evolution, and implementation of your net zero program.

The third part is creating a net zero mindset. This is about how the program
integrates with people's existing jobs and their organizational relationships.
If you lay out a program that conflicts with or does not even align
completely with everybody's incentives and structures, it will fail. It will
flop in part or in whole. Hence you want to avoid that.

And the fourth part is what I call how to embed a net zero culture into the
fabric of people’s everyday jobs. That goes beyond job descriptions. It is
about making this a part of everyday or “every hour” activities. It means
making it part of everybody's mindset, essentially what they do, how they
reinforce each other's behavior in meetings in real time, what kind of social
reinforcements and penalties there should be for achieving net zero within
the organization, and what undercurrents could jeopardize progress.
Defining Net Zero
First of all, what do you mean by net zero? First you may need to tailor
some definitions to your situation and your objectives. Let's begin with
some classic industry definitions. GHG stands for greenhouse gas. There
are a number of greenhouse gases that are important to climate change and
to net zero which we have mentioned in the carbon footprint chapters. They
are CO2 (carbon dioxide), CH4 (methane), N2O (nitrous oxide),
hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulfur hexafluoride
(SF6) and nitrogen trifluoride (NF3). Emissions can mean any greenhouse
gas that is released into the atmosphere. That is my definition, and it might
not be a scientific one and it may not align with what some carbon footprint
specialists say, but for the purposes of carbon reduction, it works. You
might further ask, what do you mean by atmosphere? I mean the air, but
you may define it differently (you might also ask “what is air?”).

People might say, well, if you do that, meaning if you inject CO2 into a cave
or a well or deep into the ocean, does that count as “decarbonization?” That
is where you could get into some constructive debates. I can think of three
cases right now where you are not injecting or not putting these greenhouse
gases into the atmosphere. What if you put it in the ground? It depends how
far underground you put it into and what kind of sealant there is in the
cavern you decide to put it into. If you decide to just pump it underground
where it can seep back up through the topsoil, it is probably still in the
atmosphere. If however you pump it into a salt cavern deep underground, it
might satisfy a lot of people that you have basically gotten rid of the
greenhouse gases. And if you inject it into the ocean, many people may
claim that is not a viable solution because the gases could bubble up to the
top and escape into the air. What if you pump these greenhouse gases into a
solid, durable, permanent substance such as concrete, cement or the like?
There is already some work being done in terms of green concrete used in
construction. In this case CO2 or other GHG would be contained within the
rock and would not escape to the air. It is an emerging field. I can't say for
sure whether that would count as the emissions being remediated or not.
These definitional questions are important decisions that you should make
consciously.

If zero GHG emissions means no GHG emissions, that sounds simple but as
you think it through you should question if you really are targeting no GHG
emissions. Maybe you are targeting low emissions, or a percentage
reduction in emissions. I think you need to carefully think about the goal
you set before you communicate to stakeholders about your net zero
program. Backing off a stated goal could undercut the initiative. On the
other hand, setting a weak goal can send a signal that you are not serious
about carbon reduction or your company’s social responsibility.

Is buying carbon credits acceptable to your stakeholders? Quite a few

companies are planning on doing this. There is an emerging industry around
Direct Air Capture (DAC) which is already being experimented with in
some small demonstration projects.

Supply chain is often defined as all the activities between your suppliers’
ultimate supplier and your customers’ ultimate customer. However, if you
are in the middle and have suppliers who in turn have their suppliers, and
those suppliers have further suppliers so your value chain is every company
or entity and every organization in between your suppliers’ ultimate
supplier and your customer's ultimate customer, it might be unrealistic to
target net zero scope 3 emissions all the way up and down that chain. You
may want to distinguish between your customer chain downstream to
customers, your supply chain upstream to suppliers, and your value chain
(end-to-end, backward plus forward).

Adjust these scope definitions to match your goals. If you think it through
carefully you might spend quite a while gathering executive, scientific,
marketing and production input into this before you decide to go much
further. You could also anchor on some preliminary definitions and keep on
editing them as you move forward.
Instilling Net Zero Principles
Values and principles underpin the work experience, as show in Figure 32.
They shape and define everything outside of them. At the next concentric
circle in the bullseye chart is the work culture. Culture is the collection of
behaviors and values that creates a day to day feeling and dynamic within
the organization. The third layer is the environment which refers to the
work environment, the place where people work in. How they interface
with their environment means how they enter and leave the buildings, how
they treat refuse and garbage, as well as how they do remediation and
everything else in their immediate surroundings. Outside of that you have
the management style, which significantly impacts all the elements inside.
Management style may affect the actual physical environment such as
buildings and offices, as well as culture which presumably stems from
management’s values. All this leads to a daily experience.

Figure 32: Net Zero Values and Principles

You may want to consider adopting the eight principles below to further
your initiative. Your “homework” will be to adapt these to your needs if
they apply to your organization and your goals.
The first principle is to make all greenhouse gas emissions visible by
measuring and posting all greenhouse gas information for all to see. That is
a grand, all-encompassing principle largely because of the use of the word
all in three places. You get what you measure, and conversely you don't get
what is not seen or measured. It just goes unnoticed. Hence you make that
greenhouse gas emissions information consumption available to people in
their everyday lives and work environment where people can reference it if
they want, not just posting it in fine print somewhere in a sustainability
report. This is more of a philosophy where the GHG emissions information
is visible in the place where it occurs to anybody working in that place.
That is totally different from writing it up in a sustainability report. It means
that if I am sitting at a desk where a pipe goes by, and the pipe is carrying
some sort of gas that includes some carbon dioxide or one of the other
GHGs which is labeled and measured, I can see exactly where the
greenhouse gas is, how much of it there is and what it is. And I can see that
without even being part of the project team and without having any special
credentials or permissions. The person sitting next to the pipe might even
feel that it is a safety or an ethical issue for them, which could cause them
to come up with ideas to reduce or eliminate it. This follows very much the
idea in lean manufacturing and distribution, lean management in general, in
making signs, visible alerts and signals for people to see. You make this
information part of the everyday work environment which is more likely to
get input and action from stakeholders who otherwise may not have
participated, but who will choose to make a difference, individually and
collectively.

The second principle is to base operational and investment decisions on a

long-term philosophy, not short-term financial goals. This draws, like some
of the other principles here, on the Toyota Production System as well as
Just-in-Time and Lean principles. The key challenge for most people will
be deciding the length of time represented by “long-term” and “short-term.”
Short-term in American management generally means quarterly. Quarterly
Earnings reports are the main trigger motivating companies to behave
counterproductively to long term sustainability. If you are a large company
with deep water, offshore oil and gas operations you could be budgeting in
far longer increments, such as decades. In my experience, most companies
consider a five-year plan a fairly long-term plan. Many companies have
said they are going to reach net zero by 2050, which is a much longer
timeframe than most businesses have used in “long-term” planning. Are
they really committed to that? Or are they just “kicking the can down the
road”? It is up to you to decide what long-term means.

The third principle is to engineer all processes to avoid unnecessary CO2

footprints. Every existing process, hopefully in a well-structured & well-
balanced company, should be documented somewhere. Take a look at every
single one of them, identify where CO2 footprint is created from that
process and then question whether it is really necessary or unnecessary. It is
a potentially huge exercise to go through every process in the company and
to engineer CO2 out of the processes. However, engineering out CO2 must
happen if you are going to achieve net zero.

The fourth principle is to codify and standardize processes to facilitate

continuous carbon reduction. Codifying and standardizing are different
things: writing it down and making it standard across plants, facilities,
company holdings, subsidiary boundaries, geographies and time. Having
standard processes will dramatically accelerate your ability to achieve
continuous carbon reduction. First of all, it means that you have defined a
single process. Once you have a standard process it is so much easier and
quicker to change that process across all the units. Having done that, you
can begin to engineer the carbon out. It will be hard to engineer carbon out
if all your processes in different parts of the company are different.

The fifth principle is to build a culture of stopping work, if necessary, to

avoid any carbon footprint. Again, note the word “any”. That is an area
where everybody's going to have to put some judgment and some number
as a threshold. Nevertheless, the principle is to build a culture of stopping
work when the carbon footprint is unacceptable. That means you need to
empower workers and employees to stop or to signal, to call out carbon
footprint where they think it is and should not be, and to empower them to
actually take it out of their network.

That brings us to the sixth principle: to empower employees to take

emissions reductions actions in their daily work. It is crucial that emissions
reduction decisions come from the top because there will be major
decisions that affect the whole company. But to achieve continuous
reduction and reach net zero, it is also imperative to empower employees to
use their own judgment to take emissions out on a daily basis wherever they
see it. This is a principle and potentially controversial subject because when
you empower people to take emissions out, it implies or requires that you
have already done what we have previously discussed - to specify exactly
what kind of emissions you are targeting and how much you are willing to
tolerate over what time frame. The rules must be very clear for people to
truly feel empowered to make decisions without getting approval. If they
attempt to make independent decisions where the rules are not clear and get
punished, pushed back, sidelined or in any other way shunted because of
their attempted empowerment, the workplace environment could become
toxic, and employees may depart over time.

The seventh principle is to use reliable technology that reinforces the

organization's strategy and core competency. There is a whole lot to unpack
in this principle as companies adopt new technologies which are only
natural to want help from new technologies. But at the same time, a lot of
that technology is not tested yet. Therefore as you adopt it, there is a chance
that it will underperform in various ways (it could overperform too, but the
risk that it could underperform has a disproportionate influence on decision-
making). This is why the oil and gas industry has historically been ultra-
conservative in new technology adoption, as it can turn out to be
uneconomical, unreliable and unsafe. When you adopt new technology in a
highly engineered environment and it doesn't work right, it is very costly in
terms of re-engineering or de-engineering it back to the way it was, and
nobody wants to go backward. So, the principle here is to use tested
technology that reinforces your strategy and core competences. You don't
want to use technology that undermines what you do best. This is a tricky
issue, but I think this principle will help you make the right choices about
technology.

The eighth and last principle I will leave you with is to reward consistency
of value. By promoting leaders who live net zero philosophies in all aspects
of their lives. The last thing you want is a hypocritical situation where the
people at the top issue statements, proclamations and declarations about net
zero but are not really serious about it and do not act upon it themselves.
They might even say one thing and then contradict it the next day in public
or in private, which sends a signal to the organization that it is okay to go
about business as usual and ignore the net zero goal. If you really plan to
reach net zero, you should identify the people who actually “walk the talk”,
and who are very conscious of their footprint of GHGs in their personal life
as well as work life. “Promoting” means rewarding those with career
success and other incentives including financial incentives. Beware of
posturing, greenwashing and hypocrisy.

If you notice some themes that sound like Total Quality Management
(TQM), you are right. Quality management, a theory of work evolved by W.
Edwards Deming, an American author, professor and consultant who is best
known for his early contributions to Japanese quality systems, and Walter
Shewhart, a physicist, engineer and statistician famous for his pioneering
work in statistical process control, laid the groundwork for the elimination
of gaps between the product or service and the customer’s perceived needs.
TQM is the engagement of the workforce in ensuring processes that
continuously eradicate quality problems. Deming figured out that
improving quality increases customer satisfaction and reduces cost at the
same time. That is why the Toyota Production System became so popular
and so successful for so long. When implemented in a culture of kaizen (the
Japanese term for continuous improvement), tools such as the Cost of
Quality, poka-yoke, Six Sigma, zero defects, Total Productive Maintenance
(TPM) and jidoka can significantly reduce waste, as well as the cost and
carbon footprint that relate to that waste.[11]
1 The Cost of Quality. The Cost of Quality concept, pioneered by Joseph
Juran who worked at Western Electric’s Hawthorne (Illinois) plant and
helped Japanese companies improve quality, as Deming did, identifies and
assigns the cost of poor quality to direct (internal failure and external
failure) and indirect (prevention and appraisal) causes. A proper accounting
of the costs of quality often yields a shockingly large value, and this
motivates an organization to deploy resources to eliminate quality
problems. Because nearly all quality failures result in waste – whether
through overproduction, disposal or collection and reworking – poor quality
almost always incurs carbon footprint. Therefore, reducing the cost of
quality also reduces the carbon footprint.

2 Poka-yoke, the Japanese term for foolproof, is a process by which

processes are designed to prevent misuse (for example, a smart password
system that rejects insufficiently tricky passwords to prevent later
breaches). Poka-yoke saves cost by preventing costly failures before they
occur. By acting on the root causes of quality failures, poka-yoke ultimately
reduces carbon footprint.

3 Six Sigma originated at Motorola in 1986. It is a process improvement

methodology designed to ensure that a process will reliably deliver output
within a prescribed range of tolerance. Sigma is the mathematical symbol
for standard deviation, which is a measure of the spread of a distribution.
When output of a process is normally distributed, 99.73% of the output will
lie at ±3 standard deviations of the distribution’s mean. Traditionally, a
process was considered capable of meeting customer specifications if those
specifications were at least three standard deviations from the process
mean. The idea of Six Sigma quality is to have the variation of the process
so narrow that the customers’ specifications are at six standard deviations
above or below the mean. Six Sigma capable processes produce only 3.4
defects per million.

Although the criteria for process capability at six sigma sound strict,
operations that run at high volumes need to be capable at this level. The
compounding of errors in a multi-stage production process amounts to a far
greater chance of error than any one individual operation. For example, if a
television set requires 500 parts and each part has an industry-leading six
sigma defect rate of 3.4 parts per million, the process will still generate up
to 1,700 faulty television sets for each one million that are produced
(assuming that each part has an independent chance of being faulty and that
there is one defective part per unit). In mission-critical operations such as
surgery, airline flights and military supply lines, process reliability can be a
matter of life and death.

Six Sigma is about teamwork and problem-solving, using Lean diagnostic

tools such as the Plan-Do-Check-Act (PDCA) cycle, the DMAIC (Define,
Measure, Analyze, Improve and Control) cycle, a systematic quality
process improvement process that includes a variety of tools including
Pareto charts, root cause analysis and statistical process control. General
Electric and FedEx, to name just two companies, have had extensive Six
Sigma programs, and have sponsored and developed thousands of
individuals who have earned the title of “black belt” in Six Sigma.

4 Zero defects is a concept related to Six Sigma, but much simpler. The
idea is that the ultimate goal of Six Sigma and related quality improvement
programs should be absolute intolerance of any error.

5 Total productive maintenance (TPM) combines the principles of

preventive maintenance with the concepts of TQM and continuous
improvement (kaizen) to achieve continuously improving reliability.

6 Jidoka, the process of making mistakes immediately apparent, is a

Japanese concept that empowers anybody working in a process the right
and the responsibility to stop the process immediately upon sign of a defect.
The idea is to bring process abnormalities to light immediately so they can
be remedied before poor quality even occurs.

Communications about the program are critical to garnering the

engagement needed to achieve net zero. Internal communications are
mostly oriented toward employees, while external communications are
designed for shareholders, customers and the community. Figure 33 shows
a categorization of communications on a two-dimensional matrix. One axis
defines whether the communication is explicitly articulated or just implied,
and the other is about whether the message is loud and clear or hidden and
ambiguous. Loud, clear and explicitly supportive communications empower
people to support the initiative. Loud, clear and ambiguous or conflicting
messages diminish the likely engagement. Explicit but minimalist or
unclear messages and communications that are in essence appendages to
other more important communications send a signal that the program is not
as important as other initiatives. Finally, loud and clear but incomplete
messaging may indicate that people should support it but that there are
hidden traps or “back doors” through which they must not pass. In any case,
the axiom “actions speak louder than words” applies here. If people say one
thing and do another, eventually it will become apparent that the actions
will become what people expect and not what they say.

Figure 33: Communications Styles

Creating a Net Zero Mindset
Now we will explore how to create a net zero mindset. Figure 34 is a net
zero leadership maturity model which shows how companies can progress
through stages of excellence with respect to the net zero mission, vision and
values, program leadership, cross-functional communication as well as
career pathing and culture.

Figure 34: Net Zero Management Maturity Matrix

The first row indicates net zero mission, vision and values. In Level One
companies, probably those mission and values pertaining to net zero will be
unspoken or unformulated, pretty much informal and undocumented. In
Level Two companies they are documented, where there is a statement that
people can refer to. In Level Three companies they are not only
documented, but well known. If you ask people on the shop floor what the
company's mission, vision and values are, you will get the correct answer.
And in Level Four companies even people outside the organization know
them; employees are rewarded for acting on the values. At level 4 net zero
becomes a self-fulfilling prophecy and gains a lot of momentum.

The second row demonstrates program leadership. At Level One, the team
is a collection of people who happen to be available. At Level Two there is
structured leadership training and a clearly defined program. At Level
Three there are KPIs and potentially a mentoring program. And at Level
Four, people in the industry try to hire people away from your organization
because they are known for being net zero experts and leaders.

The next row talks about cross-functional coordination. In Level One

companies there is no cross-functional coordination. Everything is done
within silos. Marketing does its own plan, Production does its own plan,
Engineering does its own plan, so on so forth. In Level Two companies
there is a net zero process document which some people know. In Level
Three companies there are explicit Responsible Accounted Consulting and
Informed (RACI) matrices to delineate responsibilities. At Level Four,
external strategic partnerships have been formed and there may be a Net
Zero Center of Excellence that is a repository for comprehensive
documentation on net zero transitioning.

The next row shows career pathing. In Level One companies, net zero
consists of “on-the-job training.” In Level Two companies there is a training
program for people that describes exactly how the net zero program fits into
their career, and perhaps there exists a career specifically for net zero
skilled and talented people to rise within the company, perhaps doing net
zero implementation projects. It is not yet a career in any company that I
know of today, but perhaps will be in the future. At Level Three there is a
regular recruiting cycle for people who know about net zero
implementation. And at Level Four, sustainability is an axis of advancement
in the company. Companies are known for it, where people pursue careers
because of their net zero program infrastructure.

The last row is culture. In Level One companies a shadow culture

influences most decisions. People behave in a certain way that does not
reflect what is written down in the policies and procedures. In Level Two
companies there is a transparent, rational and collaborative culture. The
objectives and standards are transparent, open to critique and are refined
over time. In Level Three companies, the culture adapts quickly to
refinements and changes in emissions and program objectives. In Level
Four companies a code of ethics drives net zero behavior and that is a
culture that is regularly reaffirmed and reinforced.

Where are you on the net zero maturity matrix?

Embedding Net Zero into Job Descriptions and the
Work Environment
In order to embed emission reduction, day-to-day behavior change should
be reinforced through awareness, analytics, active decision making and
incentives. This should apply to electricity usage, fuel consumption,
chemical or physical reactions during manufacturing or production, the
selection of building materials, and many other day-to-day decisions.
Exactly how you are going to create awareness, which analytics to use, and
which type of decision-making to incentivize depends on your situation. As
an example, you can specify the analytics that you are going to use to
monitor and control electricity usage. And you can identify specific active
decisions that need to be made in those areas by different people in the
company. Finally, you should design incentives that invite employees to
reduce carbon footprint and GHG based on their electricity usage and from
fuel consumption.

You will have better luck creating a “net zero culture” if employees’ basic
needs are satisfied first. As a prerequisite the company must already
provide the basic needs at the bottom of Maslow's Hierarchy of Needs, for
example, employees’ physiological, safety, love and esteem needs. That is
the bottom of the pyramid which means that there is nothing going on at the
workplace environment that would make people feel threatened or that their
safety is jeopardized; it presupposes that there is nothing going on that
would make them feel like it is a dangerous environment and that they
already feel decent about their jobs. Given that preamble, the net zero
program appeals to the upper half of the pyramid where people can
appreciate the need to attain net zero. It means they can think above and
beyond their own personal benefit or gain. If these conditions are not met,
the incentives, rewards and penalties that you might associate with the net
zero program will be ignored as employees focus on their lower order
needs.
Job design should consider net zero in five aspects: job scope, motivators,
penalties, empowerment and incentives, as shown in Figure 35.

Figure 35: Net Zero Motivators in Job Design

Job scopes should include carbon emissions. Most job scopes do not
include anything about carbon today. Perhaps they are not even looking at
something today in their daily job that they should be looking at. In an oil
field, if there is flaring going on as an everyday thing and the gas escapes
into the atmosphere but the person working there has never been asked to
deal with it, maybe he or she has just accepted this as a background
situation. The job scope of that person should be expanded to include
responsibility for the flaring of greenhouse gases.

Penalties and incentives need to be in place to motivate employees to do

their jobs well. Penalties and incentives should be effective in motivating
them to participate in the net zero program. Motivators are non-monetary
carrots, as opposed to sticks. Empowerment should be created through
authority levels related to budget and decision-making.
The Toyota Production System (TPS) offers some further practices that can
be co-opted to help create a net zero culture. Each of the below concepts
should be integrated into job descriptions, monetary incentives, non-
monetary motivators, empowering characteristics of the work environment,
and penalties for non-conformance or non-compliance with program
objectives.

Kaizen means continuous improvement. It has been used historically to

eliminate waste and create improvements in efficiency. Each day, each hour
and each minute you should be improving something and by continuous
improvement you will actually get where you want to go. This is based on
the belief that if each one of the entire team is engaged a little bit, it is going
to be a lot more effective in the long run than having hierarchical top-down
decision-making.

In Lean Manufacturing there is a method called 5S. The five S’s are Sort,
Simplify, Shine, Standardize and Sustain, which represent a daily mental
discipline that people follow in order to implement lean in everything they
do. It is critical to have these supporting techniques to maintain discipline
for continuous improvement. In your net zero journey you can create a
similar set of techniques to ensure that net zero becomes an aspect of every
thought, every analysis, every piece of work and every task. The techniques
should embed thinking about net zero. They can do that through a “5C”
practice, as follows:

1. Collect GHG data. Whenever something comes across somebody's

desk, computer or floor the thought should trigger: “how much
GHG is coming into or out of that?”
2. Come up with options to reduce it or eliminate GHG. This should
become second nature.
3. Collaborate through teamwork. It is one thing to get individual
thinking in that way. But it is necessary to work together in groups
on the same thing.
4. Codify lower-carbon procedures, which means taking the result of
the team brainstorming to propose, modify and update procedures
 to the net zero standard.
5. Carry out the mission based on incentives for success and rewards,
and penalties for non-conformance or failure.

Standardized work enormously enhances the potential to make continuous

improvements. The way to continuously improve work is by having
standardized work that is documented. Suppose that someone has an idea –
“hey, I think we should turn on the icemaker at 8:30 AM every day instead
of 08:00.” First of all, if the original procedure was not documented, it first
has to be documented (“turn on the ice maker every day at 08:00”).
Secondly you have to say, here is the change I am going to make. Thirdly,
even if it is documented in one place, procedures often might vary from
facility to facility. Some facilities might turn on the ice maker at 7:45,
others at 8:15 and yet others at 8:45. So the new procedure won't apply to
the ones that turn it on at 8:45, or maybe it will apply to them in a different
way if they turn it off at 7:30 PM. If all procedures are standardized,
continuous improvement can be made rapidly and consistently to achieve
the benefits in a predictable timeframe that is usually very short.

Now let's discuss nemawashi. The Toyota production system emphasizes

respect for others which translates to building consensus instead of
hierarchical decision-making. It is not acceptable to do things based on a
majority role with a minority disagreeing or based on a mandate. People
have to either buy in or abstain, but in reality, nothing changes unless there
is a consensus. This is very important for any net zero initiative because
nemawashi applies to employees, suppliers and other stakeholders.
Everybody must be on board or else the basis for going forward is fragile. A
net zero program will be a lot more effective if there is consensus among all
interested parties. These challenges are going to be very difficult to obtain.
It is only going to be possible in collaboration with partners and as a team.
Further continuous improvement is not going to work unless everybody on
your team is trying to continuously improve. Think about whether this
could work in your team or not. But if you decide that it is an important
way to go, it implies a deep culture shift for most Western companies.
Another Japanese concept is called pokayoke. Pokayoke translates to
mistake proofing about designing processes and products such that people
simply cannot misuse or abuse them and cannot make mistakes because
they are foolproof. For example, when you try to delete a file in Microsoft
Windows, the default setting triggers a warning that requires you to confirm
that you want to delete the file. “Are you sure you want to delete this file?”
That gives you a chance to say “no, I made a mistake. I don't want to delete
the file. Don't do it.” Pokayoke can help avoid potentially catastrophic
situations. Similarly, there should be backup plans and failsafe mechanisms
for high-impact carbon reduction initiatives that have risks of failure or
misalignment.

Another useful concept from Toyota production system is called hansei,

which means self-reflection. This gives everybody a chance to really think
about what could be done better and what was not perfect. After every
client assignment, Boston Strategies International conducts a post-mortem
where the consulting team assesses what went well and what could have
gone better. The process involves thinking about why things happened the
way they did, and surfaces recommendations to address any process
deficiencies. Hansei will certainly be required throughout the journey to net
zero, and some companies embed a “chapters learned” step at each stage
gate in major capital projects.

Andons in the Toyota production system are signals that tell everyone that
there is a problem. Actually, they more generally supply information about
the status, and if there is a problem you will see that because it is designed
to make the status visible for everyone to see. If the net zero project plan
has certain tasks that are critical path and others not, and a delay in a critical
path task would warrant an alert to the project manager and others, this alert
would serve the function of an andon and should be visually displayed for
all to see, for example an information wall of key metrics and real time
alerts displaying the status of the net zero program with visual alerts for
anything that is not going according to plan.

Related to this, another concept from TPS is called jidoka. This is the
process of stopping production when defects (out-of-tolerance situations)
occur. In TPS if there is a problem and the process keeps going on, the
overproduction either gets thrown out or gets in the hands of customers,
resulting in returns and customer defections or an environmental incident.
Having the process stop involves a powerful change in mindset. Jidoka can
apply to net zero programs. If a process produces methane, for example,
that process would be automatically stopped. This could happen with a
methane detector and wireless process control via Internet of Things (IoT)
devices.

Another concept from Toyota, a production system that could genuinely

apply very well to this program to reach net zero is genchi, which means
“go and see for yourself”. Genchi is a powerful concept. It sounds simple to
just not take anybody else's word. Go to the shop floor, go to the offsite, go
to wherever the leak is, go to whatever the source of the issue is and see it
for yourself. Hearing about it via a briefing and viewing photos sounds
more efficient but the investigative process that happens after you go and
see the problem for yourself is the value. It is not just seeing the problem, it
is seeing the surroundings, the environment, the context, and analyzing why
the problem occurred. From all that information you can actually rectify the
underlying causes of the problem, which should include standardizing the
processes there and elsewhere such that it never happens again.

Muda could be one of the most widely known concepts from the Toyota
Production System. Muda translates to waste. Waste occurs in so many
different ways and of course, eliminating waste and eliminating
unnecessary cost is probably the easiest and most direct way to reduce
emissions footprint and cost. Hence if you can find waste, can cut it out and
can take it out on a steady basis improving reduction of waste continuously,
then voila, you are already quite far along your path to net zero. Since
eliminating waste almost always eliminates work and cost, it almost always
results in emissions reductions. Therefore, the concept of eliminating waste
(muda) is integral to net zero programs.

The final concept from the Toyota Production System is a konnyaku stone,
which is a tool used to eliminate tiny imperfections. The point here has
nothing to do with the tool itself; it has to do with the magnitude of the
corrections. If there are very small things out of whack, TPS does not allow
them. The fact that a defect is small is not an adequate or acceptable or
sufficient excuse to ignore it. In fact, it is precisely when the problem is so
small and at the early stages that you want to detect a problem. This is
similar to cancer screening or any kind of health issues especially long-term
diseases that could haunt in later days. It is better to detect them early
because chances are they can be addressed and fixed earlier much more
quickly and cost effectively than later when they have metastasized or
become bigger problems. In net zero programs, eliminating tiny
imperfections may seem like a misallocation of resources if the goal is to
eliminate some GHG emissions, but will be essential if net zero is to be
reached.
Summary
In summary, these tools can help to engage adaptive behavior that will
sustain the momentum of a net zero program in your company. You may
want to reflect on these concepts and frameworks, come back and reread
this chapter as you progress through your net zero journey. And remember
to check out the expert interviews and worksheet templates on rev-
chain.com.
3.3 How to Establish Net Zero Goals, Objectives,
Targets, Metrics and Standards
“When you look under the hood, even those companies that have very
robust sustainability strategies are not tracking the return on their
investment. They’re not setting a baseline. They’re not understanding the
operational efficiencies, the innovation play, the risk mitigation play, the
employee reduction, employee productivity, none of that. For automotive,
we found a company that was netting $235 million annually due to their
waste management strategies and they had no idea…”
--- Tensie Whelan, New York University Stern Center for
Sustainable Business

This chapter explains how to define decarbonization goals, objectives,

metrics and targets for your business and decarbonization program goals.
Definitions
This chapter will focus on standards. Standards relate to measurement and
goal setting: goals, objectives, targets and metrics, as shown in Figure 36. A
hierarchy of relationships and definitions precede and provide context for
net zero goals. These are not textbook or dictionary definitions; they are
practical working definitions that I use personally.

Figure 36: Taxonomy of Goals, Objectives, Targets, Metrics and Standards

A goal is a qualitative milestone that defines a future state. Net zero is a

goal that defines a future state. Under it you may have objectives. Some
people define an objective as a sub-goal, and some people define it as a
quantifiable aspect that defines how far away from the goal you are. A
target, in my opinion, is a quantified objective that tells you how far you are
from the goal, quantitatively, either in units or in percentage terms. It
requires a unit of measure, and a target may also have a date associated with
it. The point is that by the time you get to the level of a target, you should
have some numbers representing progress toward the goal.

A metric is a scaled measurement of progress with respect to the target. For

example, tests are often calibrated on a zero to 100 scale. A standard is a
performance expectation expressed in terms of a metric. It means you have
already defined your metric and units of measure as well as a number that
you are expecting as the outcome, and maybe a control range, plus and
minus, above and below the mean expectation. Using the test example, for
example, a performance expectation might be 85 percent, which would be a
middle “B” at most universities. The target might be 95 percent, which
would be a solid “A.” The objective might be to get on the dean’s list and
the goal might be to graduate “summa cum laude.”

Figure 37 provides examples of goals, objectives, targets, metrics and

standards for a hypothetical net zero program. Let's assume that the overall
goal is net zero emissions. The figure shows three hypothetical objectives.
One is to eliminate greenhouse gas emissions from manufacturing
operations. A second is to replace internal combustion engine vehicles with
electric vehicles. And a third is to make all new buildings LEED certified.
We will be discussing LEED in future chapters; it is essentially a
certification for energy efficient buildings.

Figure 37: Example Goals, Objectives, Targets, Metrics and Standards for
A Net Zero Program
Once you have these objectives you can cascade them down to targets.
Example Goals, Objectives, Targets, Standards and
Metrics
For example, for the objective of eliminating greenhouse gas emissions
from manufacturing, you could establish a target of reducing metric tons of
carbon dioxide equivalent per 1000 units by 50% by 2030. That would be a
very specific quantified and actionable target. It has a unit of measure and a
full metric. It has a timeframe and a target number: 50%. Another target
related to eliminating greenhouse gas emissions from manufacturing could
be converting three of four plants to hydrogen by a certain date. And the
standard for that could be 75% of the megajoules from green hydrogen
(megajoules is a unit of energy). That is a very specific application of a
standard or expectation that you might put on the people from operations or
manufacturing, for example.

Then, if you are going outside of the manufacturing into the operational
area and getting into fleets, an objective might be to replace the internal
combustion engine (ICE) vehicles with electric vehicles. That is a fairly
common objective these days and many companies are planning on doing
this. A target related to that might be to make all new purchases of vehicles
electric by a certain date, say 2035. That is quantifiable and specific, and it
has a target date. And the standard underlying that could be that 80% of the
ton-kilometers should be electrified by 2029.[12] The associated metric is
“ton-kilometers electrified”. Of course, you have to be able to collect the
data necessary to compile that metric. That means you need to gather
weight and distance at the shipment level to facilitate the computation of
ton-km, and you probably also need to gather vehicle data by route in order
to associate the shipment data with a specific vehicle.

While we are constructing these metrics, we are also doing it with the
knowledge that underneath this lies a data architecture and infrastructure.
We are assuming that you have data sets under here to populate these. If
you don't have them, which may be the case for a lot of these things since
we are dealing with a relatively new program, that will become a separate
project which needs a monetary and time budget.

A third objective moving across might be that all new buildings are energy
efficient. The target underneath could be, for example, that 100% of new
buildings and 50% of brownfield buildings become energy-efficient by
2032. The standard here is LEED certification. LEED has multiple levels of
certification and accreditation such as gold, silver and platinum. The metric
here is LEED Gold certification. Therefore, by extension the objective
would be that half of the existing buildings would meet the LEED Gold
standard by 2032. I am not suggesting this is your target, but it is a rather
good example of the level of specificity that you can attain with a target. By
the way, it can be challenging to achieve LEED certification for an existing
building that involves retrofits and reengineering the interiors of buildings,
heating and ventilating as well as air conditioning systems, so with
buildings like that as with vehicles, many companies focus first on making
new buildings the greener variety.

You might also want to separately identify goals, objectives, targets,

standards and metrics for scope 1, 2 and 3 emissions. Internal versus
external challenges are very different and timeframes might also be very
different. In addition, data gathering would involve different people, asset
bases, infrastructure and facilities.

Each metric should be defined to eliminate ambiguity, since these will not
only be for your internal use but are likely to be published externally. Upon
examination, if somebody probes a few times and asks three or four
questions, the conceptual and data architecture should be sufficiently robust
and unambiguous to withstand scrutiny.
Calculating CO2e
For clarity it helps to express metrics and associated targets in both absolute
and per-unit terms. The absolute standards for emissions are fairly clear,
called baselining. In addition to those there are usually targets expressed as
ratios. An example would be metric tons of CO2 equivalent per unit (CO2).
Let's assume you make dishwashers as an appliance and it takes you a
certain amount of methane, carbon of dioxide, nitrous oxide and other
greenhouse gases in the construction and distribution process, you would
divide the total of all your emissions by the number of vehicles or
dishwashers etc, resulting in greenhouse gas per unit which is referred to as
carbon dioxide equivalent, or CO2e.

To calculate CO2e, you multiply each GHG by its global warming potential
and divide the total CO2e by the number of units produced. And this is the
overall consumption of greenhouse gas relative to units produced. Let's
presume you just consume one unit of each of these greenhouse gases. You
multiply each consumption unit of one by its global warming potential, add
them all up, and divide by the number of units produced. The illustration in
Figure 38 assumes that you produced 100 units. The equation yields 58,000
CO2e per unit.

Figure 38: Calculating CO2e per Unit

Scope 3 CO2e should also be measured, which involves measuring and
possibly establishing standards for your suppliers. This can be done in one
of five ways:
1. Apply similar metrics, targets and standards as those of your
company.
2. Estimate, impute or calculate the emissions of your suppliers, or
figure it out for them.
3. Ask the suppliers to “self-report” their scope 3 emissions.
4. Ask the suppliers to report their emissions and audit their reports.
5. Use third party data from an independent consulting firm.
The Case for Net Zero: An Interview with Tensie
Whelan, Professor, New York University

Tensie Whelan (NYU ‘80), Clinical Professor for Business and Society, is
the Director of the NYU Stern Center for Sustainable Business, where she is
bringing her 25 years of experience working on local, national and
international sustainability issues to engage businesses in proactive and
innovative mainstreaming of sustainability.
As President of the Rainforest Alliance, she built the organization from a
$4.5 million to $50 million budget, transforming the engagement of
business with sustainability, recruiting 5,000 companies in more than 60
countries to work with Rainforest Alliance. She transformed the Rainforest
Alliance into an internationally recognized and credible brand. Her
previous work included serving as Executive Director of the New York
League of Conservation Voters, Vice President of the National Audubon
Society, Managing Editor of Ambio, a journal of the Swedish Academy of
Sciences, and a journalist in Latin America.
Tensie has been recognized by Ethisphere as one of the 100 Most Influential
People in Business Ethics and was a Citi Fellow in Leadership and Ethics
at NYU Stern. She has served on numerous nonprofit boards and currently
serves on the advisory boards of ALO Advisors, Buzz on Earth, Edelman,
Giant Ventures, Inherent Group and Nespresso. She was most recently
appointed to the board of Emerald SPAC and is an Advisor to the Future
Economy Project for Harvard Business Review. Tensie holds a B.A. from
New York University, an M.A. from American University, and is a graduate
of the Harvard Business School Owner President Management (OPM)
Program. She was awarded the Stern Faculty Excellence Award in 2020.
David: Hi Tensie, I'm very pleased to have a few minutes to talk with you
about some important subjects in sustainability, sustainable supply chains
and governance in particular. Maybe a good place to start is: is there any
such overarching measure of progress for sustainable development, as GDP
is for the economy?
Tensie: There's no one metric, but for climate the metric is we need to keep
the world to 1.5 degrees, and we know what we need to do through the
good work of scientists in terms of dropping our GHG emissions by explicit
amounts by 2030 and 2050. For tackling poverty or health, there are also
specific metrics under the sustainable development goals to align with. But
when you get more granular, for example setting a target for water quality,
we don't have a global target on which to base individual goals. Another
challenge that we have for ESG metrics is that the reporting metrics through
the Sustainability Accounting Standards Board (SASB) and regulators are
primarily process and output-based metrics. They are not performance and
outcome-based or impact-based. So they don't really drive better societal
performance. Unfortunately a lot of companies are beginning to manage to
the reporting metrics, as opposed to managing to performance indicators
and then mapping them to the reporting metrics. That's also something we
need to keep in mind.

David: Why would money work as a single top-level metric for the
economy, while don’t we have a single metric for sustainability?

Tensie: I'm not an economist, but there's a lot of criticism about managing
to that one number, that it drives unintended consequences. You know, lack
of focus on people's happiness or well-being, for example. Or managing to
the stock market when most people actually don't have any significant stock
market holdings. So is that a symptom of our overall economic
performance? Actually not. I think there're some challenges with looking at
that one financial metric as well.

David: What do you think about composite metrics?

Tensie: As you know, the problem with that is if you have very bad
performance in one area and good performance in the other and you bring it
together, then it obscures the fact that you actually have bad performance
over here or really good performance over there. I think that's because these
issues are material in and of themselves. So, when you try to merge them, it
can be challenging. I think it's useful to have one overall score, but then you
absolutely have to go deeper to understand what that score consists of in
order to actually assess performance and to make recommendations for
improvements.

David: Speaking of money, one of the issues that comes up all the time in
my classroom and also in my consulting is that the business case needs to
be there for sustainability and sustainability investments. And fossil fuels
for ocean cargo and petroleum-based products are cheaper. Do you think it's
necessary to actually have a business case?

Tensie: Well, there's a philosophical reason to say we should just do this, it

is the right thing to do because it's actually an existential crisis if we don't
take care of it. But the reality is, in order to break through the barriers to get
to the level of transformation we need, we need to justify significant capital
investment. So a big part of our research is on the business case for
sustainability. We've developed a methodology called ROSI (Return on
Sustainability Investment) that has identified nine factors that drive better
performance when you embed sustainability as part of business strategy.
And those nine mediating factors include innovation, risk mitigation,
operational efficiency, employee engagement and retention, supplier
resiliency, sales, marketing and more. And what we find is that while any
good management can drive more innovation or operational efficiency,
sustainability is actually that next wave of Total Quality Management.
Many practices under these sustainability strategies will drive a number of
those financial benefits. It isn't that every single sustainability strategy and
practice will have a net positive, but when you look at the total bottom line
of all the different strategies and practices, you have a net positive. For
example, when we looked at this in the automotive sector, there's 18
different strategies, 16 of them drive better financial performance. The other
two cost money, but when you're looking at it holistically, you're more than
covering those two areas.

The big challenge around the business cases is that companies aren't
tracking all the different factors. In fact, when you look under the hood,
even those companies that have very robust sustainability strategies are not
tracking the return on their investment. They're not setting a baseline.
They're not understanding the operational efficiencies, the innovation play,
the risk mitigation play, the employee reduction, employee productivity,
none of that. For automotive, we found a company that was netting $235
million annually due to their waste management strategies and they had no
idea because the finance department in all corporates does not track avoided
cost. And a lot of the benefits are avoided energy cost, avoided waste, and
avoided risk amongst others.

David: Could you please tell us more about ROSI?

Tensie: ROSI stands for the Return on Sustainability Investment. The

process to assess ROSI for a company is as follows: You identify the
material issues for your industry, then what the strategies are, and under
each strategy you look at the various practices that you either have put in
place or are contemplating putting in place. It can be a backward looking or
forward-looking exercise. And then for those practices, you figure out
which of these non-mediating factors might drive better performance and
then figure out how to monetize it. Let’s say if you're looking at ergonomic
changes to the production line, you could look at increases and
improvements in productivity. You could look at fewer sick days. You could
look at reduced insurance premiums because there's better performance in
terms of health and safety, and you monetize those things as a benefit of
putting that in place against your capital costs.

David: Do you think maybe technology will improve that or the ability to
gather myriad sustainability data points and assemble them into some kind
of performance return dashboard?

Tensie: Every company that we work with, the ESG data is bad and there's
absolutely no ROSI data. Traditionally the ESG data has been collected by
the Chief Sustainability officer (CSO) on various Excel spreadsheets,
begging, borrowing and stealing it from a variety of places and shoving it
together. What we're seeing now is the CFOs are recognizing that there's
liability around ESG disclosures that aren't being well managed. So they're
beginning to look at how they better track these metrics. But then what I
worry about is that they're using the reporting metrics and managing to
those as opposed to actual KPIs. But that is the beginning of a more
professional vision and approach. Also, we are seeing companies with their
enterprise management system offerings like SAP or Workiva or Salesforce,
etc, all now working on cloud management enterprise systems to track the
ESG data. Some of them are working on things like carbon accounting to
incorporate in there, which is again not financial, but GHG emission
accounting. I'm still not yet seeing the integration with the financials like
we would do with ROSI.

Tensie: And the other big challenge with accounting is that most of the
company's valuation is in their intangibles and a lot of sustainability impact
like risk mitigation is intangible. Current accounting does a bad job of
tracking intangibles. So you've got to then figure out how you actually
assess that in a way that you feel is credible which means you have to build
out some assumptions around that. Building all that into the system is
something that I don't see companies doing yet.

David: Is there a gold standard for ESG governance practices at the

corporate level?

Tensie: I did some research on board credentials looking at Fortune 100

companies. This was a couple of years ago, and I found that only 6% of
1,188 board members had environmental credentials, 6% had governance
credentials, and a bit more like 20 something percent had social credentials.
But when I looked at the social credentials further, there was nobody, not
one, who had any kind of worker voice background (though there was a
group with Diversity, Equity and Inclusion (DEI) credentials). And then
when you look at the environment, of 1,188 board members, three had
climate credentials. When you look at different companies, like property &
casualty insurance, which is hugely impacted by climate change, there was
nobody on the board with background in that. On the governance side, six
board members had cybersecurity credentials out of 1,188. So there's that
problem.

Tensie: Some boards are beginning to incorporate ESG into one of their
committees, often the audit committee in some cases, but they're just
looking at the reporting. They're not involved at a strategy level. We're also
seeing it come into compensation. Increasingly companies are incorporating
maybe 20% of the comp going to meeting ESG metrics, not just financial
metrics. And if you look at all the committees, you've got opportunities
there in nominating and getting more credentialed board members. You
need a separate sustainability committee that is focused on the strategy and
the risks and opportunities for the organization separate from the reporting.
And then I think the sustainability office should be at a C-suite level. And it
is also seen as kind of a center of excellence. You need executive
sponsorship, you need to have a lead person in each division, you need to
have compensation tied to ESG metrics throughout the whole organization,
not just the C-suite. You need to build into your capital allocation
procedures, recognition for sustainability as a higher kind of priority,
because again, as we've been talking about, you have 20 different priorities
and sustainability will often go to the bottom? So there’s a whole series of
different steps you need to put in place.

David: I could see there would be a motivation to do that in certain

industries. For example, in consumer products, wherever a company has a
brand to protect, like Starbucks or Nike. When it comes to a lot of other
industries, I'm wondering where the incentive comes from, especially if it's
as void in areas you're describing, and there is no other company to
emulate. Isn’t the company disincentivized from doing that, because if
they're the first good guy in the field, maybe they would lose their
competitive edge by doing that as opposed to protecting their turf?

Tensie: In virtually every industry, there are a couple of leaders. If you look
at telecommunications, there are leaders there, if you look at oil and gas,
there are leaders there, if you look at utilities, there are leaders there, if you
look at the chemical companies there are leaders there. In everyone, there is
some leadership. Look at Schneider Electric, they're doing fascinating stuff
around decarbonization. And in a very proactive and interesting way,
creating loan funds for their suppliers, providing the technology, etc. In
every industry, a company can look at best-in-class and learn from that.
And those best-in-class folks are getting new business.
Tensie: One of the easiest areas to make money from sustainability is
through operational efficiency, because right now companies don't think
about the fact that they're buying more than they need and have to pay to
dispose of what's left over. They think of it as a compliance issue, not an
operational efficiency issue, but for every single company we've looked at,
these operational efficiencies are huge. We looked at a green chemistry
transformation for a pharmaceutical company. They ended up saving $1.5
million per 100 metric tons of product based on moving to green chemistry
where they reduced energy and water waste. What was interesting was that
$240,000 of that savings was due to avoiding a $5 a metric ton carbon fee
in some jurisdictions. Well, the IMF is suggesting $75 per MT, the UK has
$25, Sweden has $137. Just take the UK – that $240,000 is now $1 million
embedded cost in that particular product. That's just one product. So they're
not currently understanding the kind of opportunities that exist for cost
savings, again, because finance doesn't generally track that. So for me,
that's the place to start for these B2B manufacturing kind of organizations.

David: Yeah, I just did some work on a project, figured out that a company
could get 8% of their cost out just by doing the decarbonization of their
operations. So if you look at what cash flow that can provide, it can pay for
many times over the program and also fund a lot of the new investments
that are required.

David: Do you think there is money on the stock price side and on the
investor side as an incentive alone which might be more than enough to
have a company go pretty deep into sustainability?

Tensie: We worked with a Canadian utility who was trying to decide

whether they should get out of coal earlier as required by the government
by 2030. In doing the ROSI analysis one of the things we found is that if
they did that they'd ensure that they wouldn't be charged a higher cost of
capital, to the tune of $27 million over 10 years. So that was a key part of
their decision to get out of coal earlier. so I do think it's relevant. I also see
on the credit side of things, you know, green bonds, etc. Sustainability-
linked bonds give you access to credit at a lower price point if you are
performing well on sustainability, so that's another benefit. And I think on
the equity front that sustainability at the moment is probably not sufficiently
priced in. For companies that are performing really well, there may not be
quite as much recognition of how much that should be valued, so there
might be opportunities there.

Tensie: On the private equity (PE) side we do a fair amount of work with
PE and they're starting to look at climate commitments related to
operational efficiencies and energy savings and practices such as creating
employee stock ownership plans as ways to get more employee
engagement, as ways to improve the valuation of the company.

David: Do you think the Inflation Reduction Act is going to make a

difference?

Tensie: Absolutely. The Biden administration is trying to do this through

carrots while the EU is mostly doing it through sticks. I think the Europeans
are now getting jealous about our IRA and hopefully they'll do some more
incentive-based support as well.

David: Thanks so much, Tensie. I'm very inspired after hearing your
answers to these thorny questions.

Tensie: Thank you.

3.4 How to Shift to Clean Energy Operations
“If you had the battery of the phone you had in 1990, it would probably run
for about two minutes and be drained to nothing. There's a battery version
of Moore's Law…and it progresses at about a quarter of the speed that the
amount of semiconductor per chip has increased. But it's there, and you can
see it's happening in energy storage. One of the things hydrogen actually
has working against it is how fast [energy] storage has worked well on
battery technology, and a lot of it wasn't the mechanics. A lot of it is just the
software – how you manage charge and the discharge – and that's almost a
freebie; it doesn't take a scientific breakthrough. You don't have to design,
discover a new, better source. It’s there. It's going to happen. It's not a ‘will
it happen?’"

--- John A. Foote III, Revchain LLC

This chapter explains how energy storage, hydrogen, fuel cells and other
emerging energy technologies may offer game-changing opportunities for
your company to reach net zero. It also reviews templates to help you
evaluate the economics of each technology for your operation.

In this chapter we will review the energy transition imperative and explore
the potential for energy storage, hydrogen and other technologies to reduce
emissions.

First, let's look at the energy transition opportunity in general. A number of

mandates have been accelerating the transition. Until recently they came
largely out of the EU and recently also from the United States, in the form
of incentives. The current mandates started with the 2014 EU directive to
make the EU carbon-neutral by 2050. The US EPA also has various
reporting requirements related to emissions such as 40 CFR part 98 and
these apply mostly to heavy industries that tend to emit high amounts of
GHGs. The UK has been active as well in developing carbon reporting
regulations and disclosure requirements. There was a high-profile task force
on climate disclosure and there have been debates about carbon taxes. The
United States Inflation Reduction Act provides huge incentives for
investments in clean energy. Some of these initiatives are shown in Figure
1: Emissions Reduction Forces Requiring a Net Zero Plan.

Looking forward, additional mandates may become law. The EU has plans
to eliminate internal combustion vehicles by 2035. There will also be a
phasing out of incentives for renewable fuel vehicles, which means that
those renewable fuel vehicles will need to be profitable and independently
self-sustaining by 2030. There are carbon border taxes in EU countries,
although it's debatable how effective they've been to date. Investor pressure
has changed the dynamic considerably, with 73 or more asset managers
controlling $32 trillion in assets pledging net zero portfolios. This is driving
CEOs to pledge carbon neutrality, which those CEOs are pushing onto their
supply chain. All in all, there is huge pressure right now to adopt clean
energy.
That being said, which clean energy technology is right for you? And when
will it be the right time to adopt it? Costs are changing rapidly so it is tricky
to know when the best time will be to invest in this. The quandary is
complicated by trying to transition to clean energy in coordination with
trading partners or consortia members.
Clean Fuels
Equipment for renewable energies can be categorized starting with fuel.
There are two types of cleaner fuels – cleaner hydrocarbons and biofuels.

Cleaner hydrocarbon fuels may be an option depending on your goals.

Although natural gas consists mostly of methane which is extremely
harmful to the environment (it has a GWP many times that of CO2), it burns
cleaner than oil in most applications with one estimate showing that it
produces 30% less CO2e than oil to obtain the same amount of energy.[13]
Hence, many have considered various forms of natural gas to be “transition
fuels” or “bridge fuels” that could be economically viable until the cost of
renewables declines with economies of scale. This concept of transition
fuels tends to be criticized when the price of natural gas rises and the
investments to produce it could be better spent on renewable energies. In
case natural gas fits into your net zero plan, you may want to evaluate
compressed natural gas (CNG), liquified natural gas (LNG), liquefied
propane gas (LPG) and low-sulfur fuel oil, depending on your application.

As for biofuels, if you are going straight to renewable fuels you’ll probably
need to work with your engineering department to determine whether
methanol, ammonia, biodiesel and bio jet fuel can work for you. Traditional
oil and gas companies make fuels like methanol and ammonia; some of
them are selectively investing in and acquiring other biofuel production
facilities. As of now, biodiesel and bio jet fuel largely have their own
suppliers; their market dynamics are largely independent of the oil and
natural gas markets.

Electrification and energy storage can rapidly achieve major carbon

reductions assuming the ultimate source of energy is produced using
renewable energy. If you transition to electric vehicles and the recharge
power is coming from wind or solar power, you have really cut your carbon
footprint entirely except for the initial carbon footprint of constructing the
wind or solar farm. On the other hand, if you electrify all your vehicles and
recharge them with power from a coal-burning power plant, you have
achieved no carbon reduction at all. Assuming that you have some green
power options, and you will be studying batteries, at the moment there are
several commercially scalable types of batteries for most common
applications, notably lithium-ion and flow batteries. Each one requires
charging infrastructure. Fuel cells are another type of energy storage that
functions as an engine would. They have several design types including
Proton-Exchange Membrane (PEM), Phosphoric Acid, Alkaline, Molten
Carbonate and Solid Oxide. Each one has its more suitable applications and
is at a different stage of scientific development. My book Reinventing the
Energy Value Chain: Supply Chain Roadmaps for Digital Oilfields through
Hydrogen Fuel Cells (PennWell Books, 2021) provides information on all
these technologies.

Original equipment covers all kinds of hard goods and appliances –

vehicles, machine tools, dishwashers, laundry machines, everything and
anything that could transition from fossil fueled power to clean energy
power. There is a huge number of existing programs out there right now
where companies are using hydrogen and battery powered equipment, and
there are numerous fleet owners, operators, and service providers, retail
chains and service operations that have already installed equipment
powered by renewable sources.

Vehicle manufacturers are embedding renewable power into their vehicles.

Passenger vehicle original equipment manufacturers (OEMs) are making
hybrid vehicles which can be either self-charging (for example, Toyota) or
Plug-In (for example, GM), and truck manufacturers are making battery and
hydrogen-propelled vehicles including cargo vans and heavy trucks in
Classes 4, 5, 6, 7, and 8. In the airline market, aircraft manufacturers,
airport tug manufacturers and auxiliary power OEMs are piloting batteries
and fuel cells. In ports, crane manufacturers and ship fabricators are
experimenting with alternative fuels and the revamped engines required to
operate on them. In rail, some equipment manufacturers are launching
locomotives that run on hydrogen. In warehousing and material handling,
many companies have deployed electrified forklifts, Automated Guided
Vehicles (AGVs), delivery robots and drones.
Energy Storage
Lithium-ion battery prices have been declining greatly over the years.
Figure 39 shows how quickly they have been decreasing – from around
$650 per kWh to about $100, a 92% decrease – and still falling. This
decrease in cost has dramatically changed the economics of using lithium-
ion batteries in everything from cell phones to iPads, leaf blowers and
forklift trucks, which has been enabling the Electric Vehicle (EV) market to
take off. At the time of printing, we are still waiting for the western auto
manufacturers to release most of the electric vehicle models but we are
already on the migration path of the models, and their adoption at scale will
further decrease the cost of the batteries.

Figure 39: Lithium-ion Battery Price Trend

Sources: Boston Strategies International based on data from

Bloomberg New Energy Finance

Electric Vehicle (EV) adoption is one of the first markets driving the cost of
lithium-ion batteries down. As the scale of the EV market expands and the
cost of the batteries amortized across a much broader base, these same
batteries and variations on them can be used in other market segments at a
much lower price. This is a huge game of economies of scale playing out.
The larger the companies get and the more anode and cathode materials
they make, the lower the price of the battery cells and the battery packs. In
turn, the lower price makes the technology more likely to be adopted in
power generation and other segments.

There are many different applications for these batteries. Figure 40 maps
the applications on two dimensions – duration of discharge, and power.
Lithium-ion batteries are positioned at the lower left of the chart. A big
challenge has been that their duration of discharge is insufficient for utility
scale requirements unless you chain together multiple lithium-ion batteries,
which is being done in some cases. Alternative technologies include flow
batteries, cryogenic and molten salt batteries as well as compressed air and
pumped hydro. Wind turbines for wind farms have a similar problem with
intermittency. Is the lithium-ion battery sufficient to handle the
intermittency of the wind? Currently it is not quite there. Although Europe
is making it happen, companies like Vattenfall and Volvo are taking
substantial technical and commercial risk in pioneering this area.

Figure 40: Lithium-ion Battery Applications Map

For low power and short duration, nickel cadmium batteries are very
suitable. These are the kind of batteries you put into your home appliances.
They are composed of totally different chemistries.

Certain battery chemistries are going to be winners. The question is: when
will the demand and the market penetration achieve the critical levels at
which it starts to lower the price? Forecasting the battery chemistries of the
future is tricky. Certain battery chemistries have notable performance
advantages over others. Performance varies by application and battery
chemistry. The application is totally different for making a power tool turn,
operating an electric vehicle, or running a dishwasher.
Figure 41 illustrates some common dimensions of battery performance.
There are over two dozen attributes and relative performance characteristics
that will determine whether and when these new technologies and
applications will flourish commercially. Many of them are technical, such
as electric charge (Ah/kg) at the anode and cathode, weight (kg), volume
(L), energy density (Wh/L), cycle life (number of cycles with 80% or more
capacity), and so on. The weight of battery-powered vehicles affects their
commercialization potential, especially in heavy vehicles. Battery-powered
heavy trucks become so heavy that it takes a lot of power just to move the
batteries, let alone the payload.

Figure 41: Battery Performance Dimensions

Hydrogen
Hydrogen is competing with batteries in certain applications. Figure 42 is a
positioning matrix, with energy efficiency versus hydrocarbons on the Y
axis and carbon footprint versus hydrocarbons on the X axis. On the left
side you have a high carbon footprint and, on the right, a low carbon
footprint.

First let’s look at the energy efficiency of hydrogen (the Y axis).

Historically, hydrogen has been a byproduct of the refining process and an
input to some of the intermediate processes. That reaction is more efficient
than if that hydrogen were sucked out and converted to electricity. Energy
storage applications that take hydrogen and then use it as a storage device
or storage application and feed it into an electric power application, are
generally not very energy efficient. Lots of people have done calculations
that demonstrate that a whole lot of energy is needed to transform
hydrogen. Although hydrogen can be used in steel, glass and cement
production, its use is relatively inefficient compared to hydrocarbons. And
transforming hydrogen via an electrolyzer and then putting the hydrogen
through a fuel cell for power also loses a lot of the energy potential. In fact,
the more transformations that are involved, the more energy that is lost in
conversion. Transportation occupies a wide range in the middle. Certain
transport applications are looking economical, primarily in the heavy
industry segment. In order to really assess the economics of hydrogen, the
technical and cost aspects must be studied for a given application. Overall,
though, if there is regulation and if there are mandates which leave you no
choice as you cannot use hydrogen hydrocarbons anymore, then the Y axis
becomes less relevant.

Now let’s focus on the carbon footprint (the X axis). To segment the
applications by their carbon footprint you need to know how clean the
hydrogen is. If the hydrogen is gray hydrogen, or worse yet black hydrogen,
or maybe even blue hydrogen you might not consider that to be beneficial if
it is still essentially putting GHGs into the air. The issue of whether to
produce green or blue hydrogen is a large debate that may be raging for
decades.

Figure 42: Spectrum of Applications for Hydrogen in Industry

Source: Jacoby, David and Foote, John. “Hydrogen Fuel Cells in

Commercial Transport and Logistics,” Elsevier’s “Becoming Net Zero”
webinar. September 20, 2022.

Although the matrix in Figure 42 is useful for a macro view, many other
factors determine whether hydrogen powered vehicles are a good choice for
your applications. Hydrogen has advantages and disadvantages in terms of
equipment design and operation.
Forklifts tend to be a good application for hydrogen. They handle
a much larger payload-to-weight ratio than battery powered
forklifts. That is the reason hydrogen is already used to power
almost 40,000 forklifts in the United States.[14]
If you perform a similar analysis for trucks, you will see that it is a
two-sided story. Hydrogen appears to be a better application for
heavy trucks than batteries.
Rail and ocean are also promising modes and there are many
experiments or say, demonstration projects right now in vessel
operation and onshore equipment for transloading, offloading and
eventually processing like liquefaction.
Air freight has potential but also challenges, notably safety - you
need to compress it which involves temperature and phase change
to liquify it so as to fit into the small space that are suitable on
aircraft.
Wind, solar, biomass and geothermal energy might suit your
applications, as well as hybrid propulsion and energy production.
Biomass can be used for a specific company's production
operations and if you are already close to the source you might
consider biomass power, although it has a potentially harsh carbon
footprint.
Evaluating New Energy Technologies
The key question is which technologies will be best suited to which markets
and in what time frame? When you do your economic analysis, a lot of the
data you need to use is forecast data. To make projections you need to
decide which data you trust. If you are at the early stage, universities are
often at the forefront and frequently specific labs or companies specializing
in each technology. You need to align with the right team and possibly
license intellectual property. Figure 44 displays one of the frameworks that
I have used with my clients to narrow down the appropriate technologies to
certain industries. The criteria in Figure 43 are designed from the point of
view of a vendor of a solution or piece of equipment or service.

Figure 43: Format for Evaluation of Technology-Industry Fit

Let's imagine you are in the mass transit business where you operate
minibuses, passenger trains and trams, there will inevitably be different
performance criteria and evaluation criteria for each vehicle type and
mission (short haul versus long haul, etc.) and the optimal technology will
differ depending on the fit between the technology, the industry and the
application. The criteria in Figure 44 are designed to evaluate technology-
application fit. These templates are online at rev-chain.com.

Figure 44: Format for Evaluation of Technology-Application Fit

The Importance of Reliable Forecasts
Choosing the right technology is a function of timing. Even if demand and
supply are both increasing, they are not always in balance. Demand may
slow down until supply meets the demand, and then supply may slow down
until demand becomes firm. There is often a “chicken-and-egg” game, in
which the optimal timeframe for adoption requires judgment, consideration
and a keen sense of your organization’s risk tolerance. To that end, reliable
cost and price data can de-risk the technology investment decisions. Figure
45 demonstrates a variety of data frequently contained in Boston Strategies
International’s market intelligence reports, which are used for this purpose.

Figure 45: The Importance of Reliable Forecast Data in De-Risking

Technology Investment Decisions
I am confident you will make the right choices. Please remember to review
the interview multimedia material on rev-chain.com, which will make your
journey easier.
Shifting to Clean Energy: An Interview with John
Foote III, Chief Technology Officer, REVchain
LLC
David: Welcome, John. It's wonderful to talk to you again about so many
things energy related. Today we're going to be talking broadly about how
companies can use energy technologies to enable the energy transition and
get to net zero. So, I'm going to raise a number of provocative questions
like “can we even get to net zero?” and “which energy technologies might
help us the most?” And I'm going to put you on the spot, but that’s essential
because we’re aiming for the truth and not sugar-coating or telling a
prescribed narrative. John, it's been great to work with you over the years.
You have an illustrious background and career – would you like to briefly
introduce yourself?

John: I joined the Air Force in 1984. I flew F4s for a number of years and
that's how I ended up in Austin, Texas. One day I came home and learned
the Berlin Wall fell. And I was like, I don't have a job. Of course, I had a
job but my sense of purpose, what I needed to embrace that world, kind of
went with it because we were basically militarily monolithic. No one could
stand up to us on a battlefield. And at that time, I already had my first child,
and I said you know what? I'm not sure I want to raise my child as a gypsy
moving around once every two years. Semiconductors were just starting to
explode at that time in Austin, Texas, we were just starting manufacturing
them. The largest semiconductor tool maker was Applied Materials. I ended
up working there for a handful of years until 2008. Oddly enough, they
invested heavily into green energy of sort. They were going to be the king
of thin film solar for those who are familiar with solar. And I was working
in that part, which didn't do very well. And they gave me the option of
moving to California or leaving, so I left and worked on my own, had a
handful of small businesses.

John: One day someone from my past who I'd worked with at Applied
Materials said, do you want to come work for Aramco? I said I know
nothing about oil and gas. He said “no, but you know business processes
and technology” so I ended up in Saudi Arabia and that was where I met
you. They were on a mission to transition to category management and
improve how they spent their money and leveraging it better and I learned a
lot of things while I was there, a lot of things with you and seeing how in-
depth your analysis and your team was, we had a lot of good products from
that. Hit 60 and that meant the end of Aramco. Came back to the United
States and ended up back in semiconductor tool business again, which was
a very different business than I had left in 2018 in some ways and had a
blast doing that. Overheard they said, whoa, business is going to slow
down. And I was like, well I don't think so, but they offered me the money,
so I left. You reached out to me again and I never gave up on renewable
energy, which is what got me first going, not clean energy. And I've been a
fan of solar for years, had a solar rooftop. And clean energy and renewable
energy in my opinion is not a one stop solution. It's going to be an
integrator's approach and it takes a lot of things. And the big challenge to it
of course is not technical, it's more economics and what works best, plus the
inertia factor – often the economics may look attractive but they're not
going to give up their existing business model. I remember when I first
started at Aramco, I think it was 2013, being surprised to learn that in terms
of BTUs, coal was still king. It wasn’t more than oil and gas together, but it
was more than oil or gas separately. So, transitions are a tough thing.

David: You talked about solar and wind. Are renewable energies really
going to be used by most companies? Are they only for utilities?

John: Yes. First off, almost every company in most places is going to use
them whether they buy them directly or indirectly, because the grid is an
integrated thing. I live in Texas, the land of oil and gas, and politically it's
kind of harsh on wind and solar. And yet we lead the United States in the
percentage of wind and solar use. And how is it done? We have a great
wind corridor, so there's a lot of wind in the system. There is some utility
scale solar and then there's a lot of distributed power that's micro production
on a smaller basis. Put it on your rooftop, put it in your parking lot. And the
economics of that is much more dependent on where you are. I'm in the
process now of adding a solar system to my house. My cost per kilowatt
over the time of owning that thing is better than what I'm paying if I buy it
in the short term. Of course, it's front-loaded, so then you get into a
financing game. Does it make sense or not? Now there is a federal tax break
on it. Right now, you're looking at 30% tax credit, which is different than a
write off. That's real money, straight in the pocket. So yes, you're going to
see companies using it right now. The great challenge, of course, in solar
and wind is storage. You can make all you want. The cost to make it is
fairly good, but it is an intermittent supply. So what is the backup?

David: That's a super answer. and it leads to a whole bunch of questions

about energy storage. Are we talking about long duration storage or short
duration storage? What kinds of energy storage are going to fill that gap and
how close are we to actually having it available?

John: The answer is yes; you are going to have short-duration storage.
Some ways people realize if you're in a critical situation like server farms or
hospitals, they have short term already, but it's very short term
[uninterruptible power supply], that “clicks over”. That's not going to help
the average company get to net zero, so to speak. So of course, because of
EVs people see lithium as an answer. And that's kind of what I find mostly
as short-term storage, in hours, maybe a day or two. The best long-term
storage to date has actually been stored hydro. The largest facilities I know
of are the Tennessee Valley Association, that's pumped hydro, and they use
it for nuclear power because you can slow down the steam generator and
steam turbines. You want to turn it off, and so they can run more efficiently
at night, pumping up their power and increasing storage efficiency. Stored
hydro is very good. It's the most efficient there is.

David: If utilities have a solution for storage in pumped hydro, does that
mean that they can all use solar power with pumped hydro for overnight
storage? I mean, if that's the case and then can we foresee a world where all
the utilities are running wind turbines and solar farms and then sending us
green energy?

John: If they’re in a mountainous area, yes, but’s not going to work in Texas
like it does in the Tennessee Valley Authority.
David: In Texas in a flat area, you might have solar, and in a mountainous
or offshore area you might have wind.

John: Yeah, you have the wind, but in the west you have a lack of water
which is becoming an impediment to the expansion of hydropower. Lake
Mead [which supplies the Hoover Dam] is going to be in what they call a
“dead pool environment” in the next few years, so I don't see pumped hydro
there. It goes back to there isn't a single solution. Where you can use it, it is
a fantastic solution, but there are other storage solutions. Flow batteries, for
example, they've been talking about that as a solution for a while. It's never
been rolled out on a large enough scale to see where the economics are. But
you don't have a lithium issue, you don't have a rare earth issue, and solid-
state batteries are going to be a thing. But lithium batteries only have so
many cycles in them and over time they degrade. On a flow battery, just
flush it, put it in, you don't have a life limitation.

David: It sounds like we might have a bunch of unknowns here in the

equation. Like you said, it's maybe a spotty situation. What about the big
announcement which was made recently about fusion and the breakthrough
in fusion energy? What do you see for nuclear fission and fusion in our
future?

John: I think fusion is back on the way up. And the historical fusion that
especially the US did, where you had these one-offs, very expensive one-
time plants, that might not ever come back. You might have what I call mud
fusion, where you have a more standardized plant and hopefully a stored
old fusion material. It was just in the last few months they announced
building a smaller, slightly different salt thorium nuclear reactor where you
don't have those same issues. That's a great solution. And of course there's a
whole industry behind it. Fusion is definitely a player. Fusion of course is a
fantastic thing. I think you're more than 20 years away from it. It proves
they can do it in the long term. But remember it wasn't like the sun. It was
just an instantaneous burst where you got more energy than you put in for a
few billionths of a second.
David: So if we have a situation where basically we have a spotty
regulatory environment where the EU is putting a lot of emphasis on
regulatory frameworks to support the investments in these big missing
pieces of the puzzle like energy technologies and the US is not, then you
have a zone in the EU that might advance rapidly but then you also have
spottiness of geography where sometimes some technologies like wind and
solar are applicable and others are not.

John: In the EU they are targeting net zero by 2050 and there are a lot of
supporting mandates in every sector – disclosure of carbon and all sorts of
requirements. In the US we just passed the Inflation Reduction Act. And in
China there's major state-owned investment in a lot of new technologies
from fusion to lithium-ion batteries.

David: If you're a company but you have no control over any of that
actually. But your CEO has just claimed that we can reach net zero by 2050.
So put yourself in the role of a company for a minute. What would you
think are the most fruitful ways to get to net zero?

John: The most fruitful way is to take advantage of the politics that are out
there. Some places like that 30% tax credit in the US and you can sign up
for 100% green energy in Texas. It's not a problem. I can do it on my bill. I
know Applied Materials used to do that. So you can buy just solar and
green energy off the grid. And there's carbon credits, that's much more a
European thing. And there's green hydrogen. Is the hydrogen made from a
power source like solar, wind or nuclear? Or is it hydrogen made from
hydrocarbons and carbon capture? Or is it just hydrogen that’s made from
inducing a lot of heat, which has probably produced more greenhouses
gases, not less. Government policy is going to cause distortions and a large
company is going to take advantage of that. You're going to end up having
departments in companies whose whole entity is figuring out and working
the regulations. That's just what it is. No different than safety and cars.

David: To what extent do you think clean energy will end up being used in
various facets of shipping and distribution, like ocean freight, air freight and
trucking?
John: If you're going to play in Europe, you're going to have to embrace
renewables because who's willing to write off Europe as a market? So you
are going to see it. The question is, is it going to be a synthetic fuel? Are
you going to try and do hydrogen? If you're going to do hydrogen, you're
going to do what fuel cell? Or are you going to run cold liquid hydrogen.
There's a lot of challenges to it. But if you plan on those markets, you will
not have a choice. The challenge is, and where we're talking ocean going
shipping, there's a very large chicken-egg situation where you need quite an
infrastructure to produce the amount of green or blue hydrogen or even pink
hydrogen at scale. And then you're going to need the large wind farms. If
you're in the Middle East, you can do large amounts of solar. The largest
green hydrogen program right now on the planet is actually in Saudi Arabia.
So when you see a place like that embracing it, you see Europe embracing
it, and China will embrace it for different reasons. They might not really
care whether they're green or not. They're just short of energy for their
growth so they will continue to grow green energy and support these
because they're not going to ignore the huge market in the US. The world is
global.

David: A frequent critique of hydrogen is that the energy involved in the

reactions – first of all in taking the water and the air and electrolysis into
hydrogen, and then in liquefying it or transporting it, and then in gasifying
it or putting it into a fuel cell – if you take all those combinations of
transformations that the amount of energy used in all of that is greater than
the energy you actually get out of the other end. How can hydrogen ever be
a long-term solution if the fundamental thermal mechanics don't pan out?

John: They probably made similar arguments about the efficiency of an

internal combustion engine motor. Today it's so much better than in the
1970s. And yet the engines are much more powerful. It’s because they
weren't given a choice. It was always cheaper that day to do what you were
doing. The best internal combustion engine – 70% of it is still wasted in
heat – so if you compare it from the beginning to the end, they're all net
energy losers except for fusion. And that one has a way to go. And a lot of
the energy from wind is just free. Plus, you're going to get improvements
from catalysts and stuff like that. But [the efficiency of hydrogen] is a valid
concern in the short run.

David: That's really inspiring. Based on that, we can project generations of

improvements. Just the other day I was looking at a graph of gas turbine
efficiency between 1900 and 2000. During those 100 years, the thermal
efficiency rose from about 10-20% to about 70%. So I can foresee what
you're saying. In other new technologies, let's say that we start now, and we
take 100-year runway, and we could be up at a level of automotive internal
combustion engine, same thing. We could be at a level that's extraordinary
in about 100 years.

David: That raises the question of timing. Everybody is focused on 2050,

largely thanks to the UN and the IPCC telling us about how we have to
stem climate change by 2050, and how far behind we are. So realistically,
do you expect the pace of evolution of both fundamental science and
commercial adoption to occur between now and 2050?

John: Yes, I do. I'm going to show you an example. Everyone has one of
these phones. If you had the battery of the phone you had in 1990, it would
probably run for about two minutes and be drained to nothing. There's a
battery version of Moore's Law, which of course, doesn't have anything
scientific behind it other than what's been happening, and it progresses at
about a quarter of the speed that the amount of semiconductor per chip has
increased. But it's there, and you can see it's happening in energy storage.
One of the things hydrogen actually has working against it is how fast
[energy] storage has worked well on battery technology, and a lot of it
wasn't the mechanics. A lot of it is just the software – how you manage
charge and the discharge – and that's almost a freebie; it doesn't take a
scientific breakthrough. You don't have to design, discover a new, better
source, or worry about “we don't have enough lithium in the world” or
whatever. It’s there. It's going to happen. It's not a “will it happen?” How
many things do we have today because we didn't have a choice? We paid
the money when we launched the Apollo program, and some of it was just
out of pragmatic necessity. Velcro was convenient for NASA. We don't
think of that as high tech, but it served a purpose at the time.
David: That's phenomenal. It’s very promising that we can get there, and
it’s very promising that science will advance rapidly to cover the gap. Now,
if an individual company is trying to get to net zero, it sounds like that
might require a number of innovative investments, and potentially some
risk-taking on relatively new technologies, and maybe making some
decisions to relocate facilities where the tax incentives are favorable, etc. So
is a net zero program something that can be done within functional
departments or does it need to be done at the C-level?

John: I believe it needs executive sponsorship, especially in a larger

company. In a smaller company it can be done with internal resources, but
in publicly traded companies where there's a fiduciary responsibility to
explain what you're doing, and then once you go down that path, the
responsibility to follow through with it, I think you will actually see a
cottage industry of folks enabling that. I'd like to be part of that cottage
industry, have thought of it that way. But they'll also be in larger companies,
will develop rather large in-house…I know the division director for the
hydrogen program in Saudi Arabia, for example, they've got a lot of money
in the bank. They will do it in-house. But I guarantee they'll use outside
help, and outside help is the most efficient way to do it. First, because the
mission isn't to be green – the mission is to run your company. And how
does it achieve net zero? It's probably going to take executive direction and
departments that are focused on it, because there's not only so much
bandwidth any individual person has, but it also won’t just happen by itself,
and early on it's complicated.

David: John, thank you so much. I'm sure this advice will prove invaluable
to people in organizations that are seriously considering or already having
approved a journey to net zero. So I can't thank you enough for all your
wisdom and your experience and sharing it with us. We'll talk to you again
soon. And meanwhile, have a great day and thank you so much.

John: Yeah, it's just fun. Great talking to you.

4 How to Reduce Scope 2 Emissions –
Introduction

• This next section on Scope 2 emissions reductions opportunities

focuses on purchased fuel and electric power.
• It helps you figure out how to reduce power cost by lowering energy
intensity, how to reduce fuel cost through transportation
optimization, how to reduce building costs through green design and
how to access clean energy offsets and credits.
• It also discusses relevant regional and industry-specific government
directives, industry standards and protocols to which you and your
suppliers may need to adhere.
Introduction
This is an overview of section four on how to reduce scope 2 emissions.
Subsequent chapters will dive into much more detail on how to reduce
power costs by lowering energy intensity, how to reduce fuel costs through
transportation optimization, how to reduce building costs through green
design, and how to access clean energy offsets and credits.

The first part of this introduction will address how to reduce power costs by
lowering energy intensity. We will study seven steps to doing this. The first
is measuring energy intensity. The next is implementing energy storage and
virtual power distribution. The third is deploying energy management
systems. The fourth is participating in demand response programs. The fifth
is shaping the power load. The sixth is adopting electric vehicles. And the
seventh is charting a pathway to hydrogen.

The second part will explain how to reduce fuel costs through transportation
optimization. This will address logistics optimization methodologies, with
particular reference to carbon reduction. We will review how to optimize
networks whether they are global, regional or local. We will review how to
optimize routes, which could be viewed as a subset of the same problem but
have a different analytical toolbox. We will also explore how mode
switching can reduce carbon footprint, and we will discuss how to optimize
scheduling, whether that is vehicle or production scheduling. In terms of
reducing carbon footprint, the scheduling with the most direct connection to
carbon footprint is transportation because the efficiency gain translates
directly to carbon reduction. The last part, how to reduce fuel consumption,
will include how to enhance in-transit visibility for efficiency gains through
reductions in miles traveled, reducing asset inefficiency and at the same
time taking out unnecessary carbon emissions.

The third part will explain how to reduce building costs through green
design. We will look at green building principles, explain what LEED
design is and how it could result in carbon reduction for you, and we will
specifically examine the commercial and indirect benefits.
The final part of this section will focus on how to use energy offsets and
credits. I will present a stakeholder ecosystem and describe the different
parties involved as well as how you can work with them once you go down
one of these paths. I will also explain how third-party verifications work in
the context of renewable energy certificates.
How to Reduce Power Consumption by Decreasing
Energy Intensity and Increasing Energy Efficiency
Many people would define energy intensity as the inverse of energy
efficiency, but I look at it a bit differently. The fundamental – thermal,
chemical or mechanical, for example – energy transformation is probably
deeply embedded in your business, and you probably accept it as
unchangeable. Starting from a very high vantage point may give you the
best chance of reaching net zero. If you address the root causes you are
likely to identify the changes that might make the largest impact, even if
they are very hard or even seem impossible to make. On the other hand, if
the type of plant and equipment in your business is inherently not very
energy efficient and you don’t address that, you may hit many dead ends
and never achieve net zero even if you attack hundreds of relatively
marginal decarbonization opportunities. You really need to start with a
mindset that considers breakthrough shifts in overall energy intensity.

With that in mind, we will look at some industries and consider their energy
efficiency. Figure 46 provides some data for reference. Let’s start with the
concept of bottlenecks. There is a theory in operations management called
the Theory of Constraints. According to Eli Goldratt who has written about
twelve books including The Goal, in order to improve throughput in a
system you should start by identifying the bottleneck constraint. It is best to
start with the whole system of production and distribution or whatever, a
whole value chain, and ask: if I increased the amount of volume through
that chain, where would the first bottleneck appear in terms of delay or
limiting factor? Keeping that in mind and considering some industries from
a mechanical and physical engineering perspective we will look at energy
bottlenecks in several industries.

Figure 46: Energy Efficiency Bottlenecks of Selected Industries

In the power industry, one of the most important constraints is the
efficiency of the steam or gas turbine. When you measure the output in
terms of work created by the turbine compared to the input that it uses in
terms of fuel, and measure that input in terms of British Thermal Units
(BTUs), and then the work units gotten out of the other side, turbines are
generally at most 60% to 70% efficient. There are different turbines of
different generations and technologies, and of course some are more
efficient than others. But for many years energy efficiency has been a
binding constraint on the power industry. If you look at the work produced
by the turbine compared to the energy of the fuel which is measured in
British Thermal Units, the efficiency of the system a.k.a. the turbine itself is
frequently at most 60% to 70%, as shown in Figure 47. Consequently you
inherently have in the power generating system with turbines, a 30% or
more percent loss of energy. And the solution to this is usually to move
toward more advanced turbine technologies, which are incrementally more
efficient.

Figure 47: Power Transformation Losses

 Source: Source: Energy Consumption and Energy
Efficiency Trends in the EU-28 2000-2015.
Efficiency Trends of Energy related Products and
Energy Consumption in the EU-28. Bertoldi P.,
Diluiso F., Castellazzi L., Labanca N., Serrenho T.
2018.

Another bottleneck is transmission loss. There is frequently a substantial 5-

7% loss in line transmission. As you transmit the power from where it is
generated to where it is consumed, you could try to generate more locally
where you are going to consume. The companies which have done that
successfully through demand management especially, are the large electric
utilities, for example at Consolidated Edison (Con Ed), National Grid or
New York State Electric and Gas in the United States. If you are trying to
reach net zero in the power industry, one of the things you need to begin
looking at is the inherent energy intensity or energy efficiency of the system
you are using which is fundamentally an engineering problem but an
engineering problem that you better investigate. Because if you start a net
zero program without taking that into account, you are probably never
going to arrive at net zero. Power conversion and power transmission could
be your single largest bottleneck factors.

In the oil and gas industry, rotating equipment like turbines are used to
power many of the production and refinery operations. And in addition to
the turbine, you have production losses and interruptions coming from all
sorts of root causes such as weather, breakdowns of critical equipment,
planned and unplanned maintenance, which could last as long as a month in
some cases for refineries and processing plants. In addition to turbine
inefficiency and pump inefficiency, operational inefficiencies cause
bottlenecks that can be remedied through better supply chain optimization.

In the petrochemicals industry, you have a similar issue around the

efficiency of the pumps. A lot of the activity surrounds pumping and
pumps. While centrifugal pumps are much more efficient than gas or steam
turbines, there is still a loss of efficiency in the pumping operation itself.
Consequently, pump system engineering and pump systems reliability end
up being critically important if you are trying to attain net zero in the
petrochemicals industry, just in terms of working out the inherent
inefficiencies in your operation. A number of companies have done an
extraordinarily good job at that. ExxonMobil has been a leader in the
reliability of rotating equipment. Shell has also followed suit and of course,
Shell has a lot of operations both in the petrochemicals and refining side of
the business. Another company that is done well with this is SABIC, the
Saudi Arabian Basic Industries Corporation.

If you are working in metals and mining, the intense use of electric power
has the same inefficiencies we just talked about with turbine efficiencies. In
addition to that, the industry has a tendency to ship products around the
world for processing where it is more economical often because the hugely
capital-intensive operations benefit from lower cost of capital and tax
holidays. Therefore it is very common for product to be mined in Chile or
Brazil, shipped to South Africa or Australia, then shipped to China for
processing and shipped back to the United States for final assembly, getting
integrated into whatever components it is going into. This is the way global
logistics chains are set up now. More local and regional processing can cut
down on shipping around the world. The US Department of Energy has set
up a program called Carbon Ore, Rare Earth and Critical Minerals (CORE-
CM) to enhance the production and availability of critical minerals in the
United States. Other governments like Japan and Saudi Arabia have similar
minerals strategies.
How to Reduce Fuel Emissions and Cost Through
Transportation Optimization
All that bulk transport suffers from the inefficiency of marine transport. The
ships burn a lot of bunker fuel and are relatively inefficient in terms of
fundamental energy use. Diesel engines are more efficient than internal
combustion engines but nonetheless the inherent physical efficiency of
diesel engines maxes out at around 40% to 50%. So, if you look at the heat
capacity of the fuel, the diesel fuel, being burned right away compared to
the power that you get out by running it through the engine, you lose
approximately 50% or more of the energy in the power conversion. Could
you get around that? One of the answers might be going to electric vehicles
which have a different and a more direct profile for energy efficiency. And
you also have opportunities for network redesign to eliminate the use of
transportation in the first place.

Transportation provides many avenues for carbon footprint reduction. It can

be optimized by network optimization, mode-switching and in-transit
visibility.
Traveling fewer ton-kilometers can consume less energy. This can
come from optimizing networks as well as routing and scheduling,
or by pooling assets so that you have fewer vehicles making hauls.
Also, you might be able to do it through autonomous and
connected vehicle technologies so that you are utilizing assets
more efficiently. UPS, FedEx and Agility, just to name three
companies, have done an extraordinarily good job at all these
things. I have worked for some of these companies and can attest
to the fact that they have really probed the edges both in terms of
the scientific aspect and in terms of operations management.
Optimization of networks can dramatically reduce cost and fuel
consumption. Simulation and optimization tools can help figure
out the best possible network design.
Mode switching – shifting from truck to rail, from air to ocean or
from LTL to full truckload – typically reduces carbon footprint.
 Some options to switch modes might not be available right now
because the carrier does not serve it, the equipment is not
available or the terminal is not, but the terminal can be built if the
savings in dollars and carbon footprint justify the cost.
Enhancing in-transit visibility of equipment and inventory can
also reduce carbon footprint by increasing asset efficiency. There
are tools for asset tracking, equipment monitoring and
transportation management systems which link specific orders to
transportation equipment and schedules. In this way, visibility to
the cargo could actually be a carbon reduction opportunity
because generally what happens is once that you get visibility you
start managing your shipments better. As a result sometimes the
customer benefits through better service. Sometimes you have less
cost and less mileage freight miles and sometimes you have both.
Therefore these are definitely worth looking into for carbon
footprint reduction as well.

Discrete manufacturers can often address their energy intensity by

improving Overall Operational Efficiency. In a recent engagement for a
heating ventilating and air conditioning (HVAC) company, Boston
Strategies International recently found that electricity was 26% of the total
cost structure. In addition to that, most companies in discrete manufacturing
have significant logistics and transport costs. Let's say the transport cost is
10% of the total cost and you have a 20% or 30% loss on the 10%. In
addition to that, you have indirect losses on the electric power usage: 26%
of the total cost is power and that's 60% efficient, so you have about 15%
dead weight energy loss. Some companies focus on Overall Operational
Efficiency. Across-the-board operational efficiency could lessen the
deadweight energy loss.

Energy management systems, including virtual power plant technology, can

also create structural improvements in energy efficiency. A virtual power
plant is a central brain that sits in the middle between the power source and
the power use. It assembles the power from multiple different sources and
distributes that power to applications that are drawing on it and it does so in
an intelligent way. In large industrial facilities, production units have
different energy usage patterns which yields a complicated and lumpy
power profile. A virtual power plant that takes all the information,
memorizes and anticipates consumption requirements of each node,
optimizes the demand with the supply of power over time so as to minimize
the total energy consumption through the use of machine learning and
artificial intelligence.

Demand response programs set up differential prices for different demand

patterns. Electric utility produces their power plan on a rolling basis over a
long-time horizon, and they have a monthly rolling plan, a day-ahead
market as well as an hourly market of electricity for trading. Some establish
markets and trade at the one-minute level. Industrial users of electricity
often manage their production operations on an hourly basis and buy
electricity on the day-ahead market. In addition to trading, you may also
want to take advantage of incentive-based demand response triggers that
allow you to reserve capacity in advance. Of course, when you begin
shaping your power usage to less expensive periods this is a benefit to the
energy consumer as well as the energy producer. Electric vehicles and other
forms of electrification will economically reduce cost and carbon footprint
sometimes.

Hydrogen is expected to provide carbon-free fuel in the long run. Hydrogen

has been used for a very long time in oil and gas production. It is a
byproduct of desulfurization and hydrocracking. It has for many years been
used in the manufacturing of petrochemicals and fertilizers, as well as in
refrigerants. What is new in the field of hydrogen is that it is now being
eyed as a potential energy storage and power source for new sectors
especially transportation and manufacturing. As an energy storage medium,
it can store energy to redistribute energy use over time hereby reducing
peak energy capacity requirements. The Inflation Reduction Act of the
United States contains many provisions designed to incentivize the adoption
of hydrogen, and the EU has a hydrogen vision.[15]
How to Reduce Building Emissions Through Green
Design
Green building design can create huge Scope 1 carbon reduction
opportunities. Leadership in Energy and Environmental Design (LEED) is a
set of design standards for natural design of a building. It is based on
building principles such as considering the whole life cycle of the building
before you start to do any engineering on it. Energy efficiency is a major
component of LEED design. It takes into account heating, air conditioning
requirements and air flow, for example, as well as the carbon footprint of
the construction materials of the building themselves. While they
customarily cost a little bit more, they often have a higher resale value on
top of lower operating costs, can charge slightly more premium prices or
rates for renting and have higher occupancy rates, which can help justify the
incremental investment.
How to Access Clean Energy Offsets and Credits
Renewable energy credits and certificates can also reduce carbon footprint,
some of it directly, some indirectly. A renewable energy credit or certificate,
a REC, is provided by an electric utility vouching that power was produced
using green energy which can help reduce your production profile of carbon
emissions. To the extent that you are measuring or tracking your carbon
footprint, you can use that REC to report credibly. An offset is more of a
unique one on trading opportunity. Let's assume that there is another project
going on that is carbon neutral or carbon negative, you could make an
agreement with that developer or a broker to sell you a contract equivalent
for units of negative carbon and then offset your positive carbon footprint
with their negative carbon footprint. In financial market analogues, you
think of RECs as a futures contract while offsets are more like forward
contract. A futures contract is a tradable commodity that is very transparent
and clear. A forward contract is a one-on-one arrangement between two
parties for a transaction to occur at a future date. Carbon offsets go through
validation, verification and appraisal processes so they could potentially
also be tradable but are more unique than RECs. When you work with
carbon offsets, there is a system of auditors, brokers, retailers, and third
party that will validate the transaction in a way that makes the instrument
credible and acceptable to counterparties as well as investors and regulatory
authorities.

That is a quick introduction to this section. The next chapter in this series is
a look at how to reduce power costs by lowering energy intensity in your
business.
4.1 How to Reduce Power Consumption by
Decreasing Energy Intensity and Increasing
Energy Efficiency
“At an energy-intensive manufacturer, different solution sets can easily take
30% to 40% of the load out. There will always be energy consumption, but
that being said, efficiency means doing it better, and we in the industry have
an opinion that reducing energy intensity by 30% to 40% is doable.”

--- Fritz Troller, Therm Solutions

Reducing the inherent use of energy in your production operation, as well

as your variable or controllable use of energy, is a critical step along your
net zero journey. This chapter teaches you how to define, differentiate
between, and measure power conversion efficiency, energy efficiency,
energy cost efficiency and energy cost effectiveness; it educates you how
to manage each one to meet your goals. It further provides a framework
for conducting an energy intensity opportunity assessment to determine
where your greatest opportunities lie.
Introduction
If you are trying to get to net zero, you need to go beyond what most people
call energy efficiency. You need to consider fundamental concepts of energy
intensity and your business which could include various other facets of how
you look at your product or service and the way you produce it, beyond just
trying to conserve energy. The United States tried to conserve energy in the
1970s during the oil crisis. There was a massive effort to wean off Middle
Eastern oil by reducing energy consumption. Legislators lowered the
highway speed limit from 65 to 55 miles per hour. Households turned down
their thermostats. Everyone wore sweaters. It didn’t work. Not only did
people find it an encroachment on their lifestyles and personal liberties, but
it did not spur innovation, nor did it structurally or permanently lower the
energy intensity of industrial production.

Energy intensity is not really a widely used term. If you ask ten people what
it means you are likely to get six or seven different answers, so let me
define what I mean by energy intensity. By energy intensity, I mean four
different fractions that are related: power conversion efficiency, energy
efficiency, energy cost efficiency and energy cost effectiveness.
The Four Energy Intensity Metrics
Starting at the bottom of Figure 48, the first box shows power conversion
efficiency. This is energy produced in relation to energy consumed. Power
conversion efficiency is particularly important if you are in the energy
production or generation business. In that case, you are using certain inputs
like hydrocarbons (like oil, gas or coal), or you are using some other form
of renewable energy (like wind or sun) and putting it through a mechanical,
electrical or chemical conversion of one type of energy to produce another
type of energy. These conversions are never 100% efficient according to the
second law of thermodynamics. Whether the process is mechanical,
electrical or chemical, a conversion from one form of energy to another
inevitably results in energy loss. If it is a motor, there is loss in the turning
of the rotor and the magnets due to friction. In the case of a turbine, the
friction of the rotor and vanes turning consumes some of the energy you are
putting in as fuel. So, you put a certain amount of thermal capacity of fuel
(joules) in and you are getting a smaller amount of mechanical energy out.
The difference between the two is a function of the fundamental power
conversion technology as well as the quality and sophistication of the
equipment, machinery or device. That is the base of the pyramid, so to
speak.

Figure 48: Pathways to Reducing Energy Intensity

In the second box from the bottom, you see energy efficiency. In this
context I mean energy used per unit of output in your production. Let's
suppose you are producing textbooks – how much energy does it take to
produce one textbook? That metric is easy to relate to in terms of the energy
usage in your operation, and that makes it easier to control partly because
physical units can be understood Io everyone. If it is software, you could
use lines of code or links in a blockchain or whatever it may be. In most
cases the units of measure are kilowatt hours of electricity per unit.

At the next level we have the energy cost for the unit of output, which goes
beyond scientific units of energy. Now we are talking about costs and units,
where the ratio is no longer kilowatt hours per unit, but dollars per unit, for
example like $2.30 per book. At this level, energy prices may play a
significant role in addressing that issue.

On the final step of the ladder is energy cost effectiveness, a.k.a. energy
costs over sales dollars, which is a very high-level metric. If you are
running a business and know that energy comprises 18% of your cost
structure, for example, then you know that energy is an important portion of
your cost. That may lead to other questions and management decisions
about how to reduce energy intensity in your operation.
Ways to Lower Energy Intensity
You can also increase power conversion efficiency in five ways: 1) by
redesigning fundamental conversion processes, 2) by reengineering process
routes; 3) by upgrading or updating to more efficient equipment, 4) by
using “catalysts,” and 5) by locating production closer to its point of
consumption to reduce the power conversion inefficiencies of shipping.

Increasing Power Conversion Efficiency

In order to reduce energy intensity by increasing power conversion

efficiency, you may need to reengineer the equipment or the conversion
process, which is fundamentally an engineering activity. Upon close
examination it often proves to be a basic science challenge. How do you
make a more efficient thermal process or more efficient electrical
conversion? Could you use a different set of thermal, electrical or chemical
processes to make that conversion? These kinds of engineering questions
and fundamental engineering reviews often involve scientists who have a
relevant specialty in the application of physics, chemistry, electrical and
mechanical engineering in your industry.

It usually takes years of incremental R&D to gain a percent in efficiency on

the fundamental power conversion. Thus you are planning on staying with
the basic power plant, you will need to be pragmatic about how much
fundamental energy efficiency you can gain without migrating to
completely new technologies. It took about a hundred years for the thermal
efficiency of turbines to rise from about 10% to about 60%.[16]

Many people are hoping that hydrogen production will be a new frontier
that will replace these older technologies entirely. Energy efficiency of
hydrogen production varies according to how it is produced. The most
common production method today is methane steam reforming that has an
energy efficiency of 65% to 75%, which somewhat tells you that you are in
the efficiency range of gas turbines. There are different methods of
electrolysis which are about 61% efficient and others that are less efficient,
which are not discussed very much these days because people are not
exploring them.[17]

But after you get the hydrogen, you have to condense it, liquefy it to
transport it, and then put it through a fuel cell to get energy back out of it,
where there are energy losses in each of those steps. If you do steam
methane reforming at 72% efficiency, and put the hydrogen into a fuel cell
vehicle where you lose 30% more of the energy content of the hydrogen in
that conversion process, the energy efficiency is around 22% (72% x 30%).
Inherently perhaps that is not very different than oil and gas, because you
have loss in the oil and gas refining process as well as in the engine burning
the fuel. That energy loss would be less important if you produced the
hydrogen using green power, from wind or solar for example. As a result
there is tremendous focus on commercializing and scaling up “green
hydrogen.”

Redesigning Process Routes

Energy intensity can also be reduced by redesigning process routes, which

are the fundamental steps taken to transform raw materials to finished
product. In oil and gas, refining and petrochemicals there are usually many
ways of getting from one chemical combination to another chemical
combination. For example, in the refining process, you start off with crude
oil and put it through a number of conversion steps, some of which are
extremely well codified and known throughout the industry; you obtain
different grades of petrochemicals and eventually gasoline. That conversion
process goes through a lot of steps as well as involves a lot of piping,
pressure vessels and a lot of heating. The design of that entire process can
often be made more efficient through engineering parameters such as the
length of the pipe, how much pressure is required to pump in different
stages of the operation and how high the heat needs to be raised in order to
catalyze a certain reaction. Every industry and every manufacturing process
has process routes. For example, the automotive component industry
stamps, extrudes and casts many kinds of parts. Some of these processes
can be accomplished now with additive manufacturing, or 3D printing,
which is a completely different process that gets you to the same result. All
process routes can be considered for disruption with more efficient ones.

Upgrading or Retrofitting Equipment

Upgrading or retrofitting equipment ensures that you are using the most
efficient equipment on the market. Tools, technologies and equipment
become more sophisticated and energy-efficient all the time. If your
production operation was built more than ten years ago, chances are newer
equipment is more energy efficient. Is it worth retrofitting or upgrading the
equipment? Often this is worth an assessment from an expert.

Using Additives or Catalysts

In some cases, it may be possible to leave the process and the equipment as
it is but supercharge its output with the help of additives or catalysts.
Although catalysts are known for their uses in refining, the same concept
applies to other industries. An analog in the software development industry
could be open-source code, which gets you to the same functional result
much faster and which means you have just increased conversion
efficiency. If the operation is on blockchain or Hyperledger and the
generation of codes consumes a whole lot of energy in a data center,
increasing power conversion efficiency by injecting a catalyst of some kind
will really help reduce the energy intensity of the operation.

Localizing Processing Operations

Many transport and logistics-intensive companies have addressed energy

intensity by localizing processing – producing the thing closer to the point
of consumption to minimize the amount of ton miles. If you are in discrete
manufacturing, logistics and transportation would be a bottleneck for
energy per power conversion efficiency based on the vehicles you use on
top of the operational efficiency of machinery and equipment. And
transportation in general accounts for, shall we say, 5% to 10% of the total
cost structure that is subject to the same transportation inefficiency we have
just discussed. In addition to that, you have machinery equipment operating
at a power conversion loss factor. So there are metrics that we study, but
again, these are mostly management tools to offset that conversion loss and
minimize the total energy consumption in the whole operation. Freight
consolidation and pooling can also somewhat reduce that or offsetting that
power conversion loss. Companies that have done a lot of good things with
all this include some of the large transport companies in Europe especially,
but also in the United States and now in Asia.
How to Decrease Energy Intensity: An Interview
with Bernard Arrateig, Key Account Manager,
UltiWatt
David: Hi Bernard, it's a pleasure to talk to you again about energy
intensity, energy efficiency and how all that can help companies get to net
zero. You're an expert in the whole field, you've been doing this for a
lifetime and have a lot of wisdom to share. Before we get started, do you
want to introduce yourself and UltiWatt?

Bernard: Yeah. First of all, thanks a lot, David, for inviting me to share
what we have learned during these years working with energy. It’s been an
exciting journey and talking about CO2 and climate change, greenhouse
gas, there is a purpose behind that which is very motivating. That being said
I don't know if I am the super expert that you mentioned! Within UltiWatt
we have two main branches. The first one is about supporting our customers
to get ISO 50001 certified and improve their energy efficiency. We have
energy experts with more than 20 years of experience. They go to the field
and work with customers. The second branch is a cloud-software called
UltiVision that helps the customers structure their vision and their
management regarding energy efficiency. My role within is to prospect, to
organize demos, to make offers, and to follow up with the customers. I am a
Key Account Manager.

David: What sorts of companies have you mostly worked in during your
career?

Bernard: The founder of UltiWatt, Hassan Tazine, was the energy manager
of a Finnish paper company called UBM, and I was the purchaser at that
paper company; I was building a cross-functional team. We got along quite
well, and we were buying energy together so we decided to expand on that.

David: You mentioned ISO 50001 at the outset. Would you please describe
that very briefly, so people understand what you're talking about?
Bernard: ISO has a lot of standards that are very well recognized
everywhere that I work. The main one is 9001 which goes back to the
1990s. ISO 50001 is less known outside of Europe, I would say. It’s the
standard for energy management. There is an incentive here in Europe, at
least for some of the countries like France and Germany. If a company gets
this ISO 50001 certification, you get some tax credits, so there is a huge
incentive and many, many companies are targeting to get this ISO 50001 in
order to get the tax credits. The way the tax credits work, you get subsidies
every time that you invest in a new motor, something that will help you to
improve your energy efficiency. The subsidies can go up to 50%. The
companies that buy our software can get that subsidy so it's a nice incentive
for us.

David: Great. What are the basic steps involved in getting iso 50001
certified?

Bernard: The regular way of course, is to apply for it so you get the
document which describes all the processes that you need to put in place.
It's a big decision for a company because of course you need to change your
way of managing. You need to really integrate in the way which is
described in the norm. It has to be your routine. So you have to be careful.
First is when you do it making sure that you respect the key guidance or
guidelines of the norm. But you are always tempted to do a bit more than
the norm.

David: That sounds very much like ISO 9001 or other ISO standards. You
can easily check the boxes and many companies hire some sort of auditors
and consultants to get them certified by checking various boxes, but to
integrate it into the daily life and work habits, it's more difficult?

Bernard: Yes, exactly. But the two big things in the ISO, first of all, are
about the people, how to get everyone, all the employees, or at least the
ones that are involved with energy, how to get them involved in this
management. So through action plans, through energy performance or
whatever, you need to involve the people. It's like home. If you decide to
decrease your energy consumption at home and you don't tell your kids or
your wife or whatever, vice versa, that by letting the fridge open, the door
open, that will consume a lot. So everyone will live his own life and not pay
attention. Everyone needs to be involved. That's one of the keys. And the
second thing is, of course, to follow up your energy performance indicators.

David: How do you track down energy performance? There are four levels
of energy intensity. In any company that produces something, you've got
turbines or motors or pumps or whatever and they turn and each generation
of that equipment has an efficiency to it. And that's one sort of energy
efficiency. And then at another level, there's a management process, like
scheduling of the plant, that affects the energy efficiency, the workflow.
That can all dramatically affect energy consumption and energy efficiency.
And then at a third level, you've got the rate negotiation, the optimization
with respect to the demand charges and the rates that are charged by the
utility for the power. And if you happen to set the production operation up
at one in the morning, you probably save some money as opposed to ten in
the morning. And then still at another level, you kind of decide, if you're an
integrated conglomerate, which business do I want to be in? Some are very
energy intensive, like cement, and others are less intensive, like consulting.
You have all sorts of choices to make as a business. Does ISO 50001
address one or more of those? What is the scope?

Bernard: It’s about the first level – the turbine. How efficient is that turbine?
How is the efficiency of the process, the production? It's not about
organizing the production in a way to manage your energy. Working in the
evenings, for example, because the spot price is lower. No. That can be part
of an action plan. Say we have decided to run the machines in the evenings
now, in the night shift, because it's much cheaper. We have seen that in
France, for example, Duralex, which is producing glass, stopped the day
shift to do all the production during the night shift. But ISO doesn't get into
that.

David: So let’s focus maybe on the equipment efficiency and the other
being, I would assume smart grid and intelligent energy management
systems is all part of that.
Bernard: Right. Regarding your question about KPIs – “when you go into a
company and you start assessing their baseline, what kinds of measures do
you use to understand whether they're good at energy intensity and energy
efficiency and energy usage or not”, there are two things. We cannot define
if they are good just by measuring the baseline. It’s difficult to say. Let's
say you consume according to the baseline, five tons produced, for
example. In order to be sure that they are managing energy well, then we
need to know how they are organized. Do they have this action plan? Do
they have the involvement of the people? Do they have this integrated way
of managing energy? Do they have these energy performance indicators for
each level that you were talking about, for each process, each step within
the process and so on. If we see that everything is well structured, well
managed, they follow up things, when the actual consumption is being
modeled, for example, we can see that wow, these guys have their finger on
the pulse of their energy efficiency. So they can really monitor everything
and identify the things that need to be improved. But the way of seeing if
somebody is good is through benchmarking, but benchmarking is very
difficult. Every single process is different, so comparing the energy
efficiency of this one machine at this paper company with another one, oh
my God, there would be so many discussions about “no, you cannot
compare because we don't use the same water and we don't know the way
they manage.” That's the key point.

David: Got it. So let's say you walk into a company that's a pretty well-
established company, one that’s been in business for 50 or 100 years. It's
been making paper or some processed chemical or petrochemicals. And you
have these two things you can look at. One is equipment efficiency and the
other is intelligent or smart energy management systems. What kind of
improvements do you commonly find that you could achieve and measure
whatever and however you want as you optimize their energy usage?

Bernard: Let's say that if we go to a customer and if we see for example,

that they go straight to some solutions, you can change the electric motor,
you can switch a boiler, etc. It is not a shortcut, I don't want to say that, but
you have some obvious solutions to improve your energy efficiency. That's
good already. But as I said, we will see the difference with people – you can
get all these small ideas from everyone that we should do this – “use the
paper like this”, “we should close that door”, “we should do this, and do
that.” It’s the addition, the sum of all these small things that makes, at the
end of the day, something quite relevant. But of course, at the end of the
day, if you want to make a real change, you have to change big things. Or as
you said, you need to change the scheduling of your production by
emphasizing, for example, the night shift, because during the night, the spot
price is cheaper. So there are these obvious things that they are there. But
what makes the difference, according to us, again, according to our
experience, is to get everyone behind them.

David: Is there a bracket of numbers you might suggest? Given that our
total goal here is to help them kind of progress toward net zero, what kinds
of percentages do we find in energy usage at the industrial commercial
level? Let's say you start off with 100 megawatt hours of usage, and you go
through the whole diagnostic. How much can you take out?

Bernard: What we have seen with energy efficiency, at least with our vision,
the software is of course linked with the different processes. But over the
first two years, by managing your energy you can easily get from 3%, 5% to
almost 10% decrease in energy consumption. That's something that we can
see at least during the first two years. After that, the cruise speed will be 2-
3%. That is pretty stable, small things add up to that. But the first two years,
they are quite relevant. And the second part is ongoing. Like every year if
you just keep the process going, you can get some benefits every year.

David: There must be a cost involved in achieving this. This is one of the
biggest issues in the whole energy transition. The longer-term energy
profile can be lowered, but we have to invest in order to make it happen.
Everything costs money. If you put up offshore wind farms to produce
green energy, there's a capital investment there. If you replace motors with
IE5, IE6, or the most recent generation, it costs money to upgrade. And if
you put in heat pumps (heat pumps are widely used in Europe, but they're
not in the United States). And the main issue is that most of the buildings
already exist, and so it doesn't make economic sense to refurbish them.
Bernard: The same thing works with old buildings as well. I just put in my
house which has been built in 1967, geothermal and I got a tax credit, about
20%.

David: What percent of the benefits are dependent on a major upgrade in

equipment?

Bernard: Every single company is different. The Kyoto Protocol is a kind of

a reference with this different scope. I guess you are familiar with that. The
US did not sign it, unfortunately, but anyway, the content is pretty clear.
Scope 1 is the energy that you produce on site. Scope 2 is the energy that
you buy from the grid. Scope 3 is the one that is the trigger by buying
products from your suppliers.

Bernard: In scope 1 energy that you produce yourself, of course, if you have
a boiler that works with gas overseas, you don't have too many choices.
Let's dismantle this boiler and build another one based on biomass or green
hydrogen. The investment there would be that peak biomass is still
reasonable. An 80 MW peak investment biomass boiler is a big thing, and
you need the feedstock when you buy the energy. You need to change your
contract towards green electricity so you can change the gas. The gas is
difficult if you are using gas and if you are producing steam with that. The
other option is hydrogen, of course.

David: Yes, I've done a number of presentations and webinars on green

hydrogen and its various applications and yes, it does raise a lot of
questions. It certainly has some applications that make sense, but it's sort of
presented as a miracle cure. If you look at the specific energy usage to
generate the hydrogen and then the energy usage to turn the hydrogen into
mechanical or electrical power, it ends up looking pretty difficult to justify.

Bernard: Five to one. What I have in my mind is that you need 5 kw to

produce 1 kw with the hydrogen. In between electrolysis and the fuel cell.
David: I think the challenge that many of us have is that we compare it to
alternatives, and we consider fossil fuels to be the benchmark alternative. If
you eliminate fossil fuels as an alternative and you say, let's say that fossil
fuels as of 2035 or 2050 are no longer an option, then I think the math starts
to look a little different. Yes, it's going to cost. And here's where I'm not
sure that it's totally crazy to use 5 kw to produce 1 kw of power. If the 5
MW is green power it's not as crazy. I think a lot of the difficulty is that we
persistently embed in our thinking we just compare it to gas or oil or
whatever we use right now.

Bernard: It depends on the price of the gas in Europe, as you know, it has
been €200, even €300 per megawatt, and now it's about 55, 65. So there you
have the math changes completely. The hydrogen starts to be interesting,
right? But of course, you need the amount of energy that is today produced
out of gas and you have to multiply that by five. You will need to build a lot
of solar panels and windmills.

David: Some companies that manufacture windmills and solar panels would
be very happy about that. Is it correct to assume that basically if you can
reduce the cost by like 10% which is what you said, the upfront reduction
you experienced was what you said – 7% to 10%. Let's say five to 10%. So
the first two years, can we assume that's going to result in an equivalent
emissions reduction?

Bernard: Of course, yes. It's completely linked. Definitely. If you reduce

your energy, you reduce your CO2 emissions. Definitely.

David: In his book How to Avoid a Climate Disaster Bill Gates said we
need to reach net zero carbon emissions. I'm looking around all throughout
the value chain to figure out where we can get to net zero. And you just said
we can get five to 10% and maybe 20% if we accumulate the future gains
off the current energy consumption. And that's actually consistent with my
experience of doing decades of consulting, actually, that savings and
reductions and optimizations often result in anywhere from 5% to 25%
savings, depending on the case in question. For a company whose CEO has
announced that it’s going to reach net zero by 2050 and you present them
with a 10% optimization in energy, that CEO is still going to wonder
“where am I going to get the other 90%?” Where does this position
companies in terms of reaching net zero?

Bernard: Yes. Energy efficiency is not a silver bullet. Definitely not. We are
old enough to know that there is not one response to a problem. Life is
complicated. So you need to create a huge list of improvements to reach
this target of carbon neutrality. Definitely. And as I said, I was referring to
these scopes. One of the biggest scopes, scope 3, is on average 60% to 80%
of the total CO2 emitted by a company. So there will be a sum of millions of
activities that will lead towards this component reality. Cheap energy is
gone. Energy will be expensive. If you can save 10-15 percent, it's super
good.

David: Are you optimistic that we will reach net zero?

Bernard: Yes. There are millions of solutions and there won't be any silver
bullet. I'm a kind of humanist and a scientist. I believe in technology. There
will be a sum of things like recycling, reducing, reusing, analyzing,
changing from plastic to paper, changing this and that. So there will be a
big, big action plan to lead to carbon neutrality. And let's say all the
techniques that are out there we were talking about. Hydrogen is there. It
will need maybe 10, 15, 20 years to develop. But it’s there. I'm sure that in
ten years it will be a drastic change. By the way, I was reading a report from
a French institution about their forecast for electric cars in 2020 and 2022
and so on. They were forecasting that in 2020, among the brand-new cars,
electric cars would represent less than one percent. Ten years ago, they were
saying that it's not possible. Today, at least in Europe, electric vehicles
account for about 30% of all new cars. Can you imagine the mistake that
they made? So I believe that the solutions are out there. You just need to be
organized. Know where the CO2 comes from and for each of these sources
of CO2, have a plan how to switch, how to move, how to change. You will
get there definitely. You just need to be organized.
David: I think you just made a great case for mapping a net zero compliant
pathway! Thank you very much, Bernard, for joining us. I think what you're
doing at UltiWatt and your whole career there is so purposeful and
meaningful. Thanks for everything you do.

Bernard: Thanks again for the invitation. It was a pleasure to talk about this.
As you can see, it's tough but exciting, fascinating, and purposeful. We are
proud of what we do. There are many challenges, but it’s a fantastic way
forward.
Ways to Increase Energy Efficiency
One approach to increasing energy efficiency – energy used per physical
unit of output – is to use batteries to capture energy when it is abundant and
release it when scarce. Energy storage is often used to “shave the peak”,
consuming energy on a level-loaded basis and eliminating excess capacity
that would otherwise be needed to serve peak needs.

Energy Storage and Smart Power

A virtual power plant is practically a complex network of smart energy

storage devices. Virtual power plants level the electricity load across a
network of assets through energy storage and smart energy dispatch. Say
you have a wide variety of assets some of which are power generating while
others are power consuming. In the middle of it all is an energy storage
complex with a brain that understands and learns when each site is going to
need electricity. It takes the electricity from the various sources, stores it
and distributes it when and where it is needed. You might say that is pretty
much what the power grid does.” But your power utility doesn't usually
know your consumption patterns or figure out how to dispatch electricity to
them in an optimal way. It just gives you whatever power you ask for
whenever you request it. There are companies that set these up for large
industrial operations with a lot of success where you could forecast and
plan over a time horizon, as well as develop some rules and algorithms that
represent your energy profile. One problem with planning is that something
could always be a bit or a lot wrong. No plan or no forecast is accurate
100%.

Virtual power plants with real time monitoring and artificial intelligence
learn when your electricity is consumed and when not. They continuously
adapt to your consumption patterns and optimize the cost as per the utility’s
rate structure and demand response program. In the old days you would
plug in or develop a big Excel model where you have the rate structures on
the one end and the power consumption on the other while doing all sorts of
planning and optimization to figure out when you should buy the power,
how long you should store it and when you should distribute it to the
different assets. However inevitably that Excel model would be an
approximation because it would be a replica of what your actual production
operation consumes, but an imperfect one disconnected from reality. The
idea of the virtual power plant with an AI engine on the energy storage
would eliminate the need to do any modeling. All the intelligence is built
into the system which automatically acquires and distributes the energy as
needed optimally. Many utilities and industrial companies are undertaking
virtual power plant and energy optimization programs.

Increasing Throughput by Debottlenecking Production

Another approach to energy efficiency is to de-bottleneck in the production

process. For example, if you can produce 400 books in a day instead of 300
with the same amount of energy through management optimizations such as
balancing machine capacity within a plant, then effectively you have
achieved a 25% energy efficiency gain. The good news is that you may
even realize greater benefits in labor savings or in some other area than you
do in energy savings, which makes the time you spend looking into de-
bottlenecking pay off handsomely.
Increasing Energy Efficiency: An Interview with
Fritz Troller, CEO, Therm Solutions
David: Fritz, it’s great to chat with you about reducing energy intensity. You
have a lot to offer in this area, so maybe you could just start by giving one
or two minutes about yourself and your work in lowering energy intensity.

Fritz: Thank you for having me, David. It's great to talk to you and spend
time with you today on a subject that I'm passionate about. My partners and
I started a company called Groom Energy in 2005, which was an ESCO, an
energy savings company. Our role was to go to commercial and industrial
customers, analyze their energy usage, and come up with prioritized energy
efficiency measures and a plan for our customers, which were customarily
high-intensity energy users. We sold that company in 2016 to the largest
utility in the world, EDF, and we ran it for three more years.

David: Well, it seems you know the subject extremely deeply. Where do
you start in terms of even the baseline energy consumption for an entity?

Fritz: There are two basic things that we start out with, David. One is a
utility bill, just a general utility bill for whoever the client is that we're
working with. And the other thing is fifteen-minute interval data, also from
the utility. The utility bill gives you a gross overview of consumption and
rates from a cost standpoint. The fifteen-minute interval data puts a
timestamp on that usage, so you get more useful information. Fifteen-
minute interval data is available from almost every utility in the country.

David: Interesting. And then once you have a baseline and you're starting to
look at approaches to improve, would you look primarily at new
technologies, or would you look at operating practices?

Fritz: We can try to change human behavior within an entity, but it's not as
predictable. If you think about smart thermostats like the Nest, which are
now pretty ubiquitous, the reason the Nest is so effective is not because they
figured out any unique technology from a programmable stance.
Programmable thermostats have been around forever. The uniqueness of the
Nest is that it takes the action out of the hands of the user, and it uses
predictive analytics based on things like how often you spend time in the
space and how many people are in the space.

David: Aside from Nest, which I think most people think of as a residential
solution. At the level of large-scale business enterprises, do you work with
energy storage systems and virtual power plants? What is the larger-scale
equivalent of the Nest?

Fritz: We had a customer in food storage that had a huge cold storage,
temperature-controlled warehouse. The chicken slaughterhouse was just
down the road. A train would pull up to this cold storage warehouse and
deliver the chickens into blast freezers, which are about 25ft high. They're
like a rotisserie, like at Costco, where you see the chickens go around. They
would take these recently slaughtered chickens, put them on about 20 huge
rotisseries, slam the door shut, and then the operators would push the “on”
button, and the multimegawatt refrigeration systems would all kick in at the
same time, and they would freeze all these chickens on these rotisseries.
The problem is that in this part of North Carolina they had variable pricing,
and there was a very hot day in the summer that resulted in exorbitant
demand charges. When all those 20 rotisseries started up at the same time
and the blast freezers kicked in, their usage spiked. Instead of having a
$20,000 bill, they had a $2 million bill in a month. And so, of course, that
company panicked. So back to the Nest... The solution set in that case for a
big energy user, not a residential user, was not to try to change behaviors. If
they would try to tell the operators to push the first button and then wait 15
minutes and then push the other button, guess what? It wouldn’t work
because they have to move onto other things. But with a simple way of
relays and electronics, he can push all the buttons at the same time, but we
staged the actual compressors’ actuation.

David: So here we're talking about a $2 million a month spike, which, of

course, is sort of shocking and would jolt anybody into trying to conserve
their energy usage. But on an aggregate level, if you walk into a company in
the context of a net zero program. The benchmark, let's say, is today's
normal, and then the target is zero. Within that context, how much can
companies typically save on their electricity usage through these kinds of
measures?

Fritz: At an energy-intensive manufacturer, different solution sets can easily

take 30% to 40% of the load out. There will always be energy consumption,
but that being said, efficiency means doing it better, and we in the industry
have an opinion that reducing energy intensity by 30% to 40% is doable.

David: That is so exciting for anybody targeting net zero. In my own head, I
think, okay, I'm halfway there, through energy intensity reduction. And so I
think we hit a gold mine here. That's great! I guess the next question that
comes with that is, is there massive capital required to get that started, and
what's the structure of that kind of initiative? Or do you just go and
negotiate rates harder with the power suppliers?

Fritz: Although there can be gains from negotiating with the utility,
negotiating with the utility has limited upside. Most companies need to
come up with a priority list based on return on investment. And that can be
facilitated by putting a price on carbon, so you can reduce either energy use
or carbon cost. Low hanging fruit might be things like replacement and
replacing LED lighting. Higher cost, lower return on investment
applications, maybe for example onsite energy storage, would be farther
down the list.

David: Wow. I think you'll be getting a lot of phone calls after that. Thanks
very much for it. Very enlightening and very exciting and inspiring. I'm sure
everybody will benefit from your insights and experience on energy
intensity reduction and the various methods toward cost savings and
efficiency. So thanks very much, Fritz.

Fritz: Thanks for having me, David.

Ways to Increase Energy Cost Efficiency
If you are trying to reduce energy intensity, the third step up on in Figure 48
is energy cost efficiency, a.k.a. energy cost per unit of output. What you are
trying to do is either reduce the energy cost or increase the output for the
same energy cost. For this we will involve the pricing of the energy.

Regarding energy pricing, one of the key variables or tools to reduce energy
cost is usually buying energy off-peak. Peak energy production is the most
expensive because everybody wants it at that time. If you are operating in
an office with six accountants working during the day, and let's suppose
they arrive at 8:00 in the morning and depart at 5:00 in the afternoon, those
are probably all peak hours for electricity consumption so when they turn
on the lights they are probably using peak-hour rates. When they go home
in the evening, the electricity rates are low. Thus the fundamental setup
there is probably not energy cost efficient. If you are dealing with an
industrial operation with highly energy-intensive processes, for example a
production or a chemical operation that requires heating of certain
substances, it would consume a lot of electric power that may be undertaken
in a much less expensive way. Although increasing energy cost-efficiency
does not necessarily reduce carbon footprint, you will definitely be studying
these opportunities when you try to lower energy intensity, so why not save
money at the same time? Further, you will want to achieve some cost
savings on your net zero journey to pay for the studies to reduce carbon.

Many utilities have gone beyond rate tables by offering “demand response”
programs. The utilities themselves buy power in several different
timeframes: week-ahead market, day-ahead market, and sometimes hourly
or even minutes ahead. Each of these has price tags on it and a price for
electricity at every point in time. Pricing depends on supply and demand in
that period where the rate is hard to predict. Given this cost of electricity,
they often offer incentives for buyers to schedule their electricity needs
during the least expensive times. You may be able to take advantage of
rebates incentives, emissions credits, tax credits, federal grants and sales tax
savings by participating in the various demand response programs if you
have not yet done so.
Ways to Increase Energy Cost Effectiveness
We shall now turn to the top step on the ladder, the top row in this table that
I call energy cost effectiveness, which is energy cost per sales dollar. We are
now looking at dollars over dollars (or money over money if you are
denominated in another currency). This is quite a different way of looking
at energy intensity but an equally valid way. Usually, industries have an
average and a range of energy costs in their cost structure and it may vary
substantially by product line. In this step you are doing a commercial
analysis to determine if there is a way to shift into products and businesses
that are less energy-intense (for which energy is a lower share of the total
cost or of the sales revenue).

Some industries like metallurgy are among the highest energy percentages –
electricity accounts for around eight and a half percent of total cost. In the
oil refining business, electricity accounts for about 12% of your costs. And
if you are in bitcoin, big data or blockchain, it is going to be extremely high
because of the power-intensive data mining. Let’s assume that you are in
the petrochemicals business where energy represents 33% of your overall
cost structure, and you are pursuing a net zero path. One of the things you
may consider is whether instead of going through all the other steps and
trying to reduce your energy intensity from 33% down to zero or much
lower, it would be a wiser decision to shift from certain energy-intensive
chemical products into others based on their relative energy intensity. This
is where you will bump into marketing and strategy questions where net
zero initiatives might really touch at the core of the company – not just the
core of the production process and engineering or facilities, but also the
commercial aspects. If you are serious about a net zero program, you will
want to study the energy intensity of your different products or business
units and consider some strategic product shifts. Many companies routinely
invest in cleaner technologies through their R&D spending. As a change
agent, you could put a more concentrated effort into such a portfolio
analysis.[18]
Figure 49 shows that reducing energy intensity can involve many different
departments in the organization, but exactly which ones will depend on
which approach you take to reduce energy intensity. This is why I
encourage you to start from a holistic view of the challenge across all the
departments. An outside energy efficiency consultant may help you reduce
electricity rates. They may negotiate with the electric power company, for
example, and undertake some reengineering of your production process
which may shave a few percent from one of the four steps in the energy
intensity ladder. But that might only touch a small portion of the total
reduction that you can achieve in energy intensity. The message here is you
need to look at all four aspects.

Figure 49: The Four Pathways to Reducing Energy Intensity

I recommend that you construct a chart showing your products and services
or businesses sorted in order of energy costs as a percentage of your total
sales dollars. A useful way is as a stacked bar chart with electricity as one
type and fuel as another on the bar. This can be a diagnostic tool to start
questioning whether you want to consider addressing or redefining certain
of those businesses and products to be less energy intensive.
Summary
If you are considering a net zero target, you need to take a broad look across
power conversion efficiency, energy efficiency, energy cost efficiency and
energy cost effectiveness to determine how much you can reduce your
energy intensity. A high-level energy intensity opportunity assessment can
help you decide priorities and can identify where the different analyses and
carbon reduction opportunities may interconnect. For example, converting
from internal combustion engines to hydrogen powered truck fleet may
lower the cost of purchased electricity based on volume discounts.

If resources permit, I would recommend beginning with power conversion

efficiency and evaluating the efficiency of the fundamental physical,
chemical and thermal conversions to power your production. I would look
at energy efficiency, that is, energy per unit of output to identify ways to
adjust production or manufacturing process to increase throughput,
debottleneck or shave the peak in some way – to achieve the same amount
of output with less energy usage.

Next I would concurrently but a little bit later look into energy cost
efficiency, which would specifically involve procurement and pricing of
electricity as well as fuels to find ways to reduce the purchase cost of those
elements which may also involve reducing the carbon footprint. This study
would be primarily cost-driven which is great because you can save cost as
well as reduce your carbon footprint.

A huge amount of opportunity exists in lowering energy intensity. It may

take time to unlock, so you will probably want to keep the energy intensity
reduction project ongoing while you pursue the rest of your decarbonization
program.
4.2 How to Reduce Fuel Emissions and Cost
Through Transportation Optimization
“If you can move cargo out of the air, out of planes, onto the ground, or
even on the ocean, you're going to reduce your carbon footprint for sure.
Another way to address that is basically shortening your miles. If you can
reduce your miles from our vendor to your customer, you're going to use
less fuel, period. You're going to reduce your carbon footprint. So there are
things you can do without having to invest in electric vehicles and maybe
buying carbon credit and things like that. You can do these any day. We help
companies realize these efficiencies all the time.”

--- Giles Taylor, Trans-Solutions

This chapter shows you how to reduce emissions directly and

significantly by making better choices in transportation, logistics and
supply chain network design and operation. With the help of an expert
and some application tools you may be able to reach up to 25% savings,
which could fund other initiatives along your net zero journey.

If transportation is a significant part of your cost, you probably have an

opportunity to reduce your carbon footprint by reducing the amount of
miles or kilometers traveled. That can be achieved through network
redesign, routing and scheduling optimization, vehicle redesign as well as
other techniques that will be discussed in this chapter. UPS, FedEx, Agility,
XPO, Yellow Corp. and Geodis are just some of the logistics companies
that have made amazing progress at best practices in these areas.

When you take a transportation trip for freight you have tons moving over
miles, whether it is packages or pallets on a truck or an aircraft or whatever.
It is usually measured by weight, in imperial tons of 2000 pounds or metric
tons of 2204 pounds, and miles (or kilometers). The metric that is
commonly used in transportation is ton-miles, which is the number of tons
times the number of miles. In order to figure out where the opportunities lie
for transportation optimization, the following simplistic equations may be
useful:
Tons x Miles = Ton-Miles
Ton-Miles x Cube ≈ Trips
Trips x GWP/Trip = Emissions

Another factor in transport pricing is the cubic dimensions of the package.

Some items “cube out”, which means they take up the whole cargo area
based on their volume even if the vehicle could handle more weight.
Simplistically, ton miles times cube equals trips. Ton miles and cube
determine the number of trips that you need to take. For example, you got a
huge piece of furniture which is not very heavy, just large. It is going to
take one trip regardless of how much it weighs.

Furthermore, as discussed in the carbon footprint chapters, every type of

emission has a Global Warming Potential that measures how bad the
substance is for ozone depletion and the environment. If you use a cleaner
fuel emitting less carbon dioxide equivalents, you will have a lower GWP.
This means the fuel you are using will be important in determining your
total emissions.

In conclusion, there are nine ways to reduce fuel emissions and cost through
transportation optimization, as shown in Figure 50:
1. Reducing the product weight
2. Reducing the vehicle weight
3. Optimizing the network
4. Optimizing vehicle routing and scheduling
5. Redesigning vehicles to hold more cargo
6. Designing and packaging for logistics
7. Switching to more fuel-efficient modes
8. Switching to more fuel-efficient vehicles
9. Burning cleaner fuels

Figure 50: Transportation Variables Contributing to Emissions

Reducing the Product Weight
Product weight is often considered a “given” parameter that cannot be
changed. This assumption is not always true. Fans of mountain biking know
very well that cheap bikes are heavy and lightweight bikes are expensive.
Low-tech winter clothing is often heavy and has poor insulating value,
whereas high-tech clothing is often lightweight but has high insulating
capacity. Books can vary in weight substantially depending on the grade of
paper used. Furniture varies widely in weight depending on the type of
wood used. Frequently, lighter weight materials cost more in order to have
the same performance characteristics such as tensile strength or heat
transfer or flammability. So, it is possible to design lighter-weight products.

Assuming that the weight is not important to customer perception and price,
or value and safety of the product, the prevalent reason not to build lighter-
weight products is due to its higher costs. Often there is a trade-off between
weight reduction and cost. In these cases, carbon footprints need to be
factored into the trade-off equation and given a factor weighting.
Reducing the Vehicle Weight
Tare weight is the weight of a vehicle when it is empty (has no cargo
inside). For decades, car and truck manufacturers have been
“lightweighting” vehicles in an attempt to lower costs throughout the
lifecycle – so the manufacturer can procure less steel and transport less
weight through the various stages of manufacturing, and the customer can
move less weight around during operation. Lightening the weight reduces
the power needed to move the vehicle and its cargo, in turn reducing fuel
consumption.

For electric vehicles, battery weight is one of the largest, if not the single
largest, design constraints. Therefore, reducing the weight of the batteries as
well as of the chassis and body, without sacrificing strength or safety, is
paramount for the viability of electric vehicles relative to internal
combustion vehicles.

Since lightweighting is addressed at the design stage of a vehicle and

cannot be changed once the vehicle has been purchased, practically
speaking, this carbon reduction opportunity is best addressed upon purchase
of new vehicles. In the case of commercial truck, rail or air vehicles fleets,
it may be possible, but not likely, to do lightweighting as part of a retrofit,
refurbishment or heavy overhaul program.
Optimizing the Network
Network design can play a huge role in reducing transportation costs. Many
supply chains traverse the globe, originating in Asia, traversing Europe and
ending up in the United States, or via myriad other permutations of trade
routes. Products circumscribe the entire world, going through processing
phases, sometimes back and forth and back and forth again. It may sound
like an exaggeration, but it is actually more like the norm. Decades and
decades of declining tariff barriers have incentivized firms to set up this
way, while the relatively low cost of fuel and the absence of carbon taxes
have contributed to this phenomenon, which I describe more fully in my
book The High Cost of Low Prices (Business Expert Press, 2017).

Even though it is a simplification, the process of transforming a

complicated supply chain into a simple one can take quite a bit of time and
effort, depending on what you need to do – setting up alternative production
facilities, arranging logistics flows, conducting pilot projects, and so on so
forth. It is akin to untangling a ball of yarn. The good news is that the
reward by and large includes substantial reductions in both cost and carbon
footprint.

Supply chain network design consists of four areas of improvement: supply

network design, production network design, inventory positioning, and
distribution network design. Supply network design focuses on optimizing
the number of suppliers and determining which suppliers should supply
which plants. Production network design consists of determining how many
plants there should be, and which plants should serve which distribution
centers. Inventory positioning consists of determining how much to stock,
which distribution center to stock it on, whether to have serial or an echelon
inventory stocking, how many stocking levels there should be for each
stockkeeping unit (SKU), and how much to stock of each SKU in each
distribution center. Distribution network design consists of determining the
optimal number of master and regional distribution centers as well as their
respective capacities.
For a large company answering all these questions in the most efficient way
can be an overwhelming task. If you are just getting started, you may want
to spring from the following four questions:
Where to source from?
Where to manufacture?
How much to stock, and where?
How much stocking capacity to have at each distribution center?

Deciding the Sourcing and Distribution Points

The first two questions – where to source from and where to manufacture –
can each be answered with appropriate models built on mathematical
algorithms that find the center of gravity, as well as model, optimize and
simulate routes while applying constraints such as how many hours drivers
can drive before needing a break, etc.

Minimizing the cost of a distribution at work is usually a data intense

project with many complexities surrounding the ideal location of sources in
the ideal location for points of distribution.

At a high-level, basic cost drivers of both sourcing and distribution

networks include labor productivity, exchange rates and currency risks,
operating costs, taxes, political risk, language and culture, as well as
distance related variables such as proximity to markets, proximity to
suppliers, and proximity to customers. With so many variables, the network
design problem is a large undertaking.

Some rules of thumb can help set a high-level direction. Based on a process
strategy matrix that segregates businesses and products according to their
relative variety and relative volume, various stock keeping unit (SKUs) can
be segmented into two categories: high volume inventory-centric supply
chains, and low volume supply or sourcing-centric supply chains.[19] For
high volume inventory-centric supply chains the most cost and carbon
footprint leverage may be had by analyzing and optimizing the distribution
network first. For low-volume supply or sourcing-centric supply chains, the
most carbon benefit may be reached by analyzing and optimizing the supply
network first.

A sequence of analysis can be used to analyze either the supply or the

distribution network.

The first step is to apply heuristic algorithms, a.k.a. threshold decision

rules, that can quickly narrow down the options to a relatively manageable
set. This includes decision criteria such as region risk, language and
production cost.

The second step is to apply linear programs and potentially integer

programs to the resulting narrowed-down set of options. Linear programs
are customarily designed to minimize total cost based on the cost of
production, transportation, and inventory holding, all of which generally
involve trade-offs with the others. For minimizing carbon footprint,
transportation cost is the dominant and impactful variable to focus on.

Simple methods can be used in Excel, although they are not nearly as
accurate or precise as what can be achieved out of a network design model
fit for this purpose. Spreadsheet methods could include factor rating (i.e.,
weighted average scoring), locational cost-volume analysis and center of
gravity analysis.

Factor rating or weighted average scoring methods entail attaching weights

to a set of decision criteria, calculating the partial and total sums, and then
choosing the option with the lowest to highest weighted score, depending
on whether the scale indicates the highest as good or bad.

Locational cost-volume analysis involves constructing curves of the cost

versus the volume for each option, and seeing where they cross. The lowest
scores in certain ranges indicate the best choices for a given sourcing or
distribution location. Usually, minimizing the total cost of the network in
this way also minimizes the carbon footprint, assuming that the major
component of the transportation cost is fossil fuel.
The center of gravity model uses geographic coordinates to identify a
relative location of a certain number of options. By multiplying the volumes
to and from each of those locations by the distance between each of them
can give a rough estimate of the cost to move physical product between the
points, no matter sourcing or distribution points.

After having narrowed down the options to a small number, usually

between two and seven, the next step is to simulate in detail scenarios
involving the constraints of plants and distribution centers that the first two
steps have yielded.

This large computational exercise usually pays big dividends in terms of

cost and carbon footprint reduction.

Deciding the Amount of Inventory and Where it Should be

Stocked

After deciding where the physical source and distribution points will be
located, another factor that could drive carbon footprint and operating cost
is the amount of inventory as well as where it should be stocked, which are
inter-related decisions.

From a structural point of view, there are two types of supply chains: serial
supply chains and echelon supply chains.

In serial supply chains each actor, such as a manufacturer, wholesaler,

distributor and retailer, manages their own inventory separately without
communicating with others. This usually results in at least four tiers of
inventory. Due to multiple layers of order to delivery lead times and
variability of demand, serial supply chains are particularly susceptible to the
bullwhip effect, which is a reverberation and amplification of small initial
shocks into ever larger oscillations of inventory throughout the supply
chain.
In echelon supply chains, inventory can be held at multiple different layers
in the supply chain, but in a coordinated way with information about
demand and stock levels communicated from level to level. This usually
reduces the bullwhip effect.

The decision about whether to centralize or decentralize or hold inventory

at multiple levels of the supply chain has a strong impact on inventory
carrying costs as well as on transportation costs. The trade-offs between
centralized, decentralized and hybrid stocking policies are often evaluated
at the product line and SKU level; nearly universally the objective is
minimizing total cost while achieving target service levels, whereas a target
service level would mean, for example, a policy of fulfilling 99% of orders
on time. Carbon footprint is rarely if ever considered in inventory stocking
equations.

The total cost of an optimized inventory placement scheme tend to correlate

with lower transportation cost, but not necessarily. Depending on the
weightings applied to cost minimization and service level maximization,
there are invariably cases where a high service level objective is prioritized
over transportation cost, and consequently also over carbon footprint. For
example, Amazon may prioritize next-day delivery over transportation
cost, especially during holidays when many customers are time-sensitive,
and in those cases stocking and shipping decisions could be made to
achieve high service levels at the expensive high carbon footprint. There
could also be cases where inventory carrying cost outweighs transportation
cost, where carbon footprint would be subordinated in those cases too.

In order to address carbon footprint in stocking policies and distribution

center capacity decisions, carbon footprint would need to be a clearly
identified variable in the linear and possibly integer programs that are used
to develop the optimum stocking schemes, along with service levels,
inventory carrying costs and transportation costs.

Configuring Available-to-Promise Dates

Once the brick-and-mortar locations, such as manufacturing plants and
distribution centers, of the network are in place, operational decisions are
also primarily made based on target customer service level and
transportation cost. When Customer Service fields orders, it needs to
provide a promised, or at least expected, delivery date corresponding to the
price. This is called the available-to-promise date. The customer then
decides, based on the combination of price, delivery date and time, whether
to buy or not.

In the back end of the order management system, developing the available-
to-promise day and time is more complex than it may appear. First, if the
product is stocked on multiple distribution centers, the algorithm needs to
decide which distribution location to use. Second, a decision needs to be
made on which mode of transport to use, for example, air or ground. Third,
there are often multiple service levels within a mode, such as next day,
second day and third day, etc. Fourth, there is the choice of carrier, each of
which may have complex rate tables and volume discount agreements. All
this needs to be considered, calculated, and an optimal decision reached
regarding the combination of location, mode, service level and carrier
before offering a customer a date and time that corresponds to the price.

Currently, this complicated set of calculations and optimization decisions is

based on cost and the target service level, the same as with the inventory
placement decision. It rarely (never, in my experience) includes carbon
footprints.

This being said, it would be possible to include carbon footprint as a

parameter in each of those decisions. Mathematically, it is not much more
complex than existing workflow and calculations. However, the source
data, the data architecture and data flow, as well as the data ownership,
accuracy levels and governance all need to be worked out for this to be put
into action. Early pioneers – perhaps fulfillment operations or consumer
products companies who have ESG-conscious customers – will pave the
way and make it much easier for everybody else to follow.
Optimizing Vehicle Routing and Scheduling
Transportation routing and scheduling can be a great way to reduce
operating costs, especially if routing is currently done manually or in
several different ways within the same geographic area.

If you have not done any optimization on your routine and scheduling, there
is probably a large opportunity to reduce cost as well as carbon footprint
from optimization techniques such as routing and scheduling, cross-docking
and DC bypass.[20] Routing and scheduling are creating more efficient
vehicle routes. Mode selection involves shifting expedited (often air)
shipments to another mode that optimizes cost and service (often ground).
Cross-docking is unloading and reloading shipments at an intermediary
point without being stored, as part of a rapid delivery hub-and-spoke
network. Distribution Center (DC) bypass is moving freight directly from
factories to stores, or if not retail, directly to its end destination without
being stored at a distribution or even a mixing center. Equipment pooling is
sharing fleet assets, as happens frequently with railcars and intermodal
chassis.

While it may sound easy to optimize routing in the age of Google Maps, it
is a lot harder to optimize routing for a fleet of commercial vehicles than for
a single personal trip. Delivery route resource allocation can be done
optimally in several ways including fixed, zone, dynamic, resource-based or
hybrid algorithms.
With fixed routes, you lock in routes and serve those same routes
every day.
With zones, you designate certain delivery zones and certain
resources (vehicles and drivers) to serve certain zones; those
resources pick up whatever demand there is in those zones on a
recurring basis.
With dynamic routing, routes are determined for each delivery
cycle as a function of the demand at that point in time, which is
 usually every day based on the orders, deliveries and pickups
needed to be made.
Resource based routing starts with a specified number of vehicles
and drivers, and those resources are allocated to routes in a given
priority until there are no more resources available or until all the
stops have been assigned to vehicles or routes. Hybrid methods
use different sequences and layers of these methods.

Routing and scheduling optimization can save companies 20–40% on the

cost of fleet operations, with essentially linear reductions in carbon
footprint. This is especially true if previous methods had been manual, as
was the case at Iron Mountain. The company’s rapid growth through
acquisitions left it with many competing routing methods and overlapping
routes within the same region. To optimize the routes, it implemented an
advanced routing and scheduling software system on its fleet of 2,900
vehicles across North America. By using the vehicle routing and scheduling
software, Iron Mountain found it could reduce route miles and resources by
34% and improve its on-time delivery rate from 96% to 99%. Routing
optimization initiatives must be carefully calibrated to be able to handle the
order quantities, delivery lead times and variability of arrival times, which
can all affect safety stock requirements.[21]
Redesigning Vehicles to Handle More Cargo
If you are shipping anything oversized, irregular in shape or form, consider
customizing the vehicle to increase the cubic capacity and load factor, as
well as reduce the number of trips thereby reducing the emissions profile.
For example, moving trucks often have an overhanging cargo area over the
cab and a door on the side, both of which may allow more cargo to fit in, or
moved in and out. Vehicles can be retrofit to add more axles for heavier
weight. Customizations for trucks can in general be relatively easily
undertaken, even as retrofits to a standard production model vehicle.

As an alternative to modifying the vehicle, you might achieve the same

effective capacity increase by splitting the product into smaller pieces for
shipment to minimize the cubic dimensions and make them conform to
standard shipping boxes, which would allow you to stuff more cargo into
the same cubic space.
Designing and Packaging for Logistics
The largest carbon reduction opportunity in the Design for Logistics
category is what I call DFx. It is widely acknowledged that 80% of the
lifecycle costs are determined at the design stage based on the choices made
then. DFx consists of “Design For” any number of objectives. The
objectives range widely, from Maintainability to Serviceability to
Marketability, to Prototypability, to Testability, and from Manufacturability
to Transportability, to Operability, to Supportability or any other “ility” you
can think of.

I am going to introduce a few concepts here, such as Design for Recycling,

cubic modularity, packaging minimization and packaging reuse.

For example, if it is hard to dismantle something and if it is designed so that

it will last forever, to never be taken apart, it might be very difficult to
recycle it later, so the consumer will probably end up disposing of it in an
environmentally unfriendly way. Conversely, if the product is designed to
be recycled, it might have some very easy to disassemble components
inside and outside the unit that could make recycling much easier. This
would be Design for Recycling.

Another design consideration that can come in at the early stage is cubic,
what I loosely call here cubic modularity. It is essentially the dimensions of
the product. Suppose you make curtain rods. If you make one long curtain
rod, 12 feet long, then try to ship that by transporting it throughout the
whole supply and value chain forward to the customer, you are creating a
product that is not very transportable. It will require custom freight at every
step and a custom vehicle which will engender an extra cost to ship. If you
try to put it in an airplane, it will be super expensive. Conversely, if you just
make it either a telescoping pole or in three or four pieces that snap together
in a fashion you are probably familiar with, e.g. one piece sliding over the
other piece into one long pole, you will have achieved the same
functionality but with hugely lower transport costs, which will also reduce
emissions because it will have a smaller shipping profile. IKEA does this
with furniture, and many companies do so in other industries too.

For example, in the case of furniture, IKEA delivers extra-large, oddly

shaped furniture. But instead of delivering oddly shaped heavy large sofas
which needs a lot of manhandling and occupies a lot of space in the vehicle
during transportation, IKEA delivers it in eight boxes. The packaging is
designed in a modular way to be shipped, cutting down on both cost and
carbon footprint – and they can lower the price to the consumer and be
more price-competitive as a result.

In a completely different industry, offshore wind turbines are being

developed in novel ways so the foundations and towers for these offshore
wind structures can be fabricated, shipped, assembled and erected with
minimum transport costs and installation time. The more you can
modularize the structures, the more efficient the whole shipping chain is
going to be, and the quicker the cycle is to erect the offshore wind structure.
This applies to the structures above sea level and on the seabed as well.

Back in the world of consumer goods, packaging may in many cases be

minimized to reduce carbon footprint. Large companies have packaging
engineering teams that study, optimize packaging and study freight
dimensions. Their typical mandate is to minimize shipping costs, but carbon
can be added to their objectives. Companies such as Amazon and FedEx
have used a variety of different shipping media, and studied the use of bags
versus boxes, for example. Some of the packaging options can reduce
weight and cubic space, hence cost and emissions from shipping. In the
mainstream, however, I would say that the majority of packaging redesign
opportunities have not been fully exploited, which presents a greenfield
opportunity for most companies. Even with industrial shipments, there is
usually shrink wrap and other packaging that goes with products, which is
called dunnage. As long as the product is still adequately protected during
shipment, reducing and eliminating this packaging can reduce lifecycle
carbon footprint.
Reusing packing and packaging materials can also reduce carbon footprint.
Alternatively, you could make the packaging biodegradable or
environmentally friendly for disposal, or if it can be repurposed by the
consumer that would also reduce carbon footprint.
Switching to More Fuel-Efficient Modes
Switching modes of transport has a tremendous opportunity to reduce
global warming potential emissions as well as fuel consumption of
shipments. In fact this might be the largest opportunity for you to reduce the
emissions footprint of your transport network.

One way of reducing carbon footprint is by putting freight on the ocean

instead of in the air. Taking into account fuel efficiency, fuel type, global
warming potential and also load factor, shipping by air really generates a lot
of emissions per ton kilometer. The carbon impact is detailed in my books
The High Cost of Low Prices and From Bogota to Beijing. Ocean shipping,
by contrast, is much lower. The size of oceangoing container ships is so
large that the number of tons they carry in one shipment is enormous. It has
so much tonnage in total that on a per-ton basis it is by far the least
polluting of all the modes.

Another way of reducing carbon footprint is by putting freight on rail

instead of truck. Ground transport by rail is about 40% cleaner than truck in
terms of grams of CO2 per metric ton-mile. There are many pros and cons
to doing that, which is an evaluation for you to make. One of the drawbacks
is that rail routinely takes longer and is less reliable. However, railroads are
trying to dispatch to a scheduled timetable –called “precision railroading,”
to close the gap with trucks. So although there are some downsides to rail,
there could be some opportunities there for both emissions reduction and
cost savings.[22]
Switching to More Fuel-Efficient Vehicles
Putting goods on larger vehicles can achieve carbon footprint reductions,
contrary to what intuition may tell you. Although it seems like heavy trucks
pollute a lot they haul a lot of cargo behind them, on a per ton mile basis it
is less polluting to use Class 7 and Class 8 vehicles, which are heavy
tractors pulling trailers even though their fuel economy is only 7 miles per
gallon. Small box trucks, from Class 2 through Class 5, emit about 400
grams of CO2 per ton-mile, compared to less than 100 for Class 8 tractors.
[23] Naturally this assumes that these vehicles are all fully loaded. Lower

load factors on either mode could affect the comparison.

Burning Cleaner Fuels
Alternative fuels can reduce emissions even with the same vehicle type and
same mode. Significant technological advances are leading to greater and
greater emissions reductions. In most cases, in order to change the fuel type,
you usually also need to change the engine therefore changing out the
whole vehicle since the equipment and the engines are designed integrally.

While there are ranges of overlap, diesel engines generally have lower
emissions in terms of CO2e/ mile than gasoline internal combustion engine
vehicles. The emissions from ethanol 85 blend generally overlap with the
diesel engines. Depending on where you are on a gasoline scale, you might
be able to reduce carbon emissions by going to an 85% blend. Hybrid
electric vehicles can emit a little bit less than the gasoline engine, although
there is a wide range of overlaps so this would need to be studied. Plug-in
hybrids can achieve a slightly lower emissions profile in certain cases.
Hydrogen fuel cell vehicles have the potential for the lowest CO2e/ mile.[24]

Before reading too much into any statistics about the emissions profiles of
various clean fuels you would need to measure the grams of CO2e
emissions across the whole value chain. If you are charging a battery
electric vehicle with electricity from a coal-fired power plant electricity, this
would reduce or even negate the carbon footprint benefit.

Similarly, if you are putting blue hydrogen into a fuel cell vehicle you must
consider the carbon footprint of the production of the blue hydrogen.
Conversely, if you have green hydrogen and green power it is really the best
of both worlds, and you can indeed target that 50 to 100 range grams of
CO2 equivalent per mile. That would be an inspirational target.
Sizing the Opportunity
All these pathways could lead to both carbon footprint reduction and cost
savings. That is one of the wonderful things about transportation
optimization. Amongst all the possible avenues to lower carbon footprint
pathways, transportation optimization is directly correlated with cost
savings – the more you reduce the carbon footprint, the more you save. This
makes it easy to get started. Unless you are actively studying whether to
invest in expensive new generation capital equipment, fleets and vehicles,
there are usually short-term cash benefits from improving and optimizing
transportation and logistics networks.
Transportation Optimization: An Interview with
Giles Taylor, President, Trans-solutions
David: Giles, you have such vast experience in logistics operations and
transport consulting. It's a privilege to get your opinions on what's
happening in the world of logistics and transport and how net zero fits into
that. Before we get started, why don’t you explain a little bit about yourself
and your company, Trans-Solutions?

Giles: Sure. Before getting into consulting, I was in the operations side of
supply chain for about 15 years. So, I've been doing this for a while. Trans-
solutions is a transportation consulting firm. We've been in business for 25
years. We help shippers ship smartly and economically and bring new
solutions to their transportation network. There are two sides to our
business. One side is sourcing. We source transportation, and the other side
is engineering, where we bring new solutions to problems. For example, by
providing the justification for a transportation management system, a TMS.

David: Super. As you work with a company and consider its whole logistic
and transport opportunity, what's the order of magnitude that you typically
find on either logistics or transportation cost savings?

Giles: Well, that's a great question David. On the sourcing side we are
usually somewhere between 10% and 20% of savings on transportation. On
the engineering side, like optimization of the freight, we tend to find
upwards of 25% to 35%. For example, by moving from one mode to
another mode, one service to another service, possibly implementing some
kind of automation and things like that. We tend to find a much higher
percentage there. We have more work on the sourcing side, but maybe we
should flip that, because the percentage gains are higher. Also, a lot of the
optimization work often lowers carbon footprint for companies.

David: If we take the 10% to 30% of the relevant expenditure that would be
the savings, how much does logistics transport represent in the company's
overall revenues or costs?

Giles: Transportation, depending on the industry and the commodity,

usually tracks about 45% to 70% of your logistics cost, whereas
warehousing is closer to 15% to 30 or 35%. Then you have other things like
inventory carrying costs and other admin costs, overhead, that make up the
rest. If you're looking at transportation cost as a percentage of sales, it's way
down there. I think somewhere between as low as 3%, as high as 20%. For
example, on furniture it tends to be very high. On medical devices and
biotech, it tends to be very low. So, industry has a lot to do with this
number.

David: Okay, fabulous. So just doing simple napkin math let's say the
relevant costs are 10% of a company’s overall revenue and then let's say we
save 20%. So, we're kind of putting about 2% overall of the company's
revenue back through savings. Is that roughly right?

Giles: Yeah, with rough math, you're probably right about that. The other
thing to consider with transportation – unlike other costs in a company it
goes right to the bottom line. You're literally taking that cost out of the
balance sheet. It goes straight to the bottom line which you don't get with
other cost reductions.

David: Fantastic. Are you hearing companies saying, “I would like you to
do what you do, but set the objective function to carbon rather than cost?”
Are you seeing that or is the world still driven by cost reduction?

Giles: Yeah, unfortunately I think money still rules the day. In the United
States anyway. It's a little bit different in Europe. But still, I think that
they're very much cost driven too. Especially these days. Many companies
have been paying a lot extra over the last three years because of the COVID
disruptions, and now they're trying to claw back some of that money.
However, if you can present a solution that reduces carbon footprint and
doesn't cost more money, then they are all ears, and I think there's some
ways to do that.
Giles: Is there a correlation between cost reduction and carbon footprint
reduction? The obvious area to look at is to move away from more, what
you call it, carbon unfriendly modes of transportation. For example, if you
can move cargo out of the air, out of planes, onto the ground, or even on the
ocean, you're going to reduce your carbon footprint for sure. Another way
to address that is basically shortening your miles. If you can reduce your
miles from our vendor to your customer, you're going to use less fuel,
period. You're going to reduce your carbon footprint. So, there are things
you can do without having to invest in electric vehicles and maybe buying
carbon credits and things like that. You can do these any day. We help
companies realize these efficiencies all the time.

David: On your comment about switching modes if companies ship by air –

if you take air shipments and you change them over to water, isn't there a
huge difference in the transit time and the service level accuracy of that?
And so in what kind of conditions could companies actually make that
choice and still offer the same service to their customers?

Giles: You're spot on with that, David. If you're talking about Southeast
Asia to the West Coast, 17 to 20 days, right? That's pretty big on the
inventory side, whereas air could be two to three, or five to seven days. It's
night and day. Interestingly, in the last six to nine months, a lot of our
clients in the healthcare sector have been looking to move from air to
ocean. Now, to do that, that's a fundamental change in your supply chain.
You now have to start building larger inventories. You know, we've just
gone through 20-25 years of just-in-time inventory. And I think one of the
things that COVID did was expose the problems with that strategy. It's
great. It's very efficient. This country has very good and efficient supply
chains. We have a really good domestic network. But it doesn't leave you
any flexibility. If you're ordering enough for the month, what happens if
you can't get it on time? So, I think that there's a little bit of a rethink going
on in industry today to say, what if we put freight on the water? And that’s a
fundamental change that we've been seeing lately. Quite frankly, I don’t
know why companies didn’t do this when the cost of money was much
less.
David: A lot of companies are looking at moving their sourcing away from
China, right? Which would mean maybe shipping on the ocean from
Colombia, Venezuela to the United States or whatever, Brazil, which is less
costly and takes less time than water from China to the United States.

Giles: Sure, absolutely. We saw a lot of this when the Trump tariffs kicked
in – paying 25% tariff on goods is pretty significant. So, we actually saw
more sourcing out of less costly areas like India, Vietnam, Malaysia. But
there’s a downside to that, too. I've heard a lot of anecdotal stories about the
productivity just isn't quite as good as China, and you can't get the goods
when you want them. It's an efficient machine over there in Asia and China
in particular.

As far as reshoring, I just haven’t seen the evidence that's happening with
domestic companies. For example, I read an article in Supply Chain
Management magazine last month that said that nine out of ten small
business are planning to do something about reshoring or nearshoring in the
next few years. In other words, bringing production closer to home. And I
think something like 45%, 50%! That's a plan, right? A plan isn’t action.
So, it might not be happening. So, I think there's a little bit more talk than
there is action. As far as China nearshoring, it is happening in a big way. I
read an article that Chinese companies have filled 80% of the new
warehouse space in Nuevo Leon, MX. That’s the state bordering Texas that
has Monterrey. What’s the motivation to do this. Tariffs. As I said, a 25%
increase in cost is significant. Either way, that is good for carbon footprint
reduction, unless imports to Mexico are increasing and off-setting the
carbon reduction gain.

The metric to look at is the nominal traffic moving southbound from

Canada and northbound from Mexico. As that ticks up, more near shoring is
happening.

David: Interesting. Let's take the case of rail to truck, which might be more
clear-cut, right, and maybe easier to accomplish than some of the
international sourcing changes and mode changes. What kind of
improvement opportunities do you typically see in moving modes,
switching modes from truck to rail? How much does it save?

Giles: Very significant. Now, there's two sides to that. There's the boxcar
rail side, of which most of the transportation is on the rail. And then there's
intermodal, which has a drayage leg to the railhead, and then off the
railhead to the customer, so it's a little bit less carbon neutral. If you are
shipping rail, that's the most carbon neutral mode of transportation there is.
I’ll give you some statistics. In 2018 or 2019, CSX was claiming to be able
to move one ton of freight 450 plus miles on one gallon of gas. That's
significant. Trains can have 100, 200 railcars at a time and each car can
hold 180,000 to 200,000+ pounds of freight. Over the road, it's more like
about 130-ton mile per one gallon of fuel. So that's like three times less fuel
by using railcars. One of the challenges with that is there's not a lot of
capacity on the railway. It's full. But a lot of companies use it to save costs,
but not necessarily carbon footprint reduction. These ratios are less with
intermodal because of the drayage component, which is truck transport. So,
if you want to be a good steward of carbon, put more on the rail, if you can.

David: Have you seen a lot of that happening? Intermodal has been around
for decades and decades, are many companies actually moving toward
intermodal?

Giles: It's been back and forth ever since I've been in the industry.
Sometimes intermodal is favorable, sometimes over the road is favorable,
and it's usually cost driven. About twelve years ago, over the road trucking
companies and the Class 1 rail lines got together and made this major
investment into spurs so that they can move stuff off the rail quicker and
faster. This is rather important, because these two modes consistently
compete against one another. However, the investment in capital benefits
both sides. It works much better than it did in the past. But there's a
capacity issue right now. We always have customers that are looking to do
that. “Can I move it on the rail?” Whether it's box car or it's intermodal
containers. Now, especially the end of last year and most of last year, it was
tight on the rail. Even if you wanted to you couldn’t make that shift. It’s
starting to loosen up a little bit. Carriers are always looking for the freight
they want anyway, whether it's last-mile or less-than-truckload (LTL),
intermodal, etc. So, carriers are being a little bit pickier about what they're
taking. Now, the other side of that is rail car. If you have a heavy, dense
product, it's the way to go because you can move so much at one time. As I
was saying, you can put 180 to 200,000 pounds on a 60-foot rail car. The
heavier the shipment, the more revenue and fuel is consumed. So, what
really works on the rail is dense commodities, like canned food or food in
general, tier one raw materials, etc. And a little-known secret – if you're
moving sneakers versus canned food, you can negotiate a better rate
because it's going to use less fuel.

David: Got you. Interesting. Let's talk about fuel. If you're, let's say, running
a network of full truckload service around the United States. One option if
you want to be sustainable would be to shift to rail or intermodal. Would
there be another option: to use cleaner fuel?

Giles: Well, we're seeing some requests out there to do that, but right now I
think the options just aren't fully available. Some healthcare companies are
asking for SAF, sustainable aviation fuel, which is a cleaner fuel, but we
don't see that pervasively among our customers. One area where we do see
that is healthcare, both in Europe and the United States. If you're looking at
something like that you really must look at local transportation with smaller
vehicles, light vehicles, mid-sized vehicles, like vans and straight trucks.
There's some of that out there and you have to be close to the source to
refuel. That's one of the biggest challenges that the big 18 wheelers are
going to have, where do I refuel? About seven years ago, a consumer
package goods (CPG) company that happened to have a large piece of
property that was sitting on top of an oil shale reserve. They wanted to
know if they could tap into the natural gas below them and power their
fleet. The challenges that we found in that study were probably similar to
what they have now, and that is length of haul. We determined that the truck
could go about 250 miles and they have to turn around and get back to
refuel. So maybe it got 400 or 500 miles total. So, unless there is an
extensive refueling solution throughout the country, you’re limited by
fueling stations. And that's one of the reasons why smaller fleets like to go
to an urban area like New York or Washington DC. In San Francisco, you
can have electric trucks because you can recharge overnight. But if you're
on a long haul, going across country, that's going to be much more
challenging.

David: Are there any areas of the country where those recharging networks
are actually springing up?

Giles: It seems that both FedEx and UPS, which are to a large extent
leading this area with sustainable fuel, seem to like Washington DC and
other heavily dense areas. And of course, it would make a lot of sense too,
because you’ve got more cars in a smaller area than trucks and its pollution
and carbon footprint is much higher. So that's where that happens. I'm not
sure if this relates, but I read an article a couple of years ago about the
residents of Barcelona being up in arms because every morning they wake
up and they get this black sheen on their car. They want to move away from
diesel to gasoline, which is a little bit cleaner. That's another consideration
in cities like New York City, Hong Kong, or any other densely populated
area. There's a haze over the place.

David: Right. Definitely a consideration. You work a lot with third party
logistics companies, I assume. Maybe some fourth party logistics
companies, 4PLs. If your company is engaged on some initiative towards
sustainability, can a company rely on its 3PL to take care of the
sustainability issue?

Giles: I think it depends on the 3PL solution. The big air freight forwarders
and ocean freight forwarders all have something to say about being carbon
neutral. You can find it on their websites, but to what degree they are is
questionable. Saying it and stating it is different than doing it. So, I think if
you find a 3PL/4PL that has a track record of doing it and they can prove
that they've been able to reduce carbon with some of their customers, and
you ask really detailed questions, I think you probably can find some of that
out there. But it must be in sync with the strategy of the company. You can't
just say, I want to be more carbon neutral without addressing your strategy
on service. For example, can you take stuff out of the air and not use planes
as much? Can you put goods on the rail? Can you put goods in the ocean?
Do they have a sustainable solution within their four walls? For example,
FedEx and UPS both have model electric fleets in Washington. But you
can't go to either one of them and be totally green because that would
require their whole fleet to be electric.

David: Maybe it depends on the alignment between your sustainability

goals and their sustainability goals. Is it like finding a dance partner who
has a similar profile to you and wants to go where you're going, and on a
similar timetable?

Giles: Yes, and I think it's not an easy find. You really have to do some due
diligence on what they are able to provide and what they can't provide.
Spend quite a bit of time really sussing that out, making sure that it is going
to deliver what you're looking for. There are other ways to skin that cat too.
For example, some companies like FedEx and UPS are looking at more
sustainable packaging. If you recall, a third of a plastic bag is oil, so it may
not be a combustible fuel, but it's oil. And you're taking that out of the
ground. So, if you can move that to more bio friendly packaging, I think
maybe up to 20% of biomaterial and that type of thing, that's pretty
significant when you multiply that over all the packages that are used. You
can also do a better job up with the packaging that you're using to ship your
e-commerce. For example, everybody has received the 24” x 12” x 12”
package with a little tiny thing inside it and a bunch of peanuts. You can go
a long way by just having a better selection process and using some
technology to do that better.

David: Great. Well, this has been so enlightening, and I say that because it
seems that there are so many choices to be made on the pathway to
sustainable transportation and supply chains. You've really helped shed light
on the fact that each choice is one that requires some careful alignment and
consideration of the costs and the benefits and selection of the partners. And
there’s not one golden solution that just pops out of there that everybody
should do. I think you would be a great asset to these companies trying to
evaluate all those choices along their way toward a net zero supply chain,
and I highly recommend that they partner up with you and Trans-solutions.
Thanks very much for joining.
Giles: It's been a great pleasure to just go down this intellectual path with
you and I look forward to perhaps working together with you and these
companies as they navigate the waters toward net zero supply chains.
Thank you very much. I'd like to see that. I've been doing this for 40 years
and unfortunately, right now money wins the day. But there's things you can
do that can save money and reduce your carbon footprint’ without major
investments. I'm optimistic.
4.3 How to Reduce Building Emissions Through
Green Building Design
“The built environment…represents, between operational carbon and
embodied carbon, about 40% of total global carbon emissions. The
embodied carbon could be 20 or more years’ worth of operational carbon.
It depends on the type of building, but just the embodied carbon alone can
be a major chunk of its life cycle emissions. Normally, if you're going to
stick with normal materials like concrete and steel, if you get alternative
materials in the cement of the concrete, you can significantly reduce the
embodied carbon. Or if you get recycled steel or steel made from electric
sources rather than fossil fuel sources of for their manufacturing process,
you can generally get to say 15 or 20% reduction from embodied carbon
sticking with your concrete steel, the normal type of materials.”

--- Jacob Knowles, BR+A Consulting Engineers

Buildings represent over a third of all carbon emitted into the atmosphere.
Consequently, environmental building design is a potential gold mine for
attaining net zero in your company. This chapter provides an overview of
green building design principles and practices, specifies the requirements
for meeting LEED certification, and discusses how to achieve low carbon
footprint in existing buildings as opposed to new construction.

This chapter will cover carbon reduction opportunities stemming from

green building, green building principles, design principles, practices and
history. There are many certifications around the world for green buildings.
We are going to focus on LEED and get into that in detail. Historically
LEED has applied to new buildings, but we will also explore greening
existing buildings. LEED will be defined below.
What is Green Building?
Green building has broad environmental goals that go beyond energy, but
the goals do include reducing carbon footprint in a very important way.
Green buildings in general are environmentally responsible and energy-
efficient; green building principles cover all aspects of the design cycle –
planning, design, construction, operation, maintenance, renovation and even
demolition. The idea is to reduce the impact on human health and the
environment throughout the entire lifecycle from materials construction
onward.

One of the challenges involved in applying green buildings is that so many

existing buildings were built with a relatively inefficient carbon footprint
design and it's difficult to retrofit them. We will address that dilemma in this
chapter. On the other hand, green buildings have other benefits, such as
being more natural, more comfortable as well as more productive
environments in which to live and work, besides costing less to operate
after the construction. They use less energy so you can generally count on
consuming less electricity and power from the grid as well as less fuel for
heating and air conditioning.

Green building is one essential pillar to any plan to achieve net zero
emissions. According to the World Economic Forum, buildings accounted
for 34% of global energy consumption. Moreover, according to the
International Energy Agency, greenhouse gas emissions from building
operations increased over the last several years. The bottom line is that it is
fundamental to make green building a part of your net zero plan.[25]

Green building design principles mimic natural ecosystems. While

conventional buildings contribute to climate change, green building
principles hold that the structure should:
Be as small as possible
Stay away from sprawling
 Be based on bioclimatic design, which is a method of designing
infrastructure in the context of its respective environment, taking
advantage of the environment whenever possible

One can understand this in the context of biomimicry, which is basically the
process of looking at the way nature designs, for example how animals live
in their habitats or how weather patterns work and using those design
principles to design our own ecosystem. Biomimicry would imply living in
an appropriately sized space. If a bird lives in a nest and the nest is a certain
size in proportion to the bird, then in principle one would expect a human to
live in a size of place, live, work or whatever, in a size proportional to
whatever animals live. That's not the case at present obviously. Now that we
have higher standards of living the average house size has increased
dramatically and we have been in much larger places as well as places
where perhaps we shouldn't live at all. I used to live in the Middle East
where the temperatures are extremely hot, and now everybody lives there in
comfort using air conditioning systems most of the year. Those air
conditioning systems are run by different pumps and blowers that are driven
by electricity. So there is enormous electricity consumption where it did not
exist in the past. Is that healthy? Not for me to make the judgment right
now. But the point is that biomimicry would imply more sustainable design.

Biomimicry would also imply structure sizes proportional to the

requirement and not sprawling. Sprawling consumes a lot of real estate and
other natural resources. Conversely if you concentrate the building
occupancy within a finite area, and put smaller units, you will also reduce
the impact on the nearby natural environment, like water and air.

Finally, it would also favor bio-climatic design, which considers the

ecosystem of the building location so that it works in collaboration with that
environment and not competition with it. If you are selecting the site for a
building, you want to locate it somewhere where the sun naturally hits it to
provide heat. It then goes through heat and air conditioning cycles from the
natural environment rather than putting it somewhere out of touch from all
those cycles, therefore needing to be artificially heated and air conditioned.
That is just one small example of bio-climatic design, but those are some
fundamental principles.
The Role of Energy Efficiency in Green Building
Three widely recognized green building goals pertain directly to carbon
emissions through energy efficiency:[26] life cycle assessment, siting and
structure design efficiency, and energy efficiency.

Lifecycle assessment means you should consider the building costs from
planning to the end-of-life demolition of the building and everything in
between. To the extent that you just consider the initial building costs you
are leaving out a major opportunity to enhance harmony with the
environment. You might be producing a lot more carbon emissions in the
life cycle in, for example, the production of the building materials
themselves and the haul-away of the demolition later on, perhaps leaving
gas emissions in the materials after the building is demolished.

Siting is an important consideration in green buildings. Going back to the

Middle East example, the sun burns hot in the middle of the day so the
building construction materials used, the type of windows, tinting and
temperature thermal control materials can make an enormous difference on
the energy efficiency of the building. In the United States in cold areas, you
have the opposite situation where if the billing is designed for the cold, you
would have dramatically lower bills for heating and lower carbon emissions
that goes with that material. Efficiency means a lot of things, but in the
context of our net zero program we assume that it correlates inversely with
the carbon footprint of the materials both in terms of making and installing
or assembling them, and eventually dismantling them.

Energy efficiency not only influences the environmental consistency of the

structure, but also has a beneficial impact on operating costs. One of those
operating costs is energy so energy efficiency is greatly helped by green
design principles, or it should be and could be. Since energy is a large
expense in buildings (accounting for 48% of a green building's total life
cycle costs[27]), everything that can be done to improve energy efficiency of
a building is worthwhile.
Green building generally also has quite a strong emphasis on water
efficiency, which is not actually directly related to carbon footprint and
environmental quality, but has to do with comfort, well-being and
productivity. The fundamental nature of it is to optimize lean principles, one
of which has to do with lean maintenance and reliability engineering that is
consistent with green building, where operations and maintenance should
be optimized. You essentially want to focus on making sure something is
designed for low maintenance and maintenance designed for reliability. To
the extent that you can do that, something simple, clean, plain and does not
require a lot of energy is also going to be low cost and more reliable.

Material efficiency is another green building principal worth mentioning.

Using excess materials is wasteful and may also create carbon emissions
through the manufacture and disposal of wasted materials. Waste refers to
every resource such as water, electricity and materials at every stage, as
well as how you get rid of the garbage from inside the building. Lessening
the impact on the grid is critically important and overlaps with several of
the other principles, such as operations and maintenance optimization.
When you have low maintenance and operating costs, you have low
electricity costs, therefore putting less demand on the grid. This is a
secondary impact really. The primary impact is on your own electric costs
but the secondary one is on the grid. You are demanding less of a grid
infrastructure with all the carbon footprint and environmental externalities
that the grid costs.
LEED
Leadership in Energy Environmental Design (LEED) is a rating system for
building efficiency. LEED originated in 1989 in the United States. The
standards were codified a few years later. At the time, having a standard for
green building design, a set of principles, and making the health of the long-
term sustainability and health of the planet a priority within architecture
was a relatively revolutionary idea. A collaboration between the American
Institute of Architects and the Environmental Protection Agency resulted in
sustainable building design guidelines, which were codified as LEED by the
US Green Building Council. These institutions are still very active in green
building certification.

Internationally, green building efficiency rating systems have proliferated.

Many LEED principles have been adopted around the world. There are also
national and local green building design certification programs worldwide.
Some federal agencies, state and local governments in the United States
recognize and reward LEED certification.

LEED goals generally align with the green building principles described
above, with a few important differences. Whereas the green building
principles had a lot to do with ecology and nature, i.e. fitting into the
national environment, LEED principles explicitly aim to reduce the
contribution of the buildings to climate change, promote sustainability and
regenerative growth. LEED also aims to protect and enhance biodiversity
and ecosystem services, which extends beyond the carbon footprint.
However, there is a correlation between lowering the carbon footprint and
protecting and enhancing biodiversity.

The LEED certification process is rigorous. Getting a building LEED

certified takes time and requires a third-party verification service. It is a
process that requires registration and extensive information about the design
of the building. The fees to apply for LEED certification are non-trivial at
the very low end but can range up to a million dollars for a sizeable project.
In addition to those direct costs, LEED candidates hire auditors or verifiers
and various engineers or experts to support the certification application.
LEED buildings are said to cost slightly more than conventional buildings,
which green building proponents point out can be recouped from lower
operating costs. Over time it is possible that the LEED process will become
the norm, and when all buildings are built to LEED standards there will be
no more cost differential.

LEED certification is based on a point scoring system. The point total add
up determines what certification level is awarded. If the building scores
between 40 and 49 points, it is “certified”. Higher scores can get silver, gold
or platinum scores. The points on the application are distributed between
the following criteria (they add to more than 100):
35 points for climate change
30 points for human health
15 points for water resources
10 points for biodiversity
5 points for the green economy
5 points for community
5 points natural resources

Many people question if it is worth building green buildings if it costs more

money. This quandary is analogous to the question of whether you buy an
electric vehicle that costs 10% more than the internal combustion engine
vehicle. They cost more but once you own them you don't have to refuel
them. The cost of electricity is in most cases less than the cost of the fuel
you would have to purchase. Thus, you spend more upfront but less on the
operating costs throughout the life cycle of the car, similar to argument for
LEED certification and building design in general. In addition, the lower
operating costs tend to make the buildings have a higher resale value.[28]
Greening Existing Buildings
LEED certification has for a long time been focused on new buildings.
However, LEED “EB” is a certification for Existing Buildings that can be
used in the context of retrofits of various HVAC systems and other design
elements of buildings.
Green Building: An Interview with Jacob
Knowles, Director of Sustainable Design, BR+A
Consulting Engineers
David: Hi Jacob, it’s a pleasure to speak with you. You've done a lot of
great work with some of my colleagues at Boston University. We’re
privileged to have your opinions on green building – what are the trends,
where the biggest opportunities might be for those who are trying to
decarbonization their supply chains or get to net zero. From a supply chain
vantage point, the building is just one part of the supply chain. There's
building in almost everything we do. To start, why don’t you tell us who
you are, what you do, and a little bit about your company?

Jacob: David, thank you so much for having me and really appreciate the
opportunity. Hopefully this is helpful for those viewers out there. My name
is Jacob Knowles. I'm the director of sustainable design at BR+A. We are
engineers who design the systems and buildings that ordinarily consume
energy, but we're designing buildings now that have net neutral energy or
carbon on an annual basis. Typically, people think of net zero buildings
being maybe a house or a small eco-center, but we're starting to do that on
the scale of millions of square feet and ultimately the scale of major
campuses and cities. The world is changing very quickly and we're excited
to be working on those kinds of projects. My role in the company is to
manage a team of people that push the envelope on sustainability, energy
and carbon. We have offices all over the eastern half of the US. We do work
across the country and even internationally, focusing a lot on health care
labs, higher education, some office, and some industrial manufacturing. So,
a lot of large technical projects.

David: Wow. It sounds like a big business. If you divide the world of real
estate into commercial, industrial and residential, it sounds like it's more
commercial and industrial. Is that right?
Jacob: We don't do any residential work. Residential is an important part of
the decarbonization of buildings, but it's not what we focus on. We focus on
commercial buildings.

David: Are you working on new buildings or existing buildings?

Jacob: For the most part we do new buildings. But a big focus for
decarbonization and for a lot of our clients too, is renovation and upgrades
to existing infrastructure. So, we do it all.

David: What architectural or building design features yield the biggest

carbon savings?

Jacob: There's really a few major components to decarbonization of

buildings. One thing that people often don't think about is that on day one,
when you build that building, you're basically emitting a bunch of carbon to
fabricate all those materials like concrete and steel, aluminum, glass and all
that go into building the building. The materials supply chain is a major
driver of a building's carbon emissions. Another key component is how
much emissions you are going to have onsite – if you're burning natural gas
to heat your building, then you're creating emissions on site. And a big part
of what we're trying to avoid at this point with new buildings, is to electrify
them so they’re running on electricity and you're no longer producing
carbon emissions onsite. And then the third piece is, where are you getting
your energy from to run the building? Let's say you can transition to an all-
electric solution. Now your power is coming from the grid. Is that grid
power clean or not? If you buy just from the grid, in general, it’s going to
have emissions from the power plants. Most of our clients now are
transitioning to 100% electric at the building and 100% renewable as a
source for the electricity so that they can then be truly carbon neutral in
their operations.

David: Going back to the point that you mentioned at the beginning about
having the embodied carbon in the materials versus the lifecycle operating
cost and power cost, is there any rule of thumb about how much savings
there could be in the embodied carbon versus carbon emitted over the life
cycle of the building?

Jacob: The embodied carbon in a building can really vary quite a bit and
how much it represents of the total carbon emissions for a building’s
lifecycle can vary quite a bit. But a lot of times people think of, just as a
rule of thumb, the embodied carbon could be 20 or more years’ worth of
operational carbon. It depends on the type of building, but just the
embodied carbon alone can be a major chunk of its life cycle emissions. By
and large, if you're going to stick with normal materials like concrete and
steel, if you get alternative materials in the cement of the concrete, you can
significantly reduce the embodied carbon. Or if you get recycled steel or
steel made from electric sources rather than fossil fuel sources for their
manufacturing process, you can generally get to 15 or 20% reduction from
embodied carbon sticking with your concrete steel, the normal type of
materials.

Jacob: There's an exciting movement afoot which is for large high-rise

buildings to transition to mass timber. There are all these new materials –
laminated products – that are available that allow you to do this heavy
timber construction for high rise buildings and meet the requirements for
fire safety or structure. And it's beautiful material. A lot of times we leave it
exposed in the space. It has this benefit to the occupants for biophilia and
wellness. And not only does it reduce embodied carbon, but it actually
sequesters carbon. If you're using a renewable resource, that if they're
sustainably managed forest and you can use that timber for your
construction and then regrow the forest, essentially what you’re doing is as
the tree grows it's capturing carbon out of the atmosphere and then you're
putting it permanently in your building. You're not burning it or
decomposing it. So, you're capturing that carbon and sequestering it into the
building. It's a really exciting frontier on the embodied carbon front right
now.

David: That’s fascinating. My mind was going in the direction of taking the
steel and using green production to make that more environmentally sound.
But you’re talking about the opposite strategy: use the green materials and
make them ultra strong. How do the two really compare in terms of strength
that you mentioned?

Jacob: It's used in high rises and it's amazing. There are a lot of changes that
have to be made in terms of allowing timber to be used in high rise
construction. And many codes have now enabled that. They've got the test
data to prove that wood, if it's thick enough, can basically protect itself in a
fire where it'll char on the surface. But that char will then protect the
structural integrity of the timber, essentially oversize the members enough
that they can withstand that a little bit of loss around the surface. Obviously,
you're going to have a sprinkler system in a large commercial building so
that will manage the fire. And the fundamental thing is you're going to have
enough time for people to get out of the building safely so that meets all
those standards. It's not going to be a one size fits all solution. There's a lot
of study going on right now to see whether we can use mass timber for
laboratory buildings. Laboratory buildings normally have very strict
requirements around vibration control. The size of the structural members,
the beams that hold up the floors of the lab spaces get so large to maintain
that very low vibration that it's starts to get pretty unwieldy in terms of the
floor-to-floor heights and not having enough space for all that extra
structure. So it's not necessarily a solution for everything that people are
exploring, but for residential high rise and office high rise, it's a great fit.
Also for those other buildings where you need to use concrete steel for
more extreme fire protection control or more extreme vibration control and
structure, there are companies that are working on things like that. If you
can heat your steel to fabricate it with electricity rather than fossil fuels, and
if you can get that electricity from renewables, then you can have a carbon
neutral steel. Clams, for example, basically make concrete on the sea floor
at 50 degrees. And they do it in a carbon neutral fashion. So there are ways
in theory to make concrete that aren't high intensity. Normally, part of the
process of making cement is to heat up the materials to temperatures similar
to what you have to heat steel to melt it. So, there's a huge amount of
energy that goes into making cement and concrete. Now they’re working on
alternatives that don't require heating it to 3000 degrees. And you can
fabricate it with low emissions. o There's a lot going on multiple fronts.
David: A lot of companies are kind of out there experimenting with
hydrogen to use as a source of power, maybe electricity to produce some of
these materials. But is there also green concrete, not in the sense that it's
produced by green energy but in the sense that it sequesters CO2? You stuff
some CO2 into it and then it's basically contained. Is that something that's
gaining traction?

Jacob: I have heard of that. I am not an expert on that specific technology. I

don't know if it's the real deal or maybe a little bit of greenwashing. So I
don't want to comment on that and mislead anybody.

David: Let's say that if you're a company– not in the building industry,
you're in some other business and you happen to have buildings – and The
CEO probably tapped the VP of real estate on the shoulder and said “would
you please help this net zero initiative or this decarbonization initiative that
we have in the company?” What would you recommend is worth doing an
assessment on for his benefit?

Jacob: Ultimately it comes down to the specific circumstances of your

project. If you have a manufacturing facility and you need the most durable
materials, you're not going to have a cross laminated timber floor on your
production floor. You're probably going to have a concrete floor. So you
really want to rely on your design professionals, the architectural and
engineering teams, to help guide the process. But you want to make sure
you have team members that are familiar with these issues. It's still a
growing new industry to be designing carbon neutral buildings. And I think
there's a lot of firms that are doing great work, and then there's other firms
that it's not been a focus for them yet. So you want to make sure you build
the right partnership because they can then help guide you to say, okay, this
is the right solution for your application. And here's the types of materials
that are effective in reducing embodied carbon. Or here's the right
mechanical systems that are great at reducing energy consumption and
they're the right solution for your project. And they are going to then know
the manufacturers and suppliers and then you get your construction
manager involved to really look at specific sourcing. Okay, we're going to
use this type of material, and they know the different vendors to bid it out to
for procurement. There's a lot of great expertise out there on the street if
you build the right team.

David: How about heating and ventilation? Assuming heating, ventilating

and air conditioning would be a major component of the operating cost and
power, what types of heating options tend to reduce carbon? I say heating
because I'm sitting in a Northern clime and you are now too, and it's winter
and so my mind goes to heating. But if we're in the Middle East, it would be
air conditioning. So let’s say HVAC (heating, ventilation and air
conditioning).

Jacob: Anytime you're tackling operational carbon in a building, step one is

to reduce the demand for energy. And that comes down to looking at things
like, let's say you have a manufacturing facility or a data center or a
laboratory building. What is the equipment that you're actually putting in?
Can that equipment be more efficient? Or is there a newer product that
doesn’t demand as much energy? So step one is just to say, what is this
building actually trying to do? What's all the stuff that's going in? Can it be
used more efficiently or are there a lot of products out there whether it's
manufacturing equipment or air handlers or data center equipment? The
older models often are far less efficient in terms of the amount of
production output they can achieve versus energy input that they need.

Jacob: Another big factor too, in a lot of building types is the envelope. If
it's an existing building, you want to do an energy audit and identify
opportunities to maybe use air sealing to increase the air tightness of the
envelope on a new building, make sure that it's specified and detailed in the
right way, so that all the insulation is really continuous and doesn't have all
these thermal bridges through it. There's a lot of old envelopes and
buildings where there's literally metal going from inside all the way to the
outside and it's holding all the parts together. All that metal does is make a
big heat exchanger between the outdoors and the indoors, whereas new
envelopes using things like fiberglass will connect to materials so you really
get a continuous installation system.
Jacob: Another huge driver in a lot of buildings is the amount of makeup air
that has to be brought in, whether that's to ventilate for people or to make
up air for exhaust, like in a lab or a hospital, maybe drawing out a lot of
exhaust air and having a makeup fresh air for that. Imagine all that heating
in the winter for cold air coming in or all that cooling and dehumidification
in the summer – a great opportunity for reduction in the demand is to do
heat recovery so you can recover energy from that exhaust air and put that
heat or cool essentially back into the supply of the makeup for the fresh air.
And there are different technologies available to do that. I don't know how
far down the rabbit hole you want to go with that type of technology, but
there's some great technology to capture that energy before it leaves the
building. Let the exhaust leave, remove all the contaminants from the fume
hoods or from your manufacturing process or whatever. Capture the heat,
capture the energy and put it back on the supply side.

David: Are most of these opportunities win-win, meaning that you conserve
energy and reduce CO2 at the same time?

Jacob: I think it's important that when you're evaluating strategies to reduce
energy and reduce carbon, that you think about it holistically, there's always
going to be a long list of strategies to achieve your goal. And if you really
want to be carbon neutral, if you only stop at the things that are cheap and
have a very fast payback, you're not going to get to carbon neutral. So you
have to leverage those things that are cheap and fast payback or even things
that cost less because you reduce the load. Maybe you are putting in
something that demands less energy, but it's also smaller and more efficient.
So it actually takes up less space, requires less electrical infrastructure to
power it. And sometimes there are things that even reduce costs, but you
bundle all those very cost-effective things with the things that have a longer
payback, maybe even things that don't have a payback. Put them all
together as a single financial package that still meets your criteria. That's
how you get to carbon neutral in a financially responsible way. It's kind of a
mind shift from the kind of cherry picking of let's only do the things that
have a three-year or a five-year payback. Anything beyond that is dead. You
have to kind of shift your mindset to this more holistic approach to get to
carbon neutral.

David: Some organizations have signed up for net zero by a certain date.
Just this morning I read that New Jersey signed up to achieve net zero by
2035 instead of 2050. In the big picture, how important do you think green
building are compared to a lot of the other things like electric vehicles for
cars and I guess plastics, plastic waste and stuff like that?

Jacob: There's no doubt we have to “solve” the built environment. The

amount of carbon emissions related to the built environment represents,
between operational carbon and embodied carbon, about 40% of total
global carbon emissions, including some of the horizontal infrastructure. If
you look at buildings alone, it's closer to 30% in total, but still, it cannot be
avoided as a primary driver. It's way up there. And it's a good opportunity
because we have strategies to solve it.

David: In the case of building design, we may have a lot of opportunities

without changing our behaviors. Sounds like that's the key.

Jacob: It's really hard to convince people to change their behavior and their
expectations. If anything, people's expectations are just getting more and
more fussy. Like the “wear a sweater” thing did not go over well. The thing
is, we're not just providing an equivalent product that saves energy. We're
providing a better product that saves energy, so people are more
comfortable. They are healthier and they have better air quality.

David: Love it. And maybe that's a fantastic closing message. Jacob, thanks
a lot for sharing your wisdom and experience with us, and I hope that you
end up with a lot of connections from people who read this and are excited
to connect with you.

Jacob: David, thanks for talking with me.

4.4 How to Access Clean Energy Offsets and
Credits
“Let's say that a grocery store has a decision to make on a new
refrigeration system, and going to ultra-low Global Warming Potential
refrigerant is a costly endeavor. The store could stay with the terrible gas
with the high Global Warming Potential that leaks and ruins the
environment. Or, with carbon finance they can use carbon credits to invest
in the system that uses low-GWP refrigerant and then monetize those
emissions by selling the carbon credits to folks like Delta Airlines, which
plans to go green but needs time to scale up sufficient production of bio jet
fuel. In this case carbon credits are a very efficient way to incentivize both
parties to make environmentally sound investments.”

--- Fritz Troller, Therm Solutions

Carbon offsets and carbon credits provide a way to achieve carbon

reduction, in some cases even if you make no current changes in your
operations. Learn about how they work in this chapter.

The purpose of this chapter is to learn how carbon offsets and renewable
energy credits can help you get to net zero. For many entities, the purpose
of carbon offsets and renewable energy credits is to comply with
governmental regulations. Our context is mostly in the voluntary sphere; we
assume what we are here to do is help you reach net zero and explain in
what capacity offsets and credits might help you achieve your voluntary
goals toward net zero.

This chapter assumes that your primary goal is to see if these offsets and
credits can help you achieve your goal of low carbon emissions or no
carbon emissions, not to help you comply within a specific jurisdiction or a
specific marketplace. That would require determining the acceptability and
the value of your various credits and offsets. The section is more about how
to use them than on legal and technical compliance aspects including third
party verification, certification and auditing process which would make
your application or your financial instrument and your certificate acceptable
to the appropriate authorities.

If you are in a compliance mode within the EU or the national jurisdiction

or subnational jurisdiction, there are methodological requirements for which
you may need economists and bureaucrats reviewing your application to
determine such things as additionality (whether your application or your
planned project would really result in such carbon reductions over certain
periods of time), how it should be scored and grading of your project, as
well as the underlying financial asset on the premise and basis of its
potential for durability in carbon markets, how long the carbon is going to
last, whether the emissions might leak out and at what rate, over what
period of time, and so on. These are just some of the many processes and
requirements to make these instruments tradable.
Definitions
A carbon credit, according to my point of view and for the context of this
chapter (you could look up dictionary definitions and get different
definitions according to what lawyers, bureaucrats, traders and brokers etc.
say) is an authorization or a permission to emit a specific amount of carbon
dioxide or other greenhouse gas. An authorization means it has been
approved by relevant jurisdiction of some kind or a permission, quite
possibly approved by some carbon standards body where one carbon credit
equals one ton metric ton of CO2 equivalent. CO2 equivalent means, as
defined in previous chapters, the amount in tons of greenhouse gases times
that gas' respective Global Warming Potential. So practically a carbon credit
is an authorization to consider that you have effectively removed,
subtracted, deducted or avoided one ton of CO2 equivalent greenhouse gas
emission.

A carbon offset is the compensation of emissions in one place with carbon

avoidance, actual reduction or removal from elsewhere. It is an offset of
dirty for clean. Carbon offsets credit is a financial instrument representing
one ton of greenhouse gas emissions reduction or removal.

A carbon offset credit is a certificate representing that removal of one

metric ton of CO2 equivalent is following the methodologies, conditions
and terms of a certain compliance market, that the amount of removal can
be applied to a carbon obligation. Your carbon obligation might come from
a compliance with a mandatory emissions target or from your voluntary
emissions reduction target. Either way, a carbon offset credit is a certificate
that represents you can do that.

A Renewable Energy Credit is a tradable financial instrument that

represents proof that electricity was generated from a renewable energy
resource and put into the transmission system. Generation is one part of that
requirement and entry into the transmission system is another. However just
because it is generated doesn't mean that it becomes a REC. It needs to be
generated and actually sent out somewhere because there is some amount of
curtailed power in every generation system. And the power that might be
generated but not put into the distribution center would not count toward a
Renewable Energy Credit. Sometimes people talk about renewable energy
certificates. These are, for our purposes, the same thing as Renewable
Energy Credits.

Figure 51 lists several of these definitions in shorthand format for easy

reference.

Figure 51: Working Definitions for Carbon Credits and Offsets

Renewable energy credits and carbon offsets are different in several ways.
RECs (renewable energy credits) come from power generation, whereas
carbon offsets come from any number of diverse ranges of GHG-reducing
projects. Also, RECs are measured in megawatts of electricity whereas
carbon offsets are measured in tons of greenhouse gases avoided, reduced
or curtailed. Finally, RECs and carbon offsets follow different rules for
certification and governance. So, while they might sound a little bit alike,
they are actually very different in several important ways. Hopefully that
will give you some good background for us to go deeper into each of these
and determine whether you can benefit from them.

When carbon credits are auctioned, they generate a revenue which generally
flows from companies to regulators. You could consider that a vertical flow.
In contrast, if you trade carbon offset credits, they flow from company to
company. If it flows from the buying company to the selling company, that
could result in a different financial flow. So just to position it, if you are
buying carbon credits because you are short on your emissions target, for
example, your company would be paying the regulators for those carbon
credits. In the case where you are trading the offset credits, you are
essentially paying another company for the use of that credit.
Carbon Offsets
Carbon offsets are based on the fact that there are certain clean energy
projects going on whose carbon neutral or actually carbon-negative activity
could qualify them for being carbon offsets to GHG emission elsewhere.
These can come from all kinds of different renewable energy, agricultural
and other types of projects based on anything that reduces CO2 equivalent
emissions.

For example, a renewable energy project somewhere that is carbon negative

produces energy while at the same time also produces negative carbon
emissions. For instance, biomass that generates plants and biological life
could be absorbing CO2 as well as used as a fuel. Biogas, solar, wind,
geothermal and hydro power projects sometimes fall into this category,
especially if it is a small hydro project. For example, a run-of-river project
that wasn't there before but the river was there anyway. But now you are
using the river and capturing energy from it. You are doing no harm to the
existing environment, making no change to the existing natural landscape,
yet you are producing clean power with that.

Agricultural projects can also be the basis for carbon offsets if they reduce
methane emissions, for instance. There can be any number of ways that
agricultural projects can reduce methane emissions. Aviation projects that
reduce contrail clouds might count for carbon offset instruments and value
waste management that reduces methane emissions from landfills might
count for carbon offset credits. Carbon capture and sequestration could be
monetized and securitized as carbon offsets. Any energy efficiency projects
that qualify could count as carbon offsets. Afforestation and reforestation
projects that produce plant life that absorbs CO2 could also count as carbon
offsets. These are just a few examples.

Registries list thousands of projects from around the world in dozens of

categories. The potential for obtaining carbon offsets is increasing with the
number of projects. Many of these projects are in less developed areas
where there is more biological and agricultural life offering potential to
harness power from it through clean energy, or where there is a lot of
agricultural activity providing opportunity to do it smarter and cleaner in
various ways. The potential for these counterparty projects is truly
unbelievably large.

That being said, formalizing a carbon offset is a complex process. The

projects that underlie the carbon offset instruments go through a life cycle.
Assuming that you are building a solar farm, you have the project developer
who starts with a feasibility study, then gets the project financed,
commissioned, and operating. That cycle might take years. Meanwhile and
in parallel there is a carbon development activity. That process begins with
a carbon proponent, the entity who is going to apply and take care of all the
relevant certifications. You also have the activity proponent who prepares
documentation detailing what the project is and presents it to an auditor.
The auditor must agree with the methodologies and the documentation has
to go through a registration process with a registry. Only then it becomes a
registered program. This all happens during the financing stage.

The registration process makes the financing more likely. Thereafter during
the commissioning phase of the project there is ongoing monitoring of the
documentation by the auditor to make sure that the actual carbon reducing
or carbon eliminating activity is functioning to the extent that it has been
represented previously in all the paperwork. Then finally, a carbon
standard, which is an organizational body that monitors and certifies the
methodology, approves the project based on the integrity of all the previous
steps. The carbon standard registers the offset credit based on the standards
and requirements of carbon neutrality, reduction or removal.

In parallel to that there is a carbon monetization process, which determines

who the counterparty buying the credit would be, which would occur during
the feasibility study and financing stages. This involves emissions reduction
program negotiation, sometimes with institutes like the World Bank, for
example, that would determine where that instrument would reside.
Finally, when the project is up and running producing the negative GHGs,
the carbon credit is delivered to the buyer.

As you can see, the matching of the buyer with the project happens quite
early in the project. And then there is time between when the offset is
agreed to and when the results start to come in. This means that an offset,
for practical purposes, matures over a long time. So, you are not just buying
offsets for today's use. You would engage in an offset purchase for a future
stream of offset credits that would apply years into the future. This might be
very relevant if, for example, you are a petrochemicals company and you
can predict that your core business is going to involve a lot of carbon
emissions. And the only way that you are going to reach carbon net zero is
by buying carbon offsets over an extended period of time. In this case, you
might engage very early on with a few projects; you might evaluate,
compare and eventually negotiate them. Figure 52 shows how buyers and
sellers benefit from carbon offsets.

Buyers can use the credits to contribute toward mandated carbon

requirements. If they are under an obligation or a regime where they must
reduce carbon emissions by a certain amount, and they have not really
achieved that within their own operations, they can buy the credits to
support the offset of their projected carbon emissions.

They can also buy these to enhance their progress toward voluntary carbon
reduction targets. If your CEO has set a target of net zero by some date, and
you do not believe that you can achieve the net zero target by that date, you
may be able to purchase carbon offsets as one way of closing the gap.

Finally, they can use the carbon offsets to reduce carbon taxes. You would
of course need to check with the authorities to determine whether that is
valid or not, because obviously that is a juridical, tax and fiscal question
which would depend on the qualification criteria of the relevant tax
authorities.

Figure 52: Benefits to Buyers and Sellers of Carbon Offsets

For sellers, a carbon offset can be a way to reduce the investment in a clean
energy project. A project might cost a billion dollars, but you can offset that
with a revenue stream from the carbon offset which effectively reduces the
cash outflows, thereby increasing the net present value of the project.

Offsets might help get your project to a breakeven point earlier and then
continue to have revenue inflows from the carbon offset for a very long
time. You might also get from this an incentive to engage in profit from new
clean energy technologies.

If you are a seller, an offset could be just a one-time transaction. But it

could also allow you to become a developer of renewable energy
technology and establish a new business model selling more carbon offsets
to other buyers. That might encourage you to invest more in various
variations and permutations of your core competence, which accelerates the
pace of renewable energy technology and may lower the cost for others.
Thus, both buyers and sellers can benefit from these carbon offsets in
several substantial ways.
How to Access Carbon Offsets
One way to access carbon offsets is through emissions trading systems
(ETSs) in about 15 major city-state combinations in ten countries (either the
cities or the states have ETS's). The carbon price in euros per metric ton of
emissions traded have ranged from a low of $55 a metric ton to a high of
$90 a metric ton circa as of 2022.[29] Notably, the United States does not
operate a national emissions trading system. There are several local or
regional trading bodies and organizations or agencies. However, American
companies can obtain carbon offset credits through other emissions trading
systems like the one in California.

California has introduced aggressive carbon mitigation programs that affect

400 to 500 of the largest greenhouse gas emitters in that state, which are
mostly power fossil fuels and industrial companies. These entities must,
under the legislation, progressively reduce their emissions to 40% below
1990 levels by 2030 and to 80% below 1990 levels by 2050. The pollution
targets consist of 71% reduction in air pollution and 85% reduction in
greenhouse gases, a 94% reduction in gas consumption and on the other
side, 4 million new jobs and $200 billion saved in health costs.[30]

The California Air Resources Board, or CARB, offers allowances for

carbon usage through a reserve sale. CARB offers a reserve sale every year
and provides allowances to the carbon producing entities which are
primarily power utilities at two tiers of prices. The first tier is called Tier
One, which is for fuels that are refined in conventional methods including
sugar and starch-based ethanol, biodiesel, renewable diesel and natural gas.
Tier Two concerns the purchase and burning of fuels that involve novel or
advanced production methods such as cellulosic, alcohols, biomethane and
hydrogen. As you can see from the chart, the reserve price, which is the
price per metric ton of carbon ranges from $40 to $70 a metric ton[31] for
regulated entities under California's Carb Reserve auction.
If a project has already been approved, either regulated or unregulated
entities may identify carbon offset credit opportunities through a carbon
registry of projects. There is a regulated element to this wherein regulated
utilities can buy the offsets of regulated entities; there also exists a registry
of projects where unregulated entities can identify potential carbon offset
credit opportunities.

So going back up to a high level, another way to obtain carbon offset credits
is through emissions trading systems, and California offers a big one.

Aside from emissions trading systems, of which we have just explored, a

large number of them, especially the EU and California ETS as well as 10
to 20 or so other countries and cities that offer ETS's, have voluntary carbon
markets. This describes where private organizations such as Verra Gold
Standard Climate Action Reserve and the American Carbon Registry
document the methodologies and requirements of the rules to regulate and
monitor project development that reduces GHG emissions. These providers
specialize in industries and certain types of projects. Verra tends to
specialize in biodiversity standards; aviation carbon reduction tends to be
largely handled within the American Carbon Registry. If you are in
agricultural projects, you may want to particularly look to the Climate
Action Reserve, which also serves the California Compliance Offset
program. Depending on the nature of the project involved and the
geography in which you are working, you might go to one carbon registry
rather than the others.

The voluntary carbon market has increased in size over time and
represented about 139 million tons of CO2e in the first half of 2022. Four of
these agencies – American Carbon Registry, the Climate Action Reserve,
the Gold Standard and Verra, previously also called the Verified Carbon
Standard – issued 352,000,000 metric tons of carbon offset credits in 2021.
These organizations could be places for you to obtain offset credits as an
alternative to getting them from an Emissions Trading System (ETS).[32]
The Price of Carbon Offsets
The price of carbon offsets is a function of the region and the fundamentals
of the underlying project. Depending on which of these entities you go to,
the region would in some way characterize the price dynamics. Of course,
supply and demand are a major determinant of price. Which types of
projects are there, how much demand is there for them, and which market
are you in? Those variables would all have an impact on the price per
metric ton CO2 equivalent.

Another factor is the conservatism of calculations. How aggressive or

conservative the forecasts are often determines the credibility and the
quality of these carbon offsets. If the projections have been conservative
and the methodologies are very pragmatic and realistic, the quality is then
estimated to be higher than where they are somehow more aggressive or
risky and hopeful about the carbon emissions. The more conservative the
project the higher the price of the respective carbon offset instrument.

Additionality is also very important in determining the price of carbon

offsets. Additionality means the carbon reduction is in addition to what
would have happened anyway. In many cases these carbon reduction
projects may have happened anyway, which would raise the question about
why the project should be subsidized or whether the seller be allowed to
monetize it with a carbon offset. If the additionality is clear, the carbon
reduction can be very monetizable and high quality because it is more likely
to get approved by the governing body.

Furthermore, the degree of displacement affects the quality of the

underlying instrument, which affects the price. Displacement refers to the
shifting of CO2e from one place to another. If your project reduces carbon
but creates extra carbon elsewhere and you are not mentioning that other
place where it is being created, that will make the instrument less likely to
get approved and would command a lower price point in a trade.
Counterparties might be at risk for future claims if it is not a legitimate
carbon credit and therefore, they might end up having to write it off or “dis-
consider” it, by which I mean not count it against their carbon emissions.
That would be a risk factor for a buyer of that carbon offset and would
reduce the price of the carbon offset relative to others that are certainly
100% sure not to displace or shift carbon from one place to another.

A final factor that notably drives the price of these carbon offsets is
permanence. This is basically how long will the carbon stay avoided,
eliminated or reduced. In many cases the elimination of carbon is a result of
changing the form of the carbon dioxide or the GHG equivalent, but
changing the form of it is not always a permanent solution – sometimes the
new form reverts to the original form over time. Depending on the physical
and chemical characteristics of what is happening, that might end up
releasing a substantial amount of the carbon that was originally sequestered.
As an example, if you bury the carbon in a salt cavern but eventually the
carbon makes its way to the surface, there is leakage out. Let's suppose, for
simplistic purposes, that the leakage is 1% per year, then in 100 years all the
carbon will leak out of the salt cavern where you have buried it. You can
perhaps imagine a situation where the leakage is more substantial. Let's
assume it leaks out at 50% a year so it is only stuck in the ground for two
years. In that case that carbon offset would probably be difficult to sell to
anyone because by the time they acquire it, it would pretty much start to
dissipate and not worth anything.

All this is to say that the price of a carbon offset is a bit tricky to calculate
and it is crucial, if you are getting into carbon offsets, to evaluate these
factors from all different angles.
Renewable Energy Credits
A Renewable Energy Credit, or Renewable Energy Certificate, represents
green electricity. Renewable Energy Credits are tradable financial
instruments that represent proof that one unit of electricity was generated
from a renewable energy source and put into the transmission system.
Credits are effectively synonymous with certificates, although a certificate
is actual tangible proof.

A Renewable Energy Certificate is composed of many data elements or

attributes to prove the existence of the origin and authentication of the
renewable energy system that produced it. There is a certificate data or
serial number or categorization of the certificate. And the type of renewable
fuel and its source. The source will often name a specific renewable facility
and the date and time when the project originated as well as the birth date of
the certificate. Other information about which interconnecting utility or
utilities were involved in the transmission of that clean carbon product from
its origin to its consumption destination, and whether it relates to any
renewable portfolio standard, will also be in the data set. Eventually this
type of information will be included in or codified and included in
blockchain, although we are not there yet.

Many renewable energy projects qualify to support the creation of a

renewable energy certificate. Any kind of project that is renewable in
nature, solar, wind, geothermal, biomass and fuel cells would mainly
qualify for renewable energy certificates. There are caveats on some of
these and you would have to investigate the details by type of project if you
were in the market for RECs. For example, in the case of fuel cells there are
different fuels used in fuel cells. If the fuel used in a fuel cell is clean, it
would be more likely to result in a REC. There are some less clean fuels
used in fuel cells. Hydrogen could be green but it could also be gray or
blue. Hydropower plants may not all qualify for the REC, especially large
hydro power plants which might have been built anyway and are
commercial in nature like the Hoover Dam or some other huge hydropower
plant. But if there are small hydropower plants such as run-of-river plants
which capture energy where it was never captured before and probably
would not have been captured otherwise, they probably do qualify for
RECs.
How to Access Renewable Energy Credits
In the United States, RECs originated from renewable energy portfolio
commitments. Every state has regulatory authorities for its power
generation and most of these have applied various renewable energy
portfolio standards to the utilities. The renewable energy portfolio standards
specify what percent of power from that utility needs to be drawn or
produced from renewable resources and those targets keep on rising. Figure
53 shows their rise over time for all the states with renewable energy
portfolio standards.[33]

Figure 53: Renewable Energy Portfolio Percentages by State and Year

Source: Author’s analysis of data from Berkeley Lab.

If a utility fails to meet its percentage renewable target, it could also

theoretically buy offsets or even renewable energy credits from other
sources to make up the difference. So power producers and power buyers
may both find RECs helpful in meeting their renewable energy portfolio
standards. If they are going to do that, those RECs need to go through a
third-party verification process and need to be tracked in a registry. And we
might see the same kind of tracking and verification process emerge for
hydrogen as well as power, including verification that it comes from a green
source as opposed to a gray or black source like oil or coal. Power buyers
may be able to benefit from RECs as well. Industrial power buyers may opt
to purchase RECs from a broker or an aggregator to satisfy their carbon
reduction targets or mandates.

Many industrial producers in the United States do not fall under any
requirements to reduce their GHG emissions. But some do, especially those
in heavy, asset intensive and power intensive industries such as cement,
steel and glass or petrochemicals, oil and gas. Obviously then you do
probably fall under some reporting requirements, even if not carbon
management targets and standards. Commercial and residential buyers may
opt to purchase RECs. You may have even gotten a mail if you are on
certain American mailing lists thus receiving some promotional materials
from your utility offering to sell you green energy at a premium. This is
completely voluntary and completely up to the individuals now, at least in
the United States. Consequently both power producers and power buyers
may eventually, in certain conditions, find RECs to be helpful in meeting
their own voluntary or mandated carbon reduction targets.

Currently in the United States, there is no national marketplace for RECs,

but they do occur frequently in bilateral and private transactions. There are
local and national registries as well. They are also called attribute tracking
systems. Should you want to transact RECs, you might contact the local and
regional registries that facilitate direct transactions. These include New
England Power Pool Generation Information System (NEPOOL GIS),
NYGATS (New York Generation Attribute Tracking System), Michigan
Renewable Energy Certification System (MIRECS), Nevada Tracks
Renewable Energy Credits (NV-TREC) and Midwest Renewable Energy
Tracking System (M-RETS). Those are just a few examples. In addition
there are brokers, agents and other intermediaries as well as trading
exchanges.
The Price of RECs
The price of RECs, like the price of offsets, is highly variable over time and
by the underlying asset characteristics. But the price of RECs in the United
States is more stable and consistent than the price of carbon offset credits.
The Green E-certified REC prices between May 2020 and March 2022
varied from about $1 to $7 per REC. RECs are classified by the issuing
utility by the year or term.[34]

Solar Renewable Energy Certificates, or SRECs, are a specific type of REC

that occurs in states where the states have set a specific solar energy set-
aside within their renewable energy portfolio requirements. If the state has
said that the utilities must have a certain percentage of solar, that creates
this marketplace for SRECS which are available in those states. The date of
issuance of the REC and the date of maturity of the REC have a lot to do
with the value of the REC. The date of issue and the cash flow associated
with it will be driven by the amount of periods of income that can be
attributed to the REC.

In any state where there are major new capital projects for renewable
energy, for example offshore wind development, those can rock the boat in
terms of the REC price. A megaproject can change the dynamics of price
for the RECs. If there are only, let's say twelve, wind farms that are
contributing to RECs right now in a small state, a brand new one will dwarf
all the others having an impact on the REC prices in that state. So projects
like large offshore wind projects can noticeably change the REC index and
REC price for a specific date and year.
Using Carbon Offsets: An Interview with Fritz
Troller, CEO, Therm Solutions
David: Hi Fritz, it’s a pleasure to be with you and to spend some time
talking about carbon offsets and credits. You're a longtime friend and also
the CEO of Therm Solutions. Why don't you briefly introduce yourself and
Therm in the context of carbon offsets and credits?

Fritz: So, first of all, thank you, David, for including me. Appreciate the
invitation. I'm Fritz Troller. I am CEO and Co-founder of Therm. Therm is
a developer of carbon credits loosely around the building space. We're about
two years old. We have about 600 projects that we're developing at this
point. Our goal is to bring meaningful monetization for environmental
attributes so customers can accelerate their capex and reduce their
emissions.

David: Wow, that's a whole lot of really good words in only a few
sentences! Let me try to pick on one of them: carbon credits. I guess that's
two words. What are they? How do people obtain them? What are they
good for?

Fritz: In North America there are two categories of carbon markets. One is
the compliance market, and one is the voluntary market. The compliance
market exists in three places, now: California, which is CARB [California
Air Resource Board], RGGI [Regional Greenhouse Gas Initiative] which is
the New England states, and just recently, the country of Canada has now
enacted the OBPS [Output-Based Pricing System] which is a compliance
market in Canada. Underlying all that is a voluntary market. The voluntary
market is unregulated and it is managed customarily by a series of registries
and verifiers: registries that hold methodologies off ISO [International
Standards Organization] standards that developers like us need to follow,
and a series of verifiers who do third party verification against ANSI
[American National Standards Institute] and ISO standards to verify that the
engineering work and the actual application follows the methodology and is
credible.

David: Fantastic. Very interesting. What is a “developer?”

Fritz: We're an engineering firm. We use math and science to figure out, in
our case, avoided emissions. As an example, if a grocery store, for example,
is going to be changing the refrigeration system, our role is to look at that
refrigeration system and profile a baseline. What kind of emissions does
that refrigeration system give off in terms of leakage of bad refrigeration
gas for the environment? And then what would the new system produce in
the same scenario? And then we must do a ten-year sources and sinks kind
of calculation behind the scenes to figure out what the avoided carbon
dioxide emissions would be.

David: And what is a “verifier?”

Fritz: Verifiers act as a third-party independent check on all the data.

Verifiers are generally also engineers and they must follow ISO 14060,
which is a very specific set of processes. They actually do physical site
visits to verify and validate that not only the calculations and the
engineering algorithms are done properly, but that the equipment or change
of state actually occurred. So that could include things like physical site
visits to, in our case, buildings across North America, or it could be, in the
case of forestry credits, walking a forest and looking at the different
portfolio of trees and the topography.

David: Are you functionally acting as a consultant to the companies who

are considering these retrofits and energy credit programs that would
generate carbon credits?

Fritz: We're a little different. We take a position in the produced carbon

credits. We take a portion of those carbon credits. We want to be aligned
with our customers’ goals. If their goal is to maximize the amount of
monetization, i.e., the metric tons avoided, then we take a portion of those
metric tons avoided. We invest our own money into the verification,
validation and registration process. Our reward for doing that is a portion of
the carbon credits that are produced.

David: Fascinating. Who would be the first point of contact for a company
that just made a commitment to net zero and they want to buy carbon
credits?

Fritz: The carbon credits may not be the first place where they'd stop. They
might say, look, there are improvements we can make in our own
efficiency, in our climate efficiency, and certainly you want to go on the
road of those investments in order to become more efficient, more climate
efficient. But if in the journey of getting to that ultimate efficiency and
climate neutrality, there's a gap because they can't get to carbon neutrality
immediately. Take the example of Delta Airlines, for example. You can't
burn e-fuel today. There's just no viable quantity out there. Over the next
ten to 15 years, we're very hopeful that that will change, and they can get to
a much lower carbon footprint by using these kinds of advanced
technologies. But today they can't. So in that gap period, the carbon finance
kicks in and they buy carbon credits either through an advisor or a broker.
And the value of those carbon transfers to somebody who can make a
climate impact today. So carbon credits are really just the ability a private
market met for the transfer of capital to climate impact that could happen
today.

David: Can people say, I need a hundred thousand, and click the “buy”
button? Are they more like one-off custom transactions?

Fritz: Yes and no. It's an environmental commodity like LCFs (Low Carbon
Fuel Standard) and RINS (Renewable Identification Numbers). RINS are
more applicable to things like natural gas, while LCFS applies
predominantly to gasoline and diesel.

David: You started off by saying that there are regulated markets and then
there's private markets. Does that mean if you live in those or operate in
those places, you must use local credits?
Fritz: Let's take CARB, for example, which is California. The California
Air Resources Board set up a regulatory market, a compliance market. And
what they do is they give allowances to high volume polluters like the
utilities, for example, SCE, Southern California, Edison or PG&E, Pacific
Gas & Electric, those kinds of utilities. And every year they ratchet down
the amount of emissions that these utilities are allowed to put out. So what's
tradable is those folks who are doing better than what their allowance is,
they can sell those allowances to the polluters like the utilities that are doing
worse than their allowance. I'm trying to boil it down to something
digestible. That's basically the idea. And the market comes when folks are
either above or below those allowances and then they trade accordingly.

Fritz: Okay, very interesting. Can companies just buy their way to net zero
using offsets? That's easier than trying to pare off 1% here and 5% there and
get to 100, right?

Fritz: We look at it a little differently. It's an effective use of capital in the

market, it's pushing capital to where impact can happen more expeditiously.
I'm of the belief that climate change is something we can't push off many,
many years into the future. It just isn't viable to do that. There's a climate
emergency and again, let’s use an example of the airlines where they can't
yet find a way to produce enough e-fuel to satisfy the current need. What
the big airlines can do is transfer capital in the form of buying carbon
credits to folks who can do those kinds of projects today. Let's say that a
grocery store has a decision to make on a new refrigeration system and
going to ultra-low Global Warming Potential refrigerant is a costly
endeavor. The store could stay with the terrible gas with the high Global
Warming Potential that leaks and ruins the environment. Or, with carbon
finance they can use carbon credits to invest in the system that uses low-
GWP refrigerant and then monetize those emissions by selling the carbon
credits to folks like Delta Airlines, which plans to go green but needs time
to scale up sufficient production of bio jet fuel. In this case carbon credits
are a very efficient way to incentivize both parties to make environmentally
sound investments.
David: That's really interesting. So are most offsets from capital
investments like you just described, or are they from operating? I'm
picturing two scenarios. One is the situation you described where a
company makes an investment to get down to a low-GWP refrigerant. The
other situation is like an offshore wind farm that generates green power and
it already has a net zero carbon impact. Is that wind farm maybe going to be
selling credits?

Fritz: Yes, they are credits in a different form. Frequently renewable energy
produces something called a REC or Renewable Energy Credit, which can
be in the case of wind turbines, as you described, it can be solar panels.
When it's solar panels, they're called an SREC, a Solar Renewable Energy
Credit.

David: Fantastic. There's a REC and an SREC market which is separate

from the offset market, is that right?

Fritz: That's right.

David: Okay. How much do RECs cost?

Fritz: A REC is actually a megawatt hour of renewable energy. So when we

were talking about carbon credits, which is a metric ton of CO2 avoided, a
REC would be a megawatt-hour of renewable energy. And there are two
answers to your question about how much this is worth. In the marketplace
if a REC is sold in a state that has a Renewable Portfolio Standard (RPS),
and there are different Regional Transmission Organizations (RTOs) like
PJM and the Midwest and the Mid Atlantic, those states all have Renewable
Portfolio Standards. And Renewable Portfolio Standards mean that they've
made a commitment to a certain amount of energy that must be in the state
and that has to be renewable. So when you have an RPS, as an example, a
little bit dated, the average value of a REC or an SREC in those states might
be $10 or $20 per REC or per hour of energy. In states that do not have an
RPS, which again is akin to the voluntary market that we were talking about
before, in those states, it's a little bit less. It's roughly speaking between $1
and $2 per megawatt hour.

David: Interesting. And then for the carbon offsets. Would that have kind of
a standard price per CO2 equivalent avoided?

Fritz: That's right. There's a big variance in that. Quality means a lot in that
category, so the range can be anywhere from $2 a metric ton of carbon
avoided, all the way up to $20 per metric ton avoided. There's another
category of carbon credits for either sequestration or carbon capture, and
those numbers are massive. So those could be $200 to $400 per metric ton
of CO2e avoided. The reason they're so high is it's very, very expensive to
pull carbon out of the air and then jam it into the earth. There is very little
capacity to do that. The most famous capability is in Iceland. The reason it's
in Iceland is because it's very energy-intensive, and they can use thermal
energy, which in Iceland is right below the surface, to boost energy and
suck carbon dioxide out. To give you an idea of how precious these metric
tons are, I gave you an example of a grocery store. A grocery store project
that we talked about before with a refrigeration system would produce
about 20,000 tons of metric carbon equivalents. The biggest carbon capture
facility in Iceland for a year can only do 4000 tons. So those tons are very
precious. And there's more of that going on. That's the moonshot that we're
working on.

David: Why wouldn't everybody go with the cheaper ones? You mentioned
the word quality. In what sense is quality relevant here?

Fritz: There are two components of quality. One is permanence. Buyers

look at carbon credits and say, how permanent is this avoidance action? In
the case of forestry, for example, there are some challenges with forestry
because the world is getting hotter, and you can have a drought, you can
have a fire, you can have pestilence. They have to put different mechanisms
in place in order to assure permanence. So that's permanence. The second
most important quality component is additionality. Additionality is: would
this have happened without the incentive anyway, perhaps because it's
required from a regulatory standpoint? In other words, California says you
have to do this, or you have to do that. And is the incentive actually making
a difference? The last part of additionality is if it's already common practice
in the industry to do whatever this carbon credit produced, then that
additionality can be questioned and the quality then can be less as well.

Fritz: There are other attributes, too. Another one is location. Many
European buyers say they have operations in the United States, so we get
questions all the time for [US credits]. They say “we have 24 buildings in
the state of New York. I need 120,000 carbon credit metric tons in the state
of New York,” which is very geographic specific. And that's difficult
because many of the carbon credit projects, in fact, 82% of the of the
projects in the world are going on outside of North America. So it's small
pickings when you're trying to figure out how to offset based on the
locations you're in.

David: You have really provided very insightful and useful information for
anybody thinking about how to get to net zero. You’ve laid out a nice
baseline of information for people to work with, and I'm sure that they
would be well advised to consult you and check out Therm Solutions.
Thank you very much for your advice and insight and for joining this
fireside chat.

Fritz: Thank you so much, David.

5 How to Reduce Scope 3 Emissions –
Introduction

Section 5 guides you to Scope 3 emissions reduction opportunities, which

stem from emissions produced by your customers using your product or
service as well as your suppliers and other trading partners. This section
helps you design products and services to minimize lifecycle carbon
footprint, manage product lifecycles to minimize CO2 footprint, structure
a supply network that minimizes CO2, and incentivize supplier and
stakeholder collaboration.

This section will explore how to identify scope 3 carbon reduction

opportunities. It is divided into four topics.

The first topic is on how to design products and services to minimize

lifecycle carbon footprint. Product lifecycle theory dictates four stages to a
product evolution: introduction, growth, maturity and decline. CO2 can also
be added to that list of parameters which are actively managed within the
framework of the product lifecycle. That is about how to deal with end-of-
life recycling and reuse opportunities, as well as how to reengineer
packaging to lower carbon footprint once the product or service is in your
customer’s hands. And it is about achieving carbon reduction by designing
products for lower carbon emissions throughout the product life cycle.

The second topic is about how to reduce carbon by adjusting product

portfolios to minimize carbon dioxide emissions. The classic Boston
Consulting Group growth-share matrix categorizes business units according
to their growth rates and their market shares. Depending on the quadrant,
businesses are considered dogs, stars, cash cows, or “question marks.” This
classification scheme can also be used to strategically shift higher-carbon
businesses and product lines out, and lower-carbon business and product
lines into the prime positions.
The third topic is about how to structure a supply network to minimize
carbon footprint. It will integrate carbon into vertical integration decisions
and joint venture decisions, including contracting decisions regarding
relationships you sometimes outsource. It will also look at how virtual
business models or other hybrid business models can affect carbon footprint
and think about what kind of decisions can reduce carbon footprint at your
suppliers.

The fourth topic looks at how to incentivize supplier and stakeholder

collaboration. The first part of that will deal with how to integrate carbon
into preferred supplier programs. The second part will investigate how to
penalize suppliers for non-compliance with your expectations, mandates or
requests, and the third part is on how to keep suppliers honest.
How to Design Products and Services to Minimize
Lifecycle Carbon Footprint
There is a tremendous opportunity to design products and services for
minimal carbon footprint throughout their lifecycle and particularly at the
end of life. End-of-life is often not considered at the design stage because
its financial impact on net present value is frequently negligible. However,
the carbon impact of end-of-life disposal can be significant.

Products, services and solutions can be designed for low-carbon lifecycle

using a tool called House of Quality. CO2. The original purpose of this tool
was to design products and services so they meet customer expectations yet
do not exceed the expectations, in essence to maximize customer-perceived
quality at the lowest cost. The House of Quality design allows you to see on
the left-hand side the customer attributes, which is what the customer
wants, and the engineering characteristics which yield those attributes on
the top.

The concept of the House of Quality is to examine this matrix of attributes

and engineering characteristics in order to figure out how to best meet those
expectations. CO2 can be integrated into this tool as a customer attribute.
How to Manage the Portfolio of Products and
Services to Minimize Lifecycle Carbon Footprint
As mentioned, the growth-share matrix was introduced by Boston
Consulting Group, which was designed for managing a portfolio of business
units, can be applied here to prioritize carbon reduction by product line or
business unit.

By adding carbon as a criterion in the growth-share portfolio, carbon-

sucking businesses, product lines and products can be nudged out of “star”
positions and into “dog” positions, thereby rotating them closer to exit from
the portfolio. In contrast, low-carbon businesses, product lines and products
can receive extra investment to promote them into “star” positions, making
them more central actors in the portfolio.
How to Source to Minimize CO2 in Global Supply
Chains
Another aspect of managing scope 3 emissions currently has to do with how
much you choose to vertically integrate activities in the company, and how
you may be able in some cases to claim lower carbon footprints for
decoupling from carbon-producing activities. The framework is that one
tends to outsource things if you have a low risk of outsourcing and a low
advantage to making it in house. If there is also a risk factor to outsourcing
it, you will be more inclined to make rather than buy. If you fully integrate,
you have full control over the carbon emissions in the entire value chain.
You also have full responsibility for them because they are not your
suppliers’ emissions anymore. They become yours. So companies could
make strategic choices within a value chain framework that affect their CO2
footprint.

We will also be looking at how to integrate carbon into preferred supplier

programs. Traditionally, supplier scorecards have categories and
weightings: quality ratings, on-time, cost ratings, service ratings and so on;
these sum up on a weighted average. Carbon needs to be given weight. This
chapter will explain how to update and adjust scorecards for vendors to
consider carbon footprint.
How to Incentivize Supplier Collaboration
In this section we will also be discussing how and when to penalize
suppliers for non-compliance. Let's suppose the declared net zero target is
2040 and you want your suppliers on board to help you get there. Not only
do you want to incentivize them via the scorecard and the bonus points for
doing well, but you may also want to penalize them for non-compliance
with your own CO2 footprint objectives. If you do that, there are two
dimensions to consider. One is the so-called carrot versus the stick, and the
other is soft versus hard ways of getting what you want done.

If you think about those different dimensions, what it does is to lay out four
options. One is you could mandate that your suppliers achieve certain
carbon footprint results, or else you will terminate their contract. In other
words, you could choose to boycott those that do not have certain carbon
reporting or carbon results that you want. Investors have been doing that.
Alternatively, you could set up various collaborative initiatives with them to
achieve carbon reductions. Or you could take a soft stick approach, one of
which I would say is “shaming.” One of the carbon tracking NGOs used to
put out a list of the dirtiest polluters. You could do the same thing in your
company. You might say we a re not going to cut you off as a supplier but
we are going to publish your carbon footprint, or perhaps in some other
way, such as not issuing a press release this year saying that we are proud to
associate with you. There is a range of carrots and sticks that you can use to
deal with suppliers who are not on the same page as you regarding the CO2
agenda.

We will be exploring how to keep suppliers honest with their carbon

footprint initiatives and their reporting. In the absence of verification,
suppliers could report anything to you, which is one of the problems that
has occurred, with self-reported metrics from “nth level suppliers.” Let's
assume that you are making sneakers. The sneakers use fabric which comes
from Asia, farmed somewhere in China, woven in Vietnam and then dyed
in India. At the third level of farming, it is very difficult to verify any
specific carbon footprint practice. If you send out a voluntary survey you
can use whatever they say, but who knows whether it is right or not? That
leaves the question, how do you verify the supplier footprint? There are a
number of approaches presented here. There is obviously voluntary
disclosure; part of that may involve reading their sustainability report if
they publish one. Publicly held companies increasingly publish them,
sometimes due to mandates and government requirements, other times
voluntarily. It might also be part of their tax requirements to report such
information, which you would look at. There are, in some cases, green
certificates, especially if it is a large volume. You could check those out and
make sure they are verified by an independent third party, especially if it is
a certificate and not a renewable energy credit which should be verifiable
on its face. At a further level of verification, you could use blockchain
technology to make sure that the product and service or material is indeed
processed in the way that the supplier claims that it is. There are also
verification agencies, standards and bodies that conduct verifications for
these things.

Here we conclude the quick overview of the scope 3 chapters. I am excited

to dig further into these topics with you so let’s get into the first topic in the
upcoming chapter – how to design products and services to minimize
lifecycle carbon footprint. In that chapter, we will examine the design
aspect, of which I have already given a quick overview.
5.1: How to Design Products and Services to
Minimize Lifecycle Carbon Footprint

The earlier in the design cycle that you think green, the more leverage
you have over the carbon imprint throughout the entire lifecycle of the
product or service. This chapter teaches techniques for low carbon or zero
carbon product design, production planning, manufacturing, distribution
logistics, transportation and field service, as well as recycling, reuse or
replacement and return. Take advantage of the huge leverage effect from
starting early in the life of the product!
Introduction
This chapter will provide a net zero design road map and introduce tools to
help you design for low carbon product manufacturing or production, low
emissions distribution, low carbon operation during the life of the product
or service, low carbon maintenance and serviceability, as well as low
carbon disposal.

When you begin looking at how to create a product at the ideation, creation
or prototyping stage, every decision should keep the entire product lifecycle
in mind. This is true not only for carbon, but for various aspects of
customer satisfaction, economics and so forth. It is all too easy to conceive
of a prototype and launch a product without considering end-of-life
concerns.

There are six major gateways along the road to the end of life, as shown in
Figure 54. In the design phase you need to anticipate, manage, measure and
reduce the carbon footprint at each of these life stages. This is practically
from cradle to grave if you consider the cradle being design and disposal
being the grave.

Figure 54: Net Zero Design Roadmap

Designing for Low-Carbon Products
Let's start with designing for low carbon products. The objective is to
embed a process into the design cycle that facilitates planning and cross-
functional communication during the design process. This is to ensure that
whatever ideas you have and whatever needs to be evaluated or considered
across an organization, there will be a platform, a framework and a
methodology allowing people to speak the same language as this discussion
ensues. What you also want is a method or framework to foster creativity,
brainstorming and group thinking. Creativity is essential to eliminating the
carbon footprint, especially when you are anticipating future stages. It is
impossible to anticipate everything that will happen in the future, given that
different actors are involved in different stages of the life cycle. Production
people are involved in the manufacturing stage. Logistics and transportation
people are involved in developing a supply chain forward. Repair, field
repair and service people are involved in field operations. There are other
people who are probably not in any way connected with your organization
but who will manage the disposal at the end of life. You need to creatively
connect with those people. It helps if there is a platform from which you
can introduce the concept and on which you can talk about the same
concepts with a common language. What we are pursuing is to frame the
economic, technological and organizational choices about which the
discussion ensues.

The REVchain™ product design process borrows from a concept used in

total quality management called the House of Quality.[35] It is adapted here
for low carbon product design and involves six steps. The first is identifying
the objectives and quantifying the objectives. The second one is identifying
the engineering characteristics that can be put in place to achieve those
objectives. The third is evaluating the interrelationships between those
objectives and the engineering characteristics. The fourth is undertaking a
competitive assessment which explains where your organization sits relative
to others along those important dimensions. The fifth is defining and
evaluating technical choices. And the last part actually puts numbers to the
project and comes up with a weighted score. These are summarized in the
illustration in Figure 55 and there is a template in the learning management
system for you to use.

Figure 55: Illustrative Net Zero Product Design Process for a Passenger Car

In the House of Quality framework the objectives have traditionally come

from the customer, consistent with Total Quality Management philosophy. I
have added secondary and tertiary objectives to this chart for the case study
example here. In a net zero project, low carbon needs to be embedded in the
primary, secondary and tertiary objectives. If the primary low carbon
primary objective is to be ecological, a secondary objective might be to use
clean fuel, and the tertiary objective would state the attributes of clean fuel
– does it mean it has no odor? a clear color? no fumes? or safe to touch?
This involves a recursive process – you drill down to the tertiary
designations, then go back up to the secondary and maybe primary
objective until all the objectives are clear and consistent. Subsequently you
assign a relative importance to them, a percentage weighting. We are going
to use those weights later. This can be quite difficult and challenging, but
really important because if you do not say how important something is
relative to something else, you will have challenges and conflicts in the
design process of which you will have no way of reconciling.

The second step is to define the technology and engineering options. In this
case, if you are talking about a car and low carbon, the relevant engineering
characteristics might pertain to the engine and the drivetrain. When you
think about the engine, you might have a lot of choices to make an internal
combustion engine. You could use a battery or a fuel cell car and a number
of other possibilities such as diesel, hybrid electric, along with others. You
will also have choices for the drivetrain. They are two separate issues but
they might involve some interrelationships which we will discuss next. For
the drivetrain, you might have to choose between the type of gearbox,
suspension design, differential specifications, and other drivetrain related
technical and engineering choices.

Once you have defined objectives and weights, you can begin to put
engineering characteristics in. For example, how much CO2 and how much
N2O does each of these options generate? You need to specify units of
measure and you can construct a grid of data that represents the actual
quantities used of each of those, which will give you a basis for evaluating
the options at the end.

The third step is to map the interrelated design issues. If you have an engine
choice, one of which might be battery electric and you also have drivetrain
choices, one of which might be the suspension design. Inevitably some of
these choices for the engine are related to some of the choices for the
drivetrain. In other words, there is most likely a relationship between
battery electric engine choice and a suspension design for the drivetrain,
and others. So we represent those in terms of the degree of strength of the
relationship in the top pyramid, where you follow the drivetrain choice up
until where it meets the relevant respective battery engine choice. And this
would be the cell in which you denote whether there is either a strong
positive, a medium positive, a medium negative, or a strong and negative
relationship between the two. Then you end up with this kind of house up
with this roof, where you can very clearly, quickly and visually see which
of the engineering characteristics are interrelated. That gives you a basis for
studying those things and for focusing your resources on those interrelated
choices because they tend to be complicated engineering system decisions
that need to be made in order to achieve the objectives.

The fourth step is to score competitive offerings on the objectives. Here you
have your objectives listed again; you have customer perceptions of each of
these as well as your competitors, which are mapped here. You put your
offering and your top competitors’ offerings there. This informs you, in the
case you put this product on the market, how it is going to be perceived by
your customers compared to your competitors.

The fifth step in the product design process for low carbon is to elaborate
options for improvement. These are objective metrics, which in this case
might be horsepower, torque and fuel cost per mile.

And the sixth step is technical evaluation. You are going to arrive at a
weighted score and associate with that a cost per unit; You are going to
ultimately have a performance cost ratio. If one is A and the other is B,
performance cost ratio is basically A over B. Let's assume this is your
electric battery electric vehicle option for the car that might come out to be
number one. I hope it helps because this is essentially a mathematical and
templated way to go about the design process in a system which is
relatively complex. And this method helps you arrive at a design method
that incorporates low carbon thinking, values and weightings in your
choices.

Let me remind you there is a template in the learning management system

on rev-chain.com to guide you through this process.
Designing for Low-Carbon
Manufacturing/Production
After you have designed the low carbon product, the next step in the
pathway is to design a low carbon manufacturing or production process.
And this happens in several steps. You can take the same process that we
just went through of mapping the low carbon objectives to the engineering
design characteristics and flow that across to a low carbon design. This
becomes the Y axis as shown in Figure 56, and your next step in the
materials, parts and components design, the engineering design which was
in the first stage on the X axis, goes onto the Y axis and you add the new
dimension of materials, parts and component design, which is related to
production. You go through the same process and end up with an evaluation
lower down of the materials, parts and components that you need in order to
satisfy that engineering design. In this way you are flowing the low carbon
objectives from product design into the process design.

Figure 56: Illustrative Net Zero Materials, Parts & Components Design
Process for a Passenger Car
Thereafter you do the same thing to arrive at the production process – the
specific layout, capital expenditure and automation as well as every other
aspect of your production process. You take the parts and component design
which you had on the previous step and put it onto the Y axis, as shown in
Figure 57. Then you consider various options for the production process:
maybe it is cellular manufacturing, assembled to order, and maybe it is
mass production or mass customization.

Figure 57: Illustrative Net Zero Production Process Design Process for a
Passenger Car

After you have designed your production process, the next step is to form a
supply chain. To do that, you take the production process that you have
planned in the X axis and drop that down to your Y axis, as shown in Figure
58; you then have your low carbon production process versus your supply
chain design. Let's suppose that one would be a global supply chain, one a
local supply chain and another a regional supply chain. The scores are
weighted where the higher the score, the better.

Figure 58: Illustrative Supply Chain Design Process for a Passenger Car
Designing for Low-Emissions Distribution
Packing and packaging can be designed for low carbon. Packaging directly
covers and usually brands the item. The box may have a set of boxes,
maybe three outer packs which I will call packing in this context. This
consists of bigger boxes that go onto pallets, get stacked up and wrapped in
plastic, usually. The way this whole nesting process is designed can have
significant impacts for volume, weight and therefore for carbon footprint, as
well as carbon footprint upon disposal.

Design for Delivery is important as well. Using standardized boxes, all the
same size, tends to be easier to fit into a delivery truck. You use less cube or
the airplane and everything else uses less cubic space if all the levels of
packing and packaging nest into each other neatly. If they are standardized,
you can stack them up next to each other like stacking cups. Conversely, if
they are all different sizes or weights and shapes you are going to have
trouble stacking, therefore under-utilizing the cubic space in the vehicle
especially if they have “keep this side up” kind of limitations that force you
to lay them in certain ways.

Design for unloading optimizes the weight distribution for loading and the
unloading. If you anticipate how the unloading will occur, you can save
time and labor costs in the unloading, which to some degree would translate
to carbon footprint if the vehicle were idling. Many vehicles today are still
idle at port whereas many trucks idle in the roadway.

Design for Assembly is important for both carbon footprint and cost
savings. Shipping in pieces that are each uniform and can be assembled into
irregular shapes upon receipt can reduce distribution and shipping cost. It is
less expensive and lowers carbon to ship a sofa bed which weighs hundreds
of pounds, which would otherwise have to be handled a certain way,
delivered in a special vehicle truck and handled by certain multiple people,
as eight flat rectangular boxes that can each be handled by one person and
put in a passenger elevator instead of a freight elevator.
Designing for Low-Carbon Operation
Lifecycle energy consumption, hence carbon emissions during customer
operation can be significantly reduced by smarter design, especially if there
is an Internet-of-Things (IoT) connection and data analytics in the back end.
Smart design can leverage artificial intelligence, usually through sensors,
actuators and controls, to lower energy usage during operation.

Just beware that once you go down that path, you probably need to consider
cybersecurity protection and data privacy issues. Cybersecurity precautions
will be necessary to prevent hacking, and data gathering will need to respect
the privacy of individual users of the appliances, equipment or whatever.

Design for Low carbon Operation is a high-leverage piece of the

decarbonization puzzle. Generally, if a customer uses the product for ten
years, they have already spent three times the purchase price on energy.
Often in the case of energy intensive equipment such as rotating equipment
in factories like motors and pumps, lifecycle energy usage can be up to
seven to ten times the purchase price.
Designing for Low-Carbon Maintenance
Smart Design for Maintenance and serviceability can also reduce carbon,
especially if you can avoid service and repair in the first place. Service and
repair visits usually mean somebody going out in a truck or a vehicle to the
site, to inspect, diagnose and repair whatever the problem is. If however,
you can avoid that by empowering the user with the information necessary
to self-diagnose, there will be less field support travel, less carbon and less
labor. One way to reduce the maintenance and serviceability footprint is to
enable a communication channel for remote diagnosis, and another is to
enable the customer to take certain repair actions on his or her own, at his
or her convenience.
Designing for Recycling / Low-Carbon Disposal
Design for Recycling is high leverage for carbon reduction because
products, if they are made of plastic, oil or other substances, can continue to
emit carbon dioxide for a long time. One of the largest opportunities of this
type is to use less single use plastics. It seems obvious given all we know
about ocean plastics now, but single use plastics are still ubiquitous, despite
efforts and initiatives to do away with plastic straws and bags. They need to
be designed out at the initial stage of product design. That stage should
specify where the product is supposed to be disposed of at the end of the
life.

Design for Disassembly is a strategy for low-carbon disposal that may be

integrated with recycling. It could enhance the likelihood of proper disposal
and reduce the cost of recycling by pre-sorting. Products designed for
disassembly might be less durable, but not necessarily. This needs to be
studied on a case-by-case basis.

Recycling could also mean putting the product to an alternate use – for
example, a car battery being used for appliances and the home after it has
reached a certain lower threshold of battery charge. Let’s assume the battery
drops from 100 to 75 percent charge. At that point it might be less than
optimal for a car battery but a perfect source of power for your refrigerator.
This kind of cascading plan should be considered in the early stages of
product design in order to maximize compatibility and economics of
disposal for all parties.

Figure 59 offers a checklist for low-carbon lifecycle design. I guarantee that

when you take a look at this checklist, pull a few people together in a
meeting and brainstorm, you will come up with high potential, easy-to-
implement (“low-hanging fruit”) ideas for how to save a lot of carbon. This
could be one of the most promising areas of carbon takeout in your whole
net zero plan.
Figure 59: Lifecycle Carbon Take-Out Process Checklist
Securing Early Supplier Involvement
Design-for-Lifecycle is an ambitious project, but if done without
coordination with key and strategic suppliers, all the brilliant planning in
the world might fail upon execution due to disconnects and misalignments
with suppliers. Moreover, early supplier involvement engages creativity and
ideas about what the supplier can do that most companies might not think of
on their own because it is outside their responsibility or their view.
Therefore, due to both the propensity to fail without supply or coordination,
and also the upside potential for greater success with supplier coordination,
engagement with suppliers is essential to the success of lifecycle
decarbonization programs.

The allocation of resources to such an endeavor could become a barrier to

implementation. However, with a clear decarbonization plan and a solid
business case justification for early supplier involvement on
decarbonization projects is likely to be positive and energizing for all
parties if the parties are willing to share in the benefits.
Engaging Early Customer Involvement
Early customer involvement is also important for the successive scope 3
emissions reductions. Customers can share information on the lifecycle
carbon footprint based on their usage patterns and practices, and an
outreach to them could improve the brand image of the company, especially
in the case of consumer products.

However, preparation is required before involving customers in carbon

reduction initiatives. As with conducting focus groups or other market
research, well designed questions must be structured in advance, and the
customer experience from the interview, interaction or other engagement on
the subject should be a positive one.

For this reason, for many companies it may make sense to start internally,
then reach back to suppliers, and reach forward to customers. This being
said, every case is different, and this is one of the decisions that each
company will need to make while charting its path to decarbonization.
5.2 How to Manage the Portfolio of Products and
Services to Minimize Lifecycle Carbon Footprint

Each product and service that you offer is likely at a different stage of its
product lifecycle. Trimming products that have high carbon footprints
and are lower performing could improve your carbon footprint while
potentially also enhancing financial results. This chapter teaches you how
to guide “Question Marks” and “Dogs” out of the portfolio so you can
focus on high-performing products and services with lower carbon
footprint.

Whereas in the previous chapter we were studying ways to reduce the

carbon footprint of individual products over their lifespan, this chapter
focuses on managing carbon through two alternative definitions of “life:” 1)
as the product or product line matures through the stages of its life
(introduction, growth, maturity and decline); and 2) as the product moves
through the portfolio of products or services through the quadrants of the
growth-share matrix (“question marks, stars, cash cows and dogs”) that was
popularized several decades ago by Boston Consulting Group.[36] In case if
you are unfamiliar with these frameworks, I will explain them in this
chapter.
Product Lifecycle Overview
The product lifecycle framework, popularized by Raymond Vernon, can be
used to plan for net zero at every stage of a product’s commercial life. If
every product went through a normally distributed life cycle, there would
be a rise, a peak, a decline and an end, as illustrated below in the boxes in
Figure 60. At the beginning, you are selling pretty much to innovators.
These are people who are inclined to or predisposed to take a little bit of
risk, maybe a chance on their own learning curve to get used to some new
technology and be the first ones in on it. As you begin to climb up the
growth curve, you are primarily selling to early adopters. These are people
who are not the very first ones but are definitely a large group of people
who want to benefit from the new technology. You would hit the early
majority and eventually the late majority. These are mostly people who
jump on the bandwagon when something becomes used widely by others,
after it has been proven and the bugs have been ironed out. Then you have
the laggards, who would prefer to continue using what they have always
used in the past and not to change technologies for whatever reason. They
are people who might end up buying at the late stages of the product life
cycle. We are going to divide this into four stages: introduction, growth,
maturity and decline.

Figure 60: Product Lifecycle Carbon Take-Out Process Checklist

“Introduction” Stage
The introduction period is the best time to increase market share, which is
when you often see a lot of promotions to stimulate adoption. R&D and
engineering is very critical at this stage and it is common for products to
have some bugs at the early stages. In fact, there is a term called infant
mortality which relates to the fact that newly introduced products tend to
have a lot of premature failures, bugs, and sometimes the products fail
prematurely. For example, you have a new version of a laptop or a new
version of an electric motor. It is so new that it hasn't been adequately tested
or field-proven, so you end up with some problems. And at this stage,
actually, a lot of people would prefer not to buy things at the very early
stages because they suspect that there is always the chance that there will be
these bugs. From a production perspective you are probably going to
operate like a job shop, which is an organization or layout that produces
whatever jobs come up as the customer orders them. There is no standard or
assembly line way of producing the thing. It will depend on what the
customer wants. In the introduction stage, you are probably running fairly
short production runs because things keep on changing. As a result you will
have high production costs, a fairly limited number of models and you will
be paying attention to quality, trying to ensure you deliver good products
and do not have what I referred to earlier as infant mortality problems.
“Growth” Stage
At the growth stage, it begins to be mass produced. You often see a decline
in the price to adjust to a mass marketing strategy. At the same time there
could be proliferation into niches. In the growth stage, you are operating
like a small business would. You begin to have some product variations;
you begin to have some sales promotions to set up regional distribution and
roll out advertising programs to broaden awareness of the product. You
undertake some sales promotions but do not need so many because at this
point the product is widely recognized and you do not need the discount to
get sales. During the growth stage, it is critical to adapt the production
paradigm. Let’s talk about mass production. You would need to go from a
job shop type configuration to a mass production, manufacturing or
production paradigm. In the maturity stage, you probably need to start
going into cost control mode, doing a lot of very significant budget studies
and putting in cost controls.
“Maturity” Stage
The maturity stage is when you start to manage costs and distribution
channels very carefully to have sustained and reliable distribution at low
cost. You have lots of competitors coming in, so it becomes something
copied, mimicked and replicated. In the maturity stage, you are running the
business like a larger corporation. You have probably proliferated into
multiple brands at this point. You probably have an everyday low price
which means the price has plateaued; you are probably now finding some
optimal point at which you hopefully have already amortized a lot of your
fixed costs and development costs. So now you are able to lower those price
points since you only have to cover your marginal costs, which allows you
to really come down on the price.
“Decline” Stage
The decline stage is a wind-down situation. It resembles a company that is
winding down where you will need to rationalize the product. You probably
start discounting in coordination with that to clear old inventory out,
especially to avoid obsolete inventory you will have to write off if it is left
and nobody buys it. For example, if you have automotive parts that are in
the field which you are continuing to service and take orders for, you need
to make sure customers are not able to continue ordering them because
every time they do, you lose money trying to satisfy needs. And you will
start watching your costs for advertising and fixed overhead costs as well as
need to shut down repair facilities, change the price and remove the product
from lists everywhere. When you are in the decline stage, cost control
becomes critical because essentially you have declining revenue both from
volume and from price. You need to get it out of your system so that you are
not operating expenses to cover a product that has declining revenues. You
will be losing money unless you clear it out pretty quickly. At this stage,
you customarily face heavy competition.
Planning the Carbon Footprint of Products
Throughout Their Product Lifecycle Stages
The amount of low-carbon effort is inverse to the product lifecycle stage. In
the Introduction stage, you actually need a lot of resources on carbon
planning because all of those decisions need to be made or should be made
ideally in the introduction stage of the product life cycle. As you get
through the various subsequent stages, you have less and less control over
the outcome but you still have to expenditure in every stage, and the
number of resources that you are spending is probably the highest upfront if
you do it right.

And this is the challenge, because historically we used to push services out
to market without considering their end of life in further subsequent stages
or their carbon footprint; we focused on the operational and financial
realities of moving from stage to stage as discussed above. As the product
matures, the resources shift to mass production and improving net profit
margin. But when you are strategizing for net zero carbon takeout, the
resource allocation should ideally be front loaded, and you should parallel
process the net zero tasks throughout the remaining product lifecycle stages.

Consequently, at the Introduction stage you have five work streams. You
need to prepare for low carbon operations, low carbon procurement, low
carbon marketing, design, advertising, low-carbon field service and low-
carbon disposal. You need people from each of those departments thinking
about how to achieve net zero! That is a big change from previous
management practices.

This connects back to the project management issues raised in the

upcoming section on scheduling in the chapter on compiling the net zero
plan. The net zero program manager has his or her hands full at the product
introduction stage. Moreover, that person is more than likely exercising
only ambiguous authority, meaning you probably have quite a few
conflicting interests upfront as people are in charge of their conventional
jobs. The net zero objectives might conflict to some degree, large or small,
with their conventional role. Extensive collaboration is required and
managers across the company must be comfortable with ambiguous
authority.
Pruning High-Carbon Products
As mentioned, the growth-share matrix was introduced by Boston
Consulting Group, which was designed for managing a portfolio of business
units, can be applied here to prioritize carbon reduction by product line or
business unit. The company’s products or business units can be segmented
into two dimensions. One is market share - what percentage market share
they have, and the second dimension is market growth rate. Market share is
usually measured as a percentage compared to your top competitors, and
market growth rate is usually represented as a compound annual growth rate
per year.

There are four quadrants in the growth-share matrix, each of which should
be addressed with a different business strategy:
In every portfolio of products or companies there are a lot of
companies who have a low market share and a high market
growth rate. You don't really know whether they are going to turn
out to have a high market share and high growth, or whether they
are just going to stay in niche businesses. So we call them
question marks.
Once a company, a product or a business unit moves into a high
market share and high growth rate quadrant they are called stars.
These become the brands by which the company is known; they
generate robust revenue and profit margins.
As they mature, the stars become cash cows. Their growth rate
slows down. They might still have a high market share but have a
lower growth rate. The appropriate financial strategy is to “milk
the cow” for profit.
Dogs are companies or products that have a low market share and
low market growth.

If you are managing a portfolio to maximize profit, the optimal strategy is

to liquidate the dogs, turn the question marks into stars, and turn the stars
into cash cows.
From a carbon management perspective, the stars and cash cows are likely
very large carbon producers. Dogs are undoubtedly producing carbon as
well, but they are small and you just don't know about the question marks.
This leads to two carbon management strategies: 1) apply low-carbon
decision criteria to the question marks, and 2) accelerate the divestiture of
the higher carbon dogs.

If you apply carbon criteria to the question marks, they are more likely to
fall on one side or the other of the scale. If they have high carbon emissions,
they will become candidates for accelerated divestiture. Conversely, if they
have low carbon emissions, they may be worth investing in an effort to
make them stars.

Accelerating divestiture of dogs is the easiest and most actionable strategy.

High-emissions dogs are candidates for rapid divestiture. Low-emissions
dogs can enjoy slow, deliberate and careful evaluation, at whatever pace is
commercially and historically the norm.
Managing Customer Carbon Intensities
Savvy companies know the relative profit margins that they earn on
different customer segments. Moreover, with the increasing prevalence of e-
commerce, they frequently know the profitability profiles of individual
customers.

However, this analysis, which is often embedded in customer relationship

management systems and other sales and revenue management software,
rarely if ever considers the carbon intensity of the customers. This is
undoubtedly because most companies would never consider “firing’ their
customers, even if they have very high carbon usage profiles, and even if
those high carbon usage profiles come from their own products. Take, for
example, a manufacturer of private jets that sells its planes to wealthy
individuals, business executives and celebrities. It can probably determine
its customers carbon intensity with relative ease, but would it stop selling to
the highest emitters?

If companies take their scope 3 carbon footprint seriously, they will need to
begin examining their customer base in detail on the basis of carbon
footprint as well as profitability. This involves a more intimate
understanding of how the customer uses the product, and in certain cases
such data privacy issues may have to do with tracking customers’ usage of
the products.

The problem of understanding customers’ carbon intensities is potentially

even more challenging than the problem of understanding suppliers’ carbon
footprint. There are many more customers than suppliers in most cases.
Plus, as mentioned above, companies would rarely, if ever, think of “firing”
their customers even if they have high carbon footprint. And if acquiring
the carbon footprint data at the customer level is intrusive in any way, most
companies would not want to even consider asking their customers for it.

For these reasons, it is likely that initial progress in measuring customers

carbon intensities will come through non-governmental organizations
(NGOs), government mandates, and perhaps entrepreneurial data analytics
ventures. As there are many such organizations with the ingenuity,
motivation and resources to begin the process, we will undoubtedly see
some innovation in this area in the future.
5.3 How to Source to Minimize CO2 in Global
Supply Chains
“Nearshoring creates an opportunity for companies to move…their
manufacturing out of China and out of other foreign countries and bring it
closer to home. The cost of transportation from those manufacturing
locations is significantly less both in time and resources, which has a direct
impact on lowering the carbon footprint.”

--- Tom Cook, Blue Tiger International

Do you know where the carbon is in your global supply chain? This
chapter provides insights on GHG intensity by country, industry and
company, as well as informing you how to update your sourcing
strategies to focus on low-carbon suppliers and geographic areas with
carbon governance systems. It also provides a vertical integration
approach that could reduce your measured carbon footprint by 30% or
more while increasing profits.

This chapter consists of three major parts: 1) identifying where the carbon
comes from in a global supply chain, 2) defining sourcing strategies you
can use to reduce the carbon intensity in global supply chains; 3) vertical
integration strategies to reduce carbon footprint.

The first part is where the carbon is in many global supply chains. The
GHG Protocol’s definitions of scope 1, scope 2 and scope 3 emissions are
foundational to the split of carbon emissions, which we will examine. Then
we will investigate aggregate greenhouse gas figures by country, industry
and company so you will have a pragmatic idea where many emissions
come from, and from this you may want to reconsider your current sourcing
locations if they are responsible for a disproportionate share of global
carbon footprint. Finally, artificial intelligence is reshaping sourcing, so we
will explore how to take advantage of that for end-to-end supply chain
carbon footprint reduction. The reason is that it is quite hard to measure the
carbon footprint from end to end simply because of lack of visibility into
the nth level supplier and the nth level customer. Consequently, most
companies look only one tier above and one tier below where they sit in the
value chain. Unfortunately, that is a woefully inadequate way of measuring
carbon footprint, so we are going to look at what artificial intelligence can
eventually do to solve that problem.

The second part is which kind of sourcing strategies you can use to reduce
the carbon intensity in your global supply chain. We will relate this back to
certain countries, industries and companies in your supply chain as
potentially target-rich ways to reduce carbon footprint.

Finally, we will look at vertical integration strategies and make or buy

strategies to reduce carbon footprint.
The Challenge of Addressing Scope 3 Emissions
Most companies find that when they apply the GHG Protocol framework
for scope 1, scope 2 and scope 3 emissions, most of their emissions are in
the Scope 3 bucket. Scope 1, as we have reviewed, consists of direct
emissions from your operations, and scope 2 is indirect from purchased
electricity and fuels. Everything else is in scope 3. The Protocol defines
about fifteen major categories of sources of greenhouse gases in Scope 3
alone. That means that procurement is a critical aspect of managing
emissions and, of course, of reaching net zero. Consequently, many people
consider supplier management to be the largest opportunity as well as
challenge in the decarbonization process.

Unfortunately, scope 3 emissions are hard to determine, especially at the

company level, as shown in Figure 61.

One of the reasons why it is very hard to determine is that the

methodologies for computing it are various and complex. As mentioned, the
GHG Protocol includes about 15 totally different categories of GHG
sources such as employee commuting, business travel, capital goods
purchases and leased assets. Those are all potential areas for carbon
reduction. Undoubtedly, you will go there on your net zero journey.
However, most of them have nothing to do with each other. In addition to
that, within each of those categories, there is not one single computational
method that is standardized and approved for counting carbon. So the GHG
protocol offers about five different types of accounting options for each of
those. If you saw different accounting methods around the world, like the
Western and US accounting being governed by the Financial Accounting
Standards Board, and Europe being value added accounting, you cannot
transpose directly one accounting onto the other. It is confusing and unclear
in many ways.

Figure 61: Challenges of Measuring Scope 3 Emissions

In addition, some of the Scope 3 indirect sources of carbon could negatively
impact employee morale, executive behaviors and potentially business
performance, which could backfire on your efforts in other areas. So some
parts of Scope 3 emissions are very tricky areas with relatively lower
aggregate impact on the total carbon footprint of the company.

Taking that into account, my first recommendation is to focus more on

the core business than on indirect materials and processes. If you focus
on these core materials, services and solutions that you purchase to execute
the primary mission of the company, it is likely to get the largest impact for
the amount of time spent. You may have procurement teams working on the
other areas which a large company definitely should. If you are in charge of
the whole net zero program but do not have the bandwidth to manage
everything, delegate those aspects to a matrix structure of people who have
connections, are responsible for and authorized to make policies about
leased assets, employee commuting, international air travel and the other
areas that the Protocol considers in Scope 3.
The second reason why scope 3 is very hard to determine is because there is
an inherent lack of visibility to suppliers beyond tier one, which I will call
“tier n.” Once you start looking at a supplier's suppliers or a customer's
customers, no company has visibility. The reason is simply commercial and
proprietary information. A supplier's supply base is a trade secret. It is their
secret sauce. It is how they make their money, execute their business model
and make a profit. Almost no company that I know of, other than a not-for-
profit organization would want to disclose its suppliers’ details to anybody
or make them public. The same thing applies to customers. Almost no
company would want to reveal its customer list to its suppliers.
Fundamentally that would leave open the door to disintermediation. The
company would be at risk of its suppliers going around it directly to the end
customers one way or another.

I have directly dealt with this in many consulting engagements. It would be

terrific in supply chain management if you could use a complete set of data
that cuts across the whole supply chain, all the customers and suppliers all
the way up and down the value chain. You could do tremendous things with
optimization then, but realistically and pragmatically there is no way in any
situation in which you could get all that information except maybe an input-
output model. From the old Communist Soviet Union to North Korea, or
Cuba, it just doesn't exist in reality.

I have written about this at quite some length in my book Guide to Supply
Chain Management. In that book, one of my constructs is what I call an
anchor player. An anchor player is a strong and dominant player, or in the
value chain, who can dictate and mandate the modalities by which its
suppliers should operate. One example is Walmart. Walmart is a very
dominant force in the retail industry, specifically in a segment of the retail
industry. It at one point mandated the use of RFID tags on its suppliers. No
other actor in the entire retail value chain had enough prominence, stature
and economic power to apply a mandate like that. But Walmart did, and it
was able to get significant change. And it is actually still in place, the RFID
tag! Some people might call it a debacle. It was a big debate by many
suppliers; there was a lot of pushbacks, but Walmart made it happen.
Similarly, if you are an anchor player in your industry value chain, I
recommend that you impose carbon reporting obligations on your tier
one suppliers and mandate in your contract that they must compel
their sub-suppliers to also report, then you will, in a sense, have sort of
pushed this mandate through the entire value chain. If everybody did that,
you would have full compliance of reporting up and down the value chain.
That is just about the best we can do right now. So if any company just goes
to its tier one suppliers and say, you need to report this to me in order to be
my supplier, and as part of signing this contract, you are committing to
mandating your tier one suppliers to report it to you. That way you have
pulled, or rather pushed the edge of the envelope out one more tier. And
then it is fairly likely that your tier two suppliers are going to use the same
contract language in their contract. That is therefore another action I
suggest you take in order to maximize the potential to manage the supply
chain's carbon footprint effectively.

Then there are a number of reasons or challenges why scope 3 carbon is

difficult to manage. One would be that after you get to the third tier in the
supply chain and beyond, you frequently encounter many small and distant
suppliers who do not have the data. It comes with being small. When it
comes to being distant, small companies generally are very busy just trying
to survive and push the product out the door to satisfy their customers to
hopefully grow. They don't usually have carbon data and other compliance
related data. Readily accessible distance suppliers also tend not to have this
data partly because they are fairly far removed from any compelling need to
have it. I am based in North America so when I say distant, I refer to those
many companies in developing economies and emerging economies that
have no compliance frameworks or mandates in place. In particular many
countries in Africa, Latin America and Asia have no frameworks that
require disclosure, transparency or reporting so they just don't have it.

The second reason why tier three suppliers, which I shall refer to as tier
three just to simplify, do not have this data because they really have a
potential conflict of interest in disclosing their carbon footprint. In many
cases they plainly are trying to maximize their sales revenue and sales units.
In many cases they may do that at the expense of carbon footprint. They
may actually find that the way they can maximize their profit is by using
polluting fuel varieties and grades. They may find that there are other ways
that they can cut corners which might involve some pollution, water or air
pollution, et cetera. That is how they make their money because they are
able to cut some corners in that way. If they had to fully raise their
standards and comply with all the standards of their customers customer,
they might very well lose money. Consequently they really have no interest
in complying if they are cutting corners. The third reason why tier three
suppliers have little interest in reporting is because the players along the
way really have no authority to ask them for it unless there is a government
framework or mandate in place. The only place where that really is the case
is the EU at this point.

So my third recommendation to deal with the “nth supplier problem” is

essentially to require suppliers to take the REVchain™ class, send their
material, i.e. their completed carbon footprint template and their net
zero plan to you in order to remain in good standing as a supplier. In
other words what I am recommending is you take this body of knowledge
that we are going through in the Revchain course from beginning to end and
you mandate that upon your suppliers. It is a relatively small ask compared
to requiring suppliers to be International Standards Organization (ISO)
certified, for example. Ask your suppliers to send you the net zero plan that
they have put together at the end of the Revchain program, as well as its
supporting data. This demonstrates that they have taken the effort to turn
over the stones, look underneath, measure carbon and other GHGs so as to
come up with a plan to reduce it. So that is my third recommendation to get
around this scope 3 complexity issue.

If you follow these three recommendations, I think you will have a feasible
chance at getting to a good scope 3 carbon reduction approach.
Determining Where the Carbon Comes From:
Emissions by Country, Industry and Company
The breakouts by country, industry and company below may help to
identify sources of carbon in your supply chain.
By Country

An organization called 8 Billion Trees tracks carbon emissions by country.

Based on their data, the top emitters are China with 28%, the United States
with 15%, Russia with 5%, India with 7% and Japan with 3%. The rest of
the countries are at the 1% and 2% level. That is not to say that if your
suppliers are in these areas, then they are polluting. It is in some ways a
reflection of the size and population of these countries. India, China and the
US are large, populated countries so their total aggregate emissions would
naturally be high.[37]

So let’s examine emissions on a per capita basis. Figure 62 shows two lists.
The first is the top 25 countries by GHG per million inhabitants. Many of
the countries on the top GHG list are oil producing countries: Kuwait,
Oman, Qatar, Bahrain and Saudi Arabia are all oil producing nations in the
Gulf Cooperation Council in the Middle East. Other major Western or
westernized countries such as Australia and Canada are also considerable
oil-producing countries. You have sands, which tend to be very GHG
intensive. You have the United States toward the middle of the list, and
below that many countries that are lesser known but significant oil
producers, such as Turkmenistan, Estonia, Kazakhstan and Malaysia.
Almost every country on this list is a substantial energy producer. If you are
sourcing a large percentage of your input materials from countries like this,
they are probably either petrochemicals related or oil and gas related, for a
reason. One of the big reasons could be that whatever you are buying has
substantial oil or gas content in it. We will be discussing replacements and
substitutes for emission-producing materials later on.
 Figure 62: Carbon Emissions by Country, 2012

Source: Author’s analysis of data from Jacoby,

David Steven. The High Cost of Low Prices: A
Roadmap to Sustainable Prosperity. Business
Expert Press, 2017. pages 115-120.

The list of 25 countries at the bottom includes hardly any energy producing
nations. Most of these are small or less developed countries. There are some
islands and some countries that are in serious political disarray, so I
wouldn't draw anything in particular from these. I hardly think it is a good
idea to take your business from the top oil producing countries and put it in
the bottom 25 countries –that could be a horrible business decision with
extensive as well as unnecessary economic, political and social risks.
Therefore let's just say that the most GHG per capita comes mostly from top
oil producing countries, which might not have as strong an interest in
getting to net zero as you do, or should they commit to it, their interest may
conflict with their source of income unless managed properly.

By Industry

Three quarters (73.2%) of total carbon emissions come from energy sector
applications, broadly defined. Energy use in buildings is a huge emissions
source (17.5%) and one that goes under the radar for most companies.
Energy also includes energy for transportation (16.2%) - fuel for road
transport, aviation and shipping. Energy use in industry (24.2%) includes all
kinds of chemical, petrochemical and heavy industry, as well as iron and
steel. You then have all kinds of other agricultural applications (18.4%),
with a lot of room for improvement which many people are working on. So
three quarters of the industry comes from energy applications – not
necessarily the energy industry but all sorts of industries that consume
energy, as mentioned above.[38]

Heavy process industries like cement, oil and gas as well as steel produce
about ten times as much greenhouse gas as other industries, sometimes
more. Cement is by far the largest-emitting industry, regardless of where in
the world it is. The cement industry emits an average of 24.2 kg of CO2 per
euro of sales revenue.[39] Iron, steel and refineries are significant sources
too. Iron and Steel emits 3,487 metric tons of CO2e per year as of 2014.[40]
The other largest-emitting industries include chemicals, plastics and
aluminum, among others. So if you are trying to reach net zero emissions,
you might begin to think about your value chain, your cost structure and
how you might begin to construct ideas that would help to reduce your
dependence on some of the inputs from these industries. And, as I
mentioned above, we will explore alternatives and substitutes later in this
section.

By Company
The GHG output of specific companies, of course, runs the gamut.

The top 20 oil, gas and coal companies account for a third of global CO2
emissions. The top emitters, in terms of billions of tonnes of CO2e
produced between 1965 and 2017, were Saudi Aramco, Chevron, Gazprom,
ExxonMobil, National Iranian Oil Company, BP, Shell, Coal India,
PEMEX, Petroleos de Venezuela, PetroChina, Peabody Energy,
ConocoPhillips, Abu Dhabi National Oil Company, Kuwait Petroleum, Iraq
National Oil Company, Total, Sonatrach, BHP Billiton and Petrobras,
according to Statista.[41]

In your objective to reach net zero, you may want to consider where you
might reduce carbon counts in your value chain. Clearly you need to
evaluate your business with these companies if they are your suppliers, and
parts of your value chain that work with heavy carbon emitting companies.

Ironically, if you think hard about reaching net zero, you may have a greater
chance of getting to net zero by working with these companies than by
avoiding them. These companies and the technological initiatives they are
funding might make them good strategic partners in advanced energy
technologies. Most of these companies have major initiatives in clean
energy, and they are in many senses the ones who have the most control
over the future of clean energy and energy transition. For example, Saudi
Aramco has venture capital funds in advanced energy technology and all
kinds of initiatives at the cutting edge of everything from AI to
decarbonization to CO2 capture in addition to many other areas. So at the
same time they are producing a lot of carbon, they are also studying ways to
take it out of the atmosphere in various ways.
Identifying, Tracking and Labeling Carbon
Artificial intelligence is affecting every facet of supply chain management,
from demand planning to procurement, production, maintenance,
warehousing, delivery, payment and customer service. Insofar as each of
those functions can be optimized to reduce waste or reprogrammed to value
and prioritize carbon as a decision-making variable, artificial intelligence
can catalyze an accelerated path to decarbonization.

Supply chains are becoming increasingly digitized, to the point where the
value in the supply chain will be represented more in the algorithms, logic
and data than in the goods themselves. Artificial intelligence and machine
learning are becoming integral to every aspect of the Plan-Source-Make-
Deliver-Return framework that has become a foundation of best practice
supply chain management, thanks to the Supply Chain Operations
Reference Manual (SCOR).

In demand planning, AI is doing a better job of learning consumption and

demand patterns, in predicting future demand. This in turn reduces over
production, over shipping, and consequently the carbon footprint that goes
along with that.

In Procurement, AI will play a crucial role in improving on the industry

average estimate that are currently used to estimate scope 3 carbon
footprint. Currently, the best way to calculate carbon footprint is by using
industry average figures published by a number of think tanks and
governmental institutions. The reliability of any estimates is questionable,
which is one of the biggest problems in establishing valid carbon footprint
baselines and target. When AI algorithms do a better job of learning which
estimates are right and which are wrong, you will have a better baseline
from which to measure and reduce carbon footprint at suppliers.

AI is also being used to create digital twins of production operations and

managing monitor autonomous manufacturing. Given the number of
sensors, relays and actuators involved in automated production, there is an
inherent lack of efficiency that robotics and automation continue to attempt
eliminating. Artificial intelligence will help make factories more efficient
than they could have been, thereby reducing carbon emissions from
purchased electric power.

In warehousing, automation and smart automation such as AI will help

make autonomous mobile robots as well as automated storage and retrieval
systems more efficient, thereby reducing their pick and pack pathways,
consequently their power usage, not to mention doing the job more quickly
and efficiently than humans with the attendant benefits to end customers,
such as more rapid and reliable order fulfillment.

AI will also improve digital payment, data security and customer

experiences through smarter customer management and more seamless
customer service experiences. However, those applications will likely have
any marginal if any carbon footprint benefit.
If blockchain were deployed at scale today, it would be conceivable to
collect a granular “popcorn trail” of data to ascertain the provenance and
exact lineage of the carbon in every product, service and material, as well as
its conversion into every other product, service and material. But
blockchain has a long way to go, and even when it reaches scale there are
technical hurdles in accomplishing this.

When blockchain or some variant thereof achieves scale, AI will be

programmed to identify, track and label carbon throughout end-to-end
supply chains within a broad array of industries and products. A set of
learning algorithms will be able to mine and process trillions of data
elements about sub tier suppliers around the world, construct highly refined
estimates as well as verifiably actual scope 3 emissions for products and
services in certain cases. This will mark a great leap forward in the ability
to measure the baseline of carbon. Such measurement would signal the
beginning of accountability and consequently action toward
decarbonization.
Sourcing with Carbon Criteria
So far, the information has been high-level, and may or may not have direct
implications for your supply chain. You might ask, what sourcing strategies
can you realistically use to reduce the carbon intensity in your global supply
chain?

One strategy is to adjust your procurement policies to institutionalize

explicit preferences for suppliers with lower carbon footprints. The EU
has already produced many transparency and reporting regulations, climate
and emissions disclosures that can help you identify the carbon footprint of
your suppliers if you are in the EU. In other geographical areas, you can
rely on data from NGOs. One of the most prominent ones is the Carbon
Disclosure Project (CDP). CDP puts out what they call the “A List” each
year. This list ranks companies that voluntarily disclose their carbon
reporting to CDP, which puts together various lists by industry, geography
and company. The “A-List” consists of companies that have done
extraordinarily well on their carbon footprint and carbon reduction plans.
“A List” companies could be preferred target suppliers.

A second strategy is to use your procurement policies to drive the use of

recycled materials. For example, replacing virgin aluminum with reused
aluminum can reduce carbon footprint by 89%. Converting steel to recycled
steel can save 50% of carbon footprint. And using Bio PET (PolyEthylene
Terephthalate) instead of virgin PET can save 42% on carbon footprint.[42]
There are a great deal of other examples and variations on this theme. Using
recycled materials is a great strategy for reducing carbon footprint.

A third strategy is to use bio-materials – for example, paper instead of

aluminum. These are just two examples. Materials are routinely very
specific to a product, but there are many choices that make a big difference
such as biomaterials, biodegradable materials, dissolvable materials and
many more.
A fourth strategy is to use lower-carbon versions of the current
materials. Low carbon material substitutions and material avoidance have a
very significant impact on reducing scope 3 emissions. There are suppliers
of green steel, green cement, green power and so on. There are two types of
green in this context. The first is materials produced using renewable
energy. The second is materials that capture or sequester CO2.

And then there is the possibility to avoid materials entirely. If you avoid
materials through, for example, customer pickup instead of delivery, or
through electronic delivery, or converting some of your product from a
physical product to an electronic product, or a product conveyed primarily
through information, through the internet and etc., there might be a way to
avoid the physicality of some elements of your product entirely.

Finally, a sixth strategy would be to develop future suppliers in regions

and countries that closely govern GHG. This could mean going outside
of your traditional sourcing areas that have relatively less governance
frameworks, such as most of the United States, Australia, the Middle East,
Russia and to some degree Northern Africa, and toward areas such as
certain American states like California and the EU, which more tightly
govern emissions. In the long run you may wish, desire, strategize or target
to develop suppliers in some of the regions and countries that have GHG
governance systems that match your value system and your low carbon
objectives.

Between these six strategies – 1) using suppliers with lower carbon

footprints, 2) using recycled materials, 3) using biomaterials, 4) using
lower-carbon versions of materials, 5) avoiding materials or the physical
product elements or components itself and substituting them with
information, and 6) developing suppliers in jurisdictions that closely govern
carbon footprint – you can drive carbon out quickly and substantially.
Exploring Vertical Integration Strategies to Reduce
Carbon Footprint
Due to the difficulty of measuring carbon at the “nth supplier,” many if not
most companies measure and report only the carbon footprint of their own
operations and of their tier one suppliers (and in many cases, only their
direct customers). Assuming your organization reports its carbon footprint
only to the 1st tier, then the more you contract out to companies that further
contract to third parties, the more you distance yourself from the actual
footprint, and the lower your carbon footprint will be.

There are two ways this could play out: 1) actually shifting away from the
carbon-producing activities, and 2) setting up two levels of contracted
activities between your company and carbon.

In the first scenario, let's assume that a hypothetical airline, Pyramid Air,
decides to become a broker in the travel business, like Expedia or
priceline.com instead of operating airplanes. Its scope 1 and 2 carbon
footprint would practically go away. A virtual company’s scope 1 and 2
carbon footprint could be close to zero. In this case it would really have
changed its whole business model to get out of the airlines business and go
into the airline ticket brokerage business, or perhaps modify its portfolio of
companies to shift its assets from 100% in the airline business to 50% and
another 50% in airport-related businesses that have lower carbon footprint.
This would be one way to dramatically reduce Pyramid Air’s reported
carbon footprint.

Figure 63 shows the impact of vertical disintegration on carbon footprint

relative to a vertically integrated scenario. Assuming the businesses are
legitimately owned and managed separately, and that the company reports
its carbon footprint based on its tier one suppliers only, the business in this
example could reduce the reported carbon footprint by 38% [(180-70)/180].

Figure 63: Impact of Outsourcing Scenarios on Carbon Footprint

Note that outsourcing should not be played as an accounting shell game.
Transparent carbon reporting would still identify the operating company’s
emissions as Pyramid Air’s scope 3 emissions, and eventually, carbon
reporting methodologies and technologies will improve to capture “Tier n”
suppliers, at which point anything less than a true change in business
strategy would be perceived by investors and regulators as disingenuous.
Reducing Logistics Emissions by Nearshoring: An
Interview with Tom Cook, Managing Director,
Blue Tiger International
David: Tom, you’re an expert in logistics, supply chain management and
procurement, and the managing director of Blue Tiger International and
also of the National Institute for World Trade. You have a wealth of
experience, including being a former Marine, and you’ve contributed so
much to the supply chain and logistics professions. Maybe you can just talk
for a minute or two about yourself and your company?

Tom: Thank you, David. I appreciate the opportunity to contribute to the

courses that you’re teaching. My company basically helps companies
manage risk and “spend” in their supply chain. Very often the carbon
footprint issue comes into the equation, not only relative to reducing the
risk of their corporation, but also, at the end of the day, how does it impact
their cost structure and their expenditures? We build business models and
provide them with various options. One of those options is nearshoring.

David: Terrific. What would be a typical example of a company that has a

global supply chain that it set up 20 years ago when many companies
decided to source from China, and is now looking at it again? And what are
the benefits of nearshoring?

Tom: I think that one of the positive things that's going to come out of the
COVID pandemic is the nature of the disruption that occurred all over the
world relative to the supply chain. Nowhere more was it impacted than US
companies that were importing and buying from manufacturing in China.
So you tie that concept of what's happened in the last three years relative to
COVID and the disruption in the supply chain and the astronomical cost
(freight was ten times more expensive in 2020-2021 and 2022 than it was in
previous years)…as a result of that, supply chain risk management has
entered into the mindset of supply chain executives whose roles in every
one of their companies was elevated. As a result of the disruption, they're
now looking for ways to create resiliency and sustainability and reduce their
carbon footprint.

Tom: Nearshoring creates an opportunity for companies to move a certain

amount of their manufacturing out of China and out of other foreign
countries and bring it closer to home. One such example would be
consumer products – fashion, cosmetics, the automobile industry, for
example. Consumer electronics companies have taken advantage of the
maquiladora program in Mexico. And that has advantages for us when
foreign companies and Mexican companies make an investment in
manufacturing along the border between California and Texas. When they
import raw materials, parts and components into Mexico, if it's in the
maquiladora program they do not have to pay duties and taxes when those
goods enter. That could be a savings of as much as 30% of the landed cost
in their supply chain when they do the manufacturing. Then when they
export those goods to the United States or Canada again, there's no tax. And
the cost of transportation from those manufacturing locations is
significantly less both in time and resources, which has a direct impact on
lowering the carbon footprint for that organization.

David: Roughly what is the freight cost differential between China to the
United States, as compared to Mexico to the United States?

Tom: If we looked at January of 2020 [to exclude the effect of the

extraordinary rate increases during COVID], in order to bring a 40-foot
container from China into the West Coast of the United States the average
price was probably around $2,500. Compare that to a truckload coming up
from Mexico, which at that time, you know, January of 2020, probably cost
about $700-$800 to Chicago. Today, that's a little bit higher because
trucking costs with COVID have increased, so you might be paying about
$1000 or $1,200 for that same 40-foot truck-to-rail, but that's significantly
less than $2,500.

David: So if we equate carbon footprint to the cost of the shipping, which is

largely fuel, would it be accurate to say that nearshoring in this case would
probably cut the carbon footprint in half?
Tom: Yes.

David: So you mentioned about the Trump tariffs of 40% of the goods
coming in from China. Where do we stand with that today?

Tom: A study was done by the International Trade Administration, which is

part of the Department of Commerce, where this aspect of trade deals and
trade management is looked at. The 301 tariffs they looked at which Trump
imposed at his administration through executive order were proven to be
unsuccessful. While it was good intentions to try to do something to
manage the relationship with China, the technicality of the 301 tariffs never
really achieved what they were hoping to achieve. Trump actually put two
sets of tariffs in: 232 and 301. 232 dealt with a little bit of steel from about
16 different countries around the world, and 301 just focused on China and
focused on certain consumer products, raw materials and some industrial
goods. When Biden ran for office, he did do away with the 232 tariffs,
which normalized relationships with the countries we were purchasing steel
and aluminum from in the 301 categories, but the 301 tariff still remains
today. On about 40% of consumer products and industrial goods, we're still
paying a 25% surcharge on those goods coming out of China into the
United States.

David: Has traffic shifted from Asia, particularly China, to Europe? Are we
importing more from Europe as a result of any of these tariffs?

Tom: Every country around the world has taken various pieces of it.
Vietnam has really been a beneficiary of it. And by the way, China happens
to own a lot of the factories that are operated in Vietnam. South Korea,
Taiwan, Malaysia, the Philippines and Indonesia have picked up a lot of the
manufacturing. Some have been transferred to Europe. Most of us don't
think of Turkey as a supplier, but actually Turkey has a very strong
industrial capability.

David: Very helpful and informative. Thank you very much for your
insights and your time, as always, Tom. I would recommend anybody with
further questions to you, Blue Tiger, or the National Institute for World
Trade. Great resources. And thanks so much for joining, Tom.

Tom: Thank you, David.

5.4 How to Incentivize Supplier Collaboration
“This is a big journey for a lot of companies. There are a number of ways in
which buyers and consumers of the emissions data, the ones that are facing
all the public scrutiny and the pressure from the regulators to report and
resubmissions, are motivating their supplier base that are not as exposed to
this pressure yet. First and foremost…customer facing brands are starting
to cascade their knowledge, their experience and their expertise and
support towards suppliers. This is…the carrot approach. Second…which is
a little bit more on the stick side, is regulatory pressure. Third…there is an
opportunity in measuring carbon emissions because measuring means
starting to manage it.”

--- Julia Salant, Ecovadis

If your supply base is composed of suppliers that have not reduced their
carbon footprint yet, you may need to apply pressure and/or switch
suppliers. This chapter teaches you how to embed carbon footprint in
your vendor scorecard criteria, how to work synergistically with ESG
investors and ESG funds of climate-friendly investment management
firms to engage low-carbon suppliers, and how to become a magnet for
suppliers that operate in climate-friendly zones. Transform your supply
base the smart way!

This chapter will help you embed carbon in vendor scorecard criteria,
manage preferred supplier programs, as well as advance suppliers through a
series of sequential or stage gates toward higher level qualification and
supplier preference. It will also review how to prefer suppliers that are
funded by investors with stringent ESG criteria, in the context of asset
management firms, private equity firms and venture capital (VC) firms. It
will further explore how to attract suppliers that operate in climate friendly
jurisdictions, particularly through international procurement offices (IPOs)
in areas that follow climate friendly protocols, regulations and governance
frameworks. In summary, there are three basic topics: 1) how to embed
carbon and vendor scorecard criteria, 2) how to prefer suppliers that are
funded by investors that have stringent ESG criteria, and 3) how to attract
suppliers that operate in climate friendly jurisdictions.
Using Carbon in Preferred Supplier Criteria
Every company should have preferred supplier programs in place. Figure 64
shows the stages of supplier partnership. If you are sourcing something that
has relatively low value and the supplier relationship is relatively immature,
you would probably establish a commodity supplier relationship. It would
be transactional, based on price and possibly some other quantitatively
calibrated criteria. The next stage up after a supplier has a track record with
you and you can rely on their quality, you normally establish a preferred
supplier relationship with them. That means they have a contract, not just a
purchase order, which has standard contract terms and conditions. They are
aware of how they are doing in terms of satisfying your needs. The next
level up, you get to a point where you award a supplier a “value-added
supplier” classification. They may or may not know if you have designated
them as a “value-added supplier,” but your procurement team has
recognized that supplier has a distinctive competency. As you step up
further, you may consider some suppliers to be alliance suppliers. You
share a lot of goals and information with each other and have joint projects.
And finally, at the highest end, you would have a strategic partnership
which is based on mutual needs, a common vision, free and open
information as well as sharing of things that are normally confidential, such
as financial information and strategic secrets. A strategic partnership may or
may not involve equity positions. As you go up the ladder, normally the
supplier is aware that he or she is at a certain level rung on the ladder. But
in any case, this is an internal categorization which should be crystal clear
to anybody in purchase at all levels of that ladder within your organization.

Figure 64: Stages of Supplier Partnerships

How To Embed Carbon in Periodic Vendor
Evaluations
Most organizations create vendor scorecards at least once a year, probably
more often as you evaluate the supplier in the context of decisions related to
major projects. The scorecards should consider many major categories and
use measurable criteria. Quality, cost and service are customarily major
categories, and within each of those categories there are specific measurable
weighted criteria. By quality we mean five things, each of which has a
definition with units of measure, which help you understand and quantify
what it is. Then you have an expected rating and an actual rating which
gives you essentially a score, just like a student would on a scale of
normally 100. But you could do any scale you want. And in our case here
the supplier got a 91% score.

As part of your next zero initiative, CO2e should be one of the major
categories embedded in the scorecard as shown in Figure 65, and ideally it
should specify minor categories corresponding to it. Sometimes making
adjustments to these scorecards is rather political and quite difficult,
especially when you need to introduce this to your partner and explain that
the scorecard is changing. Not only do you need to conduct this carefully,
but also boldly, with confidence – “this is now part of the way we are going
to rate your performance” – to minimize pushback, backsliding and
excuses. And as part of that, you probably also need to think in advance to
anticipate what the supplier's ratings will be. In this case, they showed a
100% five out of five on the carbon factor. But if you really roll this out,
you might determine, or inadvertently find out that your number one
supplier is actually very poorly rated on the carbon criteria, which could
potentially drive that supplier down to a 50% from something like a 91%,
depending on the weighting of carbon. Let's suppose they go down to 78%,
which if true could realistically change your entire relationship with the
supplier. So do research in advance. Get an idea of what you think the
carbon footprint criteria are, how you think your key suppliers rate on those
criteria before you roll out to them.
 Figure 65: Sample Supplier Scorecard with Carbon Footprint

In some cases, suppliers may not want to share their carbon data, especially
if the stakes are high and their carbon data is bad. This does not happen
very often because if you are a large company, you are likely dealing with
suppliers that are publicly traded companies, who probably have limited
room to use discretion or misrepresent their carbon data or any other
financial or operating data due to their responsibilities to their shareholders.
But smaller companies are a different beast and they may not be so good at
it, especially if they are offshore, far away, where the rules, norms and
expectations are different from the values you have come to place on
carbon. Then you may find that you need verification through auditors.
Consultants and standards bodies such as DNV, TUV, ISO and Ul might
make viable auditors.

You should also check carbon numbers that suppliers provide to you against
numbers in their sustainability report and make sure they match or tie
together. If there are any gaps, make sure you can explain the differences
between what they've said in their supplier scorecard exchanges and what
they are saying to their shareholders. If in doubt, you could also check their
data against what they report to tax authorities, assuming there is a carbon
disclosure requirement in the jurisdiction. You could also ask them for
green certificates if they claim they use RECs or carbon offsets. Although
blockchain is unlikely at this stage, eventually blockchain could be one of
the ways of measuring and/or validating your suppliers’ carbon footprints.

If one of your suppliers gets low scores on data they provide to you or to
external auditors, sources and tax authorities, there are four generalizable
responses:
Mandate that they conform to your requirements
Boycott them until they do perform along those criteria and to the
targets you have proposed
Expel them from your supply base and shift to an alternate
supplier
Collaborate with them in an attempt to address the issue to your
satisfaction.
How To Prefer Suppliers That Are Funded By ESG-
Friendly Investors
Since many investor groups have adopted carbon-neutral policies for their
portfolios, one way to quickly identify suppliers that are strong on carbon
reduction would be to see which companies these ESG-conscious investor
groups are funding. So who are the largest investors?

The large private equity firms are companies like BlackRock, Blackstone,
Apollo Global Management, KKR, the Carlisle Group, CVC Capital
Partners and TPG Capital. Some of those companies have ESG investing
divisions, what they call alternative energy and investment divisions
designed specifically to guarantee that the carbon footprint of the
companies that they hold in their portfolio is within bounds they consider
acceptable. By nature, they are private and seek high returns, so they are not
always inclined to invest in ESG driven policies. A survey by New York
Life Investment Alternatives showed that 63% of them consider ESG risks
and opportunities when investing, and 37% have a formal process for
measuring ESG. After they make an investment, 30% of them measure,
monitor and report ESG risks and opportunities.[43] If you are looking for
suppliers that are environmentally friendly, private equity backed firms
might be helpful, but you have to pick which ones.

The large institutional investors include companies like Vanguard, UBS,

Fidelity, State Street, Morgan Stanley, JPMorgan Chase, Goldman Sachs,
and the like.

Venture capital firms, which would normally invest in smaller companies

(although that definition has changed and is a much wider range than it ever
used to be, so it currently overlaps between venture capital and private
equity’s typical space), include Bain Capital, General Atlantic, and
thousands of others. These firms generally specialize in a certain type of
company, according to the nature of its intellectual property, the nature of
the industries that they invest in, or the nature of the problem that they
address. Many large VC firms have established “climate funds,” such as
Shell, BlackRock, Brookfield, TPG and Breakthrough Energy Partners.[44]
If you are talking to a potential supplier that is backed by one of these
companies, you are working with the right people if you are trying to create
a green supplier portfolio.

The ESG funds of these firms and others are specifically designed to invest
in clean energy companies as well as environmentally and socially friendly
investments. If you are searching or fishing for suppliers in the green zone
then take a look at the funds of asset management companies that have
strong ESG funds. The companies in their portfolios might be good
companies to partner with.
How To Attract Suppliers That Operate in Climate
Friendly Jurisdictions
Many companies over time have set up international procurement offices in
foreign countries in order to get a better understanding of the suppliers in
that area and to contract with them, to monitor contract performance, and
assure quality. For example, decades ago Walmart set up an international
procurement office in China. Because they were building their whole
company on the back of Chinese sourcing, they needed to have local
representatives speaking the local language and understanding their
relationships in order to study which suppliers were the good ones. You
need to have “boots on the ground,” as they say. Especially when it comes
to contracting, you need local lawyers to set up the contracts the way it is
acceptable, and people there to actually see the product or service to verify
its quality and make payment.

If you set international procurement offices up in areas that you think are
climate friendly, you would have already narrowed the pool of available
suppliers to the point where most of them would be good along carbon
criteria. So instead of conducting procurement activities in the typical way
– start with a supplier in the local market that is technically reputed, and
then make sure that they comply to various carbon criteria that you have.
You could reverse the sequence – start by setting up procurement activities
in a climate friendly area where the institutions, regulations and
governance, consequently the suppliers’ business practices, are likely to be
acceptable to you from a carbon point of view.

Another potential criterion for focusing the efforts of the international

procurement office might be to source primarily from countries or regions
that have a carbon tax. Australia, Kazakhstan, Ukraine, Norway, Iceland,
the EU, Canada, Mexico, Colombia, Chile, Argentina and some others,
have or are considering carbon border taxes. The EU has some of the most
stringent carbon criteria in the whole world. There is a climate neutrality
target by 2050. There is a target to reduce greenhouse gases by 55% by
2030 compared with 1990 levels.

Focusing on countries with carbon-reduction subsidies and incentives can

be equally productive from a procurement angle. The US inflation
Reduction Act has turned the tables really on carbon reduction in the United
States. Until 2022 the United States was a laggard in climate adaptation.
However, the incentives laid out in the Inflation Reduction Act make many
renewable energy investments financially viable that were not attractive to
investors before the Act. Before the Inflation Reduction Act, there was a
carbon credit per metric ton of carbon for carbon capture and sequestration
equivalent to about $35 a ton. Under the Inflation Reduction Act it is raised
to $85 a ton. That almost triples the carbon credit, which makes a lot of
projects suddenly financially viable. They weren't before and now they are.
Similar incentives apply to carbon capture and sequestration. In addition,
wind projects got a big boost from the Inflation Reduction Act. We are now
looking at tax credits that apply to solar, wind and battery where the credit
amounts have come in at significant levels. So now the United States is on,
as they say, the economic map for renewable power.[45]
Incentivizing Suppliers: An Interview with Julia
Salant, Carbon Solutions Director, Ecovadis
David: Hi Julia, welcome to this important dialogue on getting to net zero.
Would you mind getting the conversation going by introducing yourself and
Ecovadis?

Julia: Thank you, David. It's my absolute pleasure to join you today to
discuss the most pressing problem that's facing humanity today: carbon
emissions. I'm Julia Salant, Carbon Solutions Director at Ecovadis. I've
been working in this industry for the last 15 years. Carbon emissions and
engaging suppliers in climate action, which is much closer to our core
business, has been a top priority for our customer network that includes
over 100,000 companies in 180 countries all over the world. Ecovadis has
been around for the last 15 years and we have built one of the most trusted
and robust sustainability data networks that allows buyers and suppliers to
engage on topics of sustainability, transparency and performance
improvement. Our customers include a lot of marquee names that you
know, and some less known names, but ultimately we cover companies in
more than 100 industries all over the world. So it's been quite an exciting
journey for us to grow, nurture and raise the bar on sustainability within this
global digital network that we built.

Julia: The focus on carbon for us has always been part of the sustainability
focus for the network. We look at the way in which suppliers manage their
sustainability more generally and climate action is really one of the key
components of what sustainability is. But very recently, we've identified the
need for a much more granular and much more direct engagement with
suppliers, particularly on carbon, looking closer at their baselines, looking
closer at their targets and how they progress towards targets and what levers
they pull in order to decarbonize their own operations and their supply
chains. So with that, we've added the latest addition to our product suite,
which is the Carbon Action module that was launched a year and a half ago.
And it's been an absolute pleasure to lead this with our customer base.
David: I've been following Ecovadis for a long time and it is wonderful to
see the successes that you've had. They're well deserved and you're in a
really great space. And obviously you're really knowledgeable on this
subject. Maybe we start with scope 3 emissions, because when we talk
about carbon and we talk about suppliers, we're pretty much talking about
scope 3 emissions. Would you please help us understand, in your view,
what is scope 3?

Julia: The way I see scope 3, and that's a lot of my customers and trading
partners that are playing it back to me, is the most complex business topic
on the agenda of the CEOs and boards today. I'm really excited to see scope
3 seeping into day-to-day business conversations outside of the experts and
the standard setters and the accountant space which has been around for the
last 20 years. Today, the way in which business leaders perceive scope 3 is
the emissions that are outside of their direct control, which means that these
are emissions that are coming from upstream and downstream of their own
activities. And this is what makes it such a complex challenge, the lack of
control, the lack of visibility, but also creates a tremendous opportunity
because it is usually two, three, or four times more than their own internal
emissions. So this is what scope 3 is from a business perspective. We're not
going to go into the details of the accounting practices around how to
measure and report scope 3. Usually when we talk about scope 3, we
include emissions that are coming from suppliers, emissions that are
coming from logistics and transportation. We're covering emissions that are
coming from financed emissions. So there is actually quite a lot of range
that has been very clearly defined by the GHG Protocol. What's in scope,
what's out of scope. There is a standard to refer back to and it's actually
quite widely used all over the world, as you were alluding to.

David: Since scope 3 emissions are outside of your walls, outside of your
control, somebody has to give you the data. Right? Tell us about how you
get over that hurdle.

Julia: Industry averages were basically the most common way to estimate
scope 3 emissions. These are data points that are developed and collected
and enhanced and produced on annual basis by industry groups, by
regulators, by NGOs, to really give a sense of what is the average carbon
footprint of an average economic activity in a certain country. And this is
why I'm saying estimate rather than measure scope 3 emissions. This has
been out there so companies could get a sense of what is the magnitude of
their own scope 3 emissions. To give you also another way of looking at it,
usually based on McKinsey research, as well as quite a lot of research
coming from the Carbon Disclosure Project (CDP), scope 3 emissions in
some industries account for more than 95% of the overall company
emissions. So this is a huge scale and a lot of it is based on estimates, on
averages. Some of the leading companies, such as the “Unilevers” of the
World, have been measuring and reporting their scope 3 emissions for the
last ten years. But historically the data comes through industry averages.

David: If it's been going on for decades and there's averages. is there some
repository somewhere? You mentioned CDP, is that a resource where
everybody can find if they want to know the average scope 3 emissions
multiplier for the pharmaceutical industry in Thailand, can they go look it
up in a data table at CDP?

Julia: Well, actually there is a lot of publicly available sources such as the
EPA, the IPCC, the Defra databases, so different governmental or quasi-
governmental databases that publish these emission factors on annual or
semiannual basis. So this is something that is quite widely available. What
is more complex to get your hands on is actually much more specific
economic activities in certain countries. And this is why, actually, databases
such as Ecovadis have done an incredible job at creating are specific to
economic activity, such as specific product category emission factors in
certain geographies.

David: There's quite a lot of automation that is happening right now. Is it

possible to get actual measured emissions in certain areas as opposed to the
benchmark reference points in the past?

Julia: So what is happening now is the beginning of a shift towards actual

primary data collection from suppliers, mainly. And this is why suppliers
are so important for scope 3 emissions, for the purpose of measuring and
reporting on scope 3 emissions. Replacing industry averages with actual
primary data from suppliers is top of mind for most sustainability leaders.

David: And is that something that the Ecovadis solution does?

Julia: This is one of the things that we do. We collect primary data from
suppliers all over the world on their GHG emissions and our customers use
this in their own calculations of scope 3 emissions. They replace the
industry average with actual data coming from a supplier. It's a journey,
we're getting started and a lot of suppliers are starting to share this data. But
the road is going to be long and continuous and iterative.

David: What is the incentive of the suppliers to provide that data? There are
a number of problems in getting the data. Sometimes the suppliers are small
and they don't collect it. Sometimes they're far away and sometimes they
have only a small share and they don't care. Or sometimes it may even be
against their interest, a conflict of interest, to provide it because they know
they might lose business if their emissions profile is bad. So how do you get
the suppliers to volunteer this information?

Julia: I love how you phrased it, volunteer this information. This is an
interesting approach. Look, there are a number of ways in which actually,
buyers and consumers of the emissions data, the ones that are facing all the
public scrutiny and the pressure from the regulators to report and
resubmissions, are motivating their supplier base that are not as exposed to
this pressure yet. First and foremost, it's actually not a super new
requirement. It's been around for a few years. There are three motivators
that I see.

Julia: First, there is a lot of collaboration building between companies that

are starting to engage their suppliers in climate action, industry leaders,
customer facing brands are starting to cascade their knowledge, their
experience and their expertise and support towards suppliers. This is one,
the motivated approach, this is really the carrot approach. We've done this
before. We can provide you with training, we can provide you with tools.
Let's adopt this. You need this data to improve your performance.
Julia: The second approach and the second motivator, which is a little bit
more on the stick side, is really about the regulatory pressure in Europe. We
see a lot of regulatory requirements around reporting scope 1 and scope 2
emissions now emerging, scope 3 really reaching the small and medium
enterprises. This is not only a Fortune 500 requirement, but rather it's
seeping into companies that are a size of 500 employees plus and this can
already really start changing the game. So that's the second which is a bit of
a stick.

Julia: The third is really about the opportunity, because there is an

opportunity in measuring carbon emissions because measuring means
starting to manage it. And this is why there is a blossoming industry of
carbon accounting that is happening all over the world right now where
much more automated solutions that are simple and designed for specific
sectors, specific geographies are starting to pop up on the market, that are
relatively reasonably priced – if you compare hiring a consultant and
bringing them into your operations versus subscribing to a web-based
solution that can cost a couple of hundred dollars a year to start measuring
your emissions properly and then unlock the opportunity of reduction.

David: And are those available through Ecovadis or are they more or less
supplying the information that you then aggregate and supply in a different
form?

Julia: We're quite solution agnostic. We have a scope 1 and scope 2

calculator on our platform that's available for SME users that are just
getting started on this journey- first time carbon accountants. And we have
partnerships out there for more complex applications. Really one size does
not fit all in this space. So that's why we are really looking at what's more
specific about your industry. And we'll take data from whatever solution
you need. Because we're ultimately facilitating this exchange.

David: When companies calculate scope 3 emissions, in your experience,

do they go one level back and one level forward, or do they try to go all the
way back? Where does it stop? And what's required for reporting?
Julia: This is one of the biggest challenges around scope 3 emission
measurement and reporting. The GHG Protocol provides a framework
which can be interpreted in quite different ways by different companies,
depending on their activity and on the materiality aspect of certain scope 3
categories. So indeed, there is a lot of opportunity for growth and
harmonization around that today. The regulatory landscape does not provide
as much of a prescriptive guidance, but rather wants everyone to start
measuring, to start reporting, because this exercise takes years to build
internally and externally and to mature to where it's proper audit grade
reporting, that we hope to see in a few years in every annual Sustainability
and 10K report.

David: So in the meantime, is it an open game for companies to sort of play

with their measurements? For example, if scope 3 measurement does not
extend necessarily to the second tier or third tier, if a company only counts
the first tier and then it proceeds to outsource its business and push it off by
one tier, the scope 3 goes from the second layer of the onion to the third
layer of the onion and disappears off the cliff. And so their reported
emissions can decrease a lot if they just outsource an activity. Do you see
much of that?

Julia: Potentially, the companies that start calculating their emissions, they
would look directly at their suppliers that are first tier. But from that there is
a way to estimate what's coming before and what's coming after. All of this,
again, estimates industry averages. But if you follow the GHG protocol,
you can't just say, okay, these are not my emissions, whether they're
recorded in your scope 1 and 2 or in your scope 3, upstream or downstream.
Scope 3, category one is purchased goods and services or some outsourced
activities. They need to be accounted for. Where they fall is a matter that
can vary. But what's really important here, also to note is that today, given
that there is quite an interpretation out there in terms of how to apply the
GHG protocol, what's important is actually the granularity of the reporting
exclusions, which scope 3 categories are included, excluded, and why?
What have been the changes around the management of the company? And
this is what gives companies that consume this information more or less
confidence in the data that is reported. Because we are right now in a bit of
a gray area in terms of what the standards say and how they are enforced,
and they're not necessarily enforced. This is why being transparent on how
you report, how you calculate whether the tools that are used are in line
with the GHG protocol and whether you're covering all your material
emissions and documenting the exclusions really helps.

David: Got it. We've talked a bit about suppliers as relates to scope 3, which
is the upstream, you call it. And then part of scope 3 is the other half of it, is
looking forward in the supply chain, the value chain, right toward your
customers. What are the obligations to report forward? For example,
suppose I run an office supplies store and I sell tape, but I sell it to so many
customers. Am I supposed to measure the forward carbon footprint of what
every customer does with my tape? And how would I know what anybody
does with the tape that they buy from me?

Julia: This is a really good question. And this demonstrates the importance
of the shift from corporate accounting towards product accounting because
this is where these discrepancies really start to play out. In corporate
accounting, a vast majority of what's forward looking is going to be based
on assumptions: industry averages, some lifecycle analysis studies that have
done some estimations, but ultimately it's much more modeled data. It's
really hard to tell how the consumer will use your tape, but when it comes
to product level accounting, actually there's is an emerging consensus on
what is useful material product carbon footprint data. This is not the full
scope of emissions, but rather cradle to gate emissions that are upstream
from you, you collect from others. They should account for them. You
should take yourself into your own calculations and provide to the next link
in your own cradle to gate. And this is how it creates this level of
transparency and relative accuracy and replicability and comparability of
the data that is shared across the value chain. Now, the last one in the row
will have to make, of course, some assumption.

David: It sounds very much like value added accounting. It's the same
principles, right?
Julia: Got it. Exactly.

David: So have you seen many companies develop net zero plans?

Julia: What we see a lot is the CEO for one reason or another, motivated by
investor pressure or public relations or whatever, sets a date for net zero.

David: Have you seen many companies actually develop a net zero plan?
Like put real numbers behind that and have some credible plan to get there?

Julia: Look, this is a big journey for a lot of companies and I actually would
challenge what you're saying here. I get a sense that you have a little bit of a
negative view of a CEO that has set up a net zero goal that does not have a
detailed plan behind it. Actually, just yesterday I was talking to one of the
industry leaders that told me that their net zero pledge went exactly the
same way. The CEO set out a net zero commitment, a goal, a target here,
and they did not know how they were going to reach it. And that was
obvious to everyone around the table. The reason why these net zero
pledges are important and in most cases are not backed by a very detailed
plan is because these plans emerge as resources and ambition within the
company are rising. Think about it this way. If someone doesn't put me on
the spot to deliver on a net zero commitment, most likely I will go to my
business as usual. Quite quickly. So this is what I'm seeing, is that net zero
pledges really cascade action within the organization for those who are
really meaning to follow through with these commitments, to create
detailed and elaborate plans on how to reach them. They're much more
concrete for next year and much less concrete for the next five to ten years.
But the important part is to have the long-term view and mapping out what
would be the trajectory for you to reach net zero.

David: That's a brilliant answer and actually reminds me of the way we

used to do reengineering assignments, big transformation projects at
companies. We often set a stretch goal and without knowing exactly how
we were going to get there. And it was a motivator to do a moonshot, to
really try to exceed what you break out of the box and to think differently.
So in between the aggressive stretch goal and the filling the gap, I think we
actually have some hope and a very bright future. And actually, one of the
things that I have been discovering as I've been on this journey myself is
that the growth potential economically is huge. When we challenge
ourselves in those kinds of ways, suddenly we find that we have ways of
getting places we never thought of, and that's going to stimulate decades.

Julia: In my opinion of growth potential, I absolutely agree with you. I think

one of the best examples is advancement in technology – that not all
technologies that we need to get to net zero are here, but the pace of
innovation and acceleration of these technological advancements is really
rapid. The last IPCC report included carbon removal for the first time as an
option for decarbonization technology. And that, to me, means we are
moving in the right direction, although incremental steps, but we need to
take them to get to the stretch goal.

David: Absolutely. Well, that's a fantastic observation and probably a good

place for us to wrap up. So thank you very much, Julia, for all your insights
and your practical experience as well.

Julia: My absolute pleasure.

6 Compiling the Net Zero Plan – Introduction

Section 6 helps you analyze the financial impact of carbon reduction and
document your net zero plan. It helps you size the CO2 take-out
opportunity, evaluate the revenue and operating cost impact, assess the
capital expenditure and Return on Investment, document the plan, and
present the plan to stakeholders.

Remember to access REVchain™’s customizable templates at rev-

chain.com. These are designed to be downloaded and adapted for your
bespoke Net Zero Plan. If you want advice or help, I am at your disposal.
And should I not have the answer to your question I will refer you to
specialized scientists, engineers, or transformation consultants who can
help.

The journey to Net Zero should be profitable and growth-inducing! This

section, which guides you through the quantification of benefits and costs,
distills the results of all the preceding chapters into a bottom-line financial
model and document template that you can use to build your net zero plan.
It is based on the advice of experts with hundreds of years of collective
experience. The plan should provide estimates of the possible benefits and
costs of inspiring an adaptive culture, laying the foundation for a high-
performance organization, informing how to design low-carbon products
and services, introducing energy management systems and demand
response programs that can lower carbon footprint, optimizing logistics and
transport networks, building green structures, and migrating to clean energy
technologies. This final section is about developing and presenting your
customized net zero plan, or whatever other title you will give to it based on
your carbon target.

This chapter is an introduction to the last section so it is not the “deep

dive.” Subsequent chapters will explain how to evaluate the revenue and
operating cost impact, and the capital expenditure and return on investment,
as well as how to document and present the plan. This introduction gives a
preview of three key dimensions of the chapters that will follow: 1)
financial analysis, which consists especially of what investors want to see,
the incremental revenue and cost impacts, and the required capital
investment and return on investment; 2) documenting the plan; and 3)
presenting the plan.

The first part will focus on what investors want to see, which itself consists
of three subparts: 1) understanding what investors are looking for, including
risk-return ratios as well as how to evaluate and present stock price premia;
2) assessing the revenue and operating cost impact of net zero or whatever
carbon reduction plan you have in mind, and 3) evaluating the capital
expenditure that may be required to achieve the objectives.

The second part has to do with documenting the plan. How does the net
zero plan fit in within sustainability reporting? Is it a report? Is it a
framework? Is it something you submit to regulatory authorities? What are
the elements of the net zero plan? How can you build a reasonable project
schedule for decarbonization? How many sections and pages should the
plan have?

The last part will share my advice on presenting the plan, and how to
present it to your Steering Committee, investor groups, and customers.
There are, of course, other stakeholder groups, but these are core groups
that you will need to present to. “Presenting” could include any number of
different formats including a written document and an oral presentation. I
will share some of my experience with the type of meeting where you are
transmitting an important recommendation, for which you expect decisions
and notices to proceed.
Understanding What Investors Want – A Preview
First of all, what are investors looking for? We will distinguish between
institutional investors, private equity investors, angel investors, venture
capitalists, and hedge funds, just to name a few. The relevance will depend
on what kind of investors you are dealing with in your company. Let's
assume for the moment that they are institutional investors, that your
company is fairly large, and that they have a portfolio of holdings that is
rather deep.

One dimension they regularly filter by is a company’s market

capitalization to determine if the company falls within their target
investment range. How big is the company? Usually each of the classes of
investors I just described has a sweet spot, a range of size of companies
they tend to invest in. If the net zero plan you are developing might change
your market cap in any way, you might want to consider what that move
might do for your attractiveness to your investors.

Then they might screen the resulting companies by their profitability. A

widely used profitability metric is EBITDA: earnings before interest, taxes,
depreciation and amortization. There is also the net income or many others
that measure profitability at different levels, such as gross and net margin.

Cash flow is often attractive since it offers financial security. And in this
category we have free cash flow, dividends and anything else that generates
cash for investors because cash makes the stock more interesting to
anybody who has invested in it. So if the net zero plan generates cash flow,
that would be a positive factor to investors.

Growth can be an alternative desirable feature of stocks, with risk being a

countervailing factor. If the net zero plan increases your growth potential by
opening up new markets or creating margin improvement opportunities,
these things would be a plus to investors.
One type of risk is stock price volatility, called beta in investment terms,
which is usually measured by how much your stock price has tended to
swing over time. The second is management risk, which covers
management competency as well as how well the team performs and
maintains a stable growth path for the company. If you have a non-volatile
stock to begin with, chances are your net zero plan will also be reliable and
low-risk, and that will boost the company’s value in the eyes of investors. If
the investors are very confident of the management team, they will trust that
your company is going to fully execute the net zero plan, which might raise
your stock price.

Another thing stock investors are often looking for is value, essentially a
stock price that is worth more than its current price. This would allow them
to “buy low and sell high.” So they want your price to rise above the
average of your peers.

Some investors may look at the growth to value relationship. Investors

traditionally either invest for value or for growth, one or the other. Growth
means that the company is going to accrete in revenue, size and value. A
company that is going to pay dividends is a stable source of cash
disbursements over time or is at least able to maintain its value in the
marketplace. The growth to value relationship is a ratio, growth over value
is a criterion that investors often look for. So they look for the right
relationship between growth and value, to the extent that net zero factors
into either growth or value, it will make an impact on your company's
attractiveness to investors.

Other investors may seek return on assets. In this case, those could be
influenced by your net zero plan. If you intend to change your asset base,
move into new asset classes, acquire certain technologies by companies,
buy intellectual property, or whatever it is, your return on assets might be
influenced.

Still others may look at leverage, which is your company’s degree of

indebtedness, which could also be influenced by your net zero plan. For
example, if a power generation company decides to get to net zero by
building offshore wind farms and needs to borrow rather huge amounts of
capital in order to build those offshore wind farms, that would increase the
company’s leverage which may or may not be attractive to investors,
depending on your current leverage ratios. Of course, your credit rating is
also important to investors which goes along with the leverage part. Are
you reliable? Are you paying your bills?

Simply put, investors are looking at your company for certain financial
reasons and you want to make it more attractive to them on these different
dimensions as you develop and present your plan.
Estimating the Revenue and Cost Impacts – A
Preview

In this section we’ll also learn how to evaluate the revenue and cost impacts
of the various initiatives covered earlier in the book. You’ll need to consider
resourcing some important initiatives such as:
Project Management Office (PMO). Very likely you will want to
engage a Project Management office. This is often an external
consulting or engineering partner that takes the high-level view,
manages the project, makes sure all the different pieces come
together at the right time, delivers the update reports and is
essentially on the hook to ensure it all happens on time and on
budget.
Carbon footprint study. The second resource that you might need
to spend on is the carbon footprint study which could be done by
an external economist or consulting firm. That will take money,
which may not be huge in a big scheme of things, but something
you want to budget for.
Change management support. Of the changes described in the
previous chapters, some of them have to do with lean or quality
management or change management or transformation in other
words. There are consultants who specialize in that type of work
and who are very hands-on. You may consider engaging with one
of them.
Transportation experts. You may want to eventually hire a
transportation optimization consultant or do it in house. This
should be somebody or a firm that knows transportation
optimization, network design and logistics like the back of their
hands.
Organization Development Advisor. Organization development is
a crucial element if you want a mindset change as well as
understanding and alignment across the organization. That does
not mean just greenwashing words in press releases, but actually
engaging and impacting people’s mindset so that throughout the
company people know what the net zero target is and the major
axis in order to make that happen.
Energy Efficiency Expert. I have discussed quite a bit in the
previous chapters about how to reduce energy intensity or increase
energy efficiency. You will quite possibly want to engage
somebody who will review those numbers, check them, and agree
or validate your baseline efficiency and your assessment of energy
efficiency improvement potential.
Energy Technology Consultant. If you are going into any
renewable energy technologies such as offshore wind, battery
technologies or hydrogen you probably want to engage an energy
technology expert who specializes in this area.
Green Building Expert. We discussed the green building principles
and LEED certification. If you are going deeper into that, you will
probably want to engage a LEED-certified expert or an architect
who knows about sustainable building to make sure you are going
down the right path, and to perhaps do the blueprints or designs
later on.
Energy Purchasing Expert. If you plan to purchase renewable
energy credits, you may want to access an expert on a regular
basis to inform you and guide you along the way.
Carbon Offset Broker. If your strategy is to use carbon offsets, you
may want an expert or broker in that. And if you require carbon
offset credit certifications or verifications, you may want to align
with the standards body that would provide those types of
certifications.
Marketing and Public Relations (PR). PR and Communications
are critical for messaging to your investors and other stakeholders
about your program. It is important to get that message to the right
people and in the right way. Whether internal or external, PR or
communications support is crucial. Investor relations might also
support this endeavor.
In addition to that, there could be some likely recurring services or
subscriptions, for example:
Energy Management System. If you are going to monitor your
energy use in real time, there are certain services that do that. Both
consist of hardware and software solutions as well as some
consulting expertise.
Asset Management Systems. There are transportation and
inventory visibility solutions if you plan to get that as one way of
reducing your transportation and logistics carbon footprint. Some
of the solutions offer good value for subscription.
Transportation Management System, which optimizes fleet
routing and scheduling.
Renewable Energy Credits (RECs). If you are purchasing
renewable energy credits (certificates) or carbon offsets, you may
need to do this on a periodic basis.
Sizing the Capital Investment and Return on
Investment – A Preview
Throughout the previous chapters you may have decided that some of the
areas may generate a very positive benefit but require an investment in hard
assets and infrastructure in order to achieve that benefit. Figure 66 displays
a range of equipment you may need to acquire. If you migrate to electric
vehicles, you will need charging stations. If you pilot hydrogen powered
vehicles or equipment, you will need to buy electrolyzers, fuel cells and
other ancillary equipment. If you migrate to alternative fuels, you will need
to update fleet vehicles or equipment. If you replace forklifts they will need
charging stations, and automated guided vehicles or autonomous mobile
robots will need wireless communications networks. If you are a retailer
and have physical stores, or if you are shipping into physical stores, you
might need wireless communication and temperature sensors to modulate
heating, ventilating and air conditioning costs as well as the associated
refrigerants and hydrocarbons.

Figure 66: Examples of Infrastructure That May Be Needed Along the

Pathway to Net Zero
Of course, there is more than one answer regarding the cost, depending on
whether you are looking at the cost of the vehicle, the components for those
vehicles or the cost of different fuels to fill the vehicles. They are dynamic
and changing frequently, so any figures I could put there would likely be
inappropriate or outdated for your needs for the time and place you want
them.

Is there a minimum investment to get started? The good news for many
buyers at the moment is that most of the pressure is currently on the
suppliers to reduce the costs and get to massive economies of scale, which
will make these things affordable to you. If you follow what happened in
the lithium-ion battery market, costs decreased from $600 per kilowatt hour
about ten years ago, to under $100 now. The same thing happened with
solar panels and solar farms, as measured by the cost per kilowatt hour. This
reflected decreases in the cost of the panels as well as improvements in the
efficiency of installation and operation of the solar farms. Many of these
dynamics are detailed in my book Reinventing the Energy Value Chain.[46]
Thus if you are in the market to buy, chances are you will be benefiting
from this as the products will be cheaper and cheaper over time. That raises
another question: should I just wait before I buy into the sum of this stuff
because it will be cheaper in three years? That is a difficult question to
answer without a specific use case in mind. Obviously, if everybody did
that we would just wait out the entire energy transition and come back in
the year 2060 or 2070 to get the best bargains on everything. Most
companies are not willing to do that and most investors are not going to
wait that long. There are often dips in the price declines which make it a
good time to get into the market. For example, around 2017 the lithium-ion
battery market price leveled off. Those are moments you want to look for
because they represent logical times to start buying into the market. In the
hydrogen market right now, we are at a very early stage. Investment in the
market to bring about hydrogen as a fuel for all sorts of things will come
onstream in future years. And it is becoming clearer now to everybody in
the industry when that is all going to happen. But it is following a later
progression than the lithium-ion battery market did. At this point it looks
like 2030 will bring an inflection point in prices for hydrogen technologies.

When you obtain the data you will be able to evaluate your investment, and
this chapter will help you do that.
Documenting the Plan – A Preview
After you have done all the assessments and defined all the programs, you
will need to estimate the timetable or schedule for the attainment of net
zero. To this end this section provides detailed review of project scheduling
techniques that you can follow to construct your work breakdown structure,
PERT chart and Gantt chart.

You are now ready to present it. Where does the net zero plan fit within the
sustainability reporting environment? How should it integrate with your
technology plan, capital budget cycle, supply chain plan, and perhaps other
plans that you may have at the corporate level? That will depend on your
objectives and sequencing for internal and external communications, as
well as the range of other reports that it may integrate with, such as ESG
and sustainability reports, capital budgeting plans, on top of strategic plans.

As the upcoming section will describe in detail, the net zero plan should
consist of an executive summary, a description of the approach used, a
section on governance including the Steering Committee and the people
who contributed to the development of the document, a chapter on the
baseline, an analysis of the opportunities for CO2e reduction through scope
1, scope 2 and scope 3, a Gantt chart and PERT chart indicating the timing
on how that is all going to play out. It should also include financials:
revenue, operating cost, capital expenditure, return on investment and
conclusions. There are templates for these on rev-chain.com.
Rolling Out the Plan – A Preview
You will be disseminating and communicating your net zero plan to many
stakeholders, including employees, suppliers, investors and customers, for
example. Your first audience is likely to be the Steering Committee that will
authorize and empower you to proceed in executing the plan. To help you
prepare for your presentation to the Steering Committee, I will be sharing
my thoughts on how to present to a Steering Committee for positive results.
Presenting the plan is very exciting. You and your team have put a lot into it
and you can be very proud of the analysis and hopeful of the prospects. By
this time, you have done your homework. After this plan is developed, you
will be in a position to stand with confidence, share what you are doing as
well as why and how it will benefit any given stakeholder group. You may
find it to be a very rewarding experience. I will be sharing some of my
thoughts in one of those chapters on how to present information to
customers that will shape their perception of your company.
6.1 How to Get to Net Zero – Breaking Down the
Carbon Take-Out and the Financial Payback

The journey to net zero should be profitable and growth-inducing. This

chapter, which guides you through the quantification of benefits and
costs, distills the chapters of the REVchain™ Master Class into a bottom-
line financial model you can use to build your net zero plan. It provides
estimates of the operational benefits and costs that you can anticipate
from designing low-carbon products and services, implementing energy
management systems and demand response programs, optimizing the
logistics and transport network, building green structures and migrating
to clean energy technologies, as well as other steps covered in the
previous chapters.

We have now come to the chapter on compiling the plan. This chapter will
help you quantify the carbon takeout and the operating cost impact of doing
that. I will use some examples from companies as far as what to count, how
much it should be worth in an average situation, and you can adapt that to
your situation.
Showing How You Will Get from the Baseline to Net
Zero Carbon Emissions
We will use a “waterfall” framework which starts off with a baseline and
steps down in increments. The accumulation of these increments results in
something at the other end. Figure 67 shows a waterfall chart for getting
from an initial price to a “should cost” level. There is a series of steps taken
which result in each of these incremental or delta measurements. We are
going to use this type of framework to illustrate how you can get from a
current situation on the left to a zero-carbon supply chain on the right.

Figure 67: Example Waterfall Chart (Illustrative)

Figure 68 displays the framework we will use to assess the carbon reduction
pathway. We will now begin to populate the chart based on the results we
have verified through prior consulting experience, the guest interviews in
the earlier chapters, and benchmarks from sources such as Guide to Supply
Chain Management.

Figure 68: Getting to Net Zero Waterfall Chart Framework (Blank)

Let's quantify how exactly we plan to reach net zero emissions.

Energy – Efficiency
First let’s consider energy efficiency improvements, the subject of Chapter
IV.1 How to Reduce Power Consumption by Decreasing Energy Intensity.

There are many routes to bankable savings in energy efficiency which have
already been successfully implemented at many companies. It is a rich vein,
a very high potential opportunity area that can in many cases be
implemented relatively quickly. Experts you have met through this course,
like Fritz Troller, have been dealing with energy efficiency for most of their
lives and are in the business of implementing transformative energy
efficiency improvement projects using smart technologies. Here is what
Fritz said in Increasing Energy Efficiency: An Interview with Fritz Troller,
CEO, Therm Solutions: “There is still a vast amount of efficiency gains that
can be had in the marketplace. In a manufacturer who is energy-intense,
different solutions sets can easily take 30-40% of the load out. There will
always be energy consumption – efficiency means doing it better, not
eliminating it – but we in the industry have an opinion that reducing energy
intensity by 30% to 40% is doable.”

In addition to the energy efficiency improvements, energy management

systems can reduce energy intensity. Bernard Arrateig at UltiWatt who does
energy audits and helps large companies reduce their electricity and power
needs, including very heavy industry and energy intensive operations which
are among the hardest to decarbonize, cites the ongoing savings that can be
achieved in energy intensity: “Of the decrease in energy consumption, the
cruise speed would be 2-3%. That is pretty stable, ongoing, every year. If
you just keep the process going, you can get some benefits every year. That
is what we got.”

Based on industrial energy use being 24% of total GHG emissions

(excluding buildings and transport),[47] reduced by 35% energy efficiency
gains per Fritz Troller’s estimate, plus 2.5% per year “cruise” savings rate
through 2050, which is the midpoint presented by Bernard Arrateig in his
interview, this totals 67% energy savings by 2050. Moreover, given that the
US Inflation Reduction Act offers an average of approximately 30% tax
incentive for a vast array of clean energy investments, including the Clean
Electricity Investment Credit, most if not all of the 24% industrial GHG can
be profitably removed. Therefore, we can say that increases in energy
efficiency and reductions in energy intensity can together result in a 23.2%
reduction from energy management systems. (24% of GHG emissions x
[67% energy savings + 30% average tax incentives]). In the case of energy
intensity and energy efficiency, cost savings translates directly to carbon
reduction, so the reduction is both in dollars and in CO2e.
Energy – Technology
Provisions in the US Inflation Reduction Act such as the Advanced Energy
Project Credit, the Clean Electricity Production Credit, the Clean Fuel
Production Credit, the Clean Hydrogen, Credit for Carbon Oxide
Sequestration, the Credit for Electricity Produced from Certain Renewable
Resources, the Energy Credit for Solar and Wind Facilities, and the Zero-
Emission Nuclear Power Production Credit provisions will stimulate power
producers to generate enough clean electricity to power all the low and
zero-emissions equipment referenced in the specific mentioned provisions.

Lawmakers claim that the Inflation Reduction Act will, in total, unleash a
40% reduction in carbon footprint by 2030.[48] By making several
assumptions, one of which is that if it will create 40% reduction in eight
years which will continue at a similar rate after 2030, amounting to a 5%
annual rate over 27 years to achieve 100% carbon-neutral by 2050, we can
apply that 40% to the remaining portions of energy usage that have not yet
been addressed. This can be done by deduction. Starting with the 73.2% of
GHG that is produced from energy production and consumption, we deduct
17.5% for buildings, 16.2% for transport, and 24.2% for energy use in
industry, which leaves 15.1%, representing energy use in agriculture and
fishing, fugitive emissions from energy production, and unallocated fuel
combustion.[49] Deducting all of the remaining 15.1% would eliminate 6%
of all GHG.

Consequently, we can expect a 15.1% reduction from energy technology

in various specialized sectors.
Energy – Storage, Demand Response and Peak
Shaving
Interacting with the utility's rate and time structure helps the utility lower its
capacity requirements in terms of the number of “peaker plants.” If you are
able to use power, for example, at night or on the weekends when the cost is
cheaper, that can save utility money. Utilities offer programs to help both
you and them save money by shaving that peak production, which reduces
carbon footprint because the utility can shift production to other times when
it is already operating its fixed asset anyway. According to Steven Nadel,
Executive Director of The American Council for an Energy-Efficient
Economy (ACEEE), “actual demand response savings ranged from
0%-24% of utility peak demand, with an average of 4%.”[50] Cutting 4% of
the energy used in energy production, transport and buildings, which is
73.2% of all GHG emissions, results in an average savings of both cost and
GHG of 2.9% from energy storage and related peak shaving at utilities.
Design – Green Building
Green building design, as discussed in Chapter IV.3 How to Reduce
Building Emissions Through Green Design can substantially reduce carbon
footprint and is already highly impactful in a lot of environments. New
materials help reduce embodied carbon, the carbon in the construction
materials used at the outset of building construction. In addition, operating
efficiencies can be had in heating, ventilating and air conditioning as well
as other operating costs throughout the lifetime of the buildings.

In the Green Building Interview with Jacob Knowles, Director of

Sustainable Design, BR+A Consulting Engineers, Jacob Knowles explains:
“Typically, if you're going to stick with normal materials like concrete and
steel, if you get alternative materials in the cement of the concrete, you can
significantly reduce the embodied carbon. Or if you get recycled steel or
steel made from electric sources rather than fossil fuel sources
manufacturing process, you can generally get to say 15 or 20% reduction in
embodied carbon still sticking with your concrete steel as normal type of
materials.”

Since embodied carbon equates to about 20 years of building life, according

to Knowles, and many of the advanced materials also reduce energy
requirements for building operation over its lifetime, I further assume 0.5%
per year in energy savings from green building materials. Taking the
midpoint of 17.5% for embodied carbon, adding 0.5% per year through
2050, yields a savings of 30.5% from green building. Since buildings
represent 40% of total GHG including horizontal infrastructure,[51] and
savings can be 30.5%, we can estimate potential GHG savings from green
building at 12.4%. This does not consider the impact of the Energy
Efficient Commercial Building Deduction, so could be considered as
conservative.
Design – Product Lifecycle
A low carbon product and process design, as discussed in chapter 5a, can
greatly reduce energy consumption throughout the product life cycle. In
How to Decrease Energy Intensity: An Interview with Bernard Arrateig,
Key Account Manager, UltiWatt, Bernard Arrateig refers to a demonstrated
reduction in energy intensity of “3%, 5% to almost 10% of energy
consumption…in the first two years” and a “cruise speed” of 2-3% per year
reduction after that. Assuming that the 24.2% of total energy consumption
that is attributed to “energy use in industry”[52] reflects eventual lifecycle
energy use at intermediate and final levels of consumption, that the CO2e
reductions are 7.5% in the first two years and 2.5% per year through 2050,
this would trim overall GHG emissions by 3.5% thanks to lifecycle
product redesign.
Logistics – Network Optimization
Optimizing the global supply chain and logistics network also has a clear
and quantifiable carbon footprint benefit. Nearshoring in particular has a
very large impact. In Reducing Logistics Emissions by Nearshoring:
Interview with Tom Cook, Tom Cook, the President of Managing Director of
Blue Tiger International, who has a lot of deep experience helping
companies reshore their operations, cited a freight, thus fuel and thus
carbon footprint of 50% from shifting production from China to Mexico.
Here is an excerpt of our dialogue:

David: Roughly what is the freight cost differential between China to the
United States, as compared to Mexico to the United States?

Tom: If we looked at January of 2020 [to exclude the effect of the

extraordinary rate increases during COVID], in order to bring a 40-foot
container from China into the West Coast of the United States the average
price was probably around $2,500. Compare that to a truckload coming up
from Mexico, which at that time, you know, January of 2020, probably cost
about $700-$800 to Chicago. Today, that's a little bit higher because
trucking costs with COVID have increased, so you might be paying about
$1000 or $1,200 for that same 40-foot truck-to-rail, but that's significantly
less than $2,500.

David: So if we equate carbon footprint to the cost of the shipping, which is

largely fuel, would it be accurate to say that nearshoring in this case would
probably cut the carbon footprint in half?

Tom: Yes.

Since business logistics costs are 8% of corporate sales revenue[53] and

costs can be halved by nearshoring, we can tag the potential savings in
cost and GHG from logistics and transportation optimization at 4%.
Logistics – Transport Efficiencies
Transportation optimization as studied in chapter 4b has significant
opportunities to reduce emissions, and like the logistics opportunities noted
above, these flow directly to emissions reductions through the reductions in
the use of fuel. Many companies have done this by shifting modes,
particularly from air to water, ocean-borne transport, and from truck to rail
where the fuel usage per ton-mile (or tonne-kilometer) is far lower. In
addition, many companies will benefit from zero emissions vehicle
subsidies and tax incentives, including for heavy duty vehicles, for which
the Inflation Reduction Act has laid out groundbreaking initiatives and
incentives for investing in energy efficient vehicles.

In Transportation Optimization Interview with Giles Taylor, President of

Trans-solutions, Giles Taylor notes that opportunities customarily exist for
“usually somewhere between 10% and 20% of savings on transportation…
moving from one mode to another mode, one service to another service.”
Most companies have not touched zero emissions vehicles’ opportunities
yet because they have been both unavailable and cost-prohibitive, but now
in the United States, with the Inflation Reduction Act, and also with some
subsidies that are available in Europe, in the EU, these are going to be
increasingly feasible.

The IRA provides large stimulus incentives designed to trigger investment

in clean fuels and zero emissions vehicles, including Credits for New Clean
Vehicles, Credits for New Electric Vehicles, Credits for Used Clean
Vehicles, Commercial Clean Vehicle Credit, as well as Incentives for
Biodiesel, Renewable Diesel and Alternative Fuels, the Second Generation
Biofuel Incentives, and the Sustainable Aviation Fuel Credit.[54]

Assuming that these incentives increase adoption proportionally to the

amount of the incentive, that the average incentive is about 30% (an
assumption that will be verifiable in time), and that the result of the IRA
incentives is a direct reduction in emissions rather than a step-down of
existing rates of emissions, they could increase the 10-20% optimization
potential as cited by Giles Taylor to 45% (15% + 30%). And applying the
45% savings to the 8.2% of total emissions that come from transportation
(16.2% less the 8% already counted above in logistics network redesign)
yields 45% * 8.2%, or 3.7% reduction in GHG emissions from
transportation optimization and low or no-emissions vehicles.
Transformation – Lean, Best Practices & Standards
Engaging Adaptive Behavior (III.2 How to Engage Adaptive Behavior) is
analogous to a Lean Management, Lean Manufacturing or Lean
Distribution initiative, with similar principles of organizational alignment
around transformation, and all the activities of transforming the enterprise
around a goal. The Lean Transformation, as I call it. Analysis and
experience, as documented in Guide to Supply Chain Management
(published by The Economist), prove that companies achieve about 4%
improvement from transformation initiatives which has routinely been
measured in terms of cost reduction.

Guide to Supply Chain Management, published by The Economist, [55]

offers benchmarks for incremental benefit and costs from operational
improvement. The book defines four strategies for optimal operational and
supply chain management: rationalization, synchronization, personalization
and innovation. They split down the center line into two different types, as
shown in Figure 69. On the left side of the center line, rationalization and
synchronization are predominantly based on traditional supply chain
management tools such as cost cutting, lean management and inventory
reduction. On the right, personalization or customization, and innovation
represent a more advanced approach to supply chain and operations
management. On the right side of that matrix the benefits are primarily in
terms of revenue enhancement, while on the left side the benefits are
primarily in terms of cost reduction. Each of the four strategies has a
particular metric that ties to the benefits. Rationalization normally leads to
net margin improvement. Synchronization generally leads to return on
assets improvement. Innovation tends to result in ROI and revenue growth.
Personalization or customization tends to result in higher gross margin.

Figure 69: Measured Benefits from Operational Improvements

Based on statistical financial research of publicly traded companies that
pursued rationalization, synchronization, customization and innovation
strategies, the average net margin of companies that effectively and
consistently applied a rationalization strategy was 4% higher than the net
margin of companies that did not. The average return on assets of
companies that successfully applied synchronization strategies ended up
4% higher than those that did not.[56]

While transformation initiatives have traditionally been focused on cost

reduction, if you change the transformation objective from cost to carbon
you will get approximately the same amount in carbon takeout as in cost
takeout. Seven out of the nine rationalization techniques studied in The
Economist study referenced above reduce carbon as well as cost –
techniques such as strategic sourcing, lean (waste reduction and quality
management), standardization and simplification of specifications, tier-
skipping, supplier kaizen, consignment, vendor-managed inventory, design
for manufacturability. The carbon takeout of an eighth rationalization
technique – transport optimization – is addressed later in this section.
Chapter III.2 How to Engage Adaptive Behavior walked through the
importance of making a clear vision statement and articulating what your
organization should be doing in order to achieve its Lean goals. You may
recall the below set of principles, where brackets indicate important and
discretionary word choices:
Make GHG emissions visible by measuring and posting [all] GHG
information for [all] to see.
Base operational and investment decisions on a [long-term]
philosophy, not [short-term] financial goals.
Engineer processes to avoid [unnecessary] CO2 footprint.
Codify and standardize processes to facilitate [continuous] carbon
reduction.
Build a culture of stopping work if necessary to avoid [any]
carbon footprint.
[Empower] employees to take emissions reduction actions in their
daily work.
Use reliable technology that reinforces the organization’s strategy
and core competences.
Reward consistency of values by promoting leaders who live net
zero philosophies in all aspects of their lives.

Best practice organization standards, for which a framework was provided

in Example Goals, Objectives, Targets, Standards and Metrics, enable and
incentivize measurable improvements. It may be hard to grasp how
transformative and important this is, but when you articulate the mission,
the vision and the values, and when you set leadership profiles, coordinate
between organizations and departments, set career paths and focus on the
culture that influences the mindset of people every hour of every day, you
get distinct and measurable results. Companies that excel at organizational
alignment and total enterprise transformation as in Figure 34: Net Zero
Management Maturity Matrix, which included mission, vision and values,
program leadership, cross-functional coordination as well as career path and
culture, are representative of the Synchronization strategy. According to
The Economist’s figures referenced above, companies that successfully
execute a Synchronization strategy realize at least 4% cash flow
improvements on average based on financial reporting in annual public
financial disclosures. They do this through 13 techniques – such as
constraints management and throughput analysis
“pull-based” demand trigger, just-in-time, optimal inventory placement,
sales & operations planning (S&OP), collaborative inventory management,
everyday low price, “flexibilizing” capacity, improving forecasting, and
mitigating supply chain and supply risks. Therefore we assume 4% from
best practice organization standards and targets.

Clear articulations of the goal, metrics and targets, as described in Chapter

III.3 How to Establish Net Zero Goals, Objectives, Targets, Metrics and
Standards, are critical companions to Lean Management Transformations
and Clear Organizational Standards. They align the organization with the
vision and ultimately achieve success in such transformations. “You get
what you measure,” goes the adage. It may sound a bit simplistic to
somebody who hasn't gone through this kind of a transformative exercise,
but it is crucial because the specificity and detail you put around these key
words determines the success or failure of the program. The line I am
reiterating is the first one: make GHG emissions visible by measuring and
posting all GHG information for all to see” (you will undoubtedly want to
tailor that). “What type of GHG information” and “for who to see” are
critical. Which type of GHG you choose to indicate and post or with which
frequency for who to see will drive adoption, or not. At one extreme, you
could be posting only CH4 (methane) emissions and making them available
to all field workers 100 times a day each. Let's assume you are keen to drill
in on that one metric and that one GHG, you could make an impact on that.
On the other hand, you could opt to post only a top-level metric, like
thousands of metric tons of CO2 equivalent, and make sure everybody in
the organization saw that once a day. These are very different approaches
and would likely have different outcomes. All the other messages and
supporting programs are going to make that metric move. The whole idea
here is to “move the needle.” The end result of all these efforts is to move
the needle or not move the needle.
The combined benefit of these two initiatives is 8%, as shown below in
Figure 68: Getting to Net Zero Waterfall Chart Framework.
Transformation – Supplier Management
Low-carbon sourcing, which we discussed in chapter 5c, can close the gap
to net zero. So far, if you add up everything we have explored, we get 65%
carbon takeout. You can take the rest out by applying low-carbon sourcing
techniques described in Section 5. The total potential savings in carbon
footprint across all the other initiatives that we have reviewed is 64%. If
you assume that same percent can be cut from suppliers’ emissions, and
further assume that the average scope 3 emissions is about 55% of their
total emissions – a figure which is not unreasonable considering that “for
many businesses, Scope 3 emissions account for more than 70 percent of
their carbon footprint,”[57] you end up with 35.6% potential cost or
potential carbon takeout from enacting sourcing and vendor
management strategies.

Supplier management decarbonization techniques include using supplier

scorecards that quantify carbon takeout metrics, partnering with suppliers
who are funded or supported by investors with low-carbon or ESG
objectives, setting up international procurement offices in areas with strong
governance systems, requiring suppliers to take advantage of fiscal
incentives for decarbonization, requiring suppliers to use recycled materials
or to use different materials that have lower carbon content, and
encouraging suppliers to develop their own scope 3 programs to push the
responsibility for carbon reduction on to their suppliers.

Figure 70, which was previewed in Figure 2, is the waterfall chart reflecting
how the combination of strategies can get your organization to net zero
emissions.

Figure 70: The Net Zero Waterfall Chart – Category-wise Breakout of GHG
Emissions Reduction Potential by 2050
Figure 71 summarizes some of the key calculations behind the waterfall
chart in tabular form. (Note that the Hypothetical Percent of Baseline
Carbon Footprint does not total to 100% because the percentage reductions
are specific to each calculation. Also, the Percent GHG Reductions are
rounded to one decimal place.)

Hopefully this has helped you to develop your roadmap for net zero carbon
emissions in your company. The next chapter is on how to quantify the cash
flow and capital expenditure associated with net zero, and how to assess the
return on investment and shareholder value benefits.

Figure 71: Calculations Behind the Net Zero Waterfall Chart (Category-
wise Breakout of GHG Emissions Reduction Potential)
6.2 How to Make the Business Case for Net Zero
“There are three or four things that you need to keep in mind. First is the
investment that you make with whatever the opportunity is, whether you’re
trying to reduce costs, increase your revenue from that, then the next piece
is the benefits that you get out of that.”

--- George DiRado, REVchain LLC

Implementing some elements of the transition will have a significant

effect on costs, revenues and capital expenditure. The good news is that
the program may become a profit center and your company’s stock price
may appreciate as a result of a solid and compelling net zero plan,
enabling you to tap new sources of capital. This chapter addresses what to
expect regarding incremental costs, cost savings and avoidance, capital
expenditure, return on investment, and potential stock price uplift. It also
provides guidance on financial analysis methods such as scenario analysis
and sensitivity analysis. Ultimately, success in achieving a financial green
light will depend on the effectiveness of your plan and how well you
communicate it to stakeholders.

Before getting into the detail of costs and capital expenditures, let’s first
take a high-level view of the business case for getting to net zero. The
benefits fall into two categories: 1) likely net savings from efficiency gains,
and 2) potential stock price appreciation.
Likely Net Savings from Efficiency Gains

There will, of course, be expenses related to getting to net zero, mostly for
technical and management expertise. The following resources will be
helpful:
For the energy intensity and energy efficiency studies there is no
substitute for an experienced energy efficiency consultant who has
conducted numerous energy efficiency initiatives before. When it
comes to energy intensity reduction you may need experts in
certain battery applications, consultants who are experts in certain
energy technologies like hydrogen, biomass or waste to energy. If
you plan to use RECs and offsets, you will need specialist
experience, but it may be possible to get this at little or no charge
from your power utility or from a company that issues, trades or
verifies the RECs or offsets.
For the transport and logistics optimization, a consulting firm that
knows the routes, lanes and modes that you operate on may be
able to obtain more savings than a generalist. The transportation
consultant may be a different consultant than the logistics
consultant, who might have more specialized modeling
capabilities in network design.
For green building, in addition to hiring a consultant you may
want to connect with the Green Building Council and standards
bodies such as TUV, UL, or ISO to confirm and understand the
standards by which you are designing your products and make
sure you are capturing the targeted benefits for GHG reduction.
The optimum PR and communications resourcing strategy will
depend on your current resourcing (in-house, outsourced, etc.), the
nature of the goal, target and timetable that you set, as well as
your preferences. If the impact on shareholder value is a key
element of your messaging, you may want to engage resources
that are familiar with communicating with this type of audience.
 Regarding the cost of ongoing services such as software as a
service or systems as a service, and associated hardware, there
will undoubtedly be some monthly fees, but it may be possible to
tie the outgoing payments to targeted improvements in energy
intensity, energy efficiency or cost savings.

The good news is that these expenses can in many cases be self-funded.
While you are reducing GHG emissions, you are also saving money in at
least half of the areas where you will have to spend money. In a simple
example, six of nine initiatives produce cash benefits. In some cases the
benefits reduce the Cost of Goods Sold, and in other cases reduce Sales,
General and Administrative expenses. The aggregate impact is illustrated in
Figure 3: How Efficiency Gains Can Self-Fund Your Net Zero
Transformation.

It’s not unusual to experience payback from some of these projects within a
year or two (less in some cases). Furthermore, the cost savings are
commonly recurring each year, which can help to fund new investments in
decarbonization technology implementation. Assuming Lean, Best
Practices & Net Zero Standards as well as Peak Shaving initiatives reach
their full benefits within two years, Network Optimization takes three years,
Transport Efficiencies take eight years including zero-emissions vehicles,
Energy Management takes until 2050 to reach the full savings rate, and the
financials hold steady aside from that, you will be on a path to capture $112
million in savings by 2030 and almost $150 million by 2050, as shown in
Figure 72. Reaching net zero can be highly profitable.

Figure 72: Cash Flow Benefits Over Time

Potential Stock Price Appreciation from a Solid Net
Zero Plan
In addition, if you present your case in a compelling way to your investors.
Your net zero program and how you communicate it could have a major
positive impact on how investors perceive you and therefore on your
company’s share price. Increases in share price improve the financial
position and borrowing capacity and can be used to fund investments in
technology related to decarbonization.

Figure 4: Price/Earnings Ratio of Companies with Net Zero Plans shows

that a sample of companies with a net zero target have a 65% higher
forward price earnings ratio than companies without a net zero target. This
should be a significant motivator for you to develop your net zero plan.

Moreover, when you look at the valuation of companies according to a

measure called price to book, which is the stock price of all the shares
divided by the accounting value of the company, the companies with
emissions disclosures have 20% higher price to book ratios than those with
high emissions today, as shown in Figure 5: Price/Book Ratios of
Companies with Net Zero Plans. This also establishes that a credible net
zero plan that informs your investors and makes them feel comfortable with
it is a “must do” for any publicly traded company.

Marketing and messaging about your net zero plan may be engineered to
increase corporate valuation and thereby derive the financial capacity to
invest in the future. Remember that in Chapter I Getting Off the Ground:
How to Organize for Your Decarbonization Initiative, in the section called
The Role of The Marketing Manager, I emphasized the importance of
collaboration involving Marketing, Communications and Investor relations
to ensure effective communication and messaging about your carbon
footprint reduction plan.
There are two main ways for the company’s valuation to rise: 1) if the share
price rises, or 2) if the multiple rises. The share price can rise when profit
projections rise, which could happen as a result of the savings initiatives we
explored earlier, such as network or transportation optimization. The
multiple can rise if ESG-friendly investors value your sustainability plan.

You can act on both – increase earnings hence share price by getting cash
flow from energy efficiency and other carbon reduction projects AND
enhance the multiplier, thereby pocketing savings from optimization
projects AND share price uplift.

Since the discounted cash flow method of valuation is based heavily on

future cash flows, which are influenced by the forecast savings from your
various cost reduction and energy efficiency initiatives, projections of
future cost savings and market growth can help project stock price strength.

Figure 73 shows how higher earnings and higher multiples increase your
company’s market capitalization.

Figure 73: Routes for Increasing Company Valuation Through Your Net
Zero Program
How to Identify Decarbonization Program
Investment Requirements
In the section on how to evaluate capital expenditure decisions we will
explore where to get the data for capital expenditures, consider different
ways of measuring investment profitability, and explain how to use
sensitivity analysis.

For some of the harder to decarbonize areas you may need to invest in
technologies. An increasing amount of that investment is becoming soft
investment such as software and artificial intelligence. Remember the point
that Fritz Troller made about climate and heating, ventilating and air
conditioning systems (see Increasing Energy Efficiency: An Interview with
Fritz Troller, CEO, Therm Solutions) – even with the same boilers and the
same infrastructure, using information and sensors to control temperature in
rooms, especially large rooms and conference facilities or hotels and
commercial buildings, can dramatically reduce the heating, ventilating and
air conditioning costs. To accomplish this, some degree of electrification
and repowering of equipment including devices, sensors, material handling
equipment, battery, electric vehicles, and the like, will probably be required.

If you have a product-based supply chain, there is a good chance that in

order to achieve net zero at the energy production in the raw material stage,
you may be transitioning to biofuels or alternative lighter hydrocarbons that
are not as polluting and have a lower global warming potential as well as
potentially hydrogen. Each of these has a different set of equipment
specifications. If you are using an internal combustion engine today or
whatever equipment using this kind of feedstock, sometimes you can put
the same fuels into the existing machinery. As an example, biofuels such as
ethanol blends are usually burnable in internal combustion engines up to a
certain blend rate and that is why they are available today. Figure 74
demonstrates typical energy transition equipment at multiple levels of the
value chain.
 Figure 74: Capital Equipment in the Value Chain

As you progress down into the component manufacturing segment, new

equipment is going to be required to burn these fuels which will require
capital investment. If you are talking about electrifying a network, there
will be a need for batteries and charging. How much does the lithium-ion
battery or a flow battery cost? How much does the charging network cost?
You probably know that there are three levels of charging: level one, level
two and level three. At level one you can plug into your outlet at home.
Level three is a very high-speed charge. Fuel cells, or in some cases
hybrids, will be running off hydrogen in most cases and some other
materials off others, depending on the chemical composition and the
engineering of the cell. You may need to acquire new equipment, replace
equipment, refurbish equipment and along with that, probably upgrade
infrastructure such as refueling stations and recharging stations.

If you operate in the delivery business or through a delivery company, a

shipping company, everything that happens along the vehicle segment of the
chain will need to be upgraded and updated to the new fuel type as well.
The cranes in the ports, the delivery robots on the retail streets and heavy
trucks will be retooled. A lot of them are coming out now. Hyzon is making
hydrogen powered trucks, and Tesla is making battery powered 18-
wheelers. Similar advances are happening in rail and marine transport.
Ships are running now on ammonia and methanol. All of this will take
investment.

Analysis of the required capital expenditure is best done at three levels, as

shown in Figure 75. The architecture is what I call nesting. We start off with
the mode or application, and within that we look at the category of
equipment as well as the type of technology. Although you might be talking
about a battery, a battery is different for a forklift than it is for a cargo ship.
The best way to get the right capital expenditure prescription is to ask three
successive questions: 1) what is your application? 2) What type of
equipment are you operating? And 3) what type of technology are you
aiming to use? Each pairing combination becomes a unique kind of analysis
from an engineering as well as economic point of view. Industry +
application + technology define the nest. If you expect to learn capital costs
right now, that is unfortunately not possible until you define exactly the
application, industry and technology. Only with that information can we
start generating cost estimates.

Figure 75: How to Nest Industry+Application+Technology for Technology

Evaluation
For example, if you use a lithium-ion battery in an electronic product, like
in a cell phone, you will likely have a different carbon footprint impact than
if you use a lithium-ion battery in a different application, such as a utility
scale network with distributed grid, a power grid. The battery size will be
different and the chemistry of the battery itself will be different. The
electrical connections are probably going to be different, with different
levels of power loss and recharging efficiencies, which would then require
how much battery storage you would need for a given level of throughput.
Everything about the engineering changes. If you have an energy storage,
let's say an energy storage application in one industry, it is not the same
carbon footprint as that same energy storage application in a different
industry. An energy storage system or virtual power plant to serve a refinery
cannot use the same energy storage specification as in a vehicle
manufacturing operation. The carbon footprint reduction will be different
because of the application and the industry. The reason I am going into this
is because I have done so much analysis for different industries and
applications that I have realized that this is a necessary way to organize
scenarios to get valid and actionable results.
That means you probably will be limited in your ability to apply generic
factors for the carbon footprint impact of technologies through free or
inexpensive market research outlets in your model. A free market research
report is more likely to use carbon footprint factors from a different
industry, different geography or different application than yours. This
becomes important as you forecast these effects into the future. What is
going to happen to the efficiency and hence the carbon footprint of the
technologies over the next ten years in these applications and industries?
What is going to happen to your operation over the next ten years? You
need to make a large number of assumptions in your modeling effort that all
need to be documented and bought into by the various stakeholders.
How to Structure Investment Analysis for Complex
Decarbonization Projects
Decision trees can aid in making complex decisions, especially if there are
many parameters involved. I often use these where one option is
technology, where at the second branch you can choose between different
applications of that technology, and at the third branch you might have
either high or low success. When you break it down that way, reverse all the
calculations and flow back, it essentially tells you which strategies are more
attractive than others and you can make choices like that. Figure 76 is an
example of a decision tree.

Figure 76: Decision Tree Framework

Figure 77 is an example where you have technologies, applications and
additional choices like the component type and channel. The structure itself
determines part of the answer. Depending on how you lay out the structure,
you are going to get results in those units and those terms. If your net
present value is with respect to a specific channel, a specific application, or
a specific technology, your answer will be defined in terms of channels,
applications and technologies and the one with the highest score will win.
That opens up the issue of how you bundle the choices, especially if you
have multiple channels, applications and technology numbers with a related
set of goods or services. Which comes first? The channel, the application,
or the technology? There are different ways to apply. You can find a
template on rev-chain.com which you can play with and set up however you
want as a decision tree.

Figure 77: Decision Tree Example

How to Calibrate Costs for Alternative Scales and Scopes

If you are going to make large capital investments you need to be reliable
about your acquisition cost estimate in addition to your operating and
maintenance costs over the future lifetime of that theme. There are five
levels of cost estimation accuracy, speaking not from a technical
engineering perspective but from that of project management. You will find
them in Figure 78.
Level 5. This is the least accurate cost estimate, used for concept
screening. Usually at that stage you can put up with an estimate
that is plus 50% or minus 30%.
Level 4. When you get to choosing a technology focusing on a
specific type of technology, you usually try to get within about
20% accuracy.
Level 3. When you set up a supply network, arranging customers
and suppliers with a focus somewhat on certain fixed costs of a
network that you plan to use to deliver that, you should be within
10%.
Level 2. By the time you send out RFPs for equipment or services
related to that equipment, you should be within 5% of the actual
cost that you expect to actually pay. This allows you to run a
competitive tender and compare the bids. Otherwise you are
comparing apples and oranges that have nothing to do with each
other because each company that answers has a slightly different
offering and you have not really understood or wanted to
understand the difference.
Level 1. By the time you negotiate a supply agreement, hopefully
you should be within about 2% of the actual end cost of your
project, to avoid the possibility of cost overruns during project
execution.
 Figure 78: Cost Estimate Levels

In the more widely recognized cost estimation approach the cost is

frequently higher than estimated, and relatively less often lower than
estimated. So the band is irregular.

For Level 4 cost estimation one of the most challenging parts of going
through that process is determining what economies of scale you will have
and what economies of scale the supply industry will have at that point in
time in order for you to forecast your capital costs reasonably accurately.
And again, some companies do these kinds of analysis – usually
engineering or construction firms. My company, Boston Strategies
International, does them. We come up with an actual economies of scale
graph that shows the decrease in the cost per something per whatever unit
of measure over given quantity of the unit. And that can be further
configured into certain types of conditions, features or parameters. You may
have a fundamental economy of scale within which you have a few
variations that might come into play depending on your project.
At Level 3 you may want to analyze economies of scope. Economies of
scope is the economic benefits of spreading fixed costs over a larger base
such as the number of customers. If you have a technology application and
you can spread it across more users, then you have economies of scope; the
cost of acquiring and installing it or whatever can be amortized across
multiple users. You might be able to realize economies of scope by having
longer contracts which would reduce the sales and fixed overhead as well as
the administration cost of your supplier. That might bring the cost down.
Although there could be a variety of other conditions that bring the cost
down it is hard to guess at all of them. But anything that brings the cost
down, except for increasing the volume of production generally, is
considered an economy of scope. Those are also factors which you might
attempt to bring into your analysis to the extent that you can make more
efficient operations by spreading costs across multiple plants, facilities or
companies, and that could, like with economies of scale, drive your
economics which could affect the technology choice and which could in
turn impact the carbon footprint.

You could then use those same parametric assumptions in your carbon
footprint projections and see if you can produce intelligent carbon reduction
scenarios by adjusting the variables. For instance, for every unit of
additional capacity, let's assume your carbon footprint might go up 0.3%. If
you have historically been over-specifying your equipment – maybe you
don't use the equipment at the full rated capacity or maybe it is designed so
that its carbon footprint is actually higher at certain levels of rated capacity
– you might be able to reduce your rated capacity of the purchased
equipment and reduce your carbon footprint accordingly.

For Level 3 estimates you may also need parametric costs. Take, for
example, a pump. The parameters are the flow rate, the pressure rating and
the refractory lining. The cost should be defined as a function of the rate of
increase of each of these parameters. Let's assume the cost impact for a
piece of equipment would increase 23% for every thousand gallons per
minute of flow rate, or 2% for every bar of pressure. This may sound like
overkill, but when you start to specify a $700 million project these things
make a big difference, so you probably have quite a bit of technical
engineering and cost workups needed to be done. And you probably need to
get a good idea of the size of the operation you intend to put together and
the timing which will influence the economies of scale of the industry. And
you might get much lower costs in three years from now, five years from
now, and so on. It could be a totally different profitability analysis
depending on the timing of the investment you intend to make.

How to Structure Scenario Analysis

Another useful tool for determining how much you can take out is scenario
analysis. In particular, two types of scenario analysis that I have shown
below in Figure 79.

Figure 79: Scenario Analysis Framework for Net Zero Projects

What happens if you change the activity level with the same technology
that you are currently using? By activity level, I mean the amount of
underlying activity whether it is production or power generation or
whatever, and the amount of underlying factor that generates the usage of
the carbon. What happens if you change that but you leave the technology
alone? Let's say you keep on burning regular fuel in the trucks but you
reduce the mileage or the number of tons in the truck. That means you
reduce ton-miles (or ton-kilometers) but you still consume regular fuel. In
that case, you could reduce 5% of the miles without any change in the tons.
That would be a 5% reduction in the ton-miles. You are still burning fossil
fuel but you have cut your carbon footprint by 5%.

An alternative way of running the scenario would be to say that you change
the technology but still keep running the same tons over the same miles or
kilometers. In this case the technology would have a large potential
reduction. If you change from regular fuel to low carbon fuel, let’s say
ethanol blend in a truck, this could reduce your CO2, methane and nitrogen
oxide emissions. Even if you deliver the same amount of cargo over the
same tons over the same miles to the same customers, it will reduce your
carbon footprint. Let's say you move to a 5% ethanol blend. That could
reduce your carbon footprint by 5% as well (although it would depend on
the GWP of the fuels concerned). So you have two different pathways to
getting to the 5% carbon footprint reduction: one is by changing the activity
or usage, and the other is by adopting a new technology with the same
activity level.

If you do both, you could get a “double word score” as they say in Scrabble
– twice the benefit – which would be very helpful in terms of accelerating
the journey to net zero. You need to run the scenarios in both directions and
dimensions to see what you can achieve.

The third thing on this chart which I will mention because I put it there for a
reason, is called “impact or factor.” This represents the Global Warming
Potential, which is the quotient of noxious or deleterious gas, GHG. If you
change something about the way which you operate there may be some
creative ways in which you mitigate the global warming impact without
switching fuels. For example, if you implement “carbon capture,” you could
still have the same usage in your power generation plant with the same
fossil fuel but reduce or mitigate your carbon footprint by influencing the
global warming potential factor. In this case you are not changing the GWP
of the basic fossil fuel – it stays the same, but because of the way you are
mitigating your usage of it you could be reducing the impact of the burning.
Let's look at some example scenarios. Say that you have decided that green
hydrogen is a target technology but within that, there are many different
scenarios and questions.

The first scenario concerns the power source. If you are going to generate
green hydrogen, what is going to be the power source for the hydrogen
production? You could have wind or solar, for example. And if it is solar,
which type of solar? There are concentrated solar, floating solar, fixed solar
farms, and so on so forth. Those would each be scenarios with different
carbon footprints. If the power source is wind, you could put five ten-
megawatt turbines or ten five-megawatt turbines. That difference would
possibly have a very different carbon footprint.

The second scenario concerns the energy storage technology. If you store
energy in batteries, different battery technologies could vary in carbon
footprint. There are flow batteries, lithium-ion batteries, compressed air
energy storage and gravity storage, etc, and each energy storage technology
changes the carbon footprint of the project. This is especially true if you
consider the carbon footprint of manufacturing the battery. Whether the
difference is large or small will depend on your configuration and your
application.

The third scenario would be about how to transport hydrogen. There are
many possible options, including rail, ship, truck or pipeline, and each of
those has totally different carbon footprints. You might also need to check
out some way of verifying that your green hydrogen is in fact green, which
involves a certification process and the degree to which the hydrogen might
be blue or gray could definitely change your carbon footprint.

The permutations of choices could lead to many sub-scenarios. Assuming

the technology has four options, the energy storage has four options, and the
transportation mode has four options, that makes 64 possible scenarios (4 x
4 x 4). And if you start defining hybrid scenarios, say 50% solar and 50%
wind power, then you have additional blends to model. There is almost no
limit to the amount of detail that you can go into to measure these things. If
you are with a large company that has a global footprint and a multinational
operation, even a little detail might be worth studying because when you
roll up the total volume of activity, the impact could be very significant.
Even a 1% change at a global multinational company could have 100 times
the impact on carbon footprint carbon emissions than a 50% change in a
small company.
How to Evaluate the Return on Investment
Return on investment (ROI) is a simple measure: net return divided by the
cost of the investment. The benefit of using ROI is that it is simple and
intuitive. However, it doesn't account for the timing of cash flows, which is
a big problem because if all your expenses are front-loaded and all your
revenues are backloaded, your return on investment would have the same
number for each case, while your cash flows would be opposite from each
other.

More often we end up working with net present value (NPV). The formula
and calculation mechanics are shown in Figure 80. The thing you need to
watch out for is deciding what hurdle rate or the interest rate to use. The
rate you use dramatically changes the result – 1% or 5% can result in
radically different NPVs with different go/no-go implications. Another
thing to watch out for is ensuring “apples to apples” comparisons. If you are
doing your investment pretax, your cash flows must also be pre-tax. Be sure
to be consistent in your assumptions.

Figure 80: Net Present Value Calculation

Another metric used to evaluate the investments involved in that zero
planning would be internal rate of return (IRR). The IRR is basically a
discount rate that makes the NPV equal zero: at what rate would the NPV
be zero? And it takes into account the cash going in, the cash coming out,
the investment cost, and the number of periods. It is basically the NPV
calculation just set to zero and solved for the rate (“r”).

Payback is another way of measuring project profitability. If the project

earns $100 a year, costs $1,000, it will take ten years to pay back, 1000
divided by ten. Payback ratios do not consider the time value of money,
except to intuitively understand that shorter payback is better.

Net present value takes all that information in and gives you one number
which considers the time value of inflows and outflows of cash.

The choice of investment evaluation criteria can significantly affect the

chosen path, so many executives look at multiple indicators before making
a decision. For example, if you are considering two projects – one that has a
higher NPV but a lower IRR than the second, and all other factors being
equal, e.g. upfront investment cost, you might want to select the first project
as it will generate more cash returns, even if the rate of return is lower than
the second.
How to Analyze Sensitivity to Key Variables
Whenever you are evaluating a large capital project, you should also
consider the sensitivity of the financial results to key variables. Figure 81
shows a “tornado diagram" from a study by the National Renewable Energy
Labs (NREL) for a pyrolysis system. This diagram indicates that the most
significant parameter – the one that could have the highest positive impact
on the project value – is the fuel yield. They further define it into the
scenarios of fuel yield, bio, oil, or some other blends and mixes. And
depending on the fuel yield, it could either make the project successful or in
some cases, drag it down. The second largest impact variable is the cost of
the biomass, in this case. They give you a range from $57 to $100/ton. At
those different scenarios, that is a second largest impact on the potential
returns of a whole project.

Figure 81: Tornado Diagram for Hydrogen Production

Modeling the Costs and Benefits: An Interview
with George DiRado, REVchain LLC
David: Hi George, it's a pleasure to talk with you about financial modeling
for energy transition issues and particularly calculation of benefits. George,
you’ve held many illustrious positions as Chief Financial Officer and
related positions. Before we get started, would you like to briefly introduce
yourself?

George: Sure. David. My background is in finance. I spent a lifetime with

Honeywell in a number of their businesses in various director and CFO
level positions and then went through the sale of our business, and then
spent four or five years in private equity before retiring. Now I’m
consulting to keep myself busy. So very glad to be here.

David: Sounds like a very modest description of what I know is a pretty

exciting career. Well, let's get started. You've developed an interesting
model that is in the learning management system as a template for them. Do
you want to walk through how to use it?

George: Happy to do that. First, maybe just talk about some of the concepts
that we'll go through in the model. In all investment decisions, there are
really three or four things that you need to keep in mind. First is the
investment that you make with whatever the opportunity is, whether you're
trying to reduce costs, increase your revenue from that. Then the next piece
of that is the benefits that you get out of that. So if your investment is
around making investment to generate additional revenue, you would look
at the incremental revenue that you generate and then the contribution
margin that comes with that revenue and compare that back over time to
your initial investment.

And then the third factor comes into that. And it really is the timing of that
because a dollar today is worth more than a dollar a year from now or ten
years from now. You need to take the timing of getting those investments
back into your calculation. Because you can take that dollar today, invest it
in another investment alternative. So you need to discount that back. And
the term used to do that discounting is called the cost of capital. And
there’re books that have been written on this, but I'm going to say it really
simply. It's the expected value of your investment portfolio as defined by
the revenues, costs, and capital investment, discounted by the cost of
capital. So that's kind of the high level of it. The full financial model is
available on rev-chain.com.

David: I’m sure the tool will be helpful for anybody interested in preparing
analyses to include in their decarbonization plan. Thanks very much,
George.
6.3 How to Construct a Realistic Program
Schedule

This chapter provides essential concepts, frameworks, tools and

techniques for managing a project with uncertain development paths and
timeframes. The chapter will teach you to construct a project plan that
considers the timeframe to maturity for technological evolution, scientific
research, testing, pilot and demonstration projects, budgetary decision-
making and operational deployment.

Overall, the transition to a net zero culture and work environment does not
come quickly. When you get into how to change the mindset and lay a
foundation for net zero to stick, more time and effort will be needed to
examine the job descriptions, performance metrics, company cultures and
the degree to which change is tolerated versus embraced.

You might be able to get some of the tasks done in a short timeframe. For
example, aligning the net zero program with the business strategy can be
done relatively quickly with some good facilitation and interaction with the
C-level staff. Reducing fuel costs through transportation optimization may
be done relatively quickly. You will examine the warehouses, rates and
change carriers, and you will close warehouses and consolidate inventory.

Other tasks will be bottlenecks. For example, if you are trying to reduce
power costs by lowering energy intensity, this may be a challenge if your
company has been using energy in a certain way for a long time where
processes and supply chain relationships are based on that approach.
Lowering the energy intensity by even 1% or 2% may be a big task. If you
switch from gasoline to hydrogen it would often take a long time because
hydrogen is not commercially available for most applications yet.

Reducing building costs through green design will possibly be one of the
longest time-horizon tasks. If you have pre-existing buildings which are
already amortized and you are not planning on building new facilities, the
payback period may be long and the investment may require careful
analysis. In contrast if you are building new facilities you can often build
them based on LEED design for only a few percent more than conventional
designs.

Introducing green products may take a long time as well. Product life cycles
may stretch out in many industries for two to five years varying by industry
and whether you are in discrete manufacturing or consumer products. If you
are dealing with an e-tail product then they could be much shorter, even
days or months, depending on your business.
How to Construct a Timeline
For each major activity you need to establish a work breakdown structure,
predecessor relationships and estimated time frames. To build the work
breakdown structure you can start with the tasks listed on the net zero
program chapter plan. Some of the tasks will be dependent on antecedent
steps and tied to successor steps, so you will also need to define task
dependencies. Use estimated timeframes based on the best information
available; you can always refine this over time.

Figure 82 shows a sample Gantt chart (timeline) with the time to complete
each task shown by the length of the bars. Many Gantt charts would show
two levels of time frame so you can read them more precisely, but this one
is just labeled Month One, Month Two, and Month Three. You can imagine
there is another layer down called week or even a third layer called day. So
you can visualize the time on the chart and read the start date and the end
date. And you can also include a column which says start date and end date,
so that you are exactly aware of the dates that correspond to these. I usually
do. Notice the precedence relationships, which are denoted by arrows
connecting the tasks.

Figure 82: Sample Gantt Chart

Identifying the Critical Path(s)
One of the techniques you may want to apply is Program Evaluation and
Review Technique (PERT) analysis. It identifies the project’s critical path.
PERT chart also help you identify potential bottlenecks in the project
schedule, thereby allowing you to refine the reliability of your milestone
completion dates.

To construct a PERT chart you take the tasks from the Net Zero program,
list them on the left and label each with a letter starting with A and include
the predecessor relationships. Afterwards you put the number of periods
which is, in this case, years, as illustrated in Figure 83.

Figure 83: Hypothetical Network Diagram for a Net Zero Program

Source: Author, based on constructs from Dr. Janelle Heineke, Boston

University
You can use the network diagram to find the critical path. The critical path
is the longest cumulative path to the end of the project. It means these steps
cannot get delayed without delaying the whole project.

To get that you first lay out the tasks in order of the predecessor
relationships. I will describe what is in Figure 84. You need a starting point.
If you are doing it by hand, you actually draw a circle or a square called
Start. And at the end you draw one called End. For the sake of clarity you
see that the first three tasks have no predecessor. That means that their
predecessor is the start of the project. They can start as soon as the project
starts. So what you have is A, B and C, where task A, B and C align
vertically right after the start. They each take different amounts of time,
three, six and two. But visually that is how they are displayed because
chronologically and sequentially they come just adjacent to the start. As
you can see, tasks D, E and F each have a precedence relationship: D and F
must be preceded by A. So they come after A. E has to come after B and C.
As you can see on the chart, it actually says E comes after C, and of course
C comes after Start.

Figure 84: Hypothetical Network Diagram with Slack

 Source: Author, based on constructs from Dr. Janelle Heineke,
Boston University

If you count up the time frames on every path and mark every path with an
orange line, and if you follow the orange lines on every possible path to the
end and add it up, each path has a number. So, for example, if you start
from the left and go toward the right and upward, you will see that A is
three, F is seven, and the total is ten. That is one path. If you take the
second path down and go to A -it is three, D is five, and G is four, making
the sum twelve. Thus that is a longer path. If you follow a straight
horizontal rightward path, it would be B, and then G, making the total a ten.
The lower path would be two plus two plus four, which is eight in total. As
you can see the longest path is ADG. That defines how long the project is
going to be; the project is going to be at least twelve. Your project is
definitely not going to finish before twelve, even though the other tasks
may be completed earlier than planned.
Determining Slack
Slack is the amount of time that any given task can be delayed without
affecting the project end date. Figure 85, using different input data, shows
the early and late start date, and early and late finish date for each task. The
early and late start for the Start position is zero of course.

Slack can be determined in three steps. The first is a forward path where
you proceed from beginning to end in a forward direction toward the finish
to determine the earliest possible start and finish dates for each task. The
second is a backward path where you work backward from the finish line to
identify the latest possible start and finish dates for each task. From this
data you can calculate the amount of slack in each task (this is the third
step). In other words how much buffer or extra room do you have? When
you subtract the total slack from the total duration, the path with the least
slack is called the “critical path.” Any task along the critical path needs to
be kept in sight at all times because if they run over the allotted time the
entire project will be delayed.

For example, in Figure 84 above, Task A has a duration of one. That means
it has to finish no earlier than one and, in this case, no later than one. So it
still starts at zero but it’s finish is one and one. If you go straight across task
B can start no earlier than one because that is when Task A ends. And it can
finish no earlier than three because it takes two units of time. Consequently
the early start is one and the early finish is three. Moving on to Task D, it
can start no earlier than three and can finish no earlier than three, plus the
task duration of four making it seven. Hopefully you are able to see this in
the diagram and keep on going forward through the path. I is two. You take
the late start of the previous task and you add this task duration to it of
course, and you end up that it can start no earlier than eight and finish no
earlier than eight. Same thing with the other one. J will now start no earlier
than ten because it is eight plus two, and it takes one so it can really finish
no earlier than eleven. Thus you get through the whole exercise. The project
as a whole in this case has an eleven and eleven as the early start and early
finish. The critical path is highlighted parts in yellow. After that you take
what is called a “backward pass” from the finish to the start to figure out the
late start and finish for every task. We have just figured out the numbers on
the left underneath each bubble and now we are going to figure out the
numbers on the right underneath each bubble.

In the backward pass you subtract the late start from the late finish to get
the slack. So first let's compute the late finish and the late start starting from
the right on the finish bubble, moving backward leftward toward task J. If
the late finish for the last step, the finished step is eleven and task J takes
one, then the late start for J has to be eleven minus one making it ten. Now
moving backward again to task I, if the late start was ten for J and task I
takes two, you take away two from ten you end up with eight. And this time
I am using the critical path as an example. We go up to task H and take
away four for H, we end up with four as a late start for H. Next, four minus
three is one for C and then one minus A's one is zero. So you end up
backwardly populating the late start.

When you've done both the forward pass to get all the early and late starts
and finishes, you can calculate the slack, which is the smaller value of the
late finish minus the early finish field, and the late start minus the early
start. It’s actually intuitive if you picture that you have some time at the
beginning of a task and you have some time at the end of a task that isn't
necessarily locked in and between your potential movement forward and
backward a little bit on that task, that is slack.

How to Integrate Uncertain Task Durations

If you have uncertain task durations you can assign expected, optimistic and
pessimistic times and then use those in your project planning, either your
Gantt charts or your PERT charts. Figure 85 shows a hypothetical task list
with uncertainty. It is the same task as it listed before with the same task
labels and the same predecessor relationships, except that I added an
optimistic time which is shorter, and a pessimistic time which is longer.
And it does not have to be normally distributed. It can be imbalanced. For
example, for task G (incentivize suppliers to net zero) the expected value is
four periods (let's call it four years) but let's say in a pessimistic world it
might take a little longer, but in an optimistic world it could take a lot less
time. And let's say that your underlying assumption there is that the
optimistic result would come from installing software that gets everybody
on board, and it's much quicker than trying to do it manually. Consequently
in this case, all the assumptions that you make factor into the optimistic and
pessimistic time. They may not be equally balanced on either side of the
expectation but that is fine.

Figure 85: Hypothetical Task List with Uncertainty

Of course, the big question is exactly how long will it take? This will
depend on the detail of each task and what you consider to be the early start
and the early finish, as well as the late start and late finish of those tasks.
Each task will have its own schedule and until you go through that exercise
it is really impossible to say when you are going to reach net zero. Here are
two rules to consider when drafting your project schedule.

First, getting higher percentage carbon reductions, say, 75% of the carbon
out instead of 25%, will take disproportionately longer and involve more
uncertainty. For a net zero target it is not surprising to need more than a
decade of time.

Second, the longer the time frame the larger the uncertainty portion of that
becomes. As you draw the bars out into many years forward in the future,
chances are they are going to have larger buffers and larger uncertainties.
So you need to work on that line-item task at detail level. That is the hard
part, but also the exciting part!

If you are taking the online class please do not forget to check out the
supplemental material and the templates.
6.4 How to Document the Plan

This chapter helps you document your plan to lower carbon, whether
your goal is net zero or other target(s). It provides a structure and
template to assemble the essential components of your plan in a format
that will resonate with stakeholders.

In this chapter I will walk you through the elements of the plan that could
make your low carbon plan compelling and complete. I am structuring it
into a number of sections that I have generally found important, relevant
and useful for business presentations. I will start with an executive
summary, to be followed by program governance, background and
introduction, objective, scope, approach, baseline as well as the plan itself
including targets and deliverables, benefits, timing, financials, the
organization and the team, to finish with conclusions, as shown in Figure
86.

Figure 86: Elements of the Net Zero Plan

The REVchain™ online program is designed so that you can take templates
and documents you have either worked up or analyzed from each of the
chapters of the Revchain program and slide them into the net zero plan
elements. Therefore, if you have done the work on all of them, you can
assemble your analysis work into the basic content of your report.
The Structure
The first part is a statement of the Objective. What is it that we aim to
accomplish? It sounds obvious to state the objective, but you would be
amazed at how many times it is not done. Of the hundreds of consulting
engagements I have managed, I would say that more than half of the time at
the beginning of the engagement the client had not stated the objective, or it
might be there but written in a way so unclear as to obfuscate the major
point. Often this is the result of political pressures in an organization. By
the time people get assigned to a role to manage an important project, a lot
of cultural contexts has preceded a major program. A lot of historical
contexts and assumptions have been made. As a result the objective is
assumed to be fairly self-explanatory. In other cases it may be considered
“unspeakable” because of the fear that saying it may shame somebody
whose job it was to achieve that objective, but for whatever reason the
organization needs outside help. However, it is a bad idea to skip the
statement of the objective because if you don't state the objective
somewhere in writing for everybody to see and agree on, different
stakeholders may have or develop different understandings of the objective,
which can create problems down the road.

The second part is a statement of Scope. I define the scope to make sure
that we know what is included and what is not, in particular which
businesses, products, geographies and people are included as well as which
are not. Ultimately this is a people management exercise because if you
decide that certain businesses are included and others are not, you are
including certain human beings and excluding others. Thus the scope is
critical both from a people and project management point of view, in
addition to other aspects such as financial impact.

The third part is the Approach. What is the methodology and how was this
approach chosen over other possible approaches? There must be some
methodology, framework and approach. The approach is frequently a
subject of debate not only due to competing approaches but also because
certain approaches favor certain people who are specialists in those
approaches while disfavor others who are not. Again this part could become
political. The approach could be an Achilles heel that might come back to
sabotage the project results later on if it is determined that you have
followed the wrong methodology. Therefor it is hugely important to have a
good method outlined and prepared for people to pre-agree on.

The fourth part is the Baseline. In this case, it largely consists of the
baseline carbon footprint.

The fifth part is Target and any Deliverables. All major initiatives for
transformation have some kind of deliverables or work product. Sometimes
the deliverables, or work product, may be something like changing out
equipment. In the case of a net zero plan the deliverables will be a scope 1,
scope 2 and scope 3 plan.

The sixth part is Benefits. The intended or targeted benefits are important in
any outline, proposal or report at the outset of a major transformation
program. It is important to specify the benefits to the company in financial
or strategic terms. “Net zero” is not a recommended way to state the benefit
to the company. Maybe the benefits underlying that are brand equity,
shareholder value or free cash flow from energy savings – some way that
the management and board will find compelling that has minimal risks and
downsides.

Omitting a statement of benefits may raise a couple of questions. The first

question would be: are there benefits? Maybe you are just doing a project
because it was somebody's personal pet project that does not have any
benefits for the company. That would be the worst-case scenario but I have
seen it happen. A second question could be: are the benefits accurately
sized? Some of the stakeholders might think they are unrealistically large,
and other stakeholders consider them too small to be worth pursuing. I
almost always find that there are people on both sides of this equation,
usually the C-level people think somewhat bigger and longer-term because
they connect ideas to the vision and to strategic pivots in the company’s
timeline or history, but people on the operational level think more
pragmatically and realistically, which often means smaller forecasted
benefits.

The seventh element is a Timeline. When are we going to realize the

benefits? That can also be tricky because, like with benefits, people might
disagree on the timeline or the resources attached to it. Since the sizing of
the benefits may impact the resourcing, the timeline, and sometimes the
approach, these elements are interrelated.

The eighth part, the Team, needs to identify who will be in charge of
executing the initiative.

The ninth part, the Resource Plan, aside from key financial numbers, should
explain how people, relationships and any other resources need to be
leveraged in order to achieve the result. It could be training programs,
people's time, consultants, travel and a wide range of other resource factors.
The Wrapping
Large reports, books or any kind of substantial documents that will be
widely read or critiqued usually include Front Matter and Back Matter. The
Front Matter ordinarily includes a Table of Contents, a Table of Figures, a
Table of Abbreviations, an Executive Summary, Acknowledgments, some
background and introduction to the subject. The Back Matter includes
Appendices, Notes and Sources. Books also include a Bibliography and an
Index, but these are not recommended for a standard business document or
white paper style document. The more carefully you put all this together,
the more seriously your document will be taken and the more widely it can
be circulated, including to customers or the general public. Figure 87 shows
the typical Front and Back Matter elements.

Figure 87: The Front and Back Matter of Your Net Zero Plan

The quality of the source material may influence your plan’s credibility. If
your data comes from a respected public source, such as a national
laboratory or an international non-governmental organization that has a
high brand image and reputation, the readers usually find less to disagree
with about those numbers.
The Executive Summary
Every report or document for business consumption should have an
executive summary. How many of us feel overburdened with reading
materials, with email flow? We just need the 30 second version. Most of us
are now at the stage where we absorb media in sound bites or even worse
than, micro bytes. The way Instagram and other social media feeds are
designed has trained us to get bored with anything that takes more than a
few seconds to understand.

The waterfall chart from Figure 68 would be a good thing to put in your
executive summary. If you have customized this waterfall chart for your
organization, you can make a compelling, succinct and crisp impact in
terms of explaining very summarily what you intend to do and how the
benefits intend to roll out in one chart. No matter what you say around the
chart – whether you have a full text report or not, depending on how you
want to stylize it – this chart speaks many words. It should explain how you
plan to get to net zero, including key carbon reduction plans for the
following:
1. Energy – Efficiency, Technology, and Storage
2. Design – Green Building and Product Lifecycle
3. Logistics – Network Optimization and Transport Efficiencies
4. Transformation – Lean, Best Practices & Standards
5. Supplier Management

You should also have a section on program governance modeled after

section I Getting Off the Ground: How to Organize for Your
Decarbonization Initiative. Typically, this would explain in a very succinct
way who the Steering Committee is and who is involved in the project
formally or informally. I recommend that you name names here because
being inclusive generally adds credibility to your project. If you have been
working on this over a long period of time and have so far already involved
lots of people or working teams, you may have lost track of everybody that
was involved. But everybody who you talked to, who you collaborated with
in developing this plan, is a credibility builder for your project and a very
important player potentially in its execution or rollout. Therefore it is
usually helpful to name names at this stage. Take some time to remember,
who was the original project champion? Who was the external advisor?
And acknowledge anyone who has been involved in the preparation of this
document.
The Background and Introduction
Now we will turn to the background and introduction.

Figure 1: Emissions Reduction Forces Requiring a Net Zero Plan shows

visually certain external conditions that may have been germane in your
decision to develop a plan to reach net zero. There may be some current
mandates that apply to you, or some upcoming or potential mandates that
might apply to you from a regulatory perspective. Or perhaps your CEO
made a pledge that would absolutely be one of the major things. You may
also want to reference any investor pressure and mention your investors by
name, if relevant. Who are the investors in your company? What is their
ESG plan? What is their carbon target? Are they influencing the policy of
your company? In the middle you could position the net zero plan in the
context of the operating plan, strategic plan, CapEx plan, or other
constructs. And you might say that the net zero plan is uniting, unifying or
integrating all of those on the sustainability axis.
The Objective and Scope
You probably want to have some section or a slide that succinctly describes
the Objective, which generally says that our goal is to achieve whatever by
whatever date. Underneath that it should define the key terms like net zero
and emissions. Does emission mean something released into the air or into
the ocean? Or does it mean something released into building materials?
What exactly qualifies as emissions? This might sound like an obvious
thing, but as you brainstorm, think outside the box and have whole working
teams involved in this, it will become a question. You should explain that
net means that total GHG emissions less any certified offsets or credits, if
that is what you mean.

This book contains information and diagrams that you can use for the
Scope section, such as Figure 22: Generic Oil & Gas Value Chain, Figure
23: Generic Power Generation, Transmission & Distribution Value Chain,
Figure 24: Generic Manufacturing Value Chain, and
Figure 25: Generic Distribution Value Chain. You can use those charts and
diagrams, and put some words around them to describe what exactly is the
scope that you are covering in your program. The scope statement should
clarify if you are including scope 1, 2 or 3 and whether it applies only to
first tier suppliers and customers or beyond. You should say how far
backward and how far forward in the supply chain you are including, and
why you are doing that if it is only first tier.
The Approach
If you have followed either the approach followed in this book, or the
REVchain™ online program, closely, you may represent the approach in
terms of the main steps below.

1. Organizing the Program

a. Forming a Steering Committee
b. Forming a Program Management Office
c. Assigning a Program Manager
d. Choosing Advisors
e. Selecting or Hiring a Carbon Economist
f. Designating an Operations Manager
g. Designating a Procurement Manager
h. Designating a Product Manager
i. Designating a Marketing Manager
j. Establishing a Stage Gate Process
k. Establishing a Program Management Budget and
Cost Management Procedures
2. Baselining Our Carbon Footprint
a. Mapping Our Carbon Footprint Boundaries
b. Calculating Our Carbon Footprint
c. Validating Our Carbon Footprint
i. Benchmarking Carbon Usage
ii. Applying Rates of Carbon Intensity
iii. Engaging Expert Review
3. Determining How We Plan to Reduce Our “Scope 1”
Emissions
a. Aligning Net Zero with the Business Strategy
b. Engaging Adaptive Behavior
 i. Defining Net Zero
ii. Instilling Net Zero Principles
iii. Creating a Net Zero Mindset
iv. Embedding Net Zero into Job Descriptions
and the Work Environment
c. Establishing Net Zero Goals, Objectives, Targets,
Metrics and Standards
i. Goals
ii. Objectives
iii. Targets
iv. Metrics
v. Standards
d. Shifting to Clean Energy Operations
i. Clean Fuels
ii. Energy Storage
iii. Hydrogen
4. Determining How We Plan to Reduce Our Scope 2
Emissions
i. Reducing Power Consumption by Decreasing
Energy Intensity
1. Decreasing Energy Intensity
2. Increasing Power Conversion Efficiency
3. Redesigning Process Routes
4. Upgrading or Retrofitting Equipment
5. Using Additives or Catalysts
6. Localizing Processing Operations
ii. Reducing Power Consumption by Increasing
Energy Efficiency
1. Energy Storage and Smart Power
 2. Increasing Throughput by
Debottlenecking Production
5. Reducing Fuel Emissions and Cost Through
Transportation Optimization
i. Reducing Product Weight
ii. Reducing Vehicle Weight
iii. Optimizing the Network
1. Deciding the Optimal Sources and
Distribution Points
2. Deciding the Amount of Inventory and
Where it Should be Stocked
3. Optimizing Available-to-Promise
Commitments
iv. Optimizing Vehicle Routing and Scheduling
v. Redesigning Vehicles to Handle More Cargo
vi. Designing and Packaging for Logistics
vii. Switching to More Fuel-Efficient Modes
viii. Switching to More Fuel-Efficient Vehicles
ix. Burning Cleaner Fuels
6. Reducing Building Emissions Through Green Design
i. Obtaining LEED Certification
ii. Greening Existing Buildings
7. Accessing Clean Energy Offsets and Credits
i. Carbon Offsets
ii. Renewable Energy Credits
8. Determining How We Plan to Reduce Our Scope 3
Emissions
a. Designing Products and Services to Minimize
Lifecycle Carbon Footprint
i. Designing for Low-Carbon Products
 ii. Designing for Low-Carbon
Manufacturing/Production
iii. Designing for Low-Emissions Distribution
iv. Designing for Low-Carbon Operation
v. Designing for Low-Carbon Maintenance
vi. Designing for Recycling / Low-Carbon
Disposal
vii. Securing Early Supplier Involvement
viii. Engaging Early Customer Involvement
b. Managing the Portfolio of Products and Services to
Minimize Lifecycle Carbon Footprint
i. Planning the Carbon Footprint of Products
Throughout Their Product Lifecycle Stages
ii. Pruning High-Carbon Products
iii. Managing Customer Carbon Intensities
c. Sourcing to Minimize CO2 in Global Supply
Chains
i. Determining Emissions by Country,
Industry and Company
ii. Identifying, Tracking and Labeling Carbon
iii. Sourcing with Carbon Criteria
1. Favoring suppliers with lower
carbon footprints
2. Specifying recycled materials
3. Using biomaterials
4. Using lower-carbon versions of the
current materials
5. Avoiding materials entirely
6. Developing future suppliers in
regions and countries that closely
 govern GHG
iv. Exploring Vertical Integration Strategies to
Reduce Carbon Footprint
d. Incentivizing Supplier Collaboration
i. Using Carbon in Preferred Supplier Criteria
ii. Embedding Carbon in Periodic Vendor
Evaluations
iii. Preferring Suppliers That Are Funded By
ESG-Friendly Investors
iv. Attracting Suppliers That Operate in
Climate Friendly Jurisdictions
9. Making The Business Case for Net Zero
a. Likely Savings from Efficiency Gains
b. Potential Stock Price Appreciation from a Solid
Net Zero Plan
c. Decarbonization Program Investment
Requirements
d. Calibration of Costs for Alternative Scales and
Scopes
e. Scenario Analysis
f. Return on Investment
g. Sensitivity to Key Variables
10. Determining an Estimated Program Schedule
a. Timeline
b. Critical Path
c. Slack
The Baseline Carbon Footprint
Next you want to state the baseline carbon footprint. If you use the carbon
footprinting template offered to you in the learning management system,
you can produce a detailed report, of which a top-level screenshot might
look something like Figure 29: Sample Baseline Carbon Footprint. In the
summary output you can see there is scope 1, scope 2 and scope 3
emissions as well as the sum total. It is also expressed in terms of emissions
intensity, which is tons of CO2 per unit of production. Your inputs and all
assumptions that you use to generate it should be noted.

Afterwards you will get into the action plan. I have divided it into three
sections: scope 1, scope 2 and scope 3. Feel free to rename these any way
that makes sense in your context. Internal, External and Lifecycle might be
other terms expressing much of the same content.
The Scope 1 Plan
The scope 1 plan should characterize your evaluation of alternative
technologies. Figure 43: Format for Evaluation of Technology-Industry Fit
provides a framework with criteria for evaluating technology fit, and Figure
44: Format for Evaluation of Technology-Application Fit provides a
framework for evaluating the fit between those technologies and certain
applications in your operations. There are also templates for these on rev-
chain.com.

There are many definitional, calculational and arithmetic nuances to this,

but if you look at the color coding, you can very clearly see which ones
popped up as green in this traffic light color coding scheme. The green ones
are higher on the scale. They are probably those that would pass to the next
stage of evaluation and analysis. You can also see certain red ones which
probably won't be considered anymore moving forward. Information such
as this tells your audience what you are studying or what you have studied
and how it all works out as far as you can tell. If you have not done this
work yet, you can propose it saying we are planning to conduct an analysis
of this sort.

I have also mentioned that this can be broken down into specific
applications. it could be a specific plant or manufacturing facility. You
might want to start with a certain kind of technology and then have various
subdivisions of that technology followed by applications. You might want
to consider criteria for that and again, a total score. This could drive that
whole similar analysis down to the level of plants, regions and maybe
production cells. This may also be something you want to either include in
the report or do so in the future because everyone will want to see that you
have a detailed plan to get into the weeds with. Eventually this could be
appendix material in case your presentation and your audience are just
looking for a higher-level understanding of the net zero plan.
The Scope 2 Plan
The scope 2 plan has to do with power consumption and power usage
primarily because most companies assume that you are purchasing your
electricity from a power plant. If you are in the power business, your scope
2 will look different than most manufacturing companies. In this section
you probably want a headline statement, something like we plan to reduce
the energy intensity of the operation in four ways and each optimization
path associates with a functional area, based on Figure 49: The Four
Pathways to Reducing Energy Intensity. This is the chart showing that you
could look at energy intensity in four different ways, starting with the
power conversion efficiency, which is in essence energy produced over
energy consumed. In order to address that, you need to fundamentally
reengineer the equipment or the conversion process. Figure 88 adds
columns for the baselines and the targets within each of the four pathways.
By the time you have a plan, you should be able to put in specific baselines
and targets for how you want your energy intensity to be improved in each
way, as well as identify the primary functional department which would
own that reduction in energy intensity.

Figure 88: Energy Intensity Baselines and Targets

You may also want to consider including in this section some information
and analysis of the fundamental efficiency of the equipment underlying
your production or conversion operation, which could be thermal efficiency.
The analysis should show how the equipment you are using could migrate
to another technology which has a higher rate of thermal efficiency over
time and your high-level plan to improve core operational energy intensity
and efficiency through the power conversion process.

In this section you could also discuss how you plan to debottleneck
production to reduce the energy needed for each unit of production. You
will probably use the theory of constraints (TOC) here to identify the
bottlenecks wherein you will be mapping the process and identifying the
constraints, as well as eliminating constraints in progressive steps that are
defined in TOC. TOC helps improve the management efficiency of the
process thereby reducing the total energy requirements of running the
operation.

You should also explain how you intend to improve energy efficiency by
leveling the load and shaving the peak off, as discussed in Ways to Increase
Energy Efficiency in Chapter IV.1 How to Reduce Power Consumption by
Decreasing Energy Intensity and Increasing Energy Efficiency.

The chapter on product lifecycle and product portfolio management also

explained how to prune high greenhouse gas consuming business lines or
products out of the portfolio sooner rather than later. If you look at a total
portfolio you can use the growth-share matrix described in the Pruning
High-Carbon Products section of Chapter V.2 How to Manage the Portfolio
of Products and Services to Minimize Lifecycle Carbon Footprint. Let's
suppose you have a total of 50 products, and they are evenly distributed
across stars, cash cows, question marks, and dogs. If you are not sure about
the financial future of these 20 question marks, you can put a filter related
to greenhouse gas and it may drop down to 10 when you have a more
balanced portfolio. You could also do the same thing with what is called
“dogs.” You could eliminate the dogs purely on a financial basis, but you
might also want to eliminate them on a carbon basis which would probably
trim and prune your portfolio in a way that would eliminate some
headaches for you. You might spend less resources on a company that has a
high carbon intensity or a bad GHG profile and it might improve brand
positioning as well.
The Scope 3 Plan
Scope 3 consists largely of supplier programs. You can use these to
incentivize suppliers with low carbon footprints as opposed to those that
have higher carbon footprints. For example, you would frequently want to
reward suppliers that qualify for the Carbon Disclosure Project “A list,” and
also those that are taking advantage of U.S. Inflation Reduction Act
subsidies and incentives. Those are just two minor examples. You will want
to embed the supplier partnership model from Figure 64: Stages of Supplier
Partnerships into your plan and identify the carbon-related criteria that
apply to companies trying to move up that ladder and become strategic
suppliers for you.

Another thing you should include in your supplier section or scope 3 is

supplier scorecards and how you intend to change those to integrate
decarbonization criteria. Figure 65: Sample Supplier Scorecard with
Carbon Footprint shows how to integrate decarbonization criteria into
supplier scorecards. Suppliers may be rated and reviewed more frequently
than before on these carbon criteria.

You should also explain how you will promote the use of recycled materials
and low carbon alternatives through suppliers, i.e. making some kind of
requirements or standards that suppliers would have to fulfill in order to
qualify and advance through that pathway. Green materials, material
substitutions and material avoidance can significantly reduce scope 3
emissions, as covered in Designing for Low-Carbon Products section of
Chapter V.1: How to Design Products and Services to Minimize Lifecycle
Carbon Footprint.
Articulating the Benefits
You should have some kind of a graph or data showing the extent to which
you intend to reduce greenhouse gases and by when. Is it going to come
down in waves according to different milestones or is it going to be a
smooth decline over time? Then some idea of time period: Is it 10 years or
20 years? Where are your milestones now? A graph like Figure 89:
Illustrative Chart Showing Planned GHG Reductions Over Time could
inspire confidence if you have drawn up a substantive, robust and credible
plan.

Figure 89: Illustrative Chart Showing Planned GHG Reductions Over Time

Critically, you should make the business case for net zero based on cost
savings that will flow from the initiatives, as illustrated in Figure 3: How
Efficiency Gains Can Self-Fund Your Net Zero Transformation. When you
look at benefits, one of the exciting things is that you are not only going to
reduce greenhouse gases, but also get derivative cost savings that will flow
from the energy efficiency initiatives of the type discussed in the earlier
chapters. You could even subtitle your program with something that
recognizes the savings from net zero studies which will fund the net zero
transformation, and in addition to that, they will be a profit center.

The third benefit that you may want to highlight is the potential lift in stock
price as a result of credible carbon disclosure and decarbonization targets.
As we saw earlier and illustrated in Figure 73: Routes for Increasing
Company Valuation Through Your Net Zero Program, the price to book
ratio has been shown to be higher if emissions are disclosed, and the P/E
ratio of companies with net zero plans has been shown to exceed that of
stocks without a net zero plan. The stock lift benefit could make your
program more interesting to a variety of stakeholders.
Communicating the Timeline
The timing section would ideally have a Gantt chart that visually displays
the anticipated timing. This may be challenging if there is uncertainty
around the resources and scientific rate of progress of critical energy
technologies, to give you two examples. One way to address that is to have
optimistic, pessimistic and base case ranges on a graph. Another is to
express dates as ranges such as “2035-2040.” In addition, pictures and
images might be able to convey the necessary aspects of timing without
boxing you into a firm date.
Expressing the Financials
Hopefully by now you have developed a cash flow analysis that itemizes
the cost savings you were anticipating. This section would break the
financial impact down by business line. Where is it going to accrue? In
what year is it going to accrue? The net zero plan should also have a capital
investment analysis, to the extent that this is available. The templates at rev-
chain.com might help.
Acknowledging the Team and Resources Required
The team that will carry out the work should be identified to the extent
possible. Section I Getting Off the Ground: How to Organize for Your
Decarbonization Initiative provided the functional departments that would
normally would be associated with the plan. The organization chart should
identify the program manager and the Steering Committee. In addition, a
depiction of which departments or functions would be attached to this
would be helpful, along with the nature of their reporting relationships. For
example, you may want to draw some dotted lines up from some
individuals here to the program office.

The other analysis you might want to put into this section would be
resource requirements. Figure 90: Illustrative Resource Requirements
Projection shows an example.

Figure 90: Illustrative Resource Requirements Projection

What to Say in the Conclusion
Sizable reports usually have a Conclusion. What do you put in a
conclusion? I would suggest that the conclusion be developed as an
inspirational message to stakeholders, all stakeholders that people can
genuinely relate to personally. They should reinforce the commitment,
aspirations and worthiness of achieving the benefits.

Those are my suggestions and recommendations. Please feel free to ask me

for any help or additional data or templates that you need.
6.5 How to Present the Plan

You will be presenting the plan to many stakeholders. This chapter

focuses on your presentation to the Steering Committee, which is likely
to be your first one. This will be your opportunity to secure buy-in from
executive management on the plan as well as the associated capital
investment, operating budget and resources including the right talent.
Meeting(s) with board-level decision-makers should be energizing and
positive and can lead your organization to the next generation of
leadership. This chapter provides helpful tips for reaching and surpassing
pivotal milestones through highly engaging and positive executive
management interactions.

This final chapter will share advice on how to present a plan for a major
project to the C-suite. There will be three parts: what to do before the
meeting, what to do during the meeting, and what to do after the meeting.
Before the Meeting
Preparation before the meeting is arguably the most important part.

1. Understand the audience in advance. There can be different numbers

of people in the room – usually one or two key decision makers, a
number of associate decision makers and then a lot of other people.
And the degree to which you know some of those characters and their
respective roles can dramatically impact the outcome of the meeting.
Let me give you an example. If you know about some of the people on
a personal level, it can smooth some of the introductions and early
meeting protocol which can set the mood for a more comfortable and
frank meeting.

2. Make sure the decision maker is supportive of the proposal before

the meeting. In some cases it is difficult to guarantee that the decision
maker will be in the meeting. The nature of the decision maker is that
the person is very busy, has many responsibilities and frequently
delegates them. Therefore, it is not uncommon for the decision makers
to delegate their role to somebody else or skip a meeting due to
unforeseen circumstances that arise unexpectedly.

3. Strategize the wording and tone. Word choice can be of great

importance, not only your written words on whatever document you
prepare, but also your spoken vernacular, and your way of referring to
things in a C-level meeting about a key project. They can make the
difference between somebody feeling that it's right or wrong,
particularly words related to “hot buttons.”

4. Anticipate objections. Many types of objections can come up in the

context of net zero and in terms of carbon reduction: political (clean
energy investments take jobs away from the oil industry), technical
(e.g., the science of long-duration energy storage is not available yet so
windfarms don’t make sense), environmental (e.g., toxic waste from
solar panels), and technological (e.g., hydrogen cannot be transported
because it is a safety risk), and overall (e.g., net zero is impossible so it
is folly to try). If you are pitching net zero, be prepared for objections
like these.

5. Review the slide deck, especially any numbers, in advance with

proponents. People may not object to anything you say, but they always
find at least one number that they disagree with. If these are key
numbers, that could be the end of your pitch. So anywhere where you
have numbers in your text or in your tables, especially in the body of
the report, check them with influential advisors in advance.

6. Distribute the presentation or slide deck in advance. Because of the

pervasiveness of technology like email and live streaming there is a
tendency to not print documents anymore, and to bring it in at the very
last minute. This is actually very counterproductive to your goals. The
more time the people in the meeting have to review the deck in
advance, the more comfortable they are going to be in the meeting with
what you say and more prepared they are to eventually make some
decisions based on that information. If you are presenting something
cold that they have not seen before, you are going to have a much
lower chance of getting to a positive yes answer within the meeting
itself.

7. Arrange the room in advance and be deliberate about the

interactions. Prepare, if possible, who is going to sit where, who is
going to play what role in the discussion, and even where the chairs are
and how the light is.

8. Meet early in the day. There is a phenomenon called primacy and

recency in psychology. People tend to remember things that happened
first and last. If I read off 20 numbers to you and ask you a few seconds
later to recall as many numbers as you can, chances are the numbers
that you are going to remember are the first number and the last
number I said. If people go through a whole day, and are bombarded
with all sorts of meetings, as well as tons of information and decisions,
what are they going to remember from the middle of the day?
9. Arrive early, set up and be ready. Expect technical difficulties with
Wi-Fi, projection, phone links and so on.
10. Send a paper copy of the slide deck for every attendee. This may be
considered antiquated, but it looks prepared and professional as well as
serving as a backup in case of technical problems with projection or
any other potential issues. Even if the meeting doesn't happen or gets
cancelled, they have the document. In addition, it gives them a take-
home document they can review later, maybe right after the meeting.
Every time I have done this, the answer has been “yes.”
During the Meeting
1. Have a whiteboard and write down people’s input during the
meeting. This gives formal meetings the feel of work meetings, thus
giving everybody the sense that they have a role. It also conveys the
sense that this meeting should result in some action items. If there are
no notes taken and it is a formal meeting, it can take the form of an
informational meeting with no decisions required.

2. Related to the previous point, inform the group of any decisions you
need early in the presentation. If you need resources, budget and time,
you just say exactly what you need at some point in the presentation,
because if you don't there may not be a yes or no decision made on that
issue. Conversely, if you do say what you need, you could get a yes or
no vote. Your chances of getting to yes out of that meeting will be
higher if the target outcome is clear.
After the Meeting
1. Check with the advisor or proponent to see how she or he feels the
meeting went. The proponent usually has a keen sensitivity to the
actors in the room and what is happening. That person has probably the
best antennae for understanding whether the sense is to go ahead or
not, and how to take next steps with this.

2. Send out meeting minutes within a day or two, including decisions

reached, as well as resources, budget and time frames that anybody
agreed to during the meeting, should you want to rely on those as a
basis for going forward.
Conclusion
Every company can have a profitable path to net zero. Decarbonization is
not only possible but if done the right way it can save 8% of operating cost
and add up to 20% in equity valuation. The specific approach used in your
company will vary, but the steps listed in VI.4 How to Document the Plan
should be followed in every net zero program. Hopefully this will help you
structure your project.

As Julia Salant wisely said in Incentivizing Suppliers: An Interview with

Julia Salant, Carbon Solutions Director, Ecovadis, getting to net zero is
potentially a very long journey with many twists, and we cannot expect all
these things to be resolved right now. The most important thing is to get out
of the gate to make some progress. It may be a little sloppy and may take a
little longer than we all would desire but in the end we will all get there
together.

I hope this Guide has provided you with frameworks, ideas and insights that
will help you “get out of the gate.” Best of luck on your journey and please
share any feedback with me at [email protected].
List of Abbreviations

3PL third party logistics provider

CapEx capital expenditure
CDP Carbon Disclosure Project
CEO Chief Executive Officer
CFR Code of Federal Regulations
CO2 carbon dioxide
CO2e carbon dioxide equivalent
COGS cost of goods sold
CH4 methane
CMO Chief Marketing Officer
CRM Customer Relationship Management
CSO Chief Sustainability Officer
DAC direct air capture
DEI Diversity, Equity and Inclusion
DMAIC Define, Measure, Analyze, Improve and Control
EMS Energy Management System
EPA Environmental Protection Agency
EPC Engineering, Procurement and Construction
EU European Union
EV electric vehicle
FEED Front End Engineering Design
GHG greenhouse gas
HSE health, safety and environmental
IoT Internet of Things
I.P. intellectual property
IPCC Intergovernmental Panel on Climate Change
IPO international procurement office
IRA Inflation Reduction Act (Public Law H.R. 5376, August 16, 2022)
KPI Key Performance Indicator
LEED Leadership in Energy and Environmental Design
LMS Learning Management System
M&A merger and acquisition
NGO non-governmental organization
NREL National Renewable Energy Laboratory
OEM original equipment manufacturer
OpEx operating expenditure
P&L profit & loss
PDCA Plan-Do-Check-Act
PMO project management organization or project management office
PR public relations
SASB Sustainability Accounting Standards Board
SBU strategic business unit
SCOR Supply Chain Operations Reference Model
SG&A Sales, General and Administrative
TOC Theory of Constraints
Ton imperial ton
Tonne metric ton
TQM Total Quality Management
TPM Total Productive Maintenance
VC venture capital
List of Figures
Figure 1: Emissions Reduction Forces Requiring a Net Zero Plan
Figure 2: The Net Zero Waterfall Chart – Category-wise Breakout of GHG
Emissions Reduction Potential by 2050
Figure 3: How Efficiency Gains Can Self-Fund Your Net Zero
Transformation
Figure 4: Price/Earnings Ratio of Companies with Net Zero Plans
Figure 5: Price/Book Ratios of Companies with Net Zero Plans
Figure 6: The Net Zero Journey
Figure 7: How to Access Market Data, Templates, and Scientific Research
to Bolster Your Plan
Figure 8: Sample REVchain™ Course Calendar (Asynchronous Version)
Figure 9: Program Organization Structure
Figure 10: Carbon Measurement Team Member Responsibilities
Figure 11: Operations Team Member Responsibilities
Figure 12: Procurement Team Member Responsibilities
Figure 13: Product Design / R&D / Engineering Team Member
Responsibilities
Figure 14: Marketing Team Member Responsibilities
Figure 15: Stage Gate Framework
Figure 16: Major Capital Project Stages
Figure 17: Government Agencies and NGOs Involved in Measuring Carbon
Footprint
Figure 18: Selected Investors and Academics Active in Carbon
Measurement
Figure 19: The Principal Gases Contributing to Global Warming
Figure 20: Global Warming Potential (GWP) Factors for Common
Greenhouse Gases
Figure 21: Working Definitions for Scope 1, 2 and 3 Carbon Emissions
Figure 22: Generic Oil & Gas Value Chain
Figure 23: Generic Power Generation, Transmission & Distribution Value
Chain
Figure 24: Generic Manufacturing Value Chain
Figure 25: Generic Distribution Value Chain
Figure 26: BP’s GHG Report
Figure 27: PG&E’s GHG Report
Figure 28: Toyota’s GHG Report
Figure 29: Sample Baseline Carbon Footprint
Figure 30: Unilever’s GHG Report
Figure 31: Operations and Supply Chain Strategy Impact on EVA
Figure 32: Net Zero Values and Principles
Figure 33: Communications Styles
Figure 34: Net Zero Management Maturity Matrix
Figure 35: Net Zero Motivators in Job Design
Figure 36: Taxonomy of Goals, Objectives, Targets, Metrics and Standards
Figure 37: Example Goals, Objectives, Targets, Metrics and Standards for
A Net Zero Program
Figure 38: Calculating CO2e per Unit
Figure 39: Lithium-ion Battery Price Trend
Figure 40: Lithium-ion Battery Applications Map
Figure 41: Battery Performance Dimensions
Figure 42: Spectrum of Applications for Hydrogen in Industry
Figure 43: Format for Evaluation of Technology-Industry Fit
Figure 44: Format for Evaluation of Technology-Application Fit
Figure 45: The Importance of Reliable Forecast Data in De-Risking
Technology Investment Decisions
Figure 46: Energy Efficiency Bottlenecks of Selected Industries
Figure 47: Power Transformation Losses
Figure 48: Pathways to Reducing Energy Intensity
Figure 49: The Four Pathways to Reducing Energy Intensity
Figure 50: Transportation Variables Contributing to Emissions
Figure 51: Working Definitions for Carbon Credits and Offsets
Figure 52: Benefits to Buyers and Sellers of Carbon Offsets
Figure 53: Renewable Energy Portfolio Percentages by State and Year
Figure 54: Net Zero Design Roadmap
Figure 55: Illustrative Net Zero Product Design Process for a Passenger Car
Figure 56: Illustrative Net Zero Materials, Parts & Components Design
Process for a Passenger Car
Figure 57: Illustrative Net Zero Production Process Design Process for a
Passenger Car
Figure 58: Illustrative Supply Chain Design Process for a Passenger Car
Figure 59: Lifecycle Carbon Take-Out Process Checklist
Figure 60: Product Lifecycle Carbon Take-Out Process Checklist
Figure 61: Challenges of Measuring Scope 3 Emissions
Figure 62: Carbon Emissions by Country, 2012
Figure 63: Impact of Outsourcing Scenarios on Carbon Footprint
Figure 64: Stages of Supplier Partnerships
Figure 65: Sample Supplier Scorecard with Carbon Footprint
Figure 66: Examples of Infrastructure That May Be Needed Along the
Pathway to Net Zero
Figure 67: Example Waterfall Chart (Illustrative)
Figure 68: Getting to Net Zero Waterfall Chart Framework (Blank)
Figure 69: Measured Benefits from Operational Improvements
Figure 70: The Net Zero Waterfall Chart – Category-wise Breakout of GHG
Emissions Reduction Potential by 2050
Figure 71: Calculations Behind the Net Zero Waterfall Chart (Category-
wise Breakout of GHG Emissions Reduction Potential)
Figure 72: Cash Flow Benefits Over Time
Figure 73: Routes for Increasing Company Valuation Through Your Net
Zero Program
Figure 74: Capital Equipment in the Value Chain
Figure 75: How to Nest Industry+Application+Technology for Technology
Evaluation
Figure 76: Decision Tree Framework
Figure 77: Decision Tree Example
Figure 78: Cost Estimate Levels
Figure 79: Scenario Analysis Framework for Net Zero Projects
Figure 80: Net Present Value Calculation
Figure 81: Tornado Diagram for Hydrogen Production
Figure 82: Sample Gantt Chart
Figure 83: Hypothetical Network Diagram for a Net Zero Program
Figure 84: Hypothetical Network Diagram with Slack
Figure 85: Hypothetical Task List with Uncertainty
Figure 86: Elements of the Net Zero Plan
Figure 87: The Front and Back Matter of Your Net Zero Plan
Figure 88: Energy Intensity Baselines and Targets
Figure 89: Illustrative Chart Showing Planned GHG Reductions Over Time
Figure 90: Illustrative Resource Requirements Projection
Index

ammonia, 25, 81, 196

batteries, 2, 81, 82, 83, 84, 85, 90, 113, 196, 203
Battery, 81, 82, 83, 84
Benefits, 135, 189, 194, 206, 214, 221
biofuels, 80, 81, 196
bottlenecks, 93, 95, 207, 208, 220
Building, 56, 124, 125, 126, 127, 128, 181, 187, 193, 215, 218
Business Case, 8, 193, 219
capital expenditure, 150, 179, 183, 192, 193, 195, 196
Climate, 28, 38, 40, 50, 52, 80, 136, 137, 173, 219
Credit, 133, 137, 142, 186, 188
Criteria, 165, 170, 218, 219
decarbonization, 1, 3, 4, 9, 12, 15, 16, 29, 38, 41, 61, 72, 93, 111, 128, 129,
152, 153, 159, 164, 165, 178, 179, 191, 193, 194, 206, 221, 222
Design, 17, 18, 20, 68, 97, 117, 124, 126, 128, 146, 147, 149, 150, 151, 152,
153, 187, 215, 218, 221
economies of scale, 81, 82, 182, 200, 201
Economies of scope, 201
efficiency, 1, 39, 45, 52, 54, 56, 57, 69, 84, 89, 91, 93, 94, 95, 96, 97, 98, 99,
100, 101, 102, 103, 104, 106, 107, 108, 109, 110, 118, 119, 125, 126, 134,
165, 181, 182, 185, 186, 193, 195, 197, 220, 221, 222, 232
electric, 2, 26, 50, 54, 57, 73, 81, 83, 84, 93, 95, 96, 97, 103, 105, 109, 113,
119, 122, 126, 127, 128, 130, 148, 149, 155, 165, 181, 187, 196
Emission, 164, 186
Energy Efficiency, 94, 95, 98, 106, 107, 125, 181, 185, 186, 195, 217
Energy Intensity, 98, 99, 102, 110, 187, 217, 220, 221
energy storage, 57, 80, 81, 89, 93, 97, 106, 107, 186, 197, 203, 224
engineering, 14, 17, 19, 23, 24, 25, 45, 47, 53, 64, 81, 94, 95, 97, 99, 100,
109, 118, 120, 125, 129, 141, 147, 148, 149, 155, 180, 196, 197, 199, 200,
201
ESG, 3, 29, 39, 43, 53, 116, 170, 173, 183, 191, 195, 216, 219
Footprint, 27, 28, 33, 37, 38, 40, 42, 43, 44, 49, 146, 154, 156, 162, 166,
171, 192, 217, 218, 219
Fuel, 2, 37, 81, 85, 112, 118, 142, 182, 186, 188, 196, 217, 218, 233
gas, 14, 27, 30, 32, 33, 34, 37, 38, 39, 40, 41, 42, 43, 44, 45, 47, 49, 50, 51,
57, 61, 63, 64, 69, 73, 74, 80, 81, 89, 91, 94, 95, 97, 98, 100, 102, 104,
121, 122, 124, 125, 128, 132, 136, 139, 141, 142, 159, 162, 164, 202, 221
GHG Protocol, 33, 38, 50, 159, 175, 177
Global Warming Potential, 29, 30, 31, 40, 112, 132, 142, 202
heat, 32, 33, 34, 38, 40, 51, 90, 91, 96, 100, 103, 113, 125, 128, 129, 130
House of Quality, 17, 147, 148
hydrocarbon, 80
hydrogen, 2, 25, 41, 54, 57, 73, 80, 81, 84, 85, 90, 91, 93, 97, 100, 104, 110,
119, 129, 136, 139, 181, 182, 193, 196, 202, 203, 207, 224
Inflation Reduction Act, 80, 90, 97, 174, 186, 188, 221
Investment, 1, 23, 26, 88, 173, 179, 181, 182, 186, 195, 198, 203, 219
Investor, 80, 181, 194
IPCC, 28, 38, 47, 91, 176, 178
Lean, 63, 65, 69, 188, 190, 193, 215
LEED, 43, 73, 74, 93, 97, 124, 126, 127, 181, 207, 218
Lifecycle, 32, 119, 125, 146, 152, 153, 154, 156, 187, 215, 218, 219, 221
manufacturing, 12, 17, 21, 27, 32, 33, 35, 37, 38, 42, 45, 47, 49, 51, 52, 63,
68, 73, 89, 96, 97, 100, 101, 109, 110, 113, 116, 128, 129, 130, 146, 147,
149, 150, 156, 165, 168, 169, 187, 196, 197, 203, 207, 219, 220
Material, 27, 126
methane, 27, 30, 38, 39, 43, 45, 47, 49, 61, 70, 74, 80, 100, 134, 190, 202
methanol, 81, 196
Net Zero, 2, 3, 4, 6, 8, 9, 12, 15, 16, 18, 29, 58, 60, 61, 62, 66, 67, 68, 72,
73, 76, 80, 85, 129, 136, 146, 147, 149, 150, 179, 181, 184, 185, 190, 191,
192, 193, 194, 195, 201, 208, 213, 215, 216, 217, 219, 222, 232
Network, 113, 187, 193, 208, 209, 215, 218
nitrous oxide, 27, 30, 38, 43, 61, 74
non-governmental organization, 215
Offset, 136, 181
oil, 27, 30, 33, 34, 37, 38, 39, 40, 41, 44, 45, 47, 51, 63, 64, 69, 80, 81, 89,
95, 97, 98, 100, 104, 109, 122, 139, 152, 162, 163, 164, 204, 224
perfluorocarbons, 27, 61
profit center, 9, 193, 222
quality, 1, 17, 43, 58, 59, 60, 64, 65, 98, 125, 130, 137, 143, 147, 155, 170,
171, 173, 180, 215
Recycling, 57, 117, 152, 218
Renewable Energy Credit, 133, 142
Return on Investment, 181
Savings, 186, 193, 219
Scenario Analysis, 201, 219
Stage Gate, 20, 217
supplier, 32, 36, 62, 144, 153, 159, 160, 161, 166, 169, 170, 171, 172, 173,
176, 201, 221
Technology, 1, 86, 88, 164, 181, 186, 197, 215, 219
transformation, 17, 49, 93, 178, 179, 180, 188, 190, 214, 222
transport, 232
Transport, 85, 188, 194, 215
vehicle, 26, 29, 43, 45, 50, 54, 57, 73, 74, 80, 81, 83, 85, 93, 96, 101, 105,
112, 113, 116, 117, 118, 119, 122, 130, 151, 181, 182, 188, 194, 196
Vendor, 171, 219
About the Author

David Steven Jacoby teaches Decarbonizing Global Supply Chains at

NYU’s Stern School of Business and the University of Pennsylvania, as
well as Operations Management and Supply Chain Management at NYU’s
Tandon School of Engineering. He is also a Senior Fellow at Boston
University’s Institute for Global Sustainability and the lead instructor for
Revchain’s Getting to Net Zero Master Class.

He wrote Guide to Supply Chain Management for The Economist,

Reinventing the Energy Value Chain: Supply Chain Roadmaps for Digital
Oilfields Through Hydrogen Fuel Cells for PennWell Books, and other
books. He earned his MBA and a Masters of Arts from the Wharton School
at the University of Pennsylvania, and he holds a number of supply chain
and energy management certifications including Certified Energy
Procurement Professional (CEP), Certified Fellow in Production and
Inventory Management (CFPIM), Certified in Supply Chain Management
(CSCP), Certified in Integrated Resource Management (CIRM), Certified in
Purchasing Management (Lifetime C.P.M.), and Certified in Transportation
and Logistics (CTL).

David founded and manages Boston Strategies International, a firm that

helps manufacturers, investors, technology providers, and policy makers
improve supply chain sustainability, efficiency, resilience, agility and
security. He has led engagements at energy, automotive, transport, and retail
clients in more than 50 countries. He also serves on the advisory board of
ViziApps, a low-code mobile development platform.
 Also by David Steven Jacoby

Guide to Supply Chain Management (Economist)

Optimal Supply Chain Management in Oil, Gas & Power Generation

(PennWell)

The High Cost of Low Prices: A Roadmap to Sustainable Prosperity

(Business Expert Press)

From Bogota to Beijing: Development and Life After Globalization

(Lexington Press)

Reinventing the Energy Value Chain: Supply Chain Roadmaps for Digital
Oilfields through Hydrogen Fuel Cells (PennWell)

Retooling the Economy for Digital and AI-Driven Supply Chains

(Georgetown University Press, forthcoming)
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[10] Jacoby, David Steven. The Guide to Supply Chain Management (The Economist, 2009)
[11] These quality concepts are described in the context of cost reduction strategies in Jacoby, David
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[12] Freight transport is commonly measured in ton-kilometers, meaning the number of kilometers a
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certain products, but those reflect benefits on a limited scope or base within the companies. The
figures in Figure 70 represent corporate level aggregates that add up and flow through into the
publicly reported financial results. The higher you go in the hierarchy, the more you look at a large
company and the more you look at even the national economy or the global economy, the smaller the
numbers become in aggregate and in total on average. In other words, these are more reliable and
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duds where you get no benefits.
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