Net Zero: why are companies doing this wrong?

erable°
12 min readApr 27, 2022

--

The vital but currently ignored lever of companies decarbonization strategies, explained by the Kaya identity

313 companies have responded to the international Climate Pledge and pledged to meet the Paris Agreement commitments 10 years early. Among the 2000 largest listed companies (in terms of turnover), Zerotracker has identified that more than 1000 of them have formulated a “Net Zero” or similar commitment (“Carbon neutral”, “carbon negative”…).
However, global emissions are not decreasing and have reached 50 Gt of CO2e in 2020. Why, despite all these announcements and increasing mobilization, are we not convinced that this will be enough? Why aren’t we moving towards global carbon neutrality?

Part of the explanation lies in the gap between a climate emergency requiring major efforts, which is reflected in the ambitious announcements made by companies, and the levers implemented. The latter are often quite limited, and the most effective ones are usually ignored.

1/ The mirage of carbon offsetting

Most companies emphasize the use of carbon offsetting in their decarbonization strategy. This lever does not contribute to the reduction of emissions linked to the company’s activities, but it does allow CO2 to be “removed” from the atmosphere.

However, global offsetting capacities are very limited, which calls into question the feasibility of many economic players using this lever.

Indeed, there are only two ways to achieve carbon offsetting:

  1. Using CCUS (Carbon Capture Use and Storage) technologies. But these solutions are based on technologies that are still immature and very expensive. To illustrate, their development prospects suggest a total global capacity in 2030 of 151 Mt CO2, which represents about 0.3% of current annual emissions.
  2. Create new natural carbon sinks (forests, soils, wetlands, etc.), for which three limiting factors are often forgotten:
  • the time needed to acquire the capacity to store carbon (e.g. tree growth time)
  • The lack of available space (competition with cultivated areas, etc.)
  • The fragility of these sinks (the fire in a forest used for offsetting will release the temporarily trapped carbon)

Carbon offsetting cannot therefore be used as a decisive lever in a decarbonization strategy. It is not a substitute for the essential emission reduction efforts that companies must make.

2/ Decarbonization levers, illustrated by the Kaya identity

A first set of levers that can be mobilized by companies in their decarbonization strategy can be identified thanks to the Kaya identity.

Established by the economist Yoichi Kaya in 1993, the Kaya identity involves four parameters: world population (POP), world GDP (GDP), world energy consumption (EN) and world CO2 emissions (CO2). From these elements, this equation makes it possible to express global emissions as dependent on four factors:

  • the world population (POP)
  • the average standard of living of this population (GDP/POP)
  • the energy intensity of the world economy (EN/GDP)
  • the carbon intensity of the world energy (CO2/EN)

In order to reveal the determining factors in the establishment of a decarbonization strategy, we transposed this equation to the scale of a company. The following variables appear: the company’s CO2 emissions (CO2), its energy consumption (EN), its total turnover (CA) and the volume of unit products sold by the company (VOL).

The Kaya identity applied to companies is then written as follows:

The company’s carbon emissions are therefore directly linked to :

  • its turnover (CA)
  • its business model type (VOL/CA)
  • the energy intensity of its production (EN/VOL)
  • the carbon intensity of the energy used in production (CO2/EN)

However, when we take a closer look at companies’ decarbonization strategies, we see that not all of these levers are mobilized.

A decarbonization strategy generally follows the same process:

  • understanding the company’s carbon footprint, including its direct emissions
  • calculating the emissions trajectories to be followed in order to meet the global objectives of carbon neutrality,
  • identifying the levers for improving the company’s carbon performance.

This last step generally focuses on the energy intensity of production and the carbon intensity of the energy used, only the last two terms of our equation.

The carbon intensity of the energy used by the company (CO2/EN) is the lever most mentioned in companies’ emission reduction strategies. In 2022, 85% of CAC40 companies indicated that they were working on this by decarbonizing their energy mix. This lever is indeed essential to contribute to global carbon neutrality. However, its implementation is not without difficulty.

The replacement of fossil fuels is often done in favor of electrification or the use of “biogas”, gases that emit less carbon than fossil natural gas but whose production is limited.

Electrification, on the other hand, has several limitations:

  • It is not always feasible or economically viable (changes in equipment required or even in the nature of the processes in certain cases)
  • Electrifying to decarbonize only makes sense for the decarbonization of a company if the electricity production used is itself low-carbon (renewable, hydraulic or nuclear)
  • Electrification involves significant environmental impact transfers as it mobilises natural resources and polluting industrial processes for the production of its infrastructures and components (such as batteries)

The second factor massively mobilized to reduce corporate emissions is energy efficiency (EN/VOL). 73% of CAC 40 companies mention this lever in their climate strategy. Although it is also essential, its benefits should be moderated, as the increase in energy efficiency is often accompanied by a rebound effect: as the energy used, and therefore its cost, is less per unit produced, the tendency is to produce more units. This rebound effect then reduces the environmental performance initially targeted.

These two levers are essential for reducing company emissions. However, they are limited when they remain enslaved to an extractivist economic model imposing an infinite increase in physical production. Indeed, a company, with a business model based on unit sales of products or services, is faced with contradictory injunctions. To increase its turnover, it must increase its volume and therefore its greenhouse gas emissions, contrary to its commitments.

In this situation, the total equation must decrease while the first term must increase. This means that the entire effort to reduce emissions must be based on the two levers seen above: energy efficiency (EN/VOL) and the carbon intensity of the company’s energy mix (CO2/EN), and that these levers must even compensate for the increase in turnover and production volumes. Some companies find themselves having to reduce their emissions per unit of production by -90% or even more than -100%.

The intrinsic incompatibility of certain business models with emission reduction targets even encourages some companies to express their decarbonization results only in terms of carbon intensity (fictitious example: “a 30% reduction in CO2 emissions has been achieved on our new bottle range”). Focusing on carbon intensity makes it possible to present the result of efforts to reduce emissions on the units produced, but it avoids the question of reducing the company’s total emissions.

In order to overcome this impasse, an essential and often ignored lever must be considered: the reinvention of business models.

3/ Moving to the forgotten part of the equation: business model reinvention

When it’s built on the basis of unitary product sales, the business model is intrinsically contradictory to the objectives of reducing a company’s carbon footprint. This often intuitively perceived contradiction partly explains civil society’s lack of enthusiasm for big companies’ announcements to contribute to carbon neutrality.

Let’s make it more explicit with a well-known example: Tesla.

In its Impact Report 2020, the fast-growing American company claims that in 2020, “Tesla customers helped accelerate the world’s transition to sustainable energy by avoiding 5.0 million metric tons of CO2e emissions.” It’s probably right if we consider that, without the brand, all Tesla owners would have bought a thermal car instead. This is confirmed by the graph below comparing the lifecycle emissions from a Tesla Model 3 and the ones from an average mid-size ICE.

However, the most interesting part on the graph is on the type of use of the Model 3. For a solar-charged model, with a personal use (column 2), the level of emissions is about 5x higher than with a ridesharing use. Because the most emissive part of the emissions produced — the manufacturing phase — is amortized on a more optimized use phase. This allows Tesla to meet more demand with the same amount of vehicles produced.

However, due to the company’s business model, there is a huge inconsistency in doing so: the less units they produce, the less growth they have.

As we said, Tesla has probably a positive impact on the level of CO2 emissions. But, would they still be able to claim a 5.0 million metric tons reduction if tomorrow, we are heading towards a reduction of half of the vehicle fleet?

We don’t speak about degrowth, but to move away from the individual car model. Today, Tesla has no economic interest to move towards a ridesharing model for example, except if the company reinvents its business model.

We finally reach the third leverage of our equation: (VOL/TURNOVER), the “business model productivism”.

The business model typology is an essential parameter for decarbonization to be taken into account by productivist companies. The first challenge is to decouple volumes and their physical footprints from the turnover, or even to increase the turnover at iso-volume by leaving the unit sales model. The environmental nonsense of this type of model is perceived for non-consumable products with a very short lifespan like in the packaging or fast-fashion industries. These sectors are already moving towards reuse and circularity, making it possible to partially decouple the production of physical volumes and turnover.

It’s now urgent to have the same awareness for companies based on large volume production, with a strong physical footprint, for non-optimized use.

One of the keys is to accelerate the servitization of the economy, to replace an economy of production and property by an economy of use. This move implies a change in the perception of the consumers: we don’t pay anymore for a product, for example a car, but for a service, such as “going from a point A to a point B”.

Numerous initiatives have started to emerge with the “as-a-Service” model. The French start-up Dealt, for example, is specialized in helping retail companies to move towards a “retail-as-a-service” model. The well-known brand, Darty, one of its clients, has developed a repair service for household appliances, with a monthly subscription. This new model offers them a guaranteed source of income, around €24M per year in 2021, and incentivizes them to extend the lifespan and reliability of the products.

These examples show us that these models offer a more sustainable economic model, with additional sources of income and solutions closer to the consumers expectations:

  • Creating long-term recurring revenues with a system of subscription
  • Increasing the retention rate of a customer base
  • Responding to the rising ecological awareness among consumers, with the desire to consume less

On the environmental aspect, beyond the reduction of emissions implied by the decrease of the units produced, impact generated can be greater. Under a pay-per-use model, companies are incentivized to increase the energy efficiency of the products, maximize the use of equipment or encourage reuse of components and in doing so amortizing the environmental footprint of the manufacturing processes.

This transition to an economy of use must be taken into account as soon as possible by the various economic actors.

However, one element to keep in mind with these new business models is the potential rebound effects as seen earlier with energy efficiency. The same mechanism can occur with the servitization of the economy. For example, with ridesharing, the price of a trip can decrease drastically. This may lead a traveler to prefer the use of a car over another more environmentally friendly means of transportation, or even to make a trip that he or she would not have otherwise considered making.

To diminish this risk, the company, while launching a “as-a-Service” business model, should take the environmental stakes in consideration from the beginning, by setting a pricing that is not an incentive to invest in more energy-intensive items.

What is the call-to-action for the different actors?

This need to adapt or re-adapt its business model applies equally to both big companies or start-ups.

This switch from a productivist model to servitization can be difficult to operate for a well-established company. They often have to deal with a structural resistance to change (Leonard, 1992). Their organization is less likely to cannibalize the core business for developing a new one. In this case, the solution can be to start by launching a separate entity, operating in parallel.

For example, Michelin was an early-believer in the transformation towards a service provider model. In 2000, the company developed Michelin Fleet Solutions (MFS), a monthly subscription service for large vehicle fleet operators to help them optimize their driving, waste less fuel and extend the life of their tires. However, the first try was a failure because the incentives of Michelin’s sales team weren’t aligned with this new offer. They were afraid of undermining their sales of new tires by promoting the MFS. Taking this setback into account, Michelin top management launched a separate division, Michelin Solutions, to design, develop and market services for commercial vehicles. This new entity started EFFIFUEL, a recommendation service enhanced by collecting data and leveraging Michelin professionals expertise.

Another successful example is the one of Tide Cleaners. Procter & Gamble, via a wholly-owned subsidiary, initiated Tide Cleaners, a “laundry-as-a-service” concept offering brick-and-mortar dry cleaning locations as well as delivery, 24/7 pick-up/drop-off, lockers, and even campus dry cleaning and laundry services. The service has its own organizational structure, but can rely on the expertise of Tide, the famous detergent company owned by P&G.

For start-ups, and notably the ones in their early-stage of development, the business model structure and its potential environmental impact should be considered from the beginning.

The question to ask should be the following: what is the impact of this business model at scale?

Be careful not to develop a business model that creates an antagonism between the need for growth and the impact generation, such as the precedent example of Tesla.

As we’ve seen, one of the next big challenges is to move away from the productivist model, notably by encouraging the servitization of the economy. New actors will be needed in this emerging ecosystem. Even if your core business is developed around a product, you can work on the different models of “Product-as-a-Service” or “Solutions-as-a-Service”. With the current environmental emergency, there is a need to adapt these models for companies dealing with tangible products.

Conclusion

The fight against climate change has only been taken into account partially by most companies. Our transposition of the Kaya identity to companies clearly shows that the latter are currently only interested in the main two levers, which relate to carbon intensity. However, to achieve the objectives set by the Paris Agreement notably, the other lever will need to be addressed — the business model reinvention to better align economical interests with environmental goals.

An example of such realignment is the service-based approach, especially relevant on products with a heavy environmental footprint. For example, for a car, what counts is the use you make of it. For a cab driver who uses his vehicle several times a day, ownership makes sense. However, for someone who makes a few trips a year, is owning a vehicle relevant? Wouldn’t car-sharing or car-pooling options be more appropriate?

These new models will, of course, require a mentality change among consumers. But, companies must first be encouraged, through their business model, to promote this service-based approach.

Finally, there is a last lever in the equation, the ‘turnover’, that we have chosen not to address in this article but that should not be forgotten. Acting on this part means going towards degrowth, sobriety and minimalism which are obviously interesting options from an environmental point of view.

Written by:

  • Auriane Clostre, Co-founder @StimShift and Impact Lead @Cardashift
  • Yannis Baala, Impact Projects Lead @Cardashift

--

--

erable°

erable° is a unique investment platform for funding the ecological transition, making investing in this transition accessible to retail investors.