Manufacturers Decarbonizing at Different Speeds

Sept. 20, 2021
They follow a basic cost-complexity curve to decarbonize their operations.

Like most organizations and people, manufacturers use a basic rule-of-thumb to triage initiatives and projects: perform the easy and less costly ones first before tackling the costlier and more complex projects

Using that guideline, manufacturers follow a basic cost-complexity curve (Figure 1) to decarbonize their operations. Specifically:

Stage 1: Buying renewable energy credits (RECs) is the low-cost, easy first step to start a carbon-reduction effort.

Stage 2: The next step is purchasing renewable energy through power purchase agreements (PPAs).

Stage 3: After that, manufacturers, particularly energy-intensive ones, have the option to construct onsite advanced energy projects like renewable distributed generation, battery energy storage and microgrids.

Stage 4: Finally, after harvesting the inexpensive, proverbial low-hanging decarbonization “fruit,” manufacturers can take the often costly, complex, and time-consuming steps to “deeply decarbonize” their operations. Deep decarbonization typically requires retooling manufacturing lines, changing supply chains, fundamentally redesigning products, developing new end-use markets, and altering other foundational efforts around which a business is built.

An example of deep decarbonization would be the pledge by many automakers to stop manufacturing vehicles that use internal combustion engines. There’s a reason why those commitments typically have an effective date of a decade out.

Other deep decarbonization examples include cement makers developing a product that sequesters carbon dioxide, steelmakers developing “green steel” made without carbon emissions, and chemical manufacturers substituting renewable energy for process heat derived from hydrocarbons.

Efforts to use renewable energy to create “green hydrogen” also illustrate how companies seek to fundamentally rethink at least part of their business – typically processes and markets – to position themselves favorably in a decarbonizing world.

Canadian steelmakers Algoma Steel and ArcelorMittal Dofasco (AMD) in July 2021 offered another deep decarbonization example: announcing plans to invest approximately $2.5 billion to replace manufacturing equipment. The firms expect to cut CO2 emissions 6 million tonnes within a decade.

Some manufacturers, like Pfizer, are two decades into their decarbonization journey. Other North American headquartered manufacturers that are years into their trek include Mars, 3M, Dow, DuPont, and General Motors. European-based manufacturers with a significant North American presence, like BP, Shell, and Nestle, also are revisiting their operations with an eye to decarbonizing and operating more sustainably.

But far-reaching efforts like these seems to be the exception, not the rule. Only a small minority of North American manufacturers have progressed, at least publicly, beyond buying RECs and purchasing renewable energy via PPAs. Why? It is expensive, risky, and hugely disruptive to make fundamental strategic change at multibillion-dollar manufacturers.

To be sure, manufacturers have been actively decarbonizing. Local conditions, including the economics of renewable energy, significantly influence a manufacturer’s move through the cost-complexity curve of decarbonization. Some manufacturers, like tiremaker Goodyear, remain in an early decarbonization stage.

Nevertheless, North American manufacturers view climate change as a global problem. While the U.S. has sharply lowered its CO2 emissions in recent years, largely by substituting natural gas for coal in power generation rising emissions from China and India more than offset that reduction.

Energy-intensive manufacturers like petroleum refiners, mining companies, and petrochemical manufacturers have long used onsite electric generation - often fueled with natural gas or diesel fuel - to produce process heat and electricity (and sometimes steam) to run their operations. Their challenge is to shift away from hydrocarbon-derived energy.

These manufacturers are in stage three of their decarbonization efforts, but with a twist: they’re trying to shift from existing fossil-fueled onsite generation to cost-effective cleaner forms of electricity. When power cannot be generated onsite, it must come from outside the plant

“Manufacturing is a broad industry, but in general companies in this segment have long been trying to reduce waste and improve efficiencies,” observed Isaac Maze-Rothstein, a grid edge analyst at Wood Mackenzie. “Now, they’re trying to do it sustainably.”

“Whatever their segment, though, manufacturers are becoming more receptive to low-cost decarbonization measures like buying RECs and renewable energy through PPAs,” he continued. “There’s no doubt that more and more manufacturers are investigating, and acting on, decarbonization activities.”

Some of the impetus for this is market-based as the cost of renewable energy continues to decline significantly. Other times, Maze-Rothstein said, investors are prodding, if not pressuring, companies.

A case in point is BlackRock, the world’s largest investment manager with about $8.7 trillion of assets under management. In what some call “the shot heard around the world,” CEO Larry Fink in January 2020 wrote a letter to the CEOs of companies where the asset manager owns a stake. BlackRock, he wrote, will:

place sustainability at the center of our investment approach, including: making sustainability integral to portfolio construction and risk management; exiting investments that present a high sustainability-related risk, such as thermal coal producers; launching new investment products that screen fossil fuels; and strengthening our commitment to sustainability and transparency in our investment stewardship activities. … Given the groundwork we have already laid engaging on disclosure, and the growing investment risks surrounding sustainability, we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.

BlackRock was not the only asset manager to elevate climate concerns to parity with profits and purpose. It’s just the largest to do so.