Climate Innovation: Driving Efficiency
The decarbonization imperative requires companies to look to their core operations and drive climate-focused efficiency
By Katelyn Foley, Vuk Trifkovic, and Kanika Chandaria, BCG Digital Ventures
Although efficiency is not a new concern for corporations, a new imperative is driving it: The climate emergency.
In order for us to stay under 1.5c of warming and avoid climate catastrophe, companies need to curb their carbon emissions dramatically — while still aspiring to save money and time. Yet efficiency in the form of production gains is one thing, while climate efficiency is another. Luckily, the two can be compatible, and companies that take climate efficiency seriously stand to benefit in more traditional business areas.
Driving climate efficiency requires new and nuanced thinking, and it’s important to remember that while it will be an important tool in fighting climate change, it is just the first step in the transition to a fully decarbonized economy. Concrete action, such as moving to clean, renewable sources of energy, or the identification of new revenue sources in the form of green business models to transition away from heavy-emissions activities, will be vital. But it will take time and work to get to carbon-free solutions; in the meantime, efficiency should be a high-priority topic to decrease environmental impact and drive cost and time savings in the process.
In this process, companies need to be conscious about what exactly is meant by efficiency. While we have seen huge gains in energy- and emissions-efficient technologies, the volume of GHG (greenhouse gas) emissions continues to increase. At first glance this seems counterintuitive, but in fact it is a case of the Jevons Paradox, an effect first described back in 1865 stating that when technological progress increases the efficiency with which a resource is used, the overall rate of consumption of that resource rises due to increasing demand.
Using hard-won efficiency savings only to emit more is evidently self-defeating for fighting the climate crisis, and it is also becoming untenable for companies’ bottom lines, as shareholders and governments demand lower emissions, penalizing the worst offenders. With the European carbon price soaring at the time of writing, the EU looking to impose carbon border costs on imports, and the Biden administration setting ambitious climate targets, it will soon be costly for companies to be anything but climate efficient.
The good news is that, if approached in the right way, it’s possible for corporates to align their incentives with climate goals, reducing costs while limiting emissions. This alignment of incentives might not seem straightforward, but there is potential for significant gains and also brand-new business value available for those willing to invest and leverage their resources. The application of technologies such as AI, ML, and IoT will be vital here; BCG analysis calculates that by 2030 the application of AI for climate control could help reduce between 5% and 10% of GHG emissions, while providing between $1-$3 trillion in value when applied to corporate sustainability generally. Larger companies stand to benefit particularly here, with access to massive data sets a key enabler of AI success. AI can provide a comprehensive view of a company’s carbon footprint and offers a valuable route to sustainable transformation.
There are options available across sectors and business models, and the pressures and opportunities that can drive efficiency are shared by many companies. The need to limit carbon emissions is increasingly driven by regulation and shareholder and public pressure, and can go hand-in-hand with cost savings. New businesses can also be created around carbon efficiency considerations, as businesses and consumers demand low- or zero-emissions.
Approaching efficiency
Emissions come in three categories. Scope 1 covers direct emissions from owned or controlled sources; Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating, and cooling consumed by the reporting company; and Scope 3 includes all other indirect emissions that occur in a company’s value chain (often representing the majority of an organization’s total GHG emissions — another reason why corporates should not stop at efficiency.) For this piece, we will primarily focus on Scope 1 emissions — those which corporates have the most immediate control over and which can be limited by efficiency gains.
In order to understand emissions and start implementing more efficient processes, companies first need to have a clear idea of where their emissions are coming from. They should therefore start by implementing a comprehensive monitoring process, using a centralized platform to track emissions.
There are a variety of approaches available here. Plan A, a recent graduate of BCGDV’s Social Ventures Program, helps businesses measure, reduce, and offset their carbon footprint through a software platform that guides them through the process. Companies can use Plan A’s tool to calculate their carbon footprint using company-specific data, spend-based information, or proxy-based measurements, and then reduce or offset their carbon emissions.
For production-based companies, smart sensors and IoT devices will be required to adequately track all usage and get a full and accurate picture of emissions. Platforms like Cognite can contextualize this data, and others, such as SupplyShift, extend to supply chain operations. Companies might also consider building their own solutions here, as these can then later be synchronized with production processes and AI to make efficiency gains; BASF publishes details of its carbon footprint annually — a strong example of the potential for transparency.
After a holistic assessment has been made, there are some practical steps to be followed, including switching to net-zero energy sources, identifying and eliminating leakage, and leveraging new solutions to drive efficiency.
Net-zero energy sources
The biggest impact companies can have on their emissions is moving towards net-zero energy sources. Many companies have already realized this; as part of its plan to reach net-zero emissions by 2030 across all operations and products, Apple is prioritizing bringing its suppliers to renewable energy sources alongside identifying efficiency gains.
According to a BCG study, the production and logistics operations of industrial companies account for more than half of all global carbon dioxide equivalent (CO2e) emissions from fuel combustion, and GHG emissions would have to decrease by 45% relative to the current trend by 2030 to be compatible with the goal of staying under 1.5°c of warming.
The same study noted that due to the energy-intensive process of battery production, the lifetime emissions of electric vehicles, which we will need to reduce light vehicle emissions, are currently almost the same as those of vehicles with an internal combustion engine. This underlines the importance of transitioning to net-zero energy sources in production, with even products that will be integral to a net-zero future still an emissions burden without renewable energy. Volkswagen hopes to achieve carbon-neutral production for its entire fleet by 2050 at the latest, and Daimler wants its entire fleet of passenger cars to be carbon neutral by 2039.
The switch to net-zero sources will not be easy or straightforward for every company. For some, it will require looking to novel solutions, or creative thinking in terms of existing power generation, with on-site renewable power generation providing one avenue for exploration. There is space here for innovation; new solutions that enable companies to power assets with net-zero sources, shifting vehicles away from oil, for example, will be vital.
Optimize processes, eliminate inefficiencies
Everyday company processes often contain unnecessary energy consumption and that can be ironed out. This is a win-win, with emissions savings accompanied by reduced costs.
Any leakages should be eliminated. Oil and gas companies, for example, emit huge amounts of GHG methane through leaks in installations or flaring. Solutions are coming to market enabled by remote sensing and IoT technologies that can pinpoint these leaks and prevent them; Kayrros, for example, offers solutions for methane tracking via satellite and AI technology. For GHG emissions-heavy sectors, preventing these leaks can have a massive impact in emissions reduction.
Supply chain and shipment efficiencies can help greatly reduce emissions while saving costs and time. Ware2Go, an on-demand warehousing, logistics, and fulfilment network built by UPS and BCGDV, offers digital supply chain management tools that help companies optimize inventory distribution and warehouse placement, as well as forecast seasonal demand. This helps companies more accurately understand their shipping processes and demand and thereby ship in a more sustainable way while also being smart about costs.
For companies that use heavy machinery, ensuring that usage is limited to only what is necessary for operations is highly important. BCGDV-built Shell venture MachineMax is an AI- and smart sensor-powered telematics solution that connects with industrial hardware such as construction vehicles, reducing unnecessary idling time in off-road machinery, which results in profit leakage, reduced utilization, wasted fuel, avoidable maintenance costs, and increased emissions. Solutions like MachineMax will be integral to efforts to reduce their emissions while also reducing costs, ironing out inefficiencies in fixed-output resources.
There are many solutions that can be leveraged (or built) to pinpoint and unlock efficiencies. To give just one example, geospatial solution UP42, built by BCGDV and Airbus, can be used for multiple use cases that unlock efficiency, including monitoring pipelines, identifying oil leaks, and optimizing agricultural operations.
There are numerous solutions possible across sectors, and all of these have in common their deployment of technologies such as AI, geodata, and smart sensors to drive efficiency. Companies should look to solutions that leverage these technologies where possible — or seek to create them themselves, opening up new revenue streams in the process in addition to efficiency savings.
Constantly fine tuning processes is vital, particularly in sectors where emissions are inherent to operations. For these sectors, driving efficiency is urgently necessary in the transition to net zero.
Beyond efficiency
These steps require ongoing attention, but once they have been established, companies can move on to consider Scope 2 and Scope 3 reduction targets, where a wealth of opportunities exist for new businesses related to limiting indirect emissions. Ikea is a good example here, in its drive to design products for greater energy efficiency.
As a further step, they might consider how they can create opportunities for carbon reduction through supporting certain processes. For example, agricultural technology companies might think about sequestering carbon in soil through promoting certain farming methods; those in construction might consider how certain building materials can actively bind carbon from the atmosphere rather than releasing it — startup Carbo Culture is one company working in this area.
The climate crisis dictates that companies need not just to drive efficiency for the sake of increased production, but also to be mindful of the impact they are having on the environment. Fortunately, many efficiency gains can be directed towards GHG emissions reduction, but in cases that they drive more emissions, companies will come up against regulatory and economic disincentives.
By taking a holistic approach and being transparent about emissions while also looking beyond efficiency to new business opportunities in the decarbonization economy or inventing new green technologies and solutions, companies stand to benefit greatly from the climate innovation imperative.
For more, see the other pieces in our climate innovation series:
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