Thinking about Carbon Footprint, Examining Sustainable Development of Industrial Development and Environmental Protection
Industrial companies have a large carbon footprint. Their production and logistics operations account for more than half of global carbon dioxide equivalent (CO 2 e) emissions from fuel combustion. Taking into account current trends, production and logistics emissions will need to be reduced by approximately 45% by 2030 to achieve the Paris Agreement’s 1.5°C target to limit global temperature rise. As long-term concerns about environmental issues have intensified, industrial companies are feeling increasing economic pressure to solve this problem.
Leading companies are aware of the need to take action, so they are implementing measures aimed at reducing their operating costs. Some companies went further and began to require business partners in the supply chain to also demonstrate their commitment to decolonization. The result is a fusion of environmental and economic problems that all industrial companies must be prepared to solve. The solution is a concept that we call the "green factory of the future" in which the comprehensive application of decolonization measures can reduce net emissions to zero.
To better understand the opportunities and challenges posed by decolonization, a BCG study reviewed the expectations and adoption of decolonization measures in industrial operations. The study focuses on the results of a global survey of nearly 1,200 operations executives from many production industries. This survey was conducted before the COVID-19 pandemic spread globally. But although the pandemic changed some short-term priorities, the climate challenge and the urgency to respond to it remain unchanged. In the medium term, the actions described in this report will continue to be targeted, and may even be significant. Indeed, as companies adjust their strategies to win the future after a pandemic, they have a unique opportunity to focus on climate action.
BCG surveyed industrial company executives and operations managers to assess their progress in implementing decolonization measures. We define industrial operations as the core transformation process of manufacturers, including production and maintenance, product quality and logistics (inbound, in-plant, inter-plant and out-of-warehouse) and other related functions.
Randomly selected companies participating in the survey from 1,188 global companies, each with at least 250 employees. These companies represent a wide range of production industries: automotive, consumer products, engineering products, healthcare (pharmaceutical and medical technology), materials and processing industries, and technology (telecommunications and IT equipment). Participants came from Austria, Brazil, Canada, China, France, Germany, India, Japan, Mexico, Poland, the United Kingdom and the United States. The survey aims to assess the extent to which participants are currently implementing decolonization measures in their operations and the motivation for implementing further measures. It also seeks to determine the most important levers affecting implementation, as well as the main challenges and driving forces. The survey asked participants what benefits they expected from decolonization. Research and analysis are specifically aimed at industrial sector emissions caused by fuel combustion. To identify issues related to industrial companies, we chose not to consider other important sources of emissions, such as the agricultural sector, or other specific types of emissions, such as waste and fugitive emissions.
The study found that industrial companies want to reduce their carbon footprint, and more than three-quarters of companies regard decolonization as a top priority. However, so far, most companies are struggling to achieve their goals. Only 13% of the respondents said that their company has fully implemented decolonization measures in production and logistics. The biggest obstacle to taking more active actions seems to be that these measures will increase the conversion cost.
We believe that industrial manufacturers should not regard environmental sustainability as a threat to economic sustainability. In fact, as the pressure to pursue decolonization increases throughout the industrial supply chain, environmental and economic sustainability will become increasingly difficult to separate. Despite the challenges, our research results show that companies can take a win-win action to benefit the environment and create financial value. The key to success is to determine the most effective decolonization measures, through a rigorous evaluation process, and to evaluate the economic impact of adopting these measures in a manner that considers factors other than conversion costs, such as exceeding regulations, attracting investors, and winning new customers.
Why sustainability is essential in operations
Our research focuses on environmental sustainability in industrial operations, including production and logistics. We particularly emphasized the emission of greenhouse gases (GHG), mainly CO2, but also gases such as methane and nitrous oxide.
Operational Sustainability Foundation
Sustainability has three pillars, each of which is related to industrial operations:
Although all aspects are interrelated, our research focuses on environmental sustainability as a key element of the company's long-term success. Among the many themes related to environmental sustainability in operations, four are particularly prominent:
Although industrial companies must address all these issues, we focus on greenhouse gas emissions from operations resulting from fuel combustion. The Greenhouse Gas Protocol, an organization that provides global standards, divides greenhouse gas emissions into three categories. Our research covers all three aspects:
As mentioned earlier, industrial production is a large part of global greenhouse gas emissions. CO2e is a standard unit for measuring greenhouse gas emissions. It estimates how much a given amount and type of greenhouse gases may contribute to global warming. Production accounts for more than 40% of global CO2e emissions from fuel combustion, and commercial logistics accounts for more than 10%.
As shown in the CO 2 life cycle assessment, emissions from activities related to production and logistics depend on the product. For example, for cars powered by internal combustion engines (ICE), the share of emissions that can be attributed to production is relatively low (15%), while 78% of the emissions come from the operation of the cars. In contrast, for battery-powered electric vehicles (EVs), nearly 43% of the emissions can be attributed to production, which is mainly due to battery production, which is quite energy-consuming. Therefore, although it may seem counter intuitive, the lifetime emissions of electric vehicles are almost the same as those of ICE vehicles. Our life cycle assessment of electric vehicle batteries is based on Chinese production, while battery manufacturers and power companies rely heavily on Chinese production, relying on large-emission hard coal, lignite and natural gas for power supply. To calculate the emissions of electric vehicle utilization, we used a global average power-grid combination.
Leading companies are taking action to reduce the carbon footprint of their operations, and various stakeholders are asking companies to transition to environmentally sustainable operations.
The management team of an industrial company seems to recognize the need for action. Among the study participants, more than 75% said that carbon neutrality is either the company's most important initiative or one of the first three. When asked about the main reasons for seeking to reduce carbon emissions, 28% of the respondents said that they need to meet regulatory requirements, while 25% of the respondents indicated that they should reduce conversion costs. Only 15% believe that customer demand is the main reason.
Envision a green factory of the future
Given the apparent need to take action to reduce greenhouse gas emissions in operations, what are the reasonable goals? Companies usually discuss the goal of reducing greenhouse gas emissions following the 2015 Paris target of 1.5°C. More than 190 countries have pledged to take measures to limit the global average temperature rise to 1.5 before the industrialization. Between °C. To achieve the 1.5°C target, countries need to reduce their overall net emissions to zero by 2050 and gradually reduce their emissions. Unfortunately, many countries including the top five emitters (China, the United States, the European Union, India and Russia) have failed to achieve their goals. The specific actions we discuss below can support this goal.
As of 2019, global greenhouse gas emissions from fuel combustion are about 33 gigatons of CO 2 e (Gt CO 2 e). To achieve the 1.5°C target, net emissions must be reduced to 18 Gt CO 2 e by 2030. However, extrapolating the current global emissions trend to 2030 will produce 33 Gt CO 2 e, which is an incremental target of less than 15 Gt CO 2 e relative to achieving the 1.5°C target. To close this gap, by 2030, greenhouse gas emissions from production and logistics must be reduced by 45% relative to current trends. From then on, the reduced emissions will have to continue for another 20 years until the net emissions fall to zero.
How can companies help close the gap? To reduce greenhouse gas emissions associated with operations, companies can avoid, reuse or store or offset or compensate for emissions. Each type of action includes one or more emission reduction levers.
Companies can avoid emissions by improving energy efficiency or changing their way of doing business:
Companies can use multiple methods to increase efficiency. First, to improve the energy efficiency of its operations, it can use superior operating leverage to simultaneously improve operating performance and emissions levels. The main means include reducing the scrap rate and machine idle time, and optimizing the layout to reduce the complexity of the logistics process. These measures allow companies to directly reduce emissions by reducing waste, reducing process emissions and reducing energy consumption. Companies can also take steps to produce, use and recover heat more efficiently. For example, use high-efficiency burners that can also recover waste heat, introduce heat exchanges that connect fellow users, or install heat pumps that increase the temperature of waste heat to usable levels. Second, to minimize the propagation distance of parts in its supply chain, companies can use multimodal transportation to optimize their logistics network and material handling. Third, to reduce consumption, it can deploy energy monitoring, management and steering systems (for example, deploy a stop-and-go mechanism for machines that trigger a stop when the device is not in use, or install a pneumatic system on the device. It is convenient for leak detection) One way to improve logistics efficiency is to replace manual control with an automated system that guides or controls the vehicle.
Change process or technology.
Companies can change their core production processes or technologies to replace low-emission processes with high-emission processes. For example, SSAB strives to achieve carbon-neutral steel production by 2026. It reduces CO 2 emissions by replacing the coking process traditionally used in ore-based steel making with fossil-free power and hydrogen-driven processes. Other examples include using rail transportation instead of trucks and 3D printing instead of traditional manufacturing to minimize waste, packaging and transportation emissions.
Replace fuel or power supply.
Companies can use other energy sources instead of fossil fuels and
Power generation based on fossil fuels. Options include using renewable energy sources (such as solar and wind) to generate electricity instead of coal; using biomass fuel instead of natural gas, using internal co-generation (called CHP), and using electricity instead of diesel to power forklifts.
Reuse or store.
Companies can use two main levers to reuse or store carbon emissions:
Recycling and re-manufacturing.
Companies can turn waste into reusable materials (recycling) or reuse existing parts to produce new equivalent products (re-manufacturing). For recycling, a prominent use case is the introduction of a closed-loop system that involves the local recycling of materials (usually plastic) to create new products. Compared with the use of raw materials, the use of recycled materials requires much less energy. Heavy-duty engine manufacturers provide customers with options for machine maintenance and refurbishment: they can choose new-manufactured parts or fully-functional used parts at a lower price.
Capture carbon and then use or store it.
Companies can capture the carbon emitted as a by-product of the production process and use or store the carbon to prevent its release.
Offset or compensation. Companies can compensate for their CO 2 emissions through offsetting measures. Such measures may not be related to the company's own production or logistics. Most companies view offsets as a complement to other emission reduction measures, rather than independent solutions with significant independent impact. As the company increases the share of renewable energy in its production by 2030, it will make up for the inevitable carbon dioxide emissions through carbon offsets.
Behind aspiring companies
More than 60% of research participants said that their company plans to implement decolonization measures. More than 90% of participants said that their company will use part of its manufacturing investment budget for decolonization measures in the next three years. Among these participants, about half said that the company will use more than 10% of its available manufacturing investment budget for decolonization in the next three years. To achieve ambition, companies must improve the way they implement plans. Although we have seen encouraging examples and ambitious ambitions, many previous efforts to implement decolonization measures have not been successful. Only 13% of participants reported that their company had fully implemented decolonization measures in their production and logistics.
From an industry perspective, it shows the gap between the ambitious goals in production and logistics and the current state of implementation. The technology industry has the greatest ambition to reduce carbon emissions. There are already many companies that produce IT and technical equipment and hardware with the necessary capabilities to develop and implement decolonization measures. Many technology companies strive to solve sustainability issues.
Although many companies have good intentions and plan to implement decolonization measures, in most cases, they have not set a scientific goal to measure success. According to a collaborative plan to monitor such efforts, only about 330 companies worldwide have established science-based decolonization targets. This figure represents only a fraction of the more than 10 million companies that need to decarbonize operations to achieve the Paris Agreement CO 2 emissions targets. Besides, no company in China, the world's largest emitter, has approved science-based goals.
After China, the two largest emitters in the world are the United States and the European Union. Together, these three sources account for more than 50% of global greenhouse gas emissions. Although they tend not to set science-based goals, companies in these countries are extremely ambitious in reducing their future carbon footprint. The increasing public demand for environmentally sustainable development and the increase in emissions taxes have prompted Chinese companies to have the highest ambitions. Companies in the European Union are facing similar pressure to take action. For example, Germany plans to impose a CO 2 tax of 25 euros per ton of CO 2 on fossil fuels (including natural gas) in 2021, and plans to increase it to 55 euros per ton by 2025. Sweden has developed a statutory decolonization road map.
Economic and environmental sustainable development go hand in hand
Although research participants indicate that the company is committed to reducing carbon emissions, concerns about generating higher costs have become a major obstacle to taking the necessary actions to support these good intentions. Nearly two-thirds of participants (63%) believe that decolonization will increase its conversion costs (total manufacturing costs minus material costs) by 2030. Only 21% of participants believe that by 2030, they can decarbonize to reduce conversion costs. Related to the development of investment and implementation costs to reduce carbon emissions: 63% of participants believe that these costs will increase in the next five years, while only 18% believe that these costs will decrease. Inevitably, some decolonization measures will increase conversion costs or require additional investment. But by choosing the right measures, companies can implement win-win actions to help the environment and create financial value. Generally, decolonization applications can generate positive business cases in one of three ways:
Essentially. Many measures (such as installing a compressed air system) can reduce conversion costs by improving energy efficiency and repay the investment within a reasonable time. However, the investment payback period may exceed the two years normally expected by the company.
Through subsidies. For example, although installing better insulation materials in factory buildings can reduce heating demand, companies still need government subsidies to recover their investment within a reasonable time. By avoiding CO 2 taxes. By optimizing the manufacturing footprint, the company can shorten the travel distance of its logistics operations, thereby avoiding CO 2 tax. In the next few years, the CO 2 tax may increase rapidly, which is much faster than the time required to change the production system. As a result, companies that act fastest to optimize their footprint and systems to avoid carbon taxes will gain a competitive advantage in the short term. As of 2019, 46 countries (approximately 20% of global greenhouse gas emissions) have implemented CO 2 taxes or certificates to promote decolonization. In different countries, the price of CO2 e emissions varies greatly. Sweden currently charges 114 euros per metric ton of CO2, the highest in the world. The CO2 tax rate will affect the company's best manufacturing footprint.
The management team should go beyond the debate to decarbonize whether the operation is suitable for their company, and every industrial company must take action in this regard to remain competitive. Simply providing the "best cost" is no longer relevant to winning business.
To successfully implement decolonization measures, companies need to adopt a structured three-step approach:
Assess the carbon footprint.
The company should conduct a structured assessment of CO2 emissions from its operations, including production and logistics throughout the supply chain. The assessment should cover the range of greenhouse gas emissions 1 to 3, ie direct, indirect electricity or other indirect methods. To gain an external perspective, the company should compare its carbon footprint with the corresponding footprint of its industry counterparts. Increasing transparency is essential to define specific emission reduction goals and measures. To quantify its emissions, companies should use national or international standards, such as those set by the International Organization for Standardization or the European Union. This will enable companies to use their findings for official reporting purposes (for example, regarding the CO2 tax or emissions trading system, effective in the EU.
Set realistic goals.
Companies need to set short-term, medium-term, and long-term decolonization goals based on rigorous cost-benefit analysis and the wishes and requirements of all relevant stakeholders (including employees, customers, governments, and shareholders).
Define specific measures.
Companies should carefully choose decolonization measures to ensure that they provide environmental and economic benefits. When evaluating applications, companies should consider not only savings in conversion costs, but also financial benefits, such as opportunities for more revenue. To simplify the selection process, the company should prepare a complete list of potential use cases, including a preliminary cost-benefit analysis and potential technology partners for each application.
Industrial companies should consider reducing carbon emissions from operations as part of their strategy to remain competitive in the future after a pandemic. In recent years, as the impact of climate change has become more and more obvious, the public, government, and leading companies have become more demanding and more specific about actions. As stakeholders recognize the importance of environmental resilience in promoting recovery from the current crisis, these needs are likely to surge. Given that it takes many years to successfully implement decolonization measures in complex production systems and supply chains, companies should immediately begin systematically strengthening their activities. Indeed, the next few years are likely to be a turning point.