Background / Problem Statement
Many companies/countries provide long-term targets on GHG reduction or offsets to appear green and sustainable.
Many of these companies do not commit or take too little action to change their carbon footprint in the next 5-10 years.
These communication strategies can be very confusing and prevent the public and policymakers from understanding the real efforts and progress made on the energy transition and Climate Change mitigation.
Each time we delay effective action and postpone GHG emission reduction, we must accelerate further our societies' decarbonization to keep them in line with the Paris Agreement's goals.
Why a Net Present CO2 Saving Concept?
The financial world uses Net Present Value to indicate an investment's current value based on its future cash flows. The discount rate used reflects the opportunity cost associated with this investment. It is also a way to manage the risks/uncertainties associated with cashflows forecasted in the future.
A similar concept can be applied to the Carbon flow resulting from green initiatives. In other words, a carbon saving secured in the future won’t be worth as much as one secured in the present.
The proposed discount rate is the current yearly targeted emission reduction rate up to 2050 to reach the Paris Agreement. The discount rate shall be revised every year based on the progress we made toward the Paris agreement. If countries don't reduce emissions by at least 7.6% year-on-year, this number will increase in the following years.
Let's Play with the Concept of Net Present CO2 Savings
Let's use Net Present CO2 savings and calculate the current climate value or benefit of a green initiative.
In this exercise, we calculate the Net Present CO2 savings in 2021 for 1 "bullet" GigaTon of Targeted Carbon emission reduction depending on the year of occurrence. By "Bullet," we mean a one-shot saving that occurs in a single year. Let's say a company says it will reduce its emissions by 1GigaTon in 2050. We consider that the statement applies 1GigaTon reduction in the year 2050.
We then calculate the Net Present CO2 saving for this GigaTon saved in 2050.
Calculation Summary
The outcome of the calculation can be summarized as follows:
- The 2021 Net Present CO2 Saving of 1GigaTon saved in 2050 is 111 MegaTons.
- The 2021 Net Present CO2 Saving of 1GigaTon saved in 2040 is 231 MegaTons.
- The 2021 Net Present CO2 Saving of 1GigaTon saved in 2030 is 480 MegaTons.
The Net Present CO2 saving we calculate is for an "equivalent bullet saving" happening in a single year between now and 2050.
Comparison of GHG Emission Reductions Over Time
Taking actions to reduce GHG emissions by 1 Ton in 2021 is equivalent to claiming a 8.3 Tons reduction in 2050, 4 Tons in 2040, or 1.93 Tons in 2030.
We can also refine the calculation assuming an "equivalent perpetual saving"—i.e., a saving that occurs every year from a given year until 2050.
Taking actions to reduce GHG emissions by 1 Ton per year from 2021 is equivalent to claiming an 8.75 Tons per year permanent reduction from 2050, 4.1 Tons per year from 2040, or 1.95 Tons per year from 2030.
This demonstrates that big numbers and announcements are not always translating into big ambitions!
Benefits of Adopting this Metric
By adopting Net Present CO2 saving, companies and policymakers can achieve:
- Better prioritization of climate projects: Resources can be allocated to projects with the highest immediate and impactful CO2 savings.
- Enhanced transparency: Provides a standardized metric that improves comparability across various climate action initiatives.
- Long-term value alignment: Aligns financial decision-making with environmental sustainability goals.
How to Implement Net Present CO2 Saving
Implementation involves applying a discount rate to future CO2 reductions. The key steps include:
- Identify the CO2 saving potentials of each project.
- Apply the suitable discount rate that reflects the urgency of climate mitigation.
- Calculate the Net Present CO2 saving by adjusting future CO2 savings to present values.
When used correctly, this metric aids in strategic decision-making that aligns financial and environmental considerations, fostering a more sustainable approach to project prioritization.
Immediate Climate Action
We need CLIMATE ACTION NOW , and I see clear value in companies and countries putting targets for themselves with a 5 to 10 years horizon. It also shows that to address Climate Change, we need to scale the solutions we have on our hands today and work on alternative and more long-term solutions in parallel.
We should not bet on solutions with potential GHG emission reductions scheduled only in 2035 and beyond to address the current CLIMATE EMERGENCY.
As the world intensifies its efforts to combat climate change, the focus increasingly shifts towards smarter decision-making frameworks. This article introduces the concept of Net Present CO2 saving as a metric that can enhance decision-making for climate action, especially in investment contexts.
Conclusion
Net Present CO2 saving offers a pragmatic approach to assessing and prioritizing climate action initiatives. As we seek effective strategies for tackling climate change, implementing metrics that reflect both immediate and long-term impacts is essential for meaningful progress.
Note: I use the worksheet NetPresentCO2savingsv1_2.xls for the calculation . It is a work in progress, and I am interested in getting feedback and suggestions on this tool/concept.
Update: In 2023, PWC calculated the new required yearly GHG emission reduction rate to match the Paris Agreement : 17%. This shall be the new discounting factor to calculate the Net Present Carbon Savings.