Hi, this is the fourth of five videos of my science based targets lecture.

This video gives you an overview of sector based approaches to target setting.

Now this is very cutting edge.

It's at the very cutting edge of target setting.

But as we'll see there are issues that suggest

this isn't going to be the definitive method.

It's going to have to be reworked in some ways.

There are currently two sector based methods,

the 3% solution and what's known as SDA.

The 3% solution estimates reduction possibilities in many sectors.

SDA is the approach favored by the Science Based Targets Initiative,

that's a certifying group for science targets.

SDA stands for Sectoral Decarbonization Approach.

And it uses long term sector growth estimates and forecasts about

each sector's emissions reduction opportunities to come up with

a fair allocation of reductions within a carbon budget.

The 3% Solution group has somewhat similar approach.

They estimate reasonable reductions for sectors over the next 10 years.

Then companies have an annual reduction target to meet.

From this slide you can see how much suggested reductions vary among sectors.

These reduction estimates or forecasts are based on

research done by the consulting company McKinsey and Company.

Notice the 19% to 24% which is two to three percent per year for industrial.

So it'd be handy when we talk a bit more about the Sectoral Decarbonization Approach.

The 3% Solution wasn't really created as a target setting tool,

but as a way to show companies that carbon reduction could be done profitably.

But it does provide some guidance about the capacity of sectors to reduce emissions.

It's worth noting that McKinsey and Company have a long history working in this area.

It's greenhouse gas abatement cost curve which was published in I think 2009 was

a real breakthrough in helping companies see

that carbon reduction could be a profit center if it was done properly.

I'm going to introduce

the Sectoral Decarbonization Approach with an example from Oscar Crab's article that

was published in 2015 for the steel industry,

they expect a 32% decline in CO2 emissions over the 35 years from 2015 to 2050.

That's about 1% a year.

Now that's less than half of

the 3% solution recommendation

of 2 to 3 percent per year for companies in the industrial sector.

Now notice that the SDA approach builds in

growth estimates in terms of millions of tons of steel produced.

So that's a white line just below the blue line in the table.

Moreover, if you look at the 2020 emissions they're actually growing not declining.

So there can be big differences in

the assumptions and the results of these two sectoral approaches.

The SDA approach has

all companies in an industry converging to the same carbon intensity by 2050.

So it's a convergence not a compression approach.

You can see the numbers here going from 1.97

tonnes of CO2 per ton of steel produced to 0.89.

Being a convergence approach,

it's cost efficient in that all companies have to make

similar reductions that presumably have similar costs.

Here's the convergence of carbon intensities for three hypothetical companies.

The high emitter cleans up more and the low emitter don't need to do much at all.

These are carbon intensities or carbon emissions divided by some measure of production.

In this case tons of steel produced.

Here the same three firms with same assumptions,

but now we're looking at absolute carbon emissions.

So metric tons CO2E.

Depending on how much a company has cleaned

up sort of their starting point in terms of carbon intensity,

the SDA method may actually allow a company to increase its emissions.

That's like the blue line. The Lo-Emitter.

Now it seems to me that over 35 years all companies should be

able to clean up some because the entire economy is becoming less carbon intensive.

So this result seems counter-intuitive to me,

and it's one of the issues that I think the SDA approach has

to address before it can really be universally accepted.

We can't let some companies actually increase their emissions over

a long period of decarbonization and

decoupling of economic activity from carbon emissions.

It just doesn't seem right.

Here's a table from the Sectoral Decarbonizezation Paper that

shows recommended intensity reduction pass for 11 named industries.

For some, the reductions are huge.

The first line, now in green,

shows power generation going from 591 grams per kilowatt hour to 28.7 grams.

That's a 95% decrease by 2050.

Now I suspect this is because renewables will replace a lot of fossil fuel generation.

And there'll probably be efficiency gains in terms of

grid transport and some demand side efficiencies.

Now let's scroll down and we'll look at air passenger transport.

The change is from 176 grams of CO2 per passenger kilometer to

131 grams per passenger kilometer or about

a 26% decrease over 35 years compared to a 95% decrease for power generation.

It must be that there are very few ways that air transport can avoid using fossil fuels.

So it will at best be able to make

some only marginal improvements maybe on Apron Management.

There'll be some efficiency gains in engine design and so on.

But really there's not a lot that

airline companies appear to be able to do to reduce their impact.

So there you see two sectors very different future profiles in terms of

their business operations and correspondingly very different estimates

of their ability to reduce emissions and contribute to a low carbon economy.

So sector based approaches they recognize reduction opportunities,

they recognize company differences at least the SDA does,

and the SDA approach converges to a single intensity result.

What are the problems? Well, first of all there's very high data requirements.

The focus on intensity may allow for absolute emissions to increase.

So far they only work for some industries.

Let's look at the advantages and disadvantages of sector based approaches.

The advantage is the big one is that

sectoral differences in reduction opportunities are recognized.

That's really important as we saw the airline industry has very few opportunities.

Power generation a lot.

The SDA approach recognizes company differences because we're

starting at different intensity levels and then converging to one result.

This also makes it relatively cost efficient.

Everybody has the same kind of marginal cleanup costs at the end.

The problems is that sectoral decarbonization has

very high data requirements and it's based on

long term forecasts about growth in

technological innovation over the next 20 or 30 years.

Now if these data requirements can be met and trusted,

it provides a good way to set targets that are

reasonably fair between companies and sectors.

There's a focus on intensity that may miss absolute emissions increases.

We saw an example of that.

And to me that's just counter-intuitive that

over 35 years a company ought to be allowed to maintain

its emission levels or actually increase them given the same level of productivity,

tons of steel or whatever.

SDA only works for a few industries.

About 11 named industries right now.

3% Solution has much broader coverage.

It's only for 10 years and it only looks at reduction opportunities, not growth.

So basically there's a huge faith that has to be made in very long term forecasts.

And I want to show you some.

Remember that the data

that was used during the forecast came from the International Energy Agency.

This is some that one of my students sent me that I thought was absolutely fascinating.

It looks at IEA forecasts of adding PV solar each year versus what actually happened.

Now the steep black line is the actual history and

the confusion or snarl of colored lines are IEA's various predictions.

The takeaway is that IEA may be excellent forecasting fossil fuel use in production,

but it doesn't appear to be very good at renewables or at innovation.

Now innovation and renewables have to be part of the picture.

And so if IEA isn't forecasting very well,

it really puts into doubt

those long-term SDA forecasts

which if they let some companies increase absolute emissions,

creates a real problem for us.

So a real brief summary.

We're trying to capture differences in

reduction mitigation opportunities between sectors,

and we're trying to figure out a way to allow for growth in some sectors.

And the sector based models are our first step.

So far they're sort of limited and they have

some other quirks that may be difficult to overcome.

So I'm not sold yet.

I think we can use them but with

care and we still need a definitive approach to setting science space targets.

Thanks. And next we go to the last part of the video lecture and

that's John Byrd's easy easy approach to getting a certified science based target.

And then an outline of an idea for

a hybrid approach that I've been sort of mulling

over over the last several weeks of this,

I've been putting together this lecture.

Thanks so much and see you in the next lecture.

Science-Based Target Lecture Part 4

Sustainable Business: Big Issues, Big Changes

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