A strict methodology for assessing companies’ Paris compliance
Translating Paris Agreement targets into company-specific carbon budgets and Paris Compliance Pathways (PCPs) requires a budget allocation methodology. Unless otherwise specified, references to carbon budgets are firm-specific cumulative allocated emissions, so that, collectively, firms stay within the overall carbon budgets. We propose two necessary conditions that must be met for any allocation methodology to be appropriate for assessing Paris compliance, and one desirable condition. First, the underlying global or regional decarbonisation pathways used by the methodology must be consistent with the goals of the Paris Agreement, peak emissions as soon as possible27 and contain the increase in average temperature well below 2°C and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels1. There are multiple pathways that could fulfill this requirement, and both the choice of pathway and its underlying assumptions must be transparent.
Second, the base year from which progress is measured should be set at or before 2015 and should be consistent with the underlying decarbonisation pathway (from condition 1). We propose a base year of 2015 or earlier that reflects the year the Paris Agreement was signed and captures emissions reductions that have been achieved well before 2020. This is also consistent with the “Action improved before 2020” from Durban. Platform for Enhanced Action CP.21 (2015) referred to in the Paris Agreement28 and the pathways described in the IPCC Special Report on 1.5°C2. Base years have clearly been shown to have a significant influence on a company’s carbon budget29. Furthermore, we argue that the same base year should be used to fairly compare the performance of companies. Currently, the Science-Based Targets initiative allows companies to choose their own base year. For example, a company could set a base year of 2020 for a target that compares its emissions reductions to a pathway (IEA B2DS) that has a base year of 2014, thereby neglecting emissions between 2014 and 2020. If the companies are not evaluated with a Common, and as soon as possible, base year, it is not possible to compare their actions to date with the climate goals and it becomes practically impossible to ensure that the actions are in line with the Paris goals.
Technically speaking, there are and will continue to be global emission reduction pathways that are consistent with a temperature target “well below” 2°C, starting in 2016 or later. For example, the IEA’s SDS pathway meets our first condition, but has a base year of 2018. However, pathways like these require faster decarbonization rates with each year of global inaction. More importantly, allowing base years of 2016 or later allows the overall carbon budget to be exceeded or unfairly reduces the established carbon budget of those companies that have taken appropriate action since (or before) the signing of the ‘Paris agreement, penalizing the first changes. to make up for latecomers. Note that the need for a firm’s base year to be consistent with the start year of the underlying pathway is a purely mathematical argument: it is necessary to ensure that the world meets the carbon budget of the Paris targets . But demanding that decarbonisation pathways begin in 2015 or earlier is an ethical and fair condition; to hold companies accountable for past emissions and to ensure that companies compare fairly with their peers. Ignoring emissions from the inception of the Paris Agreement makes meeting the Paris targets increasingly impractical and unworkable. Furthermore, firms are likely to reduce their financial risk by meeting the second condition. These companies will be exposed to fewer transition risks than counterparts that delay action, one reason why some stakeholders want to know whether a company is Paris compliant.
Finally, a desirable, but not necessary, condition for Paris compliance is that the methodology must take into account “common but differentiated responsibilities” to address climate change1. This means that companies in developed countries have a greater responsibility in mitigating climate change than companies in developing countries mainly due to their larger historical contributions to climate change and mitigation capabilities1. Our second condition loosely affects the accounting for historical contributions, but only to 2015 or earlier and the underlying pathways may not have sufficiently distinguished between developed and developing nations. The methodology must be clear on how it distributes the budget between companies in different countries.
Applying these conditions, we evaluate four allocation methodologies that have a version of their approach published since 2015: the Sectoral Decarbonization Approach (SDA)13,30 Greenhouse gas emissions per unit of value added (GEVA) 20.30, the Absolute Contraction Approach. (ACA)30 and the Context-based Carbon Metric method developed by the Center for Sustainable Organizations (CSO)22 (Table 1). SDA was the first method adopted and jointly developed by the Science-Based Targets initiative in 2015 (an initiative of the Carbon Disclosure Project, World Wide Fund for Nature, UN Global Compact and World Resources Institute). The SDA adopts a sectoral approach using the decarbonisation pathways of the International Energy Agency (IEA)31 and allocates sectoral budgets to companies based on their initial emission intensities, i.e. emissions (CO2 ) by activity (such as kWh of electricity or tons of steel), and its market share. Initially, the use of the Greenhouse Gas Emissions method per unit of Added Value (GEVA)13 was proposed to companies in “other industries” (for which there were no sectoral routes). which allocates the carbon budget to companies based on their economic activity. However, the Science-Based Targets initiative has moved away from this approach and instead suggests the Absolute Contraction Approach (ACA) for these companies, applying an equal percentage of emissions reductions to all companies . The Center’s context-based carbon metric for sustainable organizations methodology is similar to the GEVA method, setting targets based on economic activity (contribution to GDP), but is updated annually with actual GDP figures to ensure that remain consistent with a Paris-compliant carbon budget. It is also important to note that all these methods rely on future projections of firm-level physical or economic activity to set targets, which may differ from actual activity.
Table 1 The application of our three Paris compliance conditions to four allocation methodologies: the sectoral decarbonisation approach (SDA), greenhouse gas emissions per unit of value added (GEVA), the absolute contraction approach (ACA) and the context-based carbon metric method developed by the Center for Sustainable Organizations (CSO).
In Table 1, we find that SDA and the context-based carbon metric of CSO are the only two methods that satisfy our two conditions, while CSO also satisfies the desirable condition of differentiated responsibilities, with companies in developed countries forced to decarbonize a lot. faster than those of developing countries.
As any company will have multiple Paris compliance pathways to assess its performance, there needs to be transparency regarding the three Paris compliance conditions, i.e. the allocation method used, the base year of the pathway(s) in the underlying method, the scenario with which that method is consistent (eg IEA B2DS or SSP1-1.9), and whether they encourage differentiated responsibilities.
Operationalization of a Paris-compliant allocation methodology to derive a Paris-compliant route
Once a Paris Compliant methodology has been selected and an emissions reduction pathway is calculated using that methodology, some additional operational requirements must also be met for a company to declare that it is on a Paris Compliant pathway . The first operationalization requirement is that when applying a methodology that is based on the assumption of a future variable (for example, projected market share, to calculate emission reduction pathways and the carbon budget) , the assignment must be adjusted as soon as the realized variable information is available. For example, if market share was an input variable and a projected value was used to calculate the carbon budget in advance, the carbon budget would have to be adjusted whenever the market share differs from the projection
The second operating requirement is that if a company fails to meet the emissions reductions in its PCP in any year, it must build a “realignment” PCP that meets all of the above conditions while maintaining the company’s carbon budget . This will mean that any company that does not reduce its emissions sufficiently in any one year will have to compensate by increasing its reductions in subsequent years. In short, if a company has not met its objective, a “realignment” path should be defined to compensate for the performance deficit. Furthermore, although some methods use measures of carbon intensity, it is important that absolute emission pathways and corresponding carbon budgets are always calculated13,29. Ultimately, absolute cumulative emissions determine whether the Paris targets of keeping warming to less than 2 degrees above pre-industrial levels are met.
Finally, there are two additional minor operating requirements related to special circumstances. In the case of a merger or acquisition, the combined company must reduce its emissions as if both companies were a single company from the base year. In the case of new companies, a defensible approach must also be applied. For example, a new company has five years to establish its market share and emissions, after which it must…