Adding up emissions numbers can lead to some serious consequences for businesses. It isn’t as straightforward as 2+2=4, but when you scrutinise the numbers in detail then it can do some real damage to company value. Just ask Volkswagen.
Back in the summer of 2012 the American author and environmentalist, Bill McKibben, wrote one of the more influential recent articles on the sums related to climate change for Rolling Stone magazine. Global Warming’s Terrifying New Math brought global attention to Carbon Tracker’s work highlighting the potential financial bubble related to the unburnable carbon in proven coal, oil and gas reserves.
Today the issues around stranded assets and the future of the fossil fuel industry are topics of global debate, which have gained further momentum following the collapse in global oil prices. People have looked at how the numbers add up and started to pay far more attention to the issue. It has become a sufficiently orthodox view that even the Governor of the Bank of England has warned that our efforts to address climate change could lead to investors facing huge losses.
Now we are entering a period where people are starting to look at the numbers a lot more closely across a number of industries, to try to understand how climate change and the environment need to be factored into calculations of long-term business value. This is particularly true in the manufacturing industry, where the recent Volkswagen scandal could just be the first domino to fall.
At the Carbon Trust my team focuses on assessing the energy use of products for the UK government’s Energy Technology List, which has involved reviewing more than 60,000 products over more than a decade. So I was not surprised at all when the news broke that there are gaps between a manufacturer's claimed product performance and the actual performance that is measured when independently tested. I see it all too often.
Dealing with climate change is going to involve ratcheting-up the regulation of manufactured products. Increasingly strict standards will need to be set for the emissions associated with products, both in production and in use. But unless those standards are properly enforced then there is a serious risk that businesses operating in crowded and competitive markets will cut corners or flout the rules. This is especially true when there are loopholes that allow companies to get around the spirit of the law.
If our transition to a low carbon economy is based on incorrect numbers and wonky sums then it will make the job a lot harder and slower. So how do we get the maths right?
Firstly, we have to make sure that companies are required to measure the right numbers – the ones that reflect real world use. For example, with the EU Energy Label products are currently allowed to advertise their rating based on an eco setting, rather than their standard mode. This is despite the fact that manufacturers know most people will not use eco setting as a default. This is the sort of grey area that means that consumers are unlikely to get the cost savings they expect alongside the performance they expect.
Next you have to put claims to the test. For example, official UK market surveillance data from accredited test laboratories in 2012 showed that some freezers from Whirlpool, Miele, and Zanussi used an average of 11.9 percent, 14.6 percent and 14.4 percent more energy than declared on the EU Energy Label.
Often this isn't a deliberate ploy by the manufacturers, but reflects the fact that they have probably changed a component in their product and then not retested it to see how its performance has changed. It may also imply poor quality control in the manufacturing process. Either way it needs to be checked.
When there is a systemic failure then you have to intervene, which is exactly what happened in the domestic ovens market when it became clear that one in four manufacturers were inappropriately using test data to inflate their EU Energy Label claims. The cost of ovens affected by this issue was in the region of £150 million, from a £700 million market. And the detriment to consumers through inaccurate measurement was approximately £700,000 in additional electricity costs.
Finally you have to stop people from breaking the law. For example, today there is a lucrative black market for criminal gangs smuggling banned refrigerants containing HFCs, a very potent greenhouse gas. Governments need to work together to crack down on the criminals and take enforcement action against the companies that act illegally.
As governments and consumer champions start doing their sums on carbon emissions, companies that have done the right thing will be rewarded for becoming more sustainable. They will build trust in their brands by living up to their own claims. They are also likely to benefit directly as a business by putting a strong focus on using energy and resources more efficiently, which can increase productivity and result in more robust supply chains.
But this will not work if the market is distorted by slapdash behaviour from companies that gain a competitive advantage from breaking or bending the rules. Unless there are strong penalties and not just slaps on the wrist then there is a risk of creating a race to the bottom: the use of old inefficient technologies will be prolonged and the expected environmental benefits will not materialise.
Three key goals stand out for me:
We need to change the way products standards are developed and used by manufacturers. Many product standards were created at a time when measuring environmental performance was not important - they were designed to qualify what a product does and how it should operate. Often existing product standards have essentially been retrofitted with environmental requirements in a less-than-satisfactory ways. In future the standards development processes needs to ensure key environmental targets are embedded into standards in ways that can be unambiguously interpreted.
We need to get smart. Due to better embedded control technologies products are becoming smarter. As we are now beginning to see, some of these control systems have 'smart cheats' which make a product operate in an operationally impractical mode to ensure delivery of good environmental performance in test conditions. In the real world they harm the environment more than the customer realises. We need smart testing software to identify 'smart cheats' and we also need to ban eco modes which can be shown to be impractical in real world conditions. Standard mode should be the new eco mode.
We need manufacturers to know that there will be wider and more expansive market surveillance with clear penalties for non-compliance. Companies that seek to cheat the system need to know that the penalties will be more severe. This will also make sure that companies that do the right thing are not facing unfair competition.
When we look at the sums then we know that a sustainable, low carbon future will need products that have a much lower environmental impact than they do today. Companies and investors are starting to wake up to the fact that in a world where there is a global commitment to deal with climate change then they will need to change their approach, or they will suffer the consequences. Getting the maths right is the crucial first step.
This article is published as part of the Carbon Trust's COP21 Blog Series: The Road to Paris is Paved with Good Intentions.