Matteo Mura, Salvatore Pascale January 5, 2022 6 min read

podcast 2

Why do we need to reduce carbon dioxide emission to reduce global warming? The reason is quite simple. Carbone dioxide (CO2) is a greenhouse gas, which means that it can absorb energy, in the form of electromagnetic radiation, that otherwise would escape to space. So basically the more CO2 is in the atmosphere, the more the Earth’s surface warms up. Carbon is present in many reservoirs on Earth: atmosphere, ocean, land-biosphere and rocks and transfers of CO2 from one reservoir to another is what we call the carbon cycle. Humans, since the beginning of the industrial revolution, about 250 years ago, are altering this natural cycle by digging out carbon from the soil in the form of coal, oil and natural gas (what we call fossil fuels) to burn it and produce energy. That’s a huge perturbation to the carbon cycle which has driven the CO2 concentration increase and warmed up our climate. CO2 is the most important greenhouse gas and it accounts for 70% of the warming, but other greenhouse gases exist too, like methane. The warming up of our climate by a few degrees may not seem intuitively like a big issue, but our intuition is wrong. A few degrees more mean a totally different climate. It is like changing the rules of a game, so when playing totally unexpected and unprecedented things can happen. The most important, for us, of these consequences are: sea level rise, increase in the frequency and intensity of extreme events like floods, drought and heat waves. The more the warming, the more these changes will impact us. Limiting global warming to 1.5 or 2 degrees by the end of century is considered a sort of “safety threshold” for adaptation: above that threshold, changes in sea level and extreme events will be so big that we will struggle to adapt. Italy will be particularly impacted as she is at the centre of the Mediterranean hotspot of climate change: warmer temperatures will imply more ferocious heat waves, reduce precipitation and therefore more droughts, and sea level rise will directly impact Italian coasts, which are densely populated. So impacts of climate change will hurt our lives and our business directly.  

To reduce CO2 emission, policymakers are acting at the European level to modify the way company operate. Since 1st January 2022, the 4th phase of the Emission Trading System (ETS) was approved by the European Commission. This measure imposes several limitations to the amount of CO2 emissions that companies can emit, which have to stay below a certain threshold. Companies that are not able to comply with that will have to pay to compensate for their additional CO2 emissions. This is something unique that never happened before, and made rules much stricter relative to the previous phases of ETS, the first of which was introduced in 2005. Of course, different types of companies are affected in a different way by this measure. Energy-intensive companies, like power plants, companies producing paper, chemicals, materials for the construction industry (for example, cement), steel, aluminum, etc. are the most affected by these new policies. However these companies have a long value chain down below their value stream, therefore the rise in the costs of emissions for these companies will inevitably transfer to their clients and other value chains.  

This is what is happening in Europe, which was the first continent to introduce these policies. But Europe accounts for a small share of global emissions! So we have to acknowledge this is a global issue, which can be tackled only if all countries act to fix the problem. Overall, Europe accounts for about 7% each of global emissions, same as India, behind China (30%) and USA (15%). Interestingly, the introduction of ETS policies in Europe indirectly influenced other political entities worldwide by providing a reference point on how to act to reduce CO2 emissions, and what happened is that some provinces of China and some states of the USA (for example, California) spontaneously adopted similar measures.  

For companies, practically, they can follow several strategies not only to comply with ETS, but also to somewhat take advantage of it.  For example, companies can start thinking about decoupling their economic growth from resource use and resource impact in terms of emissions. 

Here are some numbers to explain what is happening in the European landscape: we recently assessed 280 industrial ecosystems in Europe, and nearly 56% of these ecosystems in the last 15 years have implemented a “green growth strategy”, that is, they were able to decoupled their economic growth from CO2 emissions in the last 15 years: economic growth increases, and CO2 emissions, while still increasing, were greatly reduced. This is a very promising innovation, but unfortunately it is not enough! First, we still have the remaining 44% of industrial ecosystems in Europe which are not going along this pathway of “green growth strategy”; second, even for the 56% virtuous, the CO2 emissions are still too much. As a consequence, although we were able to reach the 2020 targets for CO2 reduction, if things don’t change rapidly, we will not be able to meet the 2030 targets and following targets (2040 and 2050) for CO2 reductions.    

There are several other strategies for companies, in practice, to move into a green growth strategy. Firstly, they can compensate for their CO2 emissions, that is, buying carbon credits for the emission that exceed the ETS thresholds. That is a very basic strategy that allows companies to keep their pace and maintain their industrial processes. However, this is not really a sustainability transition policy, as it keeps the industrial process unchanged. Secondly, companies can redesign their production to make it more efficient in terms of resource they use, that is, to use less resources to produce more output. There are several ways to make their processes more efficient, for example by changing the type of energy they use and selecting only providers that sell them energy from renewable energy sources. Thirdly, they can redesign products that embeds less CO2 emissions in their manufacturing and that can be recycled at the end of their own lifecycle thus re-entering in the manufacturing process as secondary raw materials.  

Again, will this be enough? It really depends on how extensively and rapidly we will implement these policies, and change energy production system, to reach carbon neutrality. From the point of view of the physics of climate, what we need to do is simple in principle: stop burning fossil fuels to produce energy. Making businesses and production processes more efficient will also help, but the real change is to completely transform the way we produce energy and transition to carbon-free energy sources. Of course, that is a huge challenge, especially if we want to achieve it in a short time. Will we manage? It is hard to say, because it is hard to predict the future political and economic pathway we will go through. Scientists deal with this uncertainty of the future CO2 emissions by envisioning a set of future scenarios: each scenario is a self-consistent way of economic and political development.  To account for the whole range of possibilities, these scenarios go from a high-emission scenario (the most pessimistic) to a fast-energy-transition scenario (the most optimistic), including all intermediate scenarios. We can find more information about them by reading, for example, the latest IPCC assessment report released in August 2021.  So even if we do not know which one we will follow, we can still have an idea of the range of climates we can get. For the most pessimistic scenario, scientists predict 4 to 5 degrees of global warming by 2100, up to one meter of sea level rise, more extreme events etc. and that will get even worse after 2100. In the most optimistic scenario, we’ll probably manage to maintain global warming below the two degrees so limiting its most impactful and adverse effects. But we need to act fast to achieve that. One last thing to highlight is the time dimension of the climate change problem: because of the large thermal inertial of the climate system, once the climate warms up, this warming will last for thousands of years and so the choices we do in the next few decades will influence life on Earth for a very, very long time.  

This article is based on
Business 4 Climate Podcast ep. 2 | The Rising Cost of CO2 Emissions
Matteo Mura, Salvatore Pascale