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Reducing the Costs that Matter

Sharing their learnings on cost reduction at the recent Lavery/Pennell Sustainable Innovation Breakfast were Pepsico, Nestle, Shell, Rexam, the University of Cambridge, Imperial College London and 2degrees. This note summarises the discussion. Do Some Costs Matter More than Others? Economists and managers have focussed traditionally on reducing labour costs. This resulted in the loss of 1.5 million UK manufacturing jobs from 1998 to 2011, reducing manufacturing labour costs from £100 billion p.a. to around £75 billion. But the £25 billion p.a. saved previously kept staff in meaningful employment, supported their households, and stimulated the economy through spending. And the loss of those staff (representing over a third of UK manufacturing jobs) has placed increased burden onto the welfare system and in many cases resulted in economic hardship for individuals and their communities. At the same time, non-labour manufacturing costs, comprising mostly raw materials and energy, have increased from £335 billion in 2004 to £345 billion in 2011 – an annual increase of 0.4%. Compare the impact of a 3.7% p.a. improvement from 1998 to 2011 (a similar rate achieved in labour headcount reduction) which would have saved £122 billion p.a. in costs by 2011. This 35% overall reduction in non-labour costs would have substantially improved the UK’s competitiveness and boosted exports, in turn creating more jobs and wealth. While the economic benefits resulting from a focus on non-labour costs attractive, so are the environmental and social benefits: Reduced biodiversity damage from mining and energy extraction Reduced transportation and refining impacts, including water take and waste Reduced greenhouse gas emissions Improved balance of payments for the UK from reduced importing...

Paris Agreement supports sustainable innovation

The Paris Agreement on 12 December 2015 is great news for sustainable innovators. Key Points of the Agreement (full text here): Agreement to keep global average temperatures “well below” 2°C above preindustrial levels and pursue efforts to limit the temperature increase to 1.5°C Non-binding, depending on countries’ own “nationally determined contributions” which were submitted prior to the Paris summit and which result in a global annual emissions total of 55GtCO2e – which is estimated will result in a global temperature rise of 2.7°C. So beyond the national plans, which themselves require significant cuts beyond current programmes, additional reductions are still required to achieve 2°C (considered to require a global annual emissions of 40GtCO2e). Developed nations will set up a $100B p.a. fund providing “climate finance” to help poorer countries to adapt to climate change and reduce emissions. “Encourages” the voluntary cancellation of units issued under the Kyoto Protocol, including certified emission reductions that are valid for the second commitment period towards eliminating the accumulated surplus of credits, which would delay action. Why it is significant The Paris COP (and its lead-up) saw significant support for action to address GHG emissions from many sectors of society including business, investors, the church (e.g. the Pope’s second encyclical) and of course all 200 governments at the negotiation. We believe that underlying the Paris summit is a maturing of global thought to a position of acceptance and the development of a rational plan to tackle the problem. We have seen a progression consistent with Elizabeth Kubler-Ross’s model of the stages of change[1]: denial, anger, bargaining, depression and acceptance. The drive for a 1.5°C...

Distributed Generation Report

A new examination of the barriers to Distributed Generation has been released.  Lavery Pennell’s CEO Greg Lavery was a member of the Steering Committee. Entitled ‘Distributed Generation: From Cinderella to Centre Stage’ the report provides an overview of distributed generation in the UK and the barriers that it faces. Authored by the Carbon Connect division of Policy Connect, the study recommends a number of policy actions to assist distributed generation projects and thereby unlock the efficiency, emissions, security and risk reduction benefits that distributed generation offers. You can access the report...

Succeeding in an era of carbon constraints

The carbon-constrained world is creating structural changes in the global economy. As a result, busi­nesses must respond and adapt to the new low-carbon reality if they wish to remain competitive and prosper in coming years. Although the exact path to the low-carbon future remains unclear, companies can embrace five imperatives to guide them forward. These are: understanding the effects of carbon constraints and climate change; managing and mitigating the associated risks; minimizing their carbon footprint; protecting and maximizing margins; and realizing growth opportunities. Click here to read a paper on this...

Profiting from emission reduction in process industries

A common misconception in process industries is that greenhouse gas emission reduction programs are inherently unprofitable. Recent experience in the oil and gas industry, however, proves otherwise. One company, for example, iden­tified a 43 percent reduction in emissions with a net present value of several billion U.S. dollars using a five-step process that makes finding reductions in emissions both practical and profitable. Click here to read the...

Replacing Marginal Abatement Cost Curves (MACCs) with ERICs

Emissions Reduction Investment Curves (ERICs) overcome many of the issues associated with Marginal Abatement Cost Curves (MACCs) and thereby provide an effective communication tool for expressing technical opportunities in the investment language of corporate finance. Bridging this divide is vital in securing approval for profitable emissions reduction projects which benefit all parties – the environment/community, the company, and shareholders. The Limitations of MACCs Marginal Abatement Cost Curves (MACCs) are one of the tools currently used to express the economic attractiveness of emissions reduction opportunities within country or organization. The x-axis shows the size of the saving, and the more negative an opportunity on the y-axis, the better. Beyond this though, explaining a MACC becomes difficult. Let us examine the specific flaws of the MACC: 1. The MACC is counterintuitive. The more NEGATIVE something is, the better! 2. The y-axis is complex in both the assumptions used and methodology. The height of the bars represents the cost of an action (in $ per tonne of CO2e saved) in 2030. It is calculated (or at least should be calculated) by dividing the net cost of an action over its lifetime by the emissions saved. However the numerator involves a range of difficult assumptions. The net cost of an action is the up-front investment in the technology (assuming some starting time for the action which determines its progression down an assumed experience curve) plus the operating and maintenance costs over the life of the action minus the cost savings over the life of the action. Then these cash flows need to be discounted back to a single point in time (when should...