Agriculture, along with forestry and other land uses, accounts for nearly 25% of global carbon emissions. Packaged food production and Agricultural processing help account for another 21% of global emissions. Furthermore, processors contribute to greenhouse gas emissions.
Heat waves, wildfires, floods, droughts and hurricanes can have disastrous effects on Agribusiness, meaning climate change isn’t just bad for the planet; it’s bad for business.
Scope 1 emissions stem from a company’s own activities, including (but not limited to) the generation of heat, electricity and steam from the combustion of fuel. Companies can mitigate those emissions by simply switching to energy sources that have a lower carbon impact.
Scope 2 activities, which involve electricity and other types of energy purchased from third parties such as utilities, and Scope 3 emissions, which stem from activities all along the agribusiness supply chain but outside companies’ own four walls, also have an effect on the carbon footprint.
Overcoming internal barriers
Trying to reduce Scope 1 emissions invariably sees companies having to deal with common internal barriers:
An incremental, rather than a step-change, approach to mitigation is often taken, because companies view carbon reduction solely through the lens of energy efficiency.
Companies are stymied by investment hurdle rates and other internal mechanisms designed to promote ‘fairness’ in capital allocations.
Identifying carbon-reduction opportunities becomes problematic because companies find it challenging to make the changes necessary.
It’s worth pointing out that many leading agricultural processors only bother to make a small effort with regards to the issue of emissions. The kind likely to produce only incremental improvements in both energy efficiency and carbon emissions.
They will have long standing formulas in place for evaluating projected financial returns on a capital investment, but they don’t always incorporate carbon emissions into their calculations.
Further, companies are often daunted by the sheer size of the financial commitment required for meaningful energy-efficiency and carbon-reduction projects.
Upgrading or replacing a plant’s heating system with a combined heat and power (CHP) system, for instance, could consume a business unit’s capital allotment for an entire year, and that type of upgrade (and subsequent financial burden) would be nearly impossible to execute because it goes against the grain of established processes.
Indeed, some potential carbon-mitigation projects never even reach the proposal stage, because middle management are often reticent to suggest the same to those at board level.
Working toward science-based targets
If carbon reduction is a clear priority, then the internal wrangling can often be overcome. Agricultural and food processors can affirm their commitment to greenhouse gas reduction by joining the Science Based Targets initiative (SBTi).
Under SBTi guidelines, those companies involved, pledge to do their part to ensure that global temperatures don’t rise by more than 2 degrees Celsius (in line with the goals articulated by governments in the 2015 Paris climate accord).
By committing to science-based targets, there are ample opportunities to reduce Scope 1 and Scope 2 emissions.
The pace of implementation depends on the financial outcomes the company is willing to accept, but initial phases of projects have the potential to cut emissions by about 15% while producing an IRR of at least 8%.
Those at the very top of any organisation need to re-train themselves to be open to accepting deeply ingrained beliefs and practices. In so doing, they are opening themselves up to dialogue with like-minded companies who can help identify and promote investment opportunities for greenhouse gas reduction.
Once senior management sets the tone on sustainability, companies will then make informed decisions about energy efficiency and reduction of emissions.
Major levers for curbing emissions
Broadly speaking, processors can invest in four types of operations to reduce Scope 1 and Scope 2 emissions:
Energy-efficiency projects involve upgrading industrial processes to use less heat and electricity.
Combined heat and power, or cogeneration, typically harnesses steam left over by electricity generation to produce heat that is then used in industrial processes, enabling companies to reduce the amount of electricity they buy from the grid.
Combustion fuel switching means investing in equipment that burns more carbon-efficient fuels.
On-site and off-site renewables replace electricity purchased from the grid with clean power generated from solar panels.
In all four areas, many companies have already made investments in energy efficiency and emissions reduction. A large number have switched to natural gas to take advantage of relatively low fuel prices.
However, the economics of energy usage are changing. Utility regulations have evolved to promote greater flexibility in self-generation, just at a time when utilities are seeking opportunities to phase out coal-fired plants.
The cost of generating electricity from wind and solar has fallen steadily in the past decade, bolstering the case for switching to renewables. And, along with fuel-switching incentives provided by utilities, tax and financial incentives offered by government can improve the economics even further.
Benefits of virtual power purchase agreements
Processors can take advantage of VPPAs, to help with both energy efficiency and carbon mitigation.
These support the development of a renewable energy project by pledging to purchase the energy generated by the project at a specific price in the future, thus enabling the project to move forward with financing and construction.
Under the terms of a VPPA, the facility that generates the electricity essentially collects revenue from the sponsoring company and sells the generated electricity to the grid.
The sponsoring company collects or pays the difference and also collects the associated renewable energy credits.
VPPAs allow companies to support solar and wind installations in optimal locations, meaning that they aren’t restricted to placing those installations on their own premises.
They can also increase a company’s long-term exposure to energy prices, which may pose a conflict with its risk management guidelines. In essence, those companies that have the most success with VPPAs are the ones that build carbon-mitigation goals into their decision-making processes.
Agricultural processors understand the impact that climate change can have on their business, and they are equally savvy in knowing the role that they can undertake will play a part in slowing its progression and tempering its effects.
Plentiful opportunities are available for companies to use energy more efficiently and emit less carbon. Importantly for the money men, all while producing positive financial returns.
If companies can make the leap and take such steps, not only will their shareholders thank them, so will the planet.