Decarbonisation Technology - August 2024 Issue

Powering the transition to sustainable fuels and energy

August 2024 Decarbonisati n Technolo gy Powering the Transition to Sustainable Fuels & Energy May 2023

Powering the Transition to Sustainable Fuels & Energy

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Contents

August 2024

The energy transition: Progressing or stagnating? Hari Vamadevan DNV Resiliency in decarbonisation pathways Marina Barta and Paul Cannizzo Solomon Associates

Carbon advisory in EMEA Daniel Carter Wood

Waste to revenue for meeting decarbonisation goals Dave Swerdlyk Veolia Water Technologies & Solutions Powering tomorrow: Financing the energy transition Rishabh Agarwal, Joe Selby and Conrad Woodring Bechtel Transforming carbon and paving the way for a circular economy Freya Burton and Kit McDonnell LanzaTech Point-source carbon capture for industry decarbonisation Prateek Bumb Carbon Clean

Potential of natural hydrogen in the energy transition Himmat Singh Ex Scientist ‘G’ CSIR, Indian Institute of Petroleum and Advisor R&D, BPCL

Optimising electrolytic hydrogen production Dharmendra Umarnani Schneider Electric

Chemical recycling of waste plastics: The role of catalysts Tooran Khazraie Valmet Guillaume Vincent BASF

Role of liquefied CO₂ carriers in the carbon value chain Tao Shen American Bureau of Shipping (ABS) Global Sustainability Center

Role of heat integration in a sustainable, low-carbon future Warren Chung Solex Thermal Science

Decarbonisation through innovation

© 2024. The entire content of this publication is protected by copyright. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the copyright owner. The opinions and views expressed by the authors in this publication are not necessarily those of the editor or publisher and while every care has been taken in the preparation of all material included the publisher cannot be held responsible for any statements, opinions or views or for any inaccuracies.

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The world’s energy system is changing. To solve the challenges, Shell Catalysts & Technologies is developing its Decarbonisation Solutions portfolio to provide integrated value chains of technologies to help industries navigate the energy transition. Our experienced teams of consultants and engineers draw on Shell’s owner–operator– licensor expertise to co-create pathways and technology solutions to address your specific decarbonisation ambitions – creating a cleaner way forward together. Learn more at shell.com/decarbonisation. Accelerating decarbonisation solutions together

Emphatically, the technologies required for the energy transition are available for deployment. The challenge lies in creating the investment conditions required to deploy them at a global scale to minimise anthropogenic emissions of greenhouse gases. It is critical that we deploy these technologies as quickly as possible, but it is also vital to consider technology learning curves. While we have ‘technical readiness levels’ that monitor the progress of technologies through development, we lack a metric for early deployment. With time and market development, the interplay between different technologies will become more efficient, leading to improved investment returns. However, time is running out. For electrification, investment in the supply side means renewable power generation and transmission infrastructure will meet 42% of total electricity demand by 2028. Even then, renewable electricity production will need to triple to satisfy the remaining share of existing demand and new demand arising from the decarbonisation of energy-intensive industries, including fuels, chemicals, steel, iron, cement, and other industrial processes. Staying on the demand side, the transport sector requires the market penetration of electrified vehicles. Where feasible, industries are switching to electrical furnaces or new processes that avoid carbon emissions. There is also a push for increased recovery and recycling of materials to reduce the energy demand for the extraction and processing of raw materials. One sector that should not be ignored is the building sector. The very best designs are now net zero homes, incorporating sustainable building materials with greatly improved insulation, mechanical ventilation heat recovery systems, and solar panels. Unfortunately, even in the new housing market, such homes are not the standard. Some are being built as affordable homes, with slightly higher build costs offset by very low operating costs or even a positive income – a rare example of how the energy transition can be fair both socially and economically. However, by 2050, the majority of building stock will still consist of poorly insulated, low-efficiency homes with gas or oil for heating. This is where a move from coal or oil-fired heating to gas, along with better insulation, can reduce overall carbon emissions. We do not have time to wait for the perfect solution. Decarbonising oil and gas production with low-carbon hydrogen, low-carbon fuels, and carbon capture and utilisation can accelerate the decarbonisation of existing transport, industrial processes, and buildings.

Managing Editor Rachel Storry

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Consulting Editor Robin Nelson robin.nelson@ decarbonisationtechnology.com

Editorial Assistant Lisa Harrison lisa.harrison@emap.com

Graphics Peter Harper

Business Development Director Paul Mason info@decarbonisationtechnology.com tel +44 844 5888 771

Managing Director Richard Watts richard.watts@emap.com

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Cover Story ArcelorMittal and LanzaTech’s commercial-scale CCU facility in Ghent, Belgium, with investment from BASF. Courtesy: BASF

Dr Robin Nelson

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The energy transition: Progressing or stagnating? The need to transition to a cleaner energy system is widely accepted, but with the 2.0 º C carbon budget hanging by a thread by 2050, has global progress stagnated?

Hari Vamadevan DNV

I f ‘energy transition’ means clean energy replaces fossil energy in absolute terms, then the transition has not truly begun. The transition has started in some regions and for many communities and individuals, but globally, record emissions from fossil energy are on course to move even higher this year. Currently, renewables have only met some, but not all, of the world’s additional energy demand. Global carbon dioxide (CO₂) emissions have risen steadily every year, with the only exception being 2020 when the COVID-19 pandemic gripped the world. The energy transition needs to accelerate and expand beyond its current scope to reach a net zero energy system by 2050. Global emissions will fall, but not fast or far enough. DNV’s Energy Transition Outlook (ETO), an annual forecast towards 2050 based on our independent model of the world’s energy system, highlights that global emissions will only be 4% lower in 2030 than they are now and drop to 46% by 2050 (see Figure 1 ) ( DNV, 2024 ). However, time is running out to make a significant difference in curbing carbon emissions – the 2.0ºC carbon budget is in a very precarious state! Achieving net zero by mid-century would mean halving global emissions by 2030, but that is an ambition that DNV forecasts is at risk. Unfortunately, DNV predicts that limiting global warming to 1.5ºC is less likely than ever before. The slow speed of change means that the world is looking at 2.2ºC of global warming above pre- industrial levels by the end of this century. The road ahead is challenging, but DNV highlights that reaching net zero is achievable.

As agreed at COP28 in Dubai last November, the world needs more expansive policies promoting renewable electricity and other zero- carbon solutions, not just in the high-income world but globally. We have the means to keep the world on track to be at, or very near, net zero by mid-century. It will take an enormous effort and collaboration from citizens, industry, and governments. However, we need to look further than just energy systems and consumption; we must also look at the myriad of different sectors that are consuming energy. Decarbonising the fossil fuel sector is just as vital as decarbonising hard-to-abate sectors – steel, iron, cement, maritime, and buildings – and ensuring those industrial and transportation industries also transition. Making energy sustainable The global electricity landscape is on the brink of monumental change. World electricity demand has been growing by about 3% per

-4%

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Most likely future Pathway to net zero

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Figure 1 World energy-related CO₂ emissions after direct air capture (DAC) (© DNV 2024)

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Floating oshore wind Fixed oshore wind Onshore wind Solar + storage Hydropower Bioenergy Geothermal Nuclear Gas-red Oil-red Coal-red Solar PV

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Figure 2 World grid-connected electricity generation by power station type (Source: IEA 2023, GlobalData 2023, © DNV 2024)

year since the 1980s, in line with economic growth. By 2050, we anticipate a surge in global electricity demand, more than doubling from 29.5 petawatt-hours (29.5 x1015 Wh) in 2022 to 60.8 PWh in 2050 (see Figure 2 ). Large-scale electrification using renewable electricity sits at the heart of the energy transition in many countries. The declining costs of solar and wind technologies will see renewables’ share of electricity generation increase to 69% of total share. Economics is playing a pivotal role in this shift towards renewables. The levelised cost of solar is dwindling and will command a 39% share in the 2050 global power mix. Wind is also expected to grow in popularity across all regions and is anticipated to be 30% of the power supply in 2050: 21% of wind energy will come

from onshore wind, 7.3% from bottom-fixed offshore wind, and 1.6% from floating offshore wind (see Figure 3 ). Greening electricity supply through progressive policies is key to the adoption of renewable technologies and has seen some success. Take the UK for example; using Contracts for Difference (CfD) frameworks and competitive strike prices, the country has been able to champion a strong build-out of wind and solar capacity, reaching an impressive total of 45 GW today, 45% of the total installed UK generation capacity. The UK also boasts one of the most impressive offshore wind markets around the world. However, while the UK’s early ambition and action to champion the energy transition allowed the nation to make good progress, that progress now seems to be stalling.

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Figure 3 Global solar and wind capacity additions (Source: GlobalData 2023, IRENA 2023, © DNV 2024)

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200

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Figure 4 Transmission and distribution power-line length by region (Source: GlobalData 2023, DNV analysis, © DNV 2024)

Grids: Often under-appreciated With increasing electrification forecast in almost all world regions, a stronger and smarter grid is essential for delivering power, especially with rising electricity and power demand and greater use of Variable Renewable Energy Technologies (VRES). Global grid, transmission, and distribution combined will double in length from 100 million circuit-km (c-km) in 2022 to 205 million c-km in 2050 to facilitate the fast and efficient transfer of electricity (see Figure 4 ). As the share of VRES in the electricity supply grows significantly, integration of renewables and grid modernisation must work together to achieve grid reliability. Modernisation of the grid will involve grid-enhancing technologies, such as dynamic power line rating, power flow controllers, digital twin and/or real-time monitoring, and advanced grid features, to name a few. However, flexibility remains key to the major shift in the global energy landscape. As VRES capacity surges by a factor of seven, the global need for flexibility will almost double. Li-ion batteries will emerge as the primary source of flexibility worldwide and will either be integrated with renewables or operate as standalone systems. Decarbonising fossil fuels Today, fossil fuels currently cover 80% of the global primary energy supply. However, with VRES growing, that percentage will shift by the end of this decade as DNV predicts that fossil fuel will still represent around 48% of the global

energy mix by 2050. The role of oil and gas in a just transition is multifaceted. However, it will continue to act as an important contributor to the ambitions at the heart of the UN Sustainable Development Goals, providing the energy needed to support fair growth and improved living conditions for all. DNV predicts oil will make up 17% of primary energy by 2050. Natural gas will surpass oil as the world’s largest primary energy source in the mid-2030s. However, gas will be replaced by renewable sources in the power mix, with natural gas usage peaking in the mid-2030s and then gradually declining in 2050 to a level only slightly higher than today’s usage. Oil and gas will still have a pivotal part to play in the energy transition, and as one of the world’s biggest emitters, the sector must decarbonise. What can be done?  Decarbonise Scope 1 and 2 emissions in production methods, such as reducing fugitive emissions, flares, and venting, improve energy efficiency, and support electrification. v Adopt new technologies, such as CCUS and hydrogen. These technologies have a vital role in reducing Scope 3 emissions. Scaling deployment and providing supportive roadmaps for these new technologies will help to decarbonise hard- to-abate sectors or capture emissions at facilities that cannot be easily decarbonised. w Create adaption plans that provide certainty within the industry of how legacy frameworks fit with new energy systems or opportunities to diversify, by promoting renewable energy and decarbonisation of existing infrastructure.

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by consumers, whereas supply chain constraints are impacting manufacturers. For example, 33% of households in China have heat pumps, while only 12% of households in Europe do. The outlook for hydrogen remains uncertain. Renewable and low-carbon hydrogen will play a critical role in reducing emissions from hard-to-electrify sectors and achieving the objectives outlined in the Paris Agreement. To meet these targets, hydrogen must account for approximately 15% of the world’s energy demand by 2050. However, DNV’s projections indicate that the global adoption of hydrogen and its derivatives will lag those ambitions with hydrogen making up just 0.5% of the global final energy mix in 2030 and 5% in 2050. While we have achieved significant progress in many countries in terms of advancing the energy transition, it can be argued that we have addressed the low-hanging fruit mainly. The next steps will require fundamental changes in the actual energy system closer to the end user – physical changes to heating, transportation, and manufacturing equipment. This will be much harder. Cost of inaction According to the International Renewable Energy Agency (IRENA), the energy transition is estimated to cost an additional $110 trillion by 2050 ( IRENA, 2023 ). However, the cost of inaction is $178 trillion by 2070, as stated by Deloitte, whereas the global economy could gain $43 trillion over the next five decades by rapidly accelerating the transition to net zero ( Deloitte, 2022 ). Energy spending currently sits at 3.2% of GDP, with three-quarters of this allocated to unabated fossil fuels. If the world were to maintain today’s level of spending in GDP terms, this would clearly be enough to realise a clean energy future, but it would require a massive redirection of capital. Maintaining the 3.2% of GDP dedicated to energy today would be a good investment when the cost of climate impacts is considered, with projections that even 2ºC warming could reduce world GDP by 11%. A Paris-compliant transition is affordable. DNV forecasts that energy costs will diminish from 3.2% of GDP in 2019 to 1.6% in 2050 (see Figure 5 ). While we can place a monetary cost on the

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Figure 5 World energy expenditures (© DNV 2024)

Transition challenges There is a clear consensus that electrification sits at the heart of the energy transition. However, the pace of the energy transformation has been incremental. Planning and permitting cycles for new renewable capacity and grid transmission lines are slow, and waiting times for connection to the grid can still take up to five to 10 years. Difficulties with planning and permitting cause problems at nearly every stage of renewables deployment, making project timelines much longer and shrinking project pipelines. There is also still opposition from local communities regarding the impact of such infrastructure development on their immediate environment. In addition, there is a lack of incentive for end consumers to embrace electrification in many countries. For example, the current electricity market design in the UK results in an electricity price that is four times higher than the equivalent cost of natural gas per KWh – partially linked to environmental levies on electricity ( Ofgem, 2024 ). With the current cost of living crisis impacting citizens around the world, this will actively reduce the drive for consumers to consider electrical alternatives to gas and petrol, even if electrical systems are more efficient. Another challenge for decarbonisation is heating for homes, particularly where oil and gas energy sources are used. A significant solution will be the replacement of fossil fuel heating technology with heat pumps. There has been a partial adoption of the technology, but this varies greatly by region as costs and home insulation concerns hamper large-scale uptake

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energy transition, the cost of inaction on global citizens, markets, and natural systems cannot be fathomed. Put bluntly, the cost of taking appropriate action to mitigate climate change will be cheaper than the cost not to. This is already highlighted by the loss and damage fund agreed at COP28, which was set up with funding from richer countries to help developing countries cope with the effects of climate change. There is also financial risk to countries that fail to meet legally binding obligations, such as environmental (more frequent extreme weather events), economic (infrastructure damage), social (public health and social inequality), and political (loss of credibility). 2024: A defining year Looking globally, it is easy to argue that the transition seems to be in stall mode, with high oil and gas prices fuelling an exploration surge while many renewable projects are experiencing an increase in cost due to inflationary and supply-chain pressures. However, it is important to remember that the energy transition is not simply about green electricity or fossil fuels. It is

the scaling of renewables and the grid, as well as decarbonised oil and gas working together in a connected and holistic way to balance the energy system. It is vital to look at technology, government policy, the energy transition, and the energy system to get the right balance. There is a global fight for talent and investment, but finding the right balance will elevate many nations to become clean energy superpowers. This will be a defining and historic year for democracy, with around 1.5 billion people going to the polls in more than 50 countries. However, 2024 needs to be a year of hope. This is a problem bigger than one nation or one political party. It requires cross-party collaboration as new governments issue a call to arms to accelerate the energy transition to achieve legally binding net zero commitments. We must move forward faster together.

Hari Vamadevan contact.energysystems@dnv.com VIEW REFERENCES

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Resiliency in decarbonisation pathways It is important to systematically incorporate an array of considerations when it comes to developing a carbon reduction plan

Marina Barta and Paul Cannizzo Solomon Associates

T he world has entered a new era with a focus on sustainability strategies in almost every industry globally. Ambitious carbon reduction goals have been announced by numerous industries, corporations, countries, and regions. Companies have an obligation to evaluate their carbon emissions footprint responsibly and consider carbon reduction steps towards achieving the worldwide challenge of limiting the temperature rise to 1.5°C by 2100. Sustainability exponentially increased the need for innovation and amplified the need to surpass business-as-usual technologies. We have seen the genesis of great ideas blossoming into technology layers that multiple industries can utilise to achieve the goal of net zero. Industry commitments through 2030, 2040, and 2050 are vital in making any decarbonisation pathway successful. One needs to ensure a credible basis is used in making strong commitments, as credibility is important when publicly making bold statements. This article will explore the factors that make a pathway resilient enough to withstand change in this multivariable and complex challenge and how to develop strategic decarbonisation pathways during the world’s energy transition. Questions to ask when putting together a decarbonisation plan include: How resilient is the pathway to net zero? How feasible is the pathway to net zero? Is the pathway robust enough to withstand policy change, technology shift, and various pressure test scenarios, among other things? The fundamentals A strong foundation for any pathway to net

zero starts with understanding the company’s carbon footprint, then completing the following elements: • Define the basis and reference year. • Calculate Scope 1 and 2 emissions, and as the industry evolves, this can also extend to Scope 3 emissions. • Establish decarbonisation capability through the company’s marginal CO₂ cost abatement curve. • Incorporate current energy and margin project opportunities. • Incorporate and align with planned turnarounds and downtimes and major investments in refinery configurations that may be required. Equally important is ensuring that these plans and steps are kept evergreen and that there is a process for keeping the pathway to net zero up to date to hold the organisation accountable and responsible. The organisation should implement a stage gate process where the plan is periodically reviewed to ensure it is on track and that critical assumptions remain valid. Ideally, the timing and review criteria should be part of the original plan, not based on some arbitrary period that fits into a traditional planning horizon. Establishing decarbonisation capability may extend to but is not limited to: Energy optimisation and efficiency • Energy optimisation is about operational optimisation around key energy equipment (furnace efficiencies, tower pressures, boiler efficiencies, steam system management, compressor recycle). It can also involve • Integrate the impact of asset growth, divestment, and acquisition decisions.

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maintenance investment to repair in-kind facilities to enable operational optimisation (furnace damper repair, steam trap repair, insulation repair, cleaning heat exchangers). • Energy efficiency focuses on improving the design and capability to enhance performance via capital investment (waste heat recovery, condensate recovery, heat exchanger upgrades, heat integration, steam vs electrical driver selection). • As the industry adapts to changing product demand and crude feedstock scenarios because of the drive to decarbonise, significant capital investment will be seen as refinery configurations adapt accordingly. This presents key opportunities to improve both major equipment and process energy efficiencies as part of optimising the required capital investment in conjunction with aligning to decarbonisation goals in the face of changing energy and carbon prices. This same opportunistic approach to energy efficiency improvement can also be applied to major equipment replacement requirements during turnarounds and other planned downtime events. Hydrogen optimisation Hydrogen balance diagnostics are essential to ensure there is an optimal production-to-demand balance and to avoid downgrading valuable hydrogen to fuel below cost value. Evaluation of hydrogen to fuel should incorporate carbon incentives that are dependent on the country/ region emissions scheme. Crude feedstock selection Solomon has conducted further studies around the behaviours of various upstream assets in terms of crude carbon intensity. On a worldwide basis, crude extraction carbon emissions intensity is observed to be four times higher than the carbon emissions intensity through a typical average conversion refinery. A large variance exists across both upstream and refining operations as it depends on the type of crude, sources of crude, ages of wells, flaring, and transportation. Low-carbon fuel options High-carbon-to-low-carbon fuel swapping is

an important lever in enabling carbon reduction (coal, fuel oil/naphtha firing, heavy ends). Renewable energy Renewable energy and credits are becoming increasingly available globally. Renewable energy can be supplied behind and inside the refinery meter. Renewable power supply displaces higher-emissions power generation supply options. Electrification It is important to properly evaluate opportunities to electrify condensing steam turbine power generation, thereby capturing steam letdown work while evaluating the full steam and energy balance implications for the facility. Flare recovery While it is important to focus on flare reduction during upset conditions and the recovery of incremental flared materials, priority should be given to evaluating the potential for eliminating sources of flaring overall. Reduction in methane venting and fugitive emissions Methane is a potent greenhouse gas, with more than 30 times the global warming potential per tonne of CO 2 . Reduction in methane venting and leakage can lead to a large reduction in the overall emissions from a facility. Pre- and post-combustion carbon capture • Pre-combustion capture refers to hydrogen generation known as blue hydrogen. Once the carbon is removed, hydrogen is used as fuel. • Post-combustion capture refers to the process of removing the CO 2 generated at the flue gas of plants upon fuel combustion. Offsets Net zero emissions imply that most processes continue to have some residual emissions that are either impossible to abate or uneconomic to drive to zero. Offsets are carbon reductions from outside the boundaries of the process in question that result in zero emissions over the process and the offsets. Virtually every net zero plan will need to incorporate offsets at some level.

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Considerations Every pathway is unique, and when selecting the decarbonisation elements to help build a company’s marginal abatement cost curve, the pathway needs to be adaptable to a variety of considerations that can shift the order of execution. Examples include, but are not limited to, policy delays, technology readiness, and expertise availability, which can impact final investment decisions. Can the plan adapt if there is a policy change? Can the pathway adapt if there is a delay in a project? What will the impact be? Some of the considerations may include but are not limited to: Policy and regulation framework It is important to understand the policy landscape before embarking on any decarbonisation strategy. Policy can help provide incentives and drive carbon reduction through capital investment. Pathways need to be adaptable to change and delays of regulations. Does the plan have a variety of reduction steps/levers that could be substituted if regulatory changes affect the relative economics? Technology growth and maturation Sustainability strategies have initiated very ambitious opportunities to innovate and explore new technologies at a faster pace than ever before. Globally, we see a vast array of new technologies for hydrogen production, carbon capture utilisation and storage, renewables, nuclear energy, and many others. As with any new technology, risk is inevitable. Some technologies will fail before they rise, others will be dismissed, and others will surpass expectations. In addition, being the first to adapt to a new technology may lead to a competitive advantage but might also take a company down a non-viable path in the longer term. Waiting for technology maturity may limit performance risk at the expense of not meeting timeline commitments on decarbonisation. Incorporating all these aspects is important to the feasibility of a plan. Technology readiness level On par with technological growth is also the readiness level of new technologies. How is the plan impacted if there are delays to a technology

it depends on or, even worse, that technology fails to deliver expected results? Understanding the implications and risk exposure is essential. Infrastructure and raw materials • Consideration of established and new infrastructure needs is an additional element to incorporate when evaluating the robustness of a plan. If relying on carbon capture storage, it is good to know when and if your jurisdiction is working on a CO₂ infrastructure to provide an outlet market for recovered CO₂. Understanding the impacts of any possible delays is equally important. • If planning on electrifying systems behind the meter, is there available power supply from the grid? Will this power be green or low carbon intensity power? Does the city/country have plans to expand and support grid power generation, distribution, and transportation? What are the implications for the plan if the power grid does not implement its expansion steps? • In a world where there are expanding needs for batteries, catalysts, and steel, is there a sufficient supply of critical minerals to support all projects? What if every facility in the world plans to build an electrolyser in the same year? It quickly becomes infeasible from a materials, labour, and expertise perspective. The above is an extreme and unlikely example, but establishing these boundaries helps better understand capability and its impact if there are delays. Expertise As new technologies arise, expertise in these technologies globally becomes increasingly essential. Expertise comes with experience; with this new era comes room to expand knowledge and expertise. Understanding how it impacts on plans and schedules, as well as the possibility of the right expertise not being available is essential. Is there a plan to attract new talent while competing with ‘new and exciting’ industries? How do you convince new graduates that your company is on the cutting edge of technology despite the appearance of being in an industry that is in decline? Risk assessment: technical and financial We have discussed how technical risk can have an impact on a decarbonisation plan, but

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establishing the business-as-usual scenario if no action is taken will provide a set of boundaries to analyse the financial impact of carbon taxation scenarios. At what carbon tax price does Project A, Project B, and so on need executing? The next section will expand on the optimal scenario to strengthen the pathway to net zero or specific goals. Offsets Most decarbonisation plans leave offsets as the last step to take care of the residual emissions that are left after all other (economic) decarbonisation projects are implemented. Companies should consider incorporating offsets at each point in their decarbonisation journey to increase the certainty that planned future offsets are available and to mitigate potential cost escalation as more economical offsets are purchased by others. Evaluating an entity’s decarbonisation pathway and strategy is a complex exercise that requires multiple levels of the organisation partaking in the process. All these considerations are slowly placing focus on the elements needed to evaluate, while ensuring the robustness of the pathway to net zero. A decarbonisation pathway needs to be resilient to withstand and adapt to changes throughout the journey. To be resilient, it needs to display agility, feasibility, and robustness, as shown in Table 1 and Figure 1 . Scenario analysis At a minimum, any entity embarking on the decarbonisation journey will develop a carbon footprint balance and path towards net zero or a corporate-aligned reduction goal. In today’s environment, it is important to pressure-test the developed pathway while incorporating the sensitivities as outlined within the consideration section. It is important to understand the impacts that each, or a group of, sensitivity(ies) and decisions have on the overall pathway for the next 20-30 years. The following analysis will display the business-as-usual scenario against an aggressive business goal, along with a second scenario that is generated once the elements of agility, feasibility, and robustness have been incorporated into the plan.

Feasible

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Figure 1 Resiliency elements diagram

understanding the financial risk of investing in a new technology that underperforms or does not deliver is equally important. Is it best to wait for the new technology to be tested and perfected, or do you want to be the leading entity and expert in that technology? Is it best to invest today or tomorrow, and what is the financial impact if technology readiness is delayed? Is it possible to mitigate financial risk with innovative financial services such as performance guarantees or tax credit insurance? Is your investment profile rateable over the plan period, or is it front or back-loaded? Pressure test scenarios It is vital to conduct a series of scenario analyses to better understand the impacts any of these elements will have on carbon reduction commitments. At a minimum,

Resiliency elements

Elements

Displays

Policy and regulation framework Technology growth and financial Technology readiness level Infrastructure and raw materials Expertise Pressure test scenarios

Agility

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Robustness

Risk assessment: technical and financial

Table 1

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Evaluate current project list

Evaluate growth and divestment/ aquisition decisions

Evaluate current project list

Business as usual

Align with turnaround/downtimes

Calculate S cope 1 and S cope 2 COe emissions

Maintain plans and balances e vergreen

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Figure 2 Business-as-usual scenario evaluation

Figure 3 Resilient scenario evaluation

Business-as-usual scenario case Using fundamental elements, an entity can develop a carbon footprint balance across the next two decades while incorporating current project list activities, downtimes and turnarounds, growth projects, acquisitions, and divestments, excluding any decarbonisation reduction steps. It is important to understand the base case scenario of business-as-usual if an entity were to proceed towards a path with no decarbonisation action plan. In Figure 2 , business as usual is represented by the green trendline. In the past five to seven years, many entities have made the realisation that previously stated commitments were too ambitious with the current commercially available technologies. The red trendline in Figure 2 displays a more aggressive and unrealistic path to meeting the reduction goals due to the expectation that new technology, raw materials, expertise, capital, asset reconfiguration, and project planning can meet the carbon reduction expectations, regardless of the aggressive commitments made by the organisation, industry, or entity. Resilient pathway scenario case For a decarbonisation pathway to be resilient, it needs to display agility, feasibility, and robustness. It must be able to withstand any policy and regulatory changes and respond and adapt to delays with technology readiness and maturity. It is vital that asset review includes growth opportunities, divestment and acquisition decisions, turnaround, and downtime alignment, allowing for a rateable capital investment coupled with technology readiness, growth, and maturity.

It is important to understand the investment budget and forecasted funds to support the journey. The scenario displayed in Figure 3 indicates an ideal step reduction towards net zero, where time is given to incorporate the elements mentioned previously. Summary Every pathway to net zero is unique. It is important to systematically incorporate an array of considerations when it comes to developing a carbon reduction plan. Given the uncertainty surrounding regulations, technology readiness, expertise, and critical material availability, a net zero plan must incorporate the concepts of resiliency. Ensure that the plan is credible, feasible, and robust. Incorporate a stage gate review process into the plan where critical assumptions are documented and planned review times are established to check for the continued viability of the pathway. Pressure test the plan by evaluating against multiple future scenarios to help understand which assumptions are critical for success. Finally, realise that the journey to net zero is going to be a long one, and plans should be treated as evergreen with systematic processes in place to adjust the course as new information becomes available.

Paul Cannizzo paul.cannizzo@solomoninsight.com Marina Barta marina.barta@solomoninsight.com

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8-10 April 2025 Ravenna, Italy

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Carbon advisory in EMEA

Why failing to accurately track Scope 1, 2, and 3 emissions is the biggest threat to decarbonisation. Accurate data is key

Daniel Carter Wood

I n the race to decarbonise, the world stands at a crossroads where the path chosen now – be it proactive or reactive – will determine the success or failure of combating climate change. Since the Paris Agreement in 2015, nations across the globe have embraced targeted carbon legislation in a united effort to incentivise decarbonisation road mapping across all industries ( McKinsey & Co, 2021 ). The US has introduced the 45Q tax credit ( IEA, 2023 ), which reduces the cost and risk associated with investing in clean energy technology. In addition, the EU has implemented the Carbon Border Adjustment Mechanism (CBAM) (European Commission, 2023) to encourage cleaner industrial production in non-EU countries. Governments around the world are creating an ever-evolving assortment of climate-combatting laws that many believe will be the linchpin in major decarbonisation. However, despite this sharp increase in efforts being made to reduce emissions on a macro

level, time after time companies fall short of making effective deep cuts to their carbon footprint. Ineffective emissions tracking is most likely the reason for this, with many mapping out decarbonisation strategies that see them running before they can walk. Ultimately, you cannot manage what you cannot measure, and with countless numbers of stakeholders involved throughout the industrial value chain, it can become easy to lose oversight of how much carbon is truly being emitted. Operators need to fully understand the policy landscape and their carbon baseline before defining objectives and targets for decarbonisation through benchmarking, assessing market impacts and considering policy and corporate strategy. They then need to review and map assets to enable the development of decarbonisation pathway scenarios. Wood has developed a process that considers the company’s substitution, capture, offsetting, and reduction options to

Nature-based solutions offer practical and sustainable strategies that align with the objectives of the Paris Agreement

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evaluate (SCORE) and deliver an effective decarbonisation pathway that meets each business’s needs ( Wood, 2023 ). The method can be implemented into single or multiple assets, to a client’s full asset portfolio, or across a specific geography or region using an evaluation assessment of opportunities. This means that no matter what stage a company is at, there is always a pathway forward to reduce its carbon footprint. The pathway to successfully decarbonising is not linear and will vary from one company to the next; therefore, taking early action will be key to implementing a sustainable strategy and not falling at the first hurdle. How can a carbon market encourage decarbonisation? Most nations across the globe have adopted carbon legislation in the hope of significantly diminishing their carbon footprint. According to climate scientists, global carbon dioxide (CO₂) emissions must be cut by as much as 85% by 2050 to stop a temperature increase of 2˚C above pre-industrial levels ( IPCC, 2018 ). The World Bank estimates that carbon pricing schemes now cover about half of the emissions for regions that use such mechanisms ( World Bank, 2023) . Designed as an instrument that captures the external costs of greenhouse gas (GHG) emissions – the costs of emissions that the public pays for, such as damage to crops, health care costs from heat waves and droughts, and loss of property from flooding and sea level rise – and ties them to their sources through a price, usually in the form of a price on the CO₂ emitted. Emissions do and will continue to increasingly impact the balance sheet with the growing development of carbon pricing, whether through emissions trading systems or carbon taxes. The objective here is to shift the burden onto emitting operators and developers. A carbon price also stimulates clean technology and market innovation, fuelling new, low-carbon drivers of economic growth. Therefore, carbon markets, designed as systems for buying and selling carbon credits or permits, are expected to play a critical role in creating economic incentives for reducing emissions and promoting the adoption of low-

carbon technologies. The global landscape of policy development supporting carbon reduction and storage technologies such as carbon capture utilisation and storage (CCUS) is as diverse as it is complex. Initiatives such as the Inflation Reduction Act (IRA) in the US and the European Union Emissions Trading System (EUETS) are beginning to offer tax incentives and generate carbon credits that broadly incentivise decarbonisation investments. These policies are crucial as they set the stage for a more proactive approach to decarbonisation. What do we mean by ‘tracking emissions’? The GHG Protocol provides the most widely recognised accounting standards for GHS and categorises GHG emissions into three scopes. Scopes 1, 2, and 3 are the accounting standards most companies and governmental bodies use to measure direct and indirect carbon emissions. Scope 1 covers direct emissions from owned or controlled sources. Scope 2 covers indirect emissions from the purchase and use of electricity, steam, heating, and cooling. Using the energy, an organisation is indirectly responsible for releasing these GHG emissions. Scope 3 includes all other indirect emissions that occur in the upstream and downstream activities of an organisation. Accurately reporting these emissions has become a legal requirement in some countries, such as the UK, where the largest companies must include data for Scopes 1 and 2 in their annual reports. Scope 3 emissions are typically when most organisations lose track of their carbon impact; however, accurately tracking this data is critical for precisely measuring a company’s carbon footprint. Despite the complexity of cutting Scope 3 emissions, more companies are promising to do so. Nearly 240 companies have signed up for the Science Based Targets initiative – an independent organisation promoting climate action in the private sector ( Science Based Targets, 2023 ). Ninety-four per cent of these companies say they will reduce emissions linked to their customers and suppliers ( McKinsey & Co, 2021 ). However, despite the enthusiasm of these companies to keep track of Scope 3 emissions, this task is easier said than done. Ensuring the correct mechanisms are in place to collate this data

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Scope 3 emissions are typically when most organisations lose track of their carbon impact

is crucial. Even once an accurate prediction of baseline emissions is in hand, it still does not mean that mapping out a decarbonisation strategy will be an easy feat. Could a single carbon accounting system be the answer? Globally, the pace of policy development in support of carbon abatement schemes varies significantly. Currently, the global carbon accounting mechanism sits as a patchwork of different standards and protocols, each stitched together with no cohesive design. Discovering how a company can work these policies to its advantage and ultimately gain better oversight of its carbon footprint will require a proactive approach to decarbonisation. In the EU, the CBAM legislation came into effect this year, covering the import of certain cement, iron, steel, aluminium, fertilisers, electricity, and hydrogen products. It effectively sets a price on the GHG emitted from the production of these products, aligning it with EU GHG reduction goals, preventing ‘carbon leakage’, and levelling the playing field for EU and non-EU producers. Targeting direct and indirect emissions associated with the production of EU-imported goods, the legislation has been hailed by many as a shining example of how to pressure producers into taking immediate action to decarbonise. However, it is becoming increasingly evident that a standardised form of measuring carbon intensity is needed to ensure these policies

remain effective. Today, there is no single means or measure to account for carbon globally. To remedy this, one solution could be to apply actual accounting principles. Much like a ledger item, a ‘carbon item’ could be transferred from one company’s books to another as the carbon makes its way through the full value chain – from source to usage. This method would also enable industry to address and bring transparency to Scope 3 emissions, arguably the most difficult to measure because they encompass the broader supply chain of any organisation. Beyond this, different ISO standards and protocols are used across various sectors, each contributing to the current assumption-based carbon value chain. In addition, the standard or protocol each company and country choose to adopt only furthers the complexity. It is with this reasoning that taking the early initiative to understand carbon emissions is the first step in building an effective decarbonisation model that will work for and with a company. Where does Wood fit in? The journey to decarbonisation is complex, and knowing where to start can be difficult. It is important to apply a structured process to be able to map out how a company’s goals will be achieved and ultimately realised. This rings particularly true for those who are not currently tracking their emissions. To simplify this complex process, Wood created the Decarbonisation SCORE methodology, which

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