Low Carbon Economy Index 2012: Business challenges

We look at the key factors that will effect the Low Carbon Economy Index in the future and what businesses really need to be thinking about when reducing their carbon emissions. We include how countries are doing in keeping up with the pledges made at the Copenhagen United Nations (UN) Summit to reduce carbon emissions, the introduction of shale gas and what this means for the environment, deforestation and the risk of not keeping up with a carbon reduction commitment.

In the period leading up to the Copenhagen UN summit on climate change in 2009, major economies came forward and pledged carbon reduction targets for 2020. Analyses of those pledges suggest that they are collectively insufficient to meet a 2oC target. Even more worryingly, with eight years to go, it is questionable whether several of these pledges can be met.

Our calculations show the scale of the challenge from now to 2020 for some of the largest developed economies. In some respects the economic downturn may make these absolute pledges less challenging1; but at the same time economic pressures may make it much harder to finance the necessary transition towards a low carbon economy.

Figure 1: Major developed countries – pledges and the scale of challenge

Country Pledge for 2020 Pledge for 2021 Outstanding commitment
  Pledge Fossil fuel emissions in 2020, required (MtCO2e) Progress against pledge Fossil fuel emissions in 2011, actual (MtCO2e) Fall in emissions required from 2011 (MtCO2e) Emissions reduction is equivalent to ...
US 17% below 2005 levels 5,390 7% below 2005 levels 6,017 627 100% of coal power generation replaced by gas
EU-15 20% below 1990 levels 2,774 5.5% below 1990 levels 3,277 503 Removing all of UK's current emissions
Japan 25% below 1990 levels 873 12% below 1990 levels 1,307 435 Removing all industrial sector emissions
UK 34% below 1990 levels 391 18% below 1990 levels 511 101 All coal-fired power plants to shut down or use 100% biomass or be fitted with CCS

Source: PwC analysis, pledges based on countries’ announcement, data from BP Statistical Review

The challenge isn’t necessarily easier for emerging economies – pledges to reduce carbon intensity mean curbing emissions at the same time as promoting rapid economic growth (see Figure 2). China and India are expected to nearly double the size of their economies by the end of the decade, but emissions must level off soon for them to meet their targets. The majority of any new energy demand will have to be met from renewable energy and not fossil fuel generation (unless this can be fitted with carbon capture and storage (CCS)). Russia and Brazil expect slower economic growth, but their emissions pledges imply a more drastic cut in carbon intensity than both China and India.

Figure 2: BRIC countries – pledges and the scale of challenge

Country Pledge for 2020 Progress at 2011 Outstanding commitment
    Progress against pledge 2011 total fossil fuel emissions (MtCO2e) GDP change projected 2011-2020 (%) Emissions change required 2011-2020 (%) Annual decarbonisation rate required (%)
China 40-45% below 2005 carbon intensity 17% below 2005 carbon intensity 8,979 92% +12% -4.5%
India 20-25% below 2005 carbon intensity 3% below 2005 carbon intensity 1,798 86% +31% -2.8%
Russia 15-25% below 1990 absolute emissions 5% below 1990 absolute emissions 1,675 38% -19% -5.8%
Brazil 36-39% below BAU emissions n/a 482 41% -25% -6.8%

Brazil’s emissions reported here are fossil fuel emissions only and do not include emissions from deforestation, which is the biggest source of emissions for the country – business-as-usual emissions not estimated. See economic growth and deforestation section on this page for more detail.

Source: PwC analysis and projection of GDP growth, pledges based on countries’ announcement

1in contrast to the intensity pledges that some emerging economies have made

The boom of shale gas in the United States that has helped pushed down emissions there has sparked a debate on the use of gas as a transition fuel to a low carbon economy. The development and widespread deployment of fracking technology in the US has lowered the price of natural gas and resulted in a fall in greenhouse gas emissions as it displaces coal in power generation (although some analysts have raised questions around the lifecycle emissions of shale gas). Despite concerns about the possible environmental impacts of fracking, a world-wide hunt for unconventional gas reserves had already begun – China, India, Canada, Mexico, Australia, Russia and Saudi Arabia are all known to have significant reserves.

Gas may buy some time much needed by the global climate system and help limit emissions growth - displacing coal with gas in power generation roughly halves carbon emissions. But low gas prices may also reduce the incentive for investment in lower-carbon nuclear power and renewable energy. Large scale renewable and low carbon technology such as CCS will require significant amounts of political will, finance and time.

Our analysis suggests that at current rates of consumption, replacing 10% of global oil and coal consumption with gas could deliver a savings of around 1 Gt CO2e per year, or 3% of global emissions. A shift to gas away from oil and coal can provide temporary respite, a necessary but not sufficient move to the low carbon challenge.

At the same time, an over-reliance on gas, particularly in emerging economies expecting high energy demand growth, could lock in the dependence on fossil fuel. Avoiding a lock-in will require discipline in governments that encourage gas generation, to ensure that incentives are not diverted away from renewable energy. To avoid stranding new gas generation assets, new investments should be CCS-ready, with at least space to retrofit CO2 separation equipment and an agreed CO2 transport solution and storage site.

We estimate that the world economy now needs to reduce its carbon intensity by 5.1% every year to 2050 in return for a fair chance of limiting warming to 2oC above pre-industrial levels. Even to have a reasonable prospect of getting to a 4oC scenario would imply nearly quadrupling the current rate of decarbonisation.

Figure 4: Implied concentration levels at different rates of decarbonisation

Average annual rate of global decarbonisation to 2050 (%) Implied concentration levels, approximate* ppm CO2e IPCC ‘best guess’ of average global temperature increase above pre-industrial levels, rounded to nearest oC
1.6% 1,200 ppm 6oC
3.0% 750 ppm 4oC
4.5% 550 ppm 3oC
5.1% 450 ppm 2oC

Source: PwC analysis, IPCC AR4 WG1, Chapter 10, Table 10.8

* Note: This high-level analysis has rounded figures and made several simplifying assumptions, for example on carbon sinks, and ignored complex interactions in the carbon cycle (such as any feedback effects), consistent with the LCEI model described in Appendix 1. In table 10.8, the Intergovernmental Panel on Climate Change (IPCC) also provides the likely range of temperature outcomes at different CO2 equivalent concentrations. The likely range of temperature increase is greater at higher concentrations.

Regardless of the outcomes at the UN climate change summit in Doha this year, one thing is clear. Governments and businesses can no longer assume that a 2oC warming world is the default scenario. Any investment in long-term assets or infrastructure, particularly in coastal or low-lying regions needs to address more pessimistic scenarios. Sectors dependent on food, water, energy or ecosystem services need to scrutinise the resilience and viability of their supply chains. More carbon intensive sectors need to anticipate more invasive regulation and the possibility of stranded assets. And governments' support for vulnerable communities needs to consider more drastic actions.

The only way to avoid the pessimistic scenarios will be radical transformations in the ways the global economy currently functions: rapid uptake of renewable energy, sharp falls in the fossil fuel mix or massive deployment of carbon capture and storage, removal of industrial emissions and halting deforestation. This suggests a need for much more ambition and urgency on climate policy, at both the national and international level.

Either way, business as usual is not an option.

Deforestation and land use change accounts for about 17% of global greenhouse gas (GHG) emissions, more than the entire global transportation sector and second only to the energy sector. The majority of these emissions stem from deforestation and forest degradation in tropical areas.

A low carbon economy will therefore need to decouple economic growth from emissions from forestry. Figure 3 provides an overview of the link between GDP per capita and net annual carbon emissions from forests2 for selected G20 countries.


Figure 3: The link between GDP per capita and net forest carbon emissions


Brazil has reduced its annual emissions from deforestation while increasing GDP. Russia also appears to have started to decouple economic growth from forest emissions. This decoupling may be the reflection of several different factors, including:

  1. Improvements in forest governance, improved law enforcement, and stronger environmental regulation and policies.
  2. Agricultural intensification leading to increased productivity without land expansion.
  3. Agricultural expansion on land that has been previously degraded or non forested land rather than on primary forest land.
  4. Reforestation activities.

Indonesia, however, has drastically increased its forest emissions between 1990 and 2010, whilst GDP per capita has increased only slightly. This has largely been due to the expansion of plantation crops (such as palm oil) and pulpwood production. The government will likely need to strengthen policies to reverse this trend if it is to meet its ambitious target of reducing greenhouse gas (GHG) emissions in 2020 by 26% from business as usual levels.

2Annual forest carbon emissions have been estimated using the annual net change in carbon stock in above-ground forest biomass. The lines are constructed by connecting three annual averages that represent three time intervals: 1990 – 2000, 2000 – 2005, and 2005 – 2010. The corresponding GDP per capita is calculated using the mean value for each of these periods.