A company with 100% renewable energy in a clean country may have a lower avoided emissions intensity than a company with 50% renewable energy in a country with high coal production.
Electricity production currently represents 34% of global greenhouse gas (GHG) emissions. Switching to renewable energy is essential to mitigating climate change and keeping global warming to 1.5°C. Investments in low-GHG energy companies can significantly contribute to achieving climate goals. Regional assessments and life cycle analyzes (LCA) are essential to make fair comparisons between renewable and fossil fuels. A company’s avoided emissions intensity is a useful indicator for prioritizing investments and managing carbon risk in the context of evolving carbon pricing mechanisms. The impact of these investments varies from country to country, reflecting energy mixes and existing policies.
Evaluate avoided emissions from cradle to grave
It makes sense to invest in companies with sustainable energy portfolios. By “attractive” we mean the ability of a company to reduce its GHG emissions compared to a relevant reference scenario. For any company in the energy sector, we estimate avoided emissions compared to a baseline scenario based on where the company produces electricity. Energy emissions above or below their baseline scenario determine whether the contribution of renewable energy sources to reducing greenhouse gas emissions and achieving climate protection goals is positive. For the comparison to be fair, this comparative analysis of renewable energies and those of fossil fuels must include life cycle factors: commissioning, maintenance and dismantling. Figure 1 illustrates this point by showing avoided emissions. GHG values for different technologies come from the IPCC special report on renewable energy sources and climate change mitigation.
Calculation of comparative GHG impact using the LCA approach
Source: World Resources Institute, Asteria IM.
An example would be a US utility company whose entire revenue comes from electricity generation. Its energy mix is made up of 35% renewable energies, 39% fossil energies and 23% nuclear energies, with a GHG intensity over the entire life cycle of 205 tCO2e per GWh generated. Given that the company is active in the United States, this intensity is compared to the American value of 398 tCO2e/GWh. Consequently, the CO2e emissions avoided thanks to the ownership of this company are 193 tCO2e per GWh generated, even if renewable energies represent less than 50% of its production capacity. Nuclear, with a life cycle intensity of 16 tCO2e/GWh, contributes to improving the company’s overall production intensity. Whether nuclear is sustainable or not is a separate discussion that we won’t get into here.
On the other hand, a Portuguese community services company, of which 40% of its revenues come from the production of electricity and of which 74% of its production is of renewable origin, seems cleaner. Yet, with half of its fossil fuel production coming from coal, its total GHG intensity over its entire life cycle is 191 tCO2/GWh. Compared to Portugal’s reference intensity of 131 tCO2e/GWh, this translates into a negative intensity of avoided emissions of -60 tCO2e/GWh. This makes the company appear cleaner than it is when compared to an appropriate benchmark.
Use of avoided emissions in investments
Avoided emissions intensity is an important indicator for evaluating and prioritizing investments in businesses or power generation assets. It takes into account a company’s energy mix and an appropriate reference scenario. A company with 100% renewable energy in a clean country may have a lower avoided emissions intensity than a company with 50% renewable energy in a country with high coal production. This measure is relevant for equity and bond investments in public and private markets. As carbon pricing becomes more widespread, investment allocation based on the intensity of avoided emissions could become strategic for carbon risk management.
