Avoided emissions. Everyone’s talking about it. But are we talking about the same thing?
Avoided Emissions Series Part I.
The next generation of global winners will be companies that minimise their own emissions while driving their customers toward Net Zero. A key metric in evaluating the environmental impact of technological innovation is “Avoided emissions”. But what does this term actually mean? And are we all using it in the same way?
Amid growing interest in companies positioning their products as low-carbon alternatives, it’s time to make sure we are on the same page. Different approaches to calculating “avoided emissions” lead to varying — and sometimes misleading — results. For impact-driven investors, this is critical: they need clarity to answer the fundamental question: “What is the implication of my investment decision?”. Unfortunately, many current approaches fall short of answering that question.
In this mini series, we explore the limitations of these approaches, explain the merits of “consequential” assessments to assess systemic impact, and propose ways to improve the methodology for more accurate and impactful decision-making.
AVOIDED EMISSIONS 101
First up: what do we mean by emissions? Peeling back the layers of emissions terminology reveals a landscape rife with complexity.
The international standard, the Greenhouse Gas Protocol, provides a widely recognised framework:
- Scope 1 emissions are direct emissions from owned or controlled sources.
- Scope 2 emissions are indirect emissions from the generation of purchased energy (electricity, heat, steam, and cooling).
- Scope 3 emissions, often the most important and elusive, encompass all other indirect emissions within a company’s value chain, from the procurement of raw materials to the end-of-life treatment of products sold.
Enter the concept of “Avoided Emissions”, which casts light on the potential of innovative solutions to not just reduce direct emissions but to prevent them.
Often referred to as Scope 4, “avoided emissions” represent emission reductions that occur outside a product’s life cycle or value chain as a result of its use.
For climate tech startups, avoided emissions are central to their value proposition, showcasing their broader, systemic impact. But simplistic calculation methods often fail to account for the complexities of systemic impact.
EXPLAINER: CONSEQUENTIAL V ATTRIBUTIONAL
There are two core scientific methodologies to assess the environmental impact of a product or service. We’ll dive into each of these in the next part of our mini series but briefly:
Attributional Life Cycle Assessment (LCA) methods focus on environmental impacts directly associated with a product’s life cycle but not the broader market dynamics or indirect effects. It represents a snapshot, like a carbon footprint of a product. It does not tell what happens if a startup scales or the demand for a product changes. Yet, this view is applied in a conventional “avoided emissions” approach to assess this.
Consequential Life Cycle Assessment methods go beyond direct product impacts to evaluate the broader, systemic environmental consequences of market changes. This approach considers how scaling a startup or making an investment decision creates ripple effects — displacing existing technologies, influencing other markets, and altering production practices. By analysing how these shifts impact the environment, it provides critical insights into systemic transformations. For investors aiming to drive meaningful change — such as achieving net-zero emissions or reversing biodiversity loss — consequential LCA offers a powerful tool to understand the implications of their actions on the broader economic and environmental systems.
A COMMON WAY TO CALCULATE “AVOIDED EMISSIONS”
A popular approach involves conducting two attributional LCAs on the existing and the new product and deducting one footprint from the other. Instead of full attributional LCAs many practitioners use emission factors from such attributional LCAs and subtract one emission factor from another (or several others).
While well-intentioned, this approach often leads to incorrect results as it ignores critical variables, such as market dynamics and systemic shifts.
Let’s look at a few examples:
Startup A: renewable energy technologies built by a large-scale utility company
- Conventional avoided emissions approach: Calculates “avoided emissions” by subtracting the emissions of fossil energy generation from the emissions of providing energy from renewables.
- What happens in reality: Global energy demand is rising, leading to record-high fossil fuel use and greenhouse gas emissions. So far renewables only avoided the use of even more fossil fuels. Metrics like avoided emissions can obscure the fact that overall emissions are still increasing. Furthermore, cheaper energy from renewables can slow fossil fuel demand growth but may also reduce fossil fuel prices, triggering a rebound effect where lower costs drive higher consumption.
- Systemic impact: In fact, emissions might be avoided but not reduced. Yet, the “avoided emissions” approach would not see the difference between avoidance and net reduction. Taking a closer look at the market reveals if we are on track towards our net zero goals (net reduction in emissions required) or only slowing down a trajectory going into the wrong direction. Additionally, changes in demand affect price-elastic products and could cause rebound effects.
Startup B: Bio-based product from biogenic (waste) material, e.g. biopolymers, biofuels, biochemicals or biochar etc.
- Conventional avoided emissions approach: If the raw material used by Startup A is a product of a process producing several other products, the impacts (or emissions) of this process and all upstream processes are allocated among all the products. The corresponding allocated impact (or emissions) is part of Startup A’s environmental impact if the startup uses this raw material. If the raw material used is a waste, it is often considered an impact-free input.
- What happens in reality: Biomass, even when classified as waste, typically serves a purpose in existing systems — such as maintaining soil organic carbon when applied to soil or generating energy through incineration. Diverting it requires replacements, adding to environmental impacts.
- Systemic impact: Accounting for the environmental impacts of replacement materials used to substitute biomass in existing systems — such as marginal sources of animal feed or energy generation — is crucial. For products like biopolymers or biochemicals, where incumbent alternatives have varying price elasticities, assessments must also incorporate potential market dynamics within these production systems. Refineries, which produce a variety of interlinked products, may face operational shifts or changes across related production systems when a single product is replaced, depending on economic and technical parameters. Understanding these complexities is key to accurately evaluating systemic environmental impacts.
Startup C: Alternative leather
- Conventional Avoided Emissions Approach: The environmental impact of cattle farming is allocated to all products, i.e. meat, milk and hides. The environmental impact of leather is considered a share of the total impact of cattle farming. If startup B is assessed, the impact of leather production from hides is added, and the total impact (a share of cattle farming plus hide processing) is subtracted from Startup B’s impact.
- What happens in reality: Cow hides make up less than 5% of a cow’s value. Producing alternatives doesn’t reduce cattle farming but shifts leather to lower-value uses. Faux leather will thus replace other fabrics and cow hides production is likely to remain largely unaffected.
- Systemic impact: Substituting leather primarily displaces other materials like synthetic textiles. Meat and milk, not leather, drive cattle farming’s environmental footprint.
Startup D: Alternative bitumen material
- Conventional Avoided Emissions Approach: Emissions are allocated among different refinery products including bitumen, and subtracted from Startup C’s new bitumen alternative.
- What happens in reality: Bitumen’s low economic share (2–5%) means its substitution doesn’t reduce refinery outputs. Instead, it displaces marginal, more harmful bituminous materials.
- Systemic impact: Providing a substitute of bitumen is unlikely to affect the output of fossil derived bitumen or, even more importantly, the use of mineral oil. Broader market dynamics must be considered, especially the demand and supply of all refinery co-products.
Startup E: Cocoa-free chocolate
- Conventional Avoided Emissions Approach: The environmental impact from cocoa bean production and processing to form co-products like cocoa liquor, butter and powder are allocated. The allocated emission factor of cocoa butter is subtracted from the impact of Startup D.
- What happens in reality: Substitutes like shea butter face supply constraints, shifting the burden to other oils (e.g., coconut oil, palm oil etc.).
- Systemic impact: Due to the physical supply constraints an increase in demand for shea butter will only shift its use to higher-value products, triggering environmental impacts from substitute vegetable oils.
WHY SYSTEMIC IMPACT MATTERS
Many current methodologies rely on pre-calculated emissions factors and too narrow system boundaries, which are unsuitable for assessing systemic changes. The datasets are meant to uncover emission hotspots within existing supply chains and not designed to evaluate broader market implications. As a result, they miss key elements of systemic impact, leading to incomplete or misleading assessments.
THE TAKEAWAY?
While existing frameworks represent a significant step forward and make valuable contributions to assessing the environmental impacts of products, they often fail to address systemic impacts. The “avoided emissions” approach using inadequate datasets is incapable of providing a correct answer to the right questions asked.
Refining our methods and standardising key elements is essential for more accurate evaluations.
This will empower companies and investors to make better-informed decisions with a clearer understanding of their real-world systemic implications.
UP NEXT IN THIS MINI-SERIES
Part 2: Here we delve into different methodologies and their purposes. We’ll highlight factors critical to assessing systemic impact and address potential uncertainties in these assessments.
Part 3: Here we propose a way forward, suggesting how existing frameworks can be enriched by scientifically robust methods that allow the inclusion of systemic impacts and scientifically calculate avoided emissions.
Stay tuned as we explore how to move from incomplete calculations to truly impactful assessments.
