This post is based on this recorded video demonstration – Amy Gobel of ARC: Using the EN-Roads Simulator to Explore Why Companies Should Prioritize Climate Policy
Many companies recognize the risks associated with climate change and have committed to improving sustainability. As action on climate has become more politicized, firms have shifted to more internally focused strategies, setting targets and launching programs to improve emissions or reduce waste in their operations or supply chains. Yet, as illustrated in the July 2024 Net Zero Tracker, many companies find it difficult to move at the necessary scale and speed, resulting in a projected 219 months — that’s more than 18 years — to achieve the energy transition needed in 29 months. (Similarly, an October KPMG Survey of CEOs shows only 54% expect to meet their 2030 climate goals.)
What to do? For a start, it is time to look at what is constraining progress and acknowledge that sustainability professionals alone cannot overcome a playing field tilted by missing or misguided public policies that shape the structure of incentives in the marketplace. In this post, we examine the levers companies can move to accelerate scale and speed, and where climate policy fits among them.
This raises several questions:
- Which sustainability decisions and outcomes can be driven by operations or supply chain improvements alone, and which require shifts in the broader landscape?
- What role should climate policy play in a company’s emissions reduction strategies?
- And what role should companies legitimately play in influencing climate policy?
An Interactive Online Simulation Tool
An accessible online tool can help business leaders and others visualize the impact of various levers, including operational improvements and policy decisions, on Earth’s climate. With the En-ROADS simulator developed by Climate Interactive, the MIT Sloan Sustainability Initiative, and Ventana Systems, users can explore how a variety of policy-related actions — such as electrifying transport, pricing carbon, or improving agricultural practices — would affect factors including energy prices, temperature, air quality, and sea level rise. This knowledge can serve as an important data point as companies weigh the most effective strategies for reaching their own emissions targets and for responding to public calls to accelerate progress.
By visualizing those changes, the free En-ROADS simulator can also help business leaders see the economic, environmental, and social levers — internal and external — they could pull and consider climate policy among other options, says Amy Gobel of the Alliance for Responsible Capitalism. “This En-ROADS climate simulation model from MIT and Climate Interactive uses the best available science to predict what sort of levers allow us to reduce the amount of warming by the end of the century,” Gobel says.
Operational Improvements Aren’t Enough to Move Away from “Business as Usual”
In her demonstration video, Gobel walks through various scenarios with the simulator — starting with the current business-as-usual scenario, which predicts a 3.3-degree C increase by the year 2100 and the related impacts on the global economy. “This is over $150 trillion of economic damage due to climate change every year by the end of the century,” Gobel says, noting that the amount of predicted damage is larger than the current global economy.
This scenario highlights the existential need for companies to help mitigate the worst effects of climate change, a call that more and more business leaders are heeding.
However, the En-ROADS simulator also shows that focusing on the operational improvements that make economic sense with current (distorted) market incentives is not likely to be sufficient to meet company, industry, or national climate targets. In fact, a survey of more than 300 businesses from Bain & Company finds that 98% of sustainability initiatives fail to meet their objectives. The reasons cited in this report and others include lack of internal collaboration, investors backing off on climate commitments due to short-term financial shortfalls, consumers’ hesitation to pay more for sustainable products that are outliers, insufficient and poor use of data, legal challenges, and the politicization of climate commitments.
Let’s consider a detailed example1 from global energy markets that illustrates those factors at play:
- Businesses often use power purchase agreements (PPAs) as a way of reducing carbon emissions without disrupting their supply chain, processes, or products. These agreements add clean, renewable energy to the grid equivalent to the electricity demand that companies need for their processes.
- Many leading companies in the US have committed to set up PPAs equivalent to 100% of their electricity needs, such as members of the Climate Group RE100. This demand, coupled with falling prices, has led to a steady increase in both the total electricity production from renewable sources and the fraction of total energy production supplied by renewables. In fact, at over 22% of total energy production, renewables have surpassed both nuclear and coal as a source of energy. At the same time, methane gas has displaced coal as a leading source of fossil fuel electricity in the US, which is assumed2 to decrease the carbon intensity of the emissions sector3.
- This combination of market forces and voluntary action by companies has led to a decrease in carbon emissions by the US energy sector of 18% between 2005 and 2022, the last year of data reported by the US Environmental Protection Agency.
- By contrast, the European Union (EU) implemented an Emissions Trading Scheme (ETS) in 2005 that set a maximum amount of emissions for heavily emitting sectors such as energy and penalties for companies that exceeded their allocated emissions. During 2005-2022, the EU ETS led to a 49% decrease in emissions from the energy sector.
- While company-level action under distorted market forces in the US was able to drive a meaningful reduction in emissions, the EU is achieving progress on emission reductions through a policy framework that strongly incentivizes efficiency by accounting for the externalities of pollution.
Efforts by business leaders to reduce supply chain emissions are both important and laudable, especially in an environment where many companies feel pressure toward “greenhushing.” But the numbers don’t add up: Internal changes alone aren’t enough to make a significant dent in climate change projections. The En-ROADS simulator shows that until companies have broader incentives that correct market failures and take collaborative action to change their dependence on fossil fuels, they are likely to maintain current practices and processes.
Demonstrating the Impacts of Policy on Emissions and the Global Economy
By contrast, with a few public policy changes that enable markets to work better, the En-ROADS simulator shows that it is possible for companies and industries to meet their climate commitments and “bend the curve” to avert climate breakdowns. As Gobel says in her demonstration: “We might incentivize energy efficiency for buildings and industry. We might tackle other sources of greenhouse gas emissions,” such as agricultural emissions or industrial emissions of highly potent greenhouse gases.
For example, she points to the application of an appropriate carbon price as one straightforward market solution that incorporates greenhouse gas emissions as a cost of doing business. A carbon price builds in the social and environmental impacts into the price of goods and allows the market to react accordingly. The model can apply a carbon price of $250 per ton of CO2 equivalent. In Gobel’s demonstration, applying the carbon tax produces a 1-degree drop in temperature, from 3.3 C to 2.3 C, by the year 2100.
Under this scenario, the simulator shows that, over time, the use of coal, oil, and gas drops while the use of renewable energy sources grows as they become more financially attractive. “This also sheds light on an important policy discussion that’s happening now: whether to go with a phaseout of fossil fuels or a market solution such as this,” Gobel says, noting that all simulator scenarios that achieve 2 degrees C or less of warming incorporate a dropoff in fossil fuel combustion — so as long as the policy achieves this decrease in fossil fuel combustion, the precise policy mechanism becomes less important.
But Gobel notes a carbon price itself is not enough to achieve the target goal. The demonstration moves on to explore the effect of increased incentives for building and industry energy efficiency, which lowers the temperature to 2.2 C. Next up in the demonstration: policy that reduces deforestation and methane emissions, and incentives that increase reforestation and advance and scale technological carbon-removal options. With these additional actions, the temperature increase is reduced to 1.5 C by 2100.
While some might note the business costs of carbon pricing and other climate adaptation, the EnROADS simulator also projects the potential global economic impact of temperature increases. In the original 3.3-degree C scenario, the annual economic impact would be $164 trillion per year by 2100 — larger than the current world economy. But with the policy-supported mitigation actions that Gobel demonstrates, the global economic impact is estimated at $73 trillion annually by the end of this century. While that amount is larger than the current US economy, it’s far lower than that reflected in the status quo situation.
The big aha? “Climate change has direct consequences for business, and huge implications for the possibility of growth in the long term,” Gobel says. “You might notice that almost all of these [mitigating actions] have something to do with policy. That’s why I think companies should be bold advocates for climate policy.”
The Need for Bold Climate Policy Advocacy
Once companies recognize that they need aligned policy to meet their emissions commitments, they can prioritize responsible engagement in climate policy and act directly on the most powerful lever to align incentives, enable market opportunities, and avoid the worst impacts of climate catastrophe. The En-ROADS demonstration includes an exploration of ways that individual companies can consider implications for their own policy priorities.
As Gobel demonstrates, En-ROADS is a tool that can help address challenges around buy-in and data. With it, users can quickly see the long-term effects of global climate policies and actions they select, and communicate them to leadership and peers. Using this knowledge, they can advocate for effective climate policy to advance a more sustainable economy.
Watch an executive summary and a full demonstration of the En-ROADS simulator to explore:
- Why is it important to consider the role of policy in achieving climate goals?
- How do different emission reduction strategies compare?
- What are the takeaways for specific companies?
Footnotes:
- Data sources include EPA Greenhouse Gas Inventory Data Explorer for Energy sector and EU Emissions Trading Scheme data viewer for category 20 Combustion of Fuels. The goal of this comparison is to assess energy-related emissions regulated under a centralized policy (the EU ETS) compared to energy-related emissions driven by market forces that exclude the cost of pollution (the US). WHile some US emissions are covered under cap-and-trade programs in California and in eastern states through the Regional Greenhouse Gas Initiative, the total amounts are small (<10%) compared to the total, and ignoring these contributions to US emission reductions represents the more conservative assumption.
- Emissions reporting for energy production may not include methane leakage during the production and transportation of natural gas, which significantly increases the overall carbon footprint of gas use. In fact, some studies have found that, depending on the degree of leakage, natural gas may have a higher carbon intensity than coal.
- These comparisons look at absolute emissions in the US and EU, ignoring the effect of population growth. When normalized to population, the US emissions per capita decreased 28%, and EU decreased 50%. While this additional calculation decreases the gap, the EU could nevertheless decrease emissions significantly more than the US.