Greenhouse gas emission

What Is Greenhouse Gas Emission?

Greenhouse gas emission refers to the release of gases that trap heat in Earth's atmosphere, contributing to the greenhouse effect and global warming. These gases, such as carbon dioxide ((CO_2)), methane ((CH_4)), and nitrous oxide ((N_2O)), arise from both natural processes and human activities, notably the burning of fossil fuels for energy and industrial processes¹¹. Understanding greenhouse gas emission is crucial in the realm of ESG investing, where environmental factors are assessed for their impact on financial performance and societal well-being.

History and Origin

The scientific understanding of the greenhouse effect dates back to the 19th century, with significant recognition of human-induced greenhouse gas emission gaining prominence in the latter half of the 20th century. The Intergovernmental Panel on Climate Change (IPCC) was established in 1988 by the World Meteorological Organization (WMO) and the United Nations Environment Programme (UNEP) to provide comprehensive scientific assessments of climate change, its implications, and future risks, as well as adaptation and mitigation options¹⁰. A landmark moment in international efforts to address greenhouse gas emission was the adoption of the Kyoto Protocol in 1997, which set binding reduction targets for industrialized nations⁹.

Key Takeaways

• Greenhouse gas emission refers to the release of gases that trap heat in the atmosphere, leading to global warming.
• Key greenhouse gases include carbon dioxide, methane, nitrous oxide, and fluorinated gases, primarily originating from human activities like fossil fuel combustion and industrial processes⁸.
• The global scientific consensus, as reflected in reports like the IPCC's Sixth Assessment Report, highlights the unequivocal role of human activities in increasing atmospheric greenhouse gas concentrations⁷.
• Mitigating greenhouse gas emission is a central focus of sustainable finance and corporate social responsibility efforts.

Formula and Calculation

While there isn't a single "formula" for greenhouse gas emission in the financial sense, emissions are quantified by converting various gases into a common unit: carbon dioxide equivalent ((CO_2e)). This conversion accounts for the different global warming potentials (GWPs) of each gas. The GWP measures how much energy the emission of 1 ton of a gas will absorb over a given period (typically 100 years) relative to the emissions of 1 ton of (CO_2).

The (CO_2e) of a specific greenhouse gas can be calculated as:

For example, methane ((CH_4)) has a significantly higher GWP than carbon dioxide over a 100-year period, meaning a smaller quantity of methane contributes disproportionately more to global warming⁶. Companies and countries utilize these calculations to track and report their overall greenhouse gas emission, enabling better compliance with environmental regulations and targets.

Interpreting Greenhouse Gas Emission

Interpreting greenhouse gas emission data involves understanding the scale, sources, and trends of these releases. High emission levels for a company or sector typically indicate a larger environmental impact and potentially higher exposure to risk management related to climate regulations, carbon taxes, or physical climate hazards. Conversely, efforts to reduce greenhouse gas emission can signal proactive management, innovation in renewable energy adoption, and alignment with global sustainability goals. Investors often analyze these metrics to assess a company's environmental footprint and its long-term viability in a decarbonizing economy, integrating such insights into their overall investment strategy.

Hypothetical Example

Consider "GreenCo Inc.," a fictional manufacturing company. To assess its environmental impact, GreenCo calculates its annual greenhouse gas emission. This involves gathering data on:

1. Direct Emissions (Scope 1): Emissions from sources owned or controlled by GreenCo, such as fuel burned in company vehicles and on-site factory operations. For instance, if GreenCo's factory burns 1,000 tons of natural gas, and natural gas combustion releases a specific amount of (CO_2), that is a direct emission.
2. Indirect Emissions from Purchased Energy (Scope 2): Emissions from the generation of electricity, heat, or steam purchased and consumed by GreenCo. If GreenCo purchases 50,000 MWh of electricity generated by a coal-fired power plant, the emissions associated with that electricity generation are accounted for here.

By summing these up in (CO_2e), GreenCo might report a total greenhouse gas emission of 150,000 tons (CO_2e) for the year. This figure allows GreenCo to benchmark against industry peers, set reduction targets for achieving net zero goals, and demonstrate its commitment to environmental stewardship, potentially enhancing its shareholder value.

Practical Applications

Greenhouse gas emission data is integral to various aspects of modern financial markets and corporate operations:

• Investment Screening: Investors use emission data to screen companies for impact investing portfolios, favoring those with lower emissions or clear reduction pathways.
• Regulatory Reporting: Many jurisdictions and stock exchanges now require companies to disclose their greenhouse gas emission. For example, the U.S. Securities and Exchange Commission (SEC) adopted rules requiring public companies to disclose material climate-related risks and, for larger filers, Scope 1 and Scope 2 greenhouse gas emissions⁵.
• Carbon Pricing: Companies in regions with carbon pricing mechanisms (e.g., carbon taxes or cap-and-trade systems) directly face financial costs for their emissions, making emission reduction a critical financial consideration.
• Supply Chain Management: Businesses increasingly assess the greenhouse gas emission across their entire supply chain to identify hotspots and foster more sustainable practices among suppliers.
• Carbon Offsetting: Companies that cannot fully eliminate their emissions might engage in carbon offsetting projects to compensate for their residual greenhouse gas emission.

Limitations and Criticisms

Despite the growing importance of greenhouse gas emission reporting, several limitations and criticisms exist:

• Measurement Complexity: Calculating accurate greenhouse gas emission, especially for Scope 3 (indirect emissions from a company's value chain, both upstream and downstream), can be complex and involve numerous assumptions, potentially leading to inconsistencies.
• Greenwashing Concerns: There is a risk of "greenwashing," where companies may exaggerate their environmental efforts or minimize their reported emissions without substantive changes, potentially misleading investors and stakeholders.
• Lack of Standardization: While frameworks exist, full international standardization of emission reporting metrics and methodologies is still evolving, making direct comparisons across different regions or industries challenging.
• Focus on Measurement Over Action: Critics argue that an excessive focus on reporting and disclosure might detract from the urgent need for concrete, tangible actions to reduce actual emissions. For instance, some initial proposals for mandatory disclosures, such as those by the SEC, faced criticism for being scaled back, particularly regarding Scope 3 emissions⁴. Effective corporate governance is essential to ensure that emission disclosures are accurate and lead to meaningful reduction strategies.

Greenhouse Gas Emission vs. Carbon Footprint

While often used interchangeably, "greenhouse gas emission" and "carbon footprint" have distinct meanings. Greenhouse gas emission refers specifically to the release of gases that contribute to the greenhouse effect, such as carbon dioxide, methane, nitrous oxide, and fluorinated gases³. It is a direct measurement of the output of these gases into the atmosphere from a source.

A carbon footprint, conversely, is a broader term representing the total amount of greenhouse gases (including (CO_2) and other compounds, converted to (CO_2e)) emitted directly and indirectly by an individual, organization, event, or product. It encompasses all greenhouse gas emission throughout a lifecycle or operational boundary, aiming to provide a comprehensive measure of climate impact. For instance, a company's greenhouse gas emission are a component of its larger carbon footprint, which might also include emissions from employee commuting or the disposal of products.

FAQs

Q1: What are the primary greenhouse gases?
A1: The primary greenhouse gases are carbon dioxide ((CO_2)), methane ((CH_4)), nitrous oxide ((N_2O)), and fluorinated gases (hydrofluorocarbons, perfluorocarbons, sulfur hexafluoride, and nitrogen trifluoride)². Each has a different ability to trap heat and persists in the atmosphere for varying durations.

Q2: How are greenhouse gas emissions measured?
A2: Greenhouse gas emissions are typically measured in metric tons of carbon dioxide equivalent ((CO_2e)). This standardized unit accounts for the global warming potential of different gases, converting their impact into an equivalent amount of (CO_2)¹. This allows for a consistent comparison of the climate impact from various sources.

Q3: Why are companies concerned with greenhouse gas emission?
A3: Companies are concerned with greenhouse gas emission for several reasons: regulatory compliance, potential financial costs from carbon pricing, investor pressure for ESG investing and sustainability, reputational benefits, and the identification of operational efficiencies. Managing emissions effectively can enhance a company's competitive position and long-term viability in financial markets.

Q4: What is the difference between Scope 1, 2, and 3 emissions?
A4:

• Scope 1 emissions are direct emissions from sources owned or controlled by a company (e.g., fuel combustion in company vehicles or factories).
• Scope 2 emissions are indirect emissions from the generation of purchased energy consumed by the company (e.g., electricity purchased from a power plant).
• Scope 3 emissions are all other indirect emissions that occur in a company's value chain, both upstream and downstream (e.g., emissions from raw material extraction, transportation, product use, and waste disposal). These are often the most challenging to measure but represent a significant portion of a company's total carbon footprint.

Q5: How can individuals reduce their greenhouse gas emissions?
A5: Individuals can reduce their greenhouse gas emissions by adopting more sustainable practices, such as reducing energy consumption at home, opting for renewable energy sources, using public transport or electric vehicles, reducing waste, supporting businesses with strong environmental policies, and considering their diet's impact.