National Grid sets carbon budgets to cut emissions

Reducing carbon emissions should become fully integrated into everyday business decisions under innovative plans by utility company National Grid to introduce carbon budgets.

National Grid, operator of the UK’s electricity and gas supply network, is to introduce carbon budgets to help secure an 80% cut in greenhouse gas emissions by 2050.

In April, National Grid announced it had raised its two year-old greenhouse gas emissions reduction target from 60% to 80% by 2050, making the company one of the first to make such an ambitious commitment.

The target is based on a ‘composite baseline’ of 6.6 million tonnes of CO2 equivalent (CO2e) from different emissions sources.1 The tougher target mirrors that for CO2 being discussed for the UK under the climate change Bill (ENDS Report 399, pp 47-48 ). It is likely that other companies in the energy sector will have to set targets of similar ambition if the cuts are to be achieved. Indeed, many observers suggest that because other sectors have limited options to cut emissions, the energy sector will have to deliver beyond 80% cuts and be largely decarbonised by 2050 (ENDS Report 393, p 15 ).

By 2007, National Grid had cut emissions by 35% from its baseline. However, the reduction does not take account of emissions from its recent acquisition of US electricity generator Keyspan which owns 4,500 megawatts of oil/gas-fired power stations.

To achieve further reductions, National Grid says it needs to integrate carbon management into its core business functions alongside financial considerations such as the cost of raw materials or labour. This will be achieved through establishing a carbon budget for each of the company’s four main business areas - electricity and gas transmission, gas distribution, electricity distribution and generation (US only), and shared services.

Underpinning the budgets will be the ‘shadow price of carbon’ - the cost of the damage done by each tonne of carbon dioxide released (ENDS Report 396 pp 30-33 ). National Grid has adopted the price of £25 per tonne of CO2e developed by the Environment Department (DEFRA).

The company considered using the EU emissions trading scheme’s price of carbon but decided it was too volatile to provide a consistent driver.

Over the next 12 months, National Grid will assess its greenhouse gas emissions across its UK and US operations using a protocol developed by the World Resources Institute. Carbon budgets will be introduced in April 2009 for the start of the 2009/10 financial year.

Joe Kwasnik, head of climate change at National Grid, said: "The target will be very difficult for us to meet, but we think that by challenging the organisation we will find some innovative ways not only to reduce emissions, which is currently €25 per tonne, but to make us a much more efficient company."

As an added incentive, the pay of executive directors responsible for each business area will be partially dependent on achieving annual and five-yearly milestones towards the 2050 objective. The exact proportion of performance-related pay has yet to be decided, but Mr Kwasnik said it would be "significant enough to get their attention".

The effectiveness of carbon budgets to drive improvements depends on whether the price of carbon is sufficiently high. There is considerable uncertainty over whether £25 per tonne is enough.

Mr Kwasnik said the company was still learning about carbon budgets. At this stage, he said, "the actual magnitude of the price is not as important as the principle of introducing a price of carbon into our decision making."

He added that National Grid will review the price each year and increase it if it is not providing enough of an incentive.

Putting a price on environmental harm is far from an exact science. The government used the shadow price of carbon in its cost-benefit analysis of the expansion of Heathrow. But the costs of an additional 2.6 million tonnes of CO2 per year from an enlarged airport appear to have made little difference to the government’s support for expansion (ENDS Report 395, pp 30-33 ).

Aside from its US power stations, the largest sources of emissions from National Grid operations include leaks of methane from the gas distribution network, CO2 emissions from gas-fired compressors used to push gas around the network and losses of sulphur hexafluoride from electrical switchgear.

The company has a programme to reduce methane leaks by replacing old cast-iron gas pipelines and switching to more efficient electric compressors.

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