Hi, this is the third video of my Science-Based target lectures. It looks at value added approaches to setting science-based targets and this is what you'll use in the case. Science-based targets are very progressive and the value added techniques for setting the targets are almost at the very cutting edge of corporate carbon management so we're doing real time work here. Allocating the carbon budget fairly is a tricky part of setting a science-based target. Value-added has become the go-to approach for allocating carbon budget. The idea is that a company should be allowed emissions based on its contribution to the economy. This contribution to GDP is this measure of value-added where the name comes from, and value-added is a standard way that European businesses operate and pay taxes. In the U.S., our accounting measure gross profit is very close to European value-added. There are several value-added approaches, we're going to focus on the C-fact model from Autodesk because it has the best documentation. And there you can see these other ones but the C-fact will get us where we want to go. The advantage is of value-added approaches are relatively simple to compute, pretty easy to explain and they can be designed to satisfy any kind of carbon budget you want to decrease when you have to decrease. They don't recognize sectoral differences although you could do that I think with them. They're not cost efficient, they're a compression method as opposed to a convergence method and so we've already talked about this where high emitting firms won't have to make the most expensive emissions reductions compared to low emitting firms. And then that GEVA model has pretty rigid assumptions about growth, so it's not quite as flex, I don't think as the C-fact or some of the others. So I want to walk through the C-fact white paper. It's available for download and we start by just collecting some numbers, the first number is the company's carbon footprint and this is the starting amount, it's 83,073 metric tons of carbon. Next we need the contribution to GDP that's the gross profit, that's 2.1 billion for Autodesk. And then we compute the carbon intensity ratio, which is emissions divided by contribution. Now we've multiplied metric tons by a thousand kilograms, just makes the numbers work out a little neater so you don't have quite as many zeros, and we get a carbon intensity number of 0.0396 kg per dollar of GDP contribution. Now we have to look into the future and forecast the future contribution to GDP and what Autodesk it is it assumed that their gross profit would grow at the same rate as world GDP growth and that's 5.75% for the period time they were looking at. And we can update that. But anyway that's what they're doing. They're assuming that those two series global GDP and their gross profit are going to grow at 5.75% per year. And then we choose a carbon stabilization target and they decided to follow an 85% reduction pathway, this is from the IPCC report in 2009 I think and it's a recommendation for industrialized countries. So now we do a few calculations. Carbon Footprint started at 83000 is going to be reduced by 85% till the year 2050, so in 2050 the carbon footprint for Autodesk should be 12,460 metric tons of CO2. Contribution to GDP, well that's growing at 5.75% a year, it's going to go from 2.1 billion and then 40 years later it's expected to be 19.65 billion. And I have the equation there 2.1 times one plus the growth rate to the 40th power. And you can do this next up pretty easily. So carbon intensity, that's emissions divided by contribution to GDP, starts out at 0.0396, it's going to fall. It's going to fall a long way to 12460 divided by 19 billion. So emissions are going down. Contribution to GDP has gone up so that ratio is going to get a lot lot smaller. And in fact it's 0.000634 kilograms per dollar of contribution. Now we have to compute the carbon intensity reduction rate and the absolute emission reduction rate we can do both of those with the information that we have. So the carbon footprint is going to fall from 83000 to 12000. And the bottom line down here absolute emissions have to decrease shows the Excel function rate and how I've used it. I put in 40 years comma zero. That's a payment function doesn't apply here. The starting amount 83073, the ending amount, sign negative, has to be a sign change for x. I have to compute -12,460.95 that's the ending emissions with the 85% reduction and then coma zero comma and that has to do with- when the payments are made and a guess. But we aren't going to put those in and we get a minus 4.63% reduction in emissions each year. Now for carbon intensity we use that rate function and we get about a 9.8% reduction in carbon intensity. So we have all the information to work out an emissions pathway, emissions reduction pathway for Autodesk. And here's a diagram their numbers are teeny bit different because rather than use and 5.75% every year they had financial analysts forecasts for three years. So slightly different numbers. You can also see in their diagram a couple of things going on. The blue green line is the carbon intensity reduction pathway. The solid black line in the grey band is the absolute emission pathway. The white squiggly line is the actual because everything's not going to grow at 5.75% And there's a vertical gray band that says five year sliding window and that's a period of time to correct if they're are too far away. Well excuse me. From the blackline So that's Autodesk and there's a video that goes along and talks it so the calculations aren't real real hard. You have to keep things organized. Now I want to add a little complexity because what we're going to see in our case is a company where gross profit growth is greater than the growth in global GDP and I want to show you how to deal with that. So I'm going to developed a formula for the emissions for each year when the company's gross profit growth rate exceeds the GDP global GDP growth rate. So we know a couple of things we can look at carbon intensity and we know that carbon intensity has to decline. By this formula, one minus the emissions decline rate and that's divided by one plus the GDP growth rate. Now I'm going to assume that CO2 emissions have to decline 3% per year to satisfy a two degree pathway and then we'll have a global GDP growth by 3.5%. So, the decline rate for a carbon intensity is one minus the CEO emissions decline rate, .03 or .97 And that's going to be divided by one plus a GDP growth rate one. Plus.035 turns out that's equal to 0.93719. If we subtract that from one we can get the percent decrease that has to occur every year that have to be 6.8%. OK so we know how much the carbon intensity is going to change. Now here's what we're going to do. We're going to assume that our company, this was the third bullet point has profit growth of 6% per year so its a lot higher than global GDP growth rate. We're also going to assume that at the starting time the baseline emissions are 400 metric tons of CO2e. Now here's the formula to get the next year's emissions that will satisfy a two degree target. We do this, we multiply the emissions this year by 1.06 times that carbon intensity reduction factor and that gives us 397.37 metric tons of CO2 that the company can emit to be on a two degree target. Now, the company hardly reduced its emissions at all and that's because it's growing so it gets a bigger share of the entire emissions budget than companies that are either not growing or growing at a lower than 3.5% rate. And we know there are companies like that because if the average is 3,5 and this company is growing at 6% in order to get that average to work out there have to be a budget companies going at just 1% or something like that and they don't get very much a carbon budget at all. OK now we can compute the rate of change from the 400 metric tons of emissions to 397. And then that rate will apply to all years. And we do that by a percentage change formula. it's end value minus start value divided by start value so the ending value would be 397.37 a year two say minus the start value 400 year one you missions divided by the start value 400 and that gives us a percentage reduction each year of 0.00657 or.657%, just under 1%. Now that's the rate that emissions will decrease every year as long as the company continues to grow its gross profit at 6% and the global economy continues to grow at 3.5%. So now we can get an emissions pathway,, we multiply the first year's emissions, 400 by one minus the 0.00657 that's the rate that emissions have to go down every year. So. Year two will be 99.3% just a little smaller than year one. Year three will be. 99% a year too and so on. And now we have our emissions pathway. We can go out for as far as we want seven years eight years 10 years and that will be the target emissions that we're going to look for. And this should satisfy all of the criteria of science-based target setting because it is on a two degree pathway. It has a declining emissions pattern that reflects its growth. So I think we're okay. Let me summarize real quickly. Value added methods allocate emissions based on economic contribution but they don't differentiate between sectors although they could and they also are not cost efficient because there are compression methods not conversion methods. The calculation we did is kind of based on carbon intensity ratios and then use that number to compute emissions. I gave you sort of a closed form way to compute emissions when there's extra growth and the other thing that I think is interesting in the Autodesk example is that the emissions reduction target was 85% for industrialized countries and that leaves room for developing countries to grow. Thanks. And now we go on to the last of the approaches, very newest one called sector-based approaches. Thanks.
