Managing Director & Partner
Industrial companies have an enormous carbon footprint. Their production and logistics operations account for more than half of all global carbon dioxide equivalent (CO2e) emissions from fuel combustion. Considering current trends, emissions from production and logistics would need to decrease by approximately 45% by 2030 to be on a path to meet the Paris Agreement’s 1.5°C target for limiting the global temperature increase. As longstanding environmental concerns intensify, industrial companies are feeling increasing economic pressure to tackle the problem.
Recognizing the need for action, leading companies are implementing initiatives to decarbonize their operations. Moreover, some companies have gone further and started to require their business partners in the supply chain to demonstrate a commitment to decarbonization as well. The result is a convergence of environmental and economic imperatives that all industrial companies must be prepared to address. The solution is a concept that we call “the green factory of the future,” in which the integrated application of decarbonization measures reduces net emissions to zero.
To better understand the opportunities and challenges that decarbonization presents, a BCG study examined expectations for and adoption of decarbonization measures in industrial operations. The study focused on the results of a global survey of nearly 1,200 operations executives from numerous producing industries. (See “About the Study.”) This survey was conducted before the COVID-19 pandemic spread globally. However, although the pandemic has altered some short-term priorities, the climate challenge and the urgency to respond to it remain unchanged. In the middle term, the actions described in this report will continue to be relevant and may even have gained significance. Indeed, as companies revamp their strategies to win the post-pandemic future, they have a unique opportunity to focus on climate action.
BCG conducted a survey of industrial companies’ executives and operations managers to assess their progress toward implementing decarbonization measures in operations. We defined industrial operations as producers’ core transformation processes, including production and such related functions as maintenance, product quality, and logistics (inbound, in-plant, interplant, and outbound).
We selected the survey participants at random from 1,188 global companies of at least 250 employees each. The companies represent a broad array of producing industries: automotive, consumer goods, engineered products, health care (pharmaceuticals and medical technology), materials and process industries, and technology (telecommunications and IT equipment). The participants were based in Austria, Brazil, Canada, China, France, Germany, India, Japan, Mexico, Poland, the UK, and the US.
The survey sought to evaluate the participants’ current degree of implementation of decarbonization measures in their operations and their motivation to implement further measures. It also sought to identify the most important levers affecting implementation, as well as the major challenges and enablers. In addition, the survey asked about the benefits that participants expect to gain from decarbonization.
Our study’s analyses focused exclusively on industrial-sector emissions resulting from fuel combustion. In order to pinpoint the relevant issues for industrial companies, we chose not to consider other important sources of emissions, such as the agriculture sector, or other specific types of emissions, such as waste and fugitive emissions.
The study found that industrial companies want to reduce their carbon footprint, with more than three-quarters of them viewing decarbonization as a high priority. So far, however, most companies have struggled to achieve their goals. Only 13% of survey respondents say that their company has fully implemented decarbonization measures in their production and logistics. The biggest obstacle to more aggressive action seems to be concern that the initiatives will raise conversion costs.
We believe that industrial companies should not regard environmental sustainability as a threat to economic sustainability. Indeed, as pressure intensifies to pursue decarbonization throughout the industrial supply chain, environmental and economic sustainability will become increasingly difficult to separate. Although the challenges are significant, the results of our study show that companies can implement win-win actions that benefit the environment and create financial value. The keys to success are to identify the most effective decarbonization measures and to evaluate the economic impact of adopting these measures in a way that considers factors beyond conversion costs—such as getting ahead of regulations, attracting investors, and winning new customers. By using a rigorous evaluation process, a company can ensure that environmental and economic sustainability go hand in hand in the green factory of the future.
Our study focused on environmental sustainability in industrial operations, comprising production and logistics. We gave special emphasis to greenhouse gas (GHG) emissions, which are predominantly CO2 but also include such gases as methane and nitrous oxide. (See “The Basics of Sustainability in Operations.”)
Sustainability has three pillars, each of which is relevant to industrial operations:
These pillars—informally known as “people, planet, and profits”—are tightly interwoven. As emissions regulations become more numerous and more stringent, a company’s economic success will depend increasingly on its ability to become environmentally sustainable. For example, as of 2019, 46 countries had launched initiatives to establish a price for CO2 emissions, either through a tax on emissions or through certificates that offset emissions. Compliance with such regulations directly impacts companies’ economic performance. Social sustainability is implicated, too. For example, as public awareness of the need for environmental sustainability increases, employees can better relate to a company with a strong environmental agenda and will feel more satisfied working there.
Although the pillars are interconnected, our study focused on environmental sustainability as a pivotal element of a company’s long-term success. Of the many topics relevant to environmental sustainability in operations, four are especially prominent:
Although industrial companies must address each of these topics, we focused on GHG emissions in operations that result from fuel combustion. The Greenhouse Gas Protocol, an organization that provides global standards, categorizes GHG emissions into three scopes. Our study encompassed all three:
Achieving environmental sustainability through reduced GHG emissions is an essential element of The Factory of the Future and is integrated into all of its dimensions. These dimensions include structure (for example, improving the insulation of the factory building), processes (for example, optimizing the routing of logistics vehicles in the plant), and technology and digitization (for example, monitoring energy usage of machinery equipment and automating the shutoff of equipment).
As noted earlier, industrial operations are responsible for a significant share of global GHG emissions. CO2e, the standard unit for measuring GHG emissions, estimates how much of a contribution a given quantity and type of GHG may make toward global warming. Production accounts for more than 40% of global CO2e emissions from fuel combustion, and commercial logistics accounts for more than 10%. (See Exhibit 1.)
The share of CO2e emissions attributable to production- and logistics-related activities depends on the product, as the life-cycle assessment in Exhibit 1 illustrates. For example, for a car powered by an internal combustion engine (ICE), the share of emissions attributable to production is relatively low (15%), whereas 78% of emissions result from operating the car. In contrast, for a battery-powered electric vehicle (EV), nearly 43% of emissions are attributable to production, mainly owing to battery production, which is quite energy intensive. For this reason, although it may seem counterintuitive, the lifetime emissions for EVs are almost the same as those for ICE vehicles. We based our life-cycle assessment for EV batteries on production in China, where battery producers and power companies depend, to a significant degree, on electricity from a power grid that relies on emissions-heavy hard coal, lignite, and natural gas. To calculate emissions from EV utilization, we used the global average power-grid mix.
Leading companies are taking action to reduce their operations’ carbon footprint. For example, the Volkswagen Group has announced that its ID.3 EVs will be the first model manufactured at its Zwickau plant using carbon-neutral production. The automaker hopes to achieve carbon-neutral production for its entire fleet by 2050.
Daimler has announced an even more aggressive time frame for decarbonization. The automaker wants its entire fleet of passenger cars to be carbon neutral by 2039. It also intends to make its assembly plants carbon neutral by 2022, by transitioning from coal-based electricity to energy generated exclusively from renewable resources. Looking beyond its own operations, Daimler is requiring its suppliers to adopt its standards for decarbonization. Other large automakers have imposed similar requirements. As a result, having a climate-friendly production process in place has become table stakes for winning their business.
Various stakeholders are demanding that companies transition to environmentally sustainable operations. For example, BlackRock, a leading investment management company, has announced that sustainability will become its “new standard for investing” and an integral part of its strategy for increasing long-term returns.
Industrial companies’ management teams seem to recognize the need for action. Among study participants, more than 75% say that carbon neutrality is either the most important initiative at their company or one of the top three initiatives. When asked their main reason for seeking to decarbonize operations, 28% of respondents cite the need to meet regulatory requirements, and 25% point to reducing conversion costs. Only 15% say that customer demand is their primary reason.
Given the clear need for action to reduce GHG emissions in operations, what targets are reasonable? Companies usually discuss goals for reducing GHG emissions in terms of meeting the 1.5°C target derived from the 2015 Paris Agreement, in which more than 190 countries committed to taking steps to limit the global average temperature increase to 1.5°C above pre-industrial levels. To achieve the 1.5°C target, countries would need to reduce their overall net emissions to zero by around 2050, with incremental reductions along the way. Unfortunately, many countries—including the top five emitters (China, the US, the European Union, India, and Russia)—are falling short of meeting their goals. The concrete actions we discuss below can bolster efforts to achieve the target.
As of 2019, global GHG emissions from fuel combustion totaled approximately 33 gigatons of CO2e (Gt CO2e). To be on a path to achieve the 1.5°C target, net emissions would need to fall to 18 Gt CO2e by 2030. However, extrapolating the current trend for global emissions to 2030 yields emissions of 33 Gt CO2e—a shortfall of 15 Gt CO2e against the incremental goal for meeting the 1.5°C target. To close this gap by 2030, GHG emissions from production and logistics would have to decrease by 45% relative to the current trend. (See Exhibit 2.) From that point, incremental reductions would have to continue for two more decades until net emissions dropped to zero.
How can a company help close the gap? To reduce its operations-related GHG emissions, a company can avoid, reuse or store, or offset or compensate for emissions. Each category of actions includes one or more abatement levers. For each lever, we present examples of the most important applications in industrial operations, as confirmed by study participants. (See Exhibit 3.)
Avoid. A company can avoid emissions by increasing its energy efficiency or by changing how it conducts or powers its operations:
Reuse or Store. A company can apply two main levers to reuse or store carbon emissions:
Offset or Compensate. A company can compensate for its CO2 emissions through offsetting measures. Such measures can be unrelated to the company’s own production or logistics. For example, Willmott Dixon, a UK-based construction company, has partnered with Natural Capital Partners to select and execute carbon-reducing projects that provide social benefits to local communities. These benefits advance the goals of the foundation that Willmott Dixon has established to promote social causes. The projects include preserving 47,000 hectares of a carbon-dense tropical peat swamp in Borneo that was in danger of being converted into palm oil plantations. Most companies, however, view offsetting as a complement to other abatement levers, rather than as a standalone solution with significant independent impact. For example, Bosch is using offsetting as an interim solution to accelerate its progress toward carbon neutrality. As the company increases the share of renewable energy in its production through 2030, it will compensate for unavoidable CO2 emissions through carbon offsets.
More than 60% of study participants say that their company plans to implement decarbonization measures. And more than 90% of participants say that their company will dedicate a portion of its manufacturing investment budget to decarbonization measures in the next three years. Among those participants, roughly half say that the company will spend more than 10% of its available manufacturing investment budget on decarbonization in the next three years.
To realize their ambitions, companies must improve how they implement their plans. Although we see promising examples and high ambitions, many previous efforts to implement decarbonization measures have not been very successful. Only 13% of participants report that their company has fully implemented decarbonization measures in their production and logistics.
Exhibit 4 shows the gap between future ambitions and current implementation status from an industry perspective, separately for production and for logistics. The technology industry has the highest ambition to reduce carbon emissions. Already, many companies that produce IT and technology equipment and hardware have the necessary capabilities to develop and implement decarbonization measures. In addition, many technology companies are highly motivated to address sustainability issues. For example, Microsoft has announced plans to become “carbon negative” (removing more carbon from the atmosphere than it emits) by 2030. Beyond that, it plans to erase by 2050 a volume of carbon equal to all of its emissions since its founding in 1975.
Although many companies have good intentions and plan to implement decarbonization measures, in most instances they have not set science-based targets for measuring their success. Worldwide, only about 330 companies have established science-based targets for decarbonization, according to a collaborative initiative that monitors such efforts. That number represents a tiny fraction of the more than 10 million companies that would need to decarbonize their operations in order to comply with the Paris Agreement’s CO2 emissions goal. Moreover, no company in China, the world’s largest emitter, has approved science-based targets.
After China, the world’s two top emitters are the US and the EU. Together, these three sources account for more than 50% of global GHG emissions. Despite their tendency not to set science-based targets, companies in these countries are highly ambitious to reduce their carbon footprint in the future. Companies in China have the highest ambitions, motivated by rising public demand for environmental sustainability and by higher taxes on emissions. Companies in the EU are experiencing similar pressure to take action. For example, Germany plans to introduce a CO2 tax on fossils fuels (including gas) of €25 per ton of emitted CO2 in 2021, with a planned increase to €55 per ton by 2025. And Sweden has enacted statutory decarbonization roadmaps for specific industries.
Although study participants indicate that companies are committed to reducing carbon emissions, concerns about incurring higher costs pose a major obstacle to taking necessary action in support of these good intentions. Nearly two-thirds of participants (63%) believe that decarbonization will increase their conversion costs (total manufacturing costs minus material costs) by 2030. Only 21% believe that they can lower their conversion costs through decarbonization by 2030. A similar picture emerges in connection with the development of investments and implementation costs for carbon-reduction applications: 63% of participants believe that these costs will increase during the next five years, versus only 18% who believe that they will decrease.
Unavoidably, some decarbonization measures will increase conversion costs or require additional investments. Nevertheless, by selecting the right measures, a company can implement win-win actions that help the environment and generate financial value. In general, decarbonization applications can yield a positive business case in one of three ways:
As of 2019, 46 countries (responsible for approximately 20% of global GHG emissions) had implemented CO2 taxes or certificates to promote decarbonization. The pricing of CO2e emissions varies widely among countries. Sweden’s tax of €114 per metric ton of CO2 (tCO2) is currently the world’s highest. The CO2 tax rate affects a company’s optimum manufacturing footprint. BCG has modeled the tipping point at which potential savings from tax avoidance make it economically attractive to relocate manufacturing operations from one country to another. (See Exhibit 5.)
The various assumptions underlying this model include the distance between the respective countries where the parts are produced and received, the transportation mode, the parts per truckload, the labor costs in the producing and receiving countries, and the labor requirements per part. In the example shown in Exhibit 5, the receiving country is Germany and the producing country is Romania. We calculated the conversion costs (including logistics costs and CO2 tax) for producing in Romania as the base case, and we calculated the costs for producing in Germany as a potential new production location, in both cases as a function of the CO2 tax rate on transportation.
For a part that requires low labor intensity (2 hours per part) to produce, the tipping point for the CO2 tax is approximately €70 per tCO2. If the CO2 tax exceeds €70 per tCO2e, producing in Germany entails lower conversion costs than producing in Romania, indicating a business case for relocating production to Germany. For a part that requires high labor intensity (10 hours per part) to produce, the tipping point is approximately €9,500 per tCO2e. Since the highest CO2 tax worldwide is €114 per tCO2, relocating production of parts with high labor intensity from Romania to Germany would not be warranted—the labor arbitrage benefits of producing in Romania significantly exceed the costs arising from current CO2 tax rates on emissions.
Our survey respondents indicated that their companies see regulation as critical to enabling further implementation of decarbonization measures, including changes to the manufacturing footprint. Approximately 60% of participants view governmental pull (such as subsidies) and push (such as a CO2 tax) as being the most important factor for motivating implementation of more decarbonization measures in their operations. Only 22% say that reduced investment cost is the most important factor, and just 9% point to stronger demand from customers.
Several companies have demonstrated that decarbonization measures can simultaneously improve business performance and help the environment:
Management teams should move beyond debating whether decarbonizing operations is the right move for their company. As Daimler, VW, and other leading players make commitment to decarbonization an explicit criterion for supplier selection, it is clear that every industrial company must take action on this front to remain competitive. Simply providing the “best cost” is becoming less relevant to winning business.
To successfully implement decarbonization measures, a company needs to adopt a structured three-step approach:
Industrial companies should regard efforts to decarbonize operations as integral to their strategy for maintaining competitiveness in the post-pandemic future. In recent years, as the effects of climate change have become increasingly visible, demands for action—by the public, by governments, and by leading companies—have grown louder and more specific. There is a strong possibility that these demands will intensify quite radically as stakeholders recognize the importance of environmental resilience in promoting a recovery from the current crisis. In view of the multiyear time frame required to successfully implement decarbonization measures in complex production systems and supply chains, companies should begin systemically ramping up their activities immediately. Indeed, the next few years may well be the turning point. As others have observed, we are the first generation to witness the effects of climate change and also the last generation with the ability to prevent those effects from irreversibly harming our planet.
BCG’s Innovation Center for Operations is an ecosystem for exploring the factory of the future. The ICO’s objective is to support all operational functions, including manufacturing, engineering, and supply chain management. We offer a variety of resources, facilities, and expertise in support of Industry 4.0 implementation. Among these resources is a network of Industry 4.0 model factories in multiple locations. The model factories, which BCG makes available in collaboration with best-in-class partners, allow clients to experiment and assess Industry 4.0 solutions—such as collaborative robots, 3D printing, augmented reality, and big data—with real assembly and production lines and machines that demonstrate new technologies. Additionally, BCG experts can bring the ICO’s mobile labs directly to client sites to demonstrate potential impact and opportunities. The ICO seeks to improve companies’ competitive advantage by helping them realize benefits in productivity, quality, flexibility, and speed. The center reinforces our commitment to innovation, Industry 4.0, and the use of advanced technologies in operations.
We partner with clients across the public, private, and social sectors to align their strategy, operations, and stakeholder engagement with a low-carbon world. Our work is supported by BCG’s range of consulting experience across all industries and capabilities, as well as by our expanding reach of brands.