June 17, 2021

Emissions intensity and absolute emissions: What they are and why it matters

Climate change is one of the greatest global environmental and economic challenges of our time. An energy transition or evolution is underway in response to the scientific consensus that future global temperature growth needs to be limited. New green energy sources and clean technologies are emerging and show the potential to replace higher emitting products and industries.

As this transition plays out, many of Canada’s traditional higher-emitting industries will continue to have a place within the push for a lower carbon economy. In some cases, this is because it will take time to transition to lower-emission substitutes. In others, it is because no ready substitutes are presently available. In this context, governments and businesses alike are busy setting policies in place to reduce emissions in those industries.

However, the fact that there are two common ways to measure GHG emissions reductions—emissions intensity and absolute emissions—is sometimes a cause for confusion. How do these two categories of measurement align with progress towards limiting future temperature increases? Do they always work in concert, or do they sometimes clash?

But before addressing these important questions, let’s clarify the difference between absolute emissions and emissions intensity.

Emissions intensity reductions…absolute emissions reductions…what’s the difference?

Absolute Emissions

Absolute emissions reductions are the basic unit of GHG abatement used in Canada’s domestic climate targets. They are exactly what they sound like: reducing the physical amount of GHG emitted into the atmosphere over time.

Source: National Inventory Report 1990-2019 – Greenhouse Gas Sources and Sinks in Canada – Part 3; BCA’s own calculations

Canada has publicly committed to reduce its national emissions by at least 40% below 2005 levels as part of renewed commitments under the Paris Agreement (Figure 1). Canada has also introduced legislation to get to net-zero emissions by 2050, meaning that, after emissions are significantly reduced, for every tonne of CO2 that humans continue to be emitted into the atmosphere, an equal amount must be removed. For a more detailed discussion on what the “net” in net zero means, see here.

Emissions Intensity

Emissions intensity, on the other hand, measures the volume of emissions produced against some other relevant unit. Examples include emissions per person; emissions per unit of output; or emissions per dollar generated, among many other possible measures.

Sources: National Inventory Report 1990-2019 – Greenhouse Gas Sources and Sinks in Canada – Part 3; Statistics Canada; BCA’s own calculations

For example, suppose a business produces 1 tonne of GHGs for every trinket it manufactures. If it can reduce GHGs to 0.5 tonnes per unit of output, then its emissions intensity is said to have fallen.

As another example, Canada’s total national emissions can be measured against our gross domestic product (GDP) to describe how much we emit given the nation’s economic output. Figure 2 shows that Canada’s emissions intensity has been falling steadily in recent years.

How absolute emissions and emissions intensity measures fit within Canada’s climate goals

Canada’s latest climate plan has sets out an ambitious dual goal:

  1. Achieving deep domestic absolute emissions reductions, while…
  2. Growing the economy.

The fastest way to achieve the first of these goals would be to shut down large, heavy-emitting sectors of the Canadian economy with no regard for the people negatively impacted. This, of course, would dramatically hurt the wellbeing of millions of Canadians, resulting in a massive failure to achieve goal (2) while succeeding at goal (1) in record time.

Similarly, it is entirely possible for Canada to make progress on emissions intensity while simultaneously increasing our national absolute emissions. For example, Alberta’s oil sands produce 36% fewer GHG emissions per barrel than they did in in 2000, but the total number of barrels produced has risen even faster. This has helped the economy grow (goal 2) but led to regression on goal 1 (total emissions are up).

Achieving both emissions reductions and economic growth, therefore, requires one of two things to happen. The first is that high-emission products or inputs are substituted for lower-emissions ones—in a manner where economic growth resulting from the latter exceeds the offsetting decline in the former. The second option is where emissions intensity comes into play. If emissions can be reduced at a faster rate than production increases, then not only will absolute emissions fall, but the economy (in that particular sector) will grow; goals (1) and (2) would be met.

These two options are not mutually exclusive. Which option makes the most sense depends on factors like cost, and how easily the product in question can be substituted. Natural gas can replace coal-fired electricity fairly easily, but there is no ready alternative to cement, steel, aluminum, or services like marine shipping, aviation, and long-haul transportation. These are necessary components of modern life, but they do not currently have viable alternative lower carbon goods that can easily replace them.

Can progress on emissions intensity matter independent of absolute reductions?

As noted above, for goods with no readily available substitute, if emissions intensity can decrease faster than production increases, then Canada’s dual climate goal can be achieved. But are there other situations where emissions intensity might matter more than absolute reductions? There are, in fact, two such scenarios, described below.  

Scenario #1: Global Displacement of Higher Emitting Goods:

Energy demand in the developing world is increasing, especially in China. While China’s middle class and industrial capacity expands, that nation has also committed under the Paris Agreement to stop its emissions from rising by 2030. Part of this plan includes increasing the role of natural gas in its primary energy consumption because natural gas emits fewer GHGs per unit of energy produced than coal, another major source of Chinese energy. In other words, China is looking to reduce the emissions intensity of its electricity generation.

This provides Canadian natural gas producers an opportunity to export lower emitting liquefied natural gas (LNG) to help displace China’s coal. If this were to happen, absolute emissions in Canada would likely increase due to as LNG production rose, but the increase would be less than the corresponding improvement in Chinese emissions intensity.

From the perspective of Canada’s climate targets, this represents a step backwards even though global emissions would see a net decrease.

Scenario #2: Limiting Future Emissions Growth in a Global Economy—Company-level Contributions

In this scenario, world demand for aluminum is going up, and two competing aluminum manufacturing businesses—“Choice Aluminum Co.” and “Aluminum Pros Ltd.”, respectively—recognize the opportunity to fulfill this new world demand. Let’s imagine that both companies are looking for investors to support the growth of their operations, but only one can win the contract.  Further, we’ll assume their underlying financial standings are more or less the same, and both companies can fetch the same price for aluminum.

Choice Aluminum Co. is the larger of the two aluminum producers and emits 10 megatonnes (MT) of absolute emissions, whereas Aluminum Pros Ltd. only emits 5 MT. However, Choice Aluminum Co. has adopted manufacturing practices that allow it to produce each unit of aluminum with 50% fewer emissions than Aluminum Pros Ltd because its power is sourced from hydroelectricity rather than coal. Despite Aluminum Pros Ltd.’s lower absolute emissions, investors should rationally allocate their capital to Choice Aluminum Co. because, all else held equal, it can supply the world’s new aluminum demand by emitting fewer emissions than Aluminum Pros Ltd. In this situation, emissions intensity is the best apples-to-apples measure of these companies’ ability to manufacture aluminum in the most environmentally friendly way.

Now let’s imagine that Choice Aluminum Co. is located in Canada, and Aluminum Pros Ltd. is in the United States. Assuming investors reward Choice Aluminum Co., the company’s increased production will lead to higher absolute emissions for both the company and for Canada, but global emissions will be lower than if Aluminum Pros Ltd. had been the ones meeting the increased demand for aluminum.

In this scenario, each company’s emissions intensity was a more climate-friendly metric for investors to assess than each company’s absolute emissions. Canada would be taking a step back from achieving its Paris and net zero targets, but it would be increasing global absolute emissions by a smaller amount than had the aluminum been manufactured in the United States by Aluminum Pros Ltd. Carbon leakage is avoided.

What is the pathway forward?

So how and when should absolute emissions or emissions intensity be the measure of progress on climate change by policy makers and businesses? As unsatisfactory as this answer is, the correct answer is, it depends.

The world is undergoing an energy transition. New types of low-carbon, prosperity-creating economic activities are emerging, and these activities ought to be embraced. However, Canada’s transition to a lower carbon future will also include improving the environmental performance of existing, higher carbon economic activities well into the future—especially for goods and services that do not have easy, lower carbon substitutes. This is where maintaining economic competitiveness is so important for reducing emissions. As with the Choice Aluminum Co. scenario, if Canadian businesses can produce lower-emission goods and services than their international competitors, they can contribute to lowering global emissions intensity. But if they cannot compete on price as well as environmental performance, they may not get the chance.

Achieving Canada’s dual climate goals is theoretically possible if, as previously stated, measures of emissions intensity progress and economic prosperity improvements can pair with domestic absolute emissions cuts. But on the pathway to achieving this ambitious marriage of the two units of GHG measurement, pragmatic solutions—not all-or-nothing idealism—will help us achieve the dual climate goals.

Businesses and policy makers will need to embrace the transition to lower carbon substitute goods where possible and accept that emissions intensity progress in hard-to-decarbonize sectors may not immediately jive with domestic or global absolute emissions reductions even though they represent progress. Many more clean tech advances for these industries are needed to see their emissions intensity improvements overcome absolute emissions growth in these sectors.

For our part, we believe that with the right mix of policy support and private and public sector investment, achieving Canada’s net-zero target by 2050 is attainable. We’ll have more to say on achieving Canada’s emissions targets in the context of Alberta’s distinct economy in the weeks to come.

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