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Hi, this is the third video of my Science-Based target lectures.

Â It looks at value added approaches to setting

Â science-based targets and this is what you'll use in the case.

Â Science-based targets are very progressive and the value

Â added techniques for setting the targets are almost

Â at the very cutting edge of

Â corporate carbon management so we're doing real time work here.

Â Allocating the carbon budget fairly is a tricky part of setting a science-based target.

Â Value-added has become the go-to approach for allocating carbon budget.

Â The idea is that a company should be allowed

Â emissions based on its contribution to the economy.

Â This contribution to GDP is this measure of value-added where the name comes from,

Â and value-added is a standard way that European businesses operate and pay taxes.

Â In the U.S., our accounting measure gross profit is very close to European value-added.

Â There are several value-added approaches,

Â we're going to focus on the C-fact model from

Â Autodesk because it has the best documentation.

Â And there you can see these other ones but the C-fact will get us where we want to go.

Â The advantage is of value-added approaches are relatively simple to compute,

Â pretty easy to explain and they can be designed

Â to satisfy any kind of carbon budget you want to decrease when you have to decrease.

Â They don't recognize sectoral differences although you could do that I think with them.

Â They're not cost efficient,

Â they're a compression method as opposed to

Â a convergence method and so we've already talked about this where

Â high emitting firms won't have to make

Â the most expensive emissions reductions compared to low emitting firms.

Â And then that GEVA model has pretty rigid assumptions about growth,

Â so it's not quite as flex, I don't think as the C-fact or some of the others.

Â So I want to walk through the C-fact white paper.

Â It's available for download and we start by just collecting some numbers,

Â the first number is the company's carbon footprint and this is the starting amount,

Â it's 83,073 metric tons of carbon.

Â Next we need the contribution to GDP that's the gross profit,

Â that's 2.1 billion for Autodesk.

Â And then we compute the carbon intensity ratio,

Â which is emissions divided by contribution.

Â Now we've multiplied metric tons by a thousand kilograms,

Â just makes the numbers work out a little neater so you don't have quite as many zeros,

Â and we get a carbon intensity number of 0.0396 kg per dollar of GDP contribution.

Â Now we have to look into the future and

Â forecast the future contribution to GDP and what Autodesk it is it assumed

Â that their gross profit would grow at the same rate as

Â world GDP growth and that's 5.75% for the period time they were looking at.

Â And we can update that.

Â But anyway that's what they're doing.

Â They're assuming that those two series

Â global GDP and their gross profit are going to grow at 5.75% per year.

Â And then we choose a carbon stabilization target and

Â they decided to follow an 85% reduction pathway,

Â this is from the IPCC report in 2009 I

Â think and it's a recommendation for industrialized countries.

Â So now we do a few calculations.

Â Carbon Footprint started at 83000 is going to be reduced by 85% till the year 2050,

Â so in 2050 the carbon footprint for Autodesk

Â should be 12,460 metric tons of CO2.

Â Contribution to GDP, well that's growing at 5.75% a year,

Â it's going to go from 2.1 billion and then

Â 40 years later it's expected to be 19.65 billion.

Â And I have the equation there 2.1 times one plus the growth rate to the 40th power.

Â And you can do this next up pretty easily.

Â So carbon intensity, that's emissions divided by contribution to GDP,

Â starts out at 0.0396, it's going to fall.

Â It's going to fall a long way to 12460 divided by 19 billion.

Â So emissions are going down.

Â Contribution to GDP has gone up so that ratio is going to get a lot lot smaller.

Â And in fact it's 0.000634

Â kilograms per dollar of contribution.

Â Now we have to compute

Â the carbon intensity reduction rate and

Â the absolute emission reduction rate

Â we can do both of those with the information that we have.

Â So the carbon footprint is going to fall from 83000 to 12000.

Â And the bottom line down here absolute emissions have to

Â decrease shows the Excel function rate and how I've used it.

Â I put in 40 years comma zero.

Â That's a payment function doesn't apply here.

Â The starting amount 83073,

Â the ending amount, sign negative,

Â has to be a sign change for x. I have to compute -12,460.95 that's

Â the ending emissions with the 85% reduction and

Â then coma zero comma and that has to do with- when the payments are made and a guess.

Â But we aren't going to put those in and we get a

Â minus 4.63% reduction in emissions each year.

Â Now for carbon intensity we use that rate function and we get about

Â a 9.8% reduction in carbon intensity.

Â So we have all the information to work out an emissions pathway,

Â emissions reduction pathway for Autodesk.

Â And here's a diagram their numbers are teeny bit different because rather than use and

Â 5.75% every year they had financial analysts forecasts for three years.

Â So slightly different numbers.

Â You can also see in their diagram a couple of things going on.

Â The blue green line is the carbon intensity reduction pathway.

Â The solid black line in the grey band is the absolute emission pathway.

Â The white squiggly line is the actual because everything's

Â not going to grow at 5.75% And there's

Â a vertical gray band that says five year sliding window and

Â that's a period of time to correct if they're are too far away.

Â Well excuse me.

Â From the blackline So that's

Â Autodesk and there's a video

Â that goes along and talks it so the calculations aren't real real hard.

Â You have to keep things organized.

Â Now I want to add a little complexity because what we're

Â going to see in our case is a company where

Â gross profit growth is greater

Â than the growth in global GDP and I want to show you how to deal with that.

Â So I'm going to developed a formula for the emissions for each year when

Â the company's gross profit growth rate exceeds the GDP global GDP growth rate.

Â So we know a couple of things we can look at carbon intensity and we know

Â that carbon intensity has to decline.

Â By this formula,

Â one minus the emissions decline rate and that's divided by one plus the GDP growth rate.

Â Now I'm going to assume that CO2 emissions have to decline

Â 3% per year to satisfy

Â a two degree pathway and then we'll have a global GDP growth by 3.5%.

Â So, the decline rate for a carbon intensity

Â is one minus the CEO emissions decline rate,

Â .03 or .97 And that's going to be divided by one plus a GDP growth rate one.

Â Plus.035 turns out that's equal to 0.93719.

Â If we subtract that from one we can get

Â the percent decrease that has to occur every year that have to be 6.8%.

Â OK so we know how much the carbon intensity is going to change.

Â Now here's what we're going to do.

Â We're going to assume that our company,

Â this was the third bullet point has

Â profit growth of 6% per year so its a lot higher than global GDP growth rate.

Â We're also going to assume that at the starting time

Â the baseline emissions are 400 metric tons of CO2e.

Â Now here's the formula to get

Â the next year's emissions that will satisfy a two degree target.

Â We do this, we multiply the emissions this year by 1.06

Â times that carbon intensity reduction factor and that

Â gives us 397.37 metric tons of

Â CO2 that the company can emit to be on a two degree target.

Â Now, the company hardly reduced its emissions at

Â all and that's because it's growing so it gets a bigger share

Â of the entire emissions budget than companies that are either

Â not growing or growing at a lower than 3.5% rate.

Â And we know there are companies like that because if the average is

Â 3,5 and this company is growing at 6% in order

Â to get that average to work out there have to be

Â a budget companies going at just 1% or something like

Â that and they don't get very much a carbon budget at all.

Â OK now we can compute the rate of change from the 400 metric tons of emissions to 397.

Â And then that rate will apply to all years.

Â And we do that by a percentage change formula.

Â it's end value minus start value divided by

Â start value so the ending value would be 397.37

Â a year two say minus the start value

Â 400 year one you missions divided by the start value 400 and that gives us

Â a percentage reduction each year of 0.00657

Â or.657%, just under 1%.

Â Now that's the rate that emissions will decrease

Â every year as long as the company continues to grow its gross profit at

Â 6% and the global economy continues to grow at 3.5%.

Â So now we can get an emissions pathway,,

Â we multiply the first year's emissions,

Â 400 by one minus the 0.00657 that's the rate that emissions have to go down every year.

Â So. Year two will be 99.3% just a little smaller than year one.

Â Year three will be.

Â 99% a year too and so on.

Â And now we have our emissions pathway.

Â We can go out for as far as we want seven years eight years 10 years and that will be

Â the target emissions that we're going to look for.

Â And this should satisfy all of the criteria of science-based target setting

Â because it is on a two degree pathway.

Â It has a declining emissions pattern that reflects its growth.

Â So I think we're okay.

Â Let me summarize real quickly.

Â Value added methods allocate emissions based on

Â economic contribution but they don't differentiate between sectors

Â although they could and they also are not cost

Â efficient because there are compression methods not conversion methods.

Â The calculation we did is kind of based on

Â carbon intensity ratios and then use that number to compute emissions.

Â I gave you sort of a closed form way to compute emissions

Â when there's extra growth and the other thing that I think is interesting in

Â the Autodesk example is that the emissions reduction target was

Â 85% for industrialized countries and that leaves room for developing countries to grow.

Â Thanks. And now we go on to the last of the approaches,

Â very newest one called sector-based approaches. Thanks.

Â