In recent years, sustainability issues have become ever more relevant to socio-political and economic discussions.
The intention of the UN’s 17 Sustainable Development Goals (SDGs) is to create the conditions necessary for tackling the challenges of today’s society, with global climate action being one of the essential goals (SDG 13). International regulations like the Paris Agreement (2015) are being implemented at a national level through measures such as legal limits for CO2 emissions.
Given these developments, efficient and sustainable management of CO2 emissions at company level is becoming increasingly important. However, the complexity of the issue means that several different factors must be considered when seeking to reduce greenhouse gas emissions. In addition, the profitability of a company is clearly an important part of the discussion. Finding the right balance between sustainability and profitability is therefore key. Simulation models are an effective management tool for understanding all the different factors involved – also known as drivers – and for defining meaningful measures and evaluating their effects.
Fleet-Wide CO2 Emissions and Life Cycle Assessment
Fleet-wide CO2 emissions are a good example for illustrating this issue. At present, the transport sector accounts for roughly a quarter of global greenhouse gas emissions and thus represents a major variable for reducing overall CO2 emissions. With this in mind, the European Union has adopted a regulation that sets CO2 emissions targets for passenger cars and light commercial vehicles. The regulation focuses on the average CO2 emissions generated during the use phase of all new vehicles registered by a car manufacturer in a single year. Manufacturers incur significant penalties if their fleet-wide emissions exceed the legally defined limit value.
The increasing number of electric vehicles being manufactured suggests that CO2 emissions can be significantly reduced during the use phase, assuming that these vehicles are charged with renewable electricity. Electric vehicles therefore have a CO2 value of zero when fleet emissions are calculated. However, when viewed holistically, the vehicle use phase is only one component of the product life cycle. Vehicle life cycle assessments cause much debate but cover the entire product life cycle, which includes vehicle production and disposal in addition to the use phase and other steps. For example, the energy-intensive process of producing batteries for electric vehicles releases around three times as much CO2 as combustion vehicles. Politicians have already started discussing the implications of product life cycle emissions: Further changes to CO2 fleet limits have been mentioned in the German government’s coalition agreement and at a European level, although no specific regulations have been adopted to date (so far). However, minimum quotas for using secondary raw materials are in place as well as a target for only allowing CO2-neutral vehicles on the market by 2035, suggesting that regulations are already being extended to account for product life cycle considerations.
The complexity of these considerations presents a number of challenges for car manufacturers. Obviously the existing regulations must be observed to sustain the company’s profits and to prevent any damage to its reputation. Yet to achieve effective decarbonization, manufacturers also need to start thinking beyond life cycle assessments, not least because the corresponding legal requirements are likely to do this soon.
CO2 Simulation Model for Company Management
Modern simulation models are an effective tool for assessing and mitigating risk, allowing car manufacturers to successfully meet emissions-related challenges. An integrated scenario analysis can be used to investigate and evaluate various future scenarios and ultimately predict the results. The graphic below illustrates how a simulation model is relevant for managing CO2 emissions.
1. Identify the correct drivers
The first step is to identify the drivers that have an impact on CO2 control variables. It is best to involve as many specialist departments as possible to gather a wide range of views. A short-term major impact achieved by actions such as distributing combustion vehicles (ICE) with particularly high CO2 emissions in another market less close to exceeding CO2 limit values can be a potential driver when assessing CO2 fleet emissions. In addition to weight-related and price-related considerations, simulations can also cover external delivery issues such as supply chain bottlenecks.
2. Integrate financial metrics
Since measures to reduce CO2 emissions also have a financial impact, any simulation model must be supplemented with key financial figures. Simulating major impacts achieved through manufacturing a variety of models and presenting the effects on (financial) aggregates can optimize the contribution to operating income and protect the profitability of an OEM.
It is worth noting that scaling back on vehicles that have particularly high emissions but that achieve a good profit margin can have opposing implications: profits are reduced but penalties are avoided. A simulation model will show what makes most sense from a financial perspective.
3. Define alternative scenarios
When constructing simulation models, the starting point is the base case scenario, which can represent existing CO2 planning and a forecast. This scenario can then be supplemented with additional assumptions regarding the drivers identified, leading to alternative scenarios. Adding in optimistic assumptions that predict an ideal future situation results in the best-case scenario. By contrast, the worst-case scenario considers the undesirable effects that can occur in a given situation. The scenario considered most likely is covered by the probable-case scenario.
4. Implement a targeted management approach
Due to the wealth of potential measures with different effects on costs and revenue, CO2 accounting requires a targeted and proactive approach. Introducing a sophisticated simulation model provides an effective and efficient tool for making financial decisions, shifting the focus onto developing precise measures that form the basis of targeted recommendations for action. Consistently using the simulation model clarifies which of these recommendations will constitute an advantage over the competition.
Work with us to harness the potential of simulation models for your company. We can simulate the impact of identified drivers and define effective measures to help you manage and configure your CO2 footprint in a sustainable way. Together we can make a tangible impact – for your company, our society and the planet – in line with our promise of “Enabling You to Shape a Better Tomorrow!”