Measuring the real carbon footprint across ICT & transport: a holistic approach

Policymakers, including in the European Union and the United Kingdom, are working to reach net zero by 2050.

To reduce CO2 emissions they are developing sustainability policies at company, sector and national levels. By way of illustration, at a sector and EU-wide level the EU has banned the sale of new internal combustion engine cars by 2035 . To support policy making there are agreed environmental reporting standards (the European Sustainability Reporting Standards - ESRS) applying to listed and large EU companies. 

These standards, based on a widely used international categorisation, breaks emissions down into three sorts: (i) direct emissions from a company’s own activities (Scope 1); (ii) emissions from the energy the business consumes (Scope 2); and (iii) emissions across the firm’s value chain, including the use and disposal of its products (Scope 3).  Scope 1 and 2 emissions are directly traceable to a company’s activities and lifecycle, whereas Scope 3 covers a more complex chain of emissions.  

These standards provide valuable information on the emissions generated by each company/sector. However, where sectors (in this article, we refer to sector, but this could equally apply to a company) have substantial impacts on emissions in other sectors, referred to as "spillover effects" or "additional effects," capturing these additional effects is essential to fully understand the overall impact of a change in policy or regulation. 

For instance, increased usage of Information and Communication Technology (ICT) may increase energy consumption, which could lead to higher emissions in the ICT and energy sectors (Figure 1) captured by sectoral reporting. However, because ICT is an enabling technology for other changes, this may be offset by reductions in emissions in other sectors, for example increased uptake can cut transport emissions because videoconferencing reduces the need for commuting or business travel. 

Source: Frontier Economics

Policymakers must take additional effects into account to achieve decarbonisation that is as efficient as possible

Policies that focus on reducing emissions separately in each sector will, if successful, reduce overall emissions. But the outcome would not be as efficient as it could be because each sector would be reducing its emissions in isolation. By contrast, incorporating spillover effects could eliminate emissions faster and/or more cheaply because policy interventions would target the overall net carbon footprint.

Take policy on emissions from public buses. A narrow focus on emissions generate by buses (Scopes 1 to 3) could lead policymakers to implement policies to reduce the number of buses. But if additional effects are taken into account, the optimal policy could be to put more buses on the road in order to bring about a drop in private transport emissions (Figure 2).

Source: Frontier Economics

The estimation of additional effects is therefore critical for policymakers who want to reduce the economy's emissions as efficiently as possible.  A holistic approach that incorporates effects outside the sector, thereby measuring the net carbon footprint change due to policies, would lead to more effective policy design because the overall impact of some sectors is more important than their Scope 1 to 3 emissions. In the same vein, policymakers could direct their efforts to sectors which potentially have substantial positive additional effects on other sectors. 

A framework for estimating effects holistically 

When determining the impact of a policy in a sector with additional impacts (such as expanding the use of videoconferencing, or increasing the availability of a public transport network), we need to understand the impact under two scenarios: one in which a policy, for instance, expansion of videoconference use, is implemented (“factual scenario”) and a second where it is not (“counterfactual scenario”).

The International Telecommunication Union (ITU) has recommended a method for the telecoms sector based on such an approach.  All potential additional effects and relevant control factors are built into the two scenarios and compared to arrive at the real net CO2 impact. Some studies  already use this methodology, and the European Commission has proposed adopting it as the standard way of measuring these effects in the telecoms sector . 

Implementation of this framework is challenging 

The ITU Recommendation sets out detailed guidance on how to define additional effects and how to evaluate them in each scenario, but its implementation approach is too vague.  For example, the methodology is clear on what additional effects should be considered, depending on the objective of the analysis, and what the conceptual approach should be to comparing the two scenarios. However, once the effects are defined, the Recommendation does not provide detailed guidance on estimation of these effect.

Estimation can be challenging for several reasons. First, even estimating the direct effects of policy can be challenging, for example understanding the likely counterfactual, absent the policy intervention, and then determining the impact of the policy intervention including unintended consequences. This is then compounded when trying to understand the additional spillover effects in other sectors, where the interactions between sectors may not be well understood. In addition, because net zero is a long term policy goal, any estimation needs to take a long term view in a period where the economy and society are changing fast, not least due to the impact of net zero policies themselves. 

Economists are well placed to help implement a holistic approach 

Additional effects are important for policymakers, companies and investors in assessing sustainability policies, but estimating them is difficult. The ITU methodology is a good starting point, but the framework has some limitations and is not easy to apply.

This is where economists come into their own. They are well equipped to conduct this type of analysis, as they are familiar with similar factual and counterfactual approaches in other contexts. This puts them in a position where they can support companies, regulators or governments that need to estimate the overall effects of CO2 emissions as they craft the best policies to make the transition to net zero.