27 August 2018
At BHP, we recognise that climate change is a global challenge – a challenge that requires a collaborative approach from both business and government. That said, expectations of the role that industry should play in contributing to international climate commitments and delivering the transition to a lower carbon economy are increasing.
For businesses like BHP, greenhouse gas (GHG) emissions are generally described in three forms. There are the GHG emissions that are generated directly from running operations, which are labelled ‘scope 1’ emissions. Then there are the emissions from the generation of electricity purchased, for example, to power mines and offices, which are called ‘scope 2’ emissions. The last set of emissions, ‘scope 3’ emissions, are those generated indirectly beyond a company’s operations in its value chain, including upstream by suppliers, and downstream by customers when they use a company’s products.
Last year, BHP set the long-term goal of achieving net-zero scope 1 and 2 emissions in the second half of this century, consistent with the Paris Agreement. However, while reducing our scope 1 and 2 emissions is vital, emissions from our value chain (scope 3) are many times greater than those from our own operations.
The most significant contribution to scope 3 emissions in our value chain comes from our customers’ processing and using the products we sell them. Understandably then, there is growing interest from our investors and other stakeholders in both how these emissions should be addressed, but also in the broader value to society of the commodities we produce and how our business will be impacted by the low carbon transition.
Take steelmaking, for example, which uses our iron ore and metallurgical coal. It is a process that makes up over half of scope 3 emissions associated with our business. Although they are emissions-intensive to produce, steel products (not to mention products manufactured using steel equipment) are used as the building blocks of many important elements of our modern day lives - from our transport to housing, agriculture, manufacturing, energy production, and water supply systems. Steel is also critical to the sectors and technologies on which a lower carbon economy will be based, such as energy and resource efficient buildings, renewable energy infrastructure, and low emissions transport.
Every part of a wind turbine depends on iron and steel. Onshore wind turbines require an average of 180 tonnes of steel per MW, while offshore wind turbines require an average of 450 tonnes of steel per MW.
The complex job of calculating and tracking scope 3 emissions
Scope 3 emissions provide a range of challenges for BHP from the way they are calculated and tracked through to how we contribute to addressing them. These are challenges that we are facing head-on.
Collecting primary emissions data for activities beyond our own operations – especially from our customers – can be difficult, so we sometimes need to use secondary ‘industry-average’ data, for example when we are estimating emissions from the processing or use of our products. This industry-average data may not reflect the true emissions intensity of the actual activities taking place in our value chain, such as the particular processes or technologies that our customers are using at their operations. Relying on secondary data also means we can’t track the impact on the ground of any initiatives or projects to reduce emissions.
For BHP, as for other resources companies, estimating the overall scope 3 footprint of our value chain is made more challenging because we produce both iron ore and metallurgical coal. These are used further downstream in the same industrial process – steelmaking. The scope 3 accounting approach we use at present means that some of the emissions reported for these commodities are ‘double counted’, which inflates our overall emissions figure. In other words, we are over-reporting scope 3 emissions.
We are working to improve our scope 3 accounting approach to address these limitations. For our FY2018 data (soon to be published as part of our 2018 Annual Reporting suite), our focus will be on improving the transparency of our scope 3 reporting by further disaggregating our emissions data for major emissions sources. We will also provide more detail on the scope 3 calculation methodologies we use. Our scope 3 reporting approach will continue to evolve as we work to improve the quality of our emissions data.
A focus on enhanced data assessment
Developing a clearer scope 3 picture will allow us to track our overall emissions performance over time (a prerequisite for setting any future targets) and help us get a better handle on how we can collaborate to address these emissions.
We have a diverse portfolio that includes both energy commodities (our various coal, natural gas and petroleum products) and non-energy commodities (such as iron ore and copper). Coming up with a set of metrics to measure the overall ‘climate performance’ of our business is therefore more complicated than it would be for an oil and gas producer or a coal mining company.
For example, while fossil fuels are ‘single use’ products, the emissions intensity of the initial steel or copper production process must be weighed against the value provided by the final product over the course of its long (potentially endless) lifecycle – including multiple secondary uses following recycling. This will become increasingly significant as we move towards a more circular economy.
Potential emissions reduction strategies also need to be customised to the commodity. For example, reducing the scope 3 emissions from energy commodities could be achieved by diversifying towards lower carbon energy sources (including shifting from oil to gas), whereas reducing the emissions intensity related to the processing of non-energy commodities, like iron ore, relies on the decarbonisation of the industrial process (such as steelmaking), employed by our customers.
Our climate strategy also needs to consider the bigger picture. How should we measure the value of our products in enabling the low carbon transition? And how do we account for the emissions avoided by society through the use of our products over their full lifecycle? Our copper products, for example, are ideally placed to support the electrification of the energy system – particularly of transport – with a battery-powered electric car requiring three times as much copper as a conventional car.
What we are doing to address scope 3 emissions
By definition, scope 3 emissions occur from sources that are not owned or controlled by BHP, but by our customers, suppliers and others in our value chain. We believe we have a shared role in addressing these emissions.
We recognise that, even though we cannot typically directly influence scope 3 emissions, we have a stewardship role in working with others in our value chain to achieve emissions reductions across the full lifecycle of our products. We already work directly with our customers to help them improve the productivity and environmental performance of their processes based on the quality characteristics of our products, and we can build on these relationships to identify more strategic opportunities to partner in implementing projects with the potential to achieve more material emissions reductions.
Emissions from industrial processes are dependent on the quality of the raw materials they use. For example, different grades of iron ore and metallurgical coal produce different levels of GHG emissions in the steel-making process. Higher grade iron ore and metallurgical coal leads to lower GHG emissions. Most seaborne iron ore ranges from 58% to 63% iron content. BHP’s average iron ore grade is 61%, moving to 62% with the recently approved South Flank project, and is therefore comparatively high grade. Similarly, around three-fifths of BHP’s metallurgical coal is linked to premium low volatile (PLV) indices reflecting its relatively high grade characteristics.
In addition, we already work in partnership with others to accelerate the development of low emissions technologies with the potential to deliver step-change emissions reductions over a longer time horizon. Carbon Capture and Storage (CCS) has the potential to play a pivotal role in reducing emissions from industrial processes (such as steelmaking) that are recognised as being technologically difficult to decarbonise, and our CCS investments focus on reducing the cost and accelerating the deployment of this critical technology. For example, we are supporting work at Peking University that aims to address the key policy, technical and economic barriers to CCS deployment in China’s steel industry.
Decarbonisation scenarios consistent with the Paris Agreement typically assume widespread deployment of large-scale CCS by 2050, far in excess of the relatively few facilities operating or in development today. Low-carbon alternatives such as renewables are available to substitute for fossil fuels in the energy sector, but for industrial sectors like cement manufacture and the production of new steel, carbon-based feedstocks are an inherent part of the production process – not simply a source of energy. There are no readily available options to decarbonise these industrial processes based on existing technologies. CCS currently represents the most realistic solution for decarbonising these major emissions-intensive industrial sectors at the rate and scale required, which is why we see it as a key component of the broad array of measures needed to achieve a well below 2-degree outcome in line with international commitments.
As we continue to develop a better understanding of the scope 3 emissions associated with our business, we will be able to more readily identify and prioritise opportunities to help influence emissions reductions across our value chain, focus our efforts where they are likely to have the greatest impact, and scale up our current activities. This in turn will provide us with a better understanding of what an appropriate long-term strategy and level of ambition in relation to scope 3 emissions might look like.
Understanding and addressing emissions in our value chain remains a priority for BHP. Despite the challenges inherent in measuring and addressing GHG emissions beyond the boundaries of our operations, we will look to work with our customers, investors, and resource sector peers to develop an appropriate response to meeting these challenges, and capitalise on the long term opportunities for our business in doing so.
1 World Steel Association, Sustainable Steel, 2012, page 11. (https://www.worldsteel.org/en/dam/jcr:5b246502-df29-4d8b-92bb-afb2dc27ed4f/Sustainable-steel-at-the-core-of-a-green-economy.pdf)