Carbon intensity: This overlooked metric is key to the green transition

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Hannah Hauman, Global Head, Carbon Trading, Trafigura Group, Bassam Fattouh, Director, Oxford Institute for Energy Studies; Professor, School of Oriental and African Studies, Tatsuya Terazawa, Chairman and Chief Executive Officer, The Institute of Energy Economics, Japan

• An often overlooked factor in emissions reporting is the fact that different processes mean the same materials emit vastly different amounts of carbon.
• This variation is a material’s carbon intensity — crude oil, for example, has a 150x range of carbon intensity.
• Accounting for carbon intensity is key to objectively valuing “low carbon” materials to reduce emissions in existing supply chains and deliver decarbonization.

Not all commodities are created equally. In fact, when it comes to emissions, there is far more variation in intensity based on production methods than is currently understood.

Take, for example, how despite comparable operators and similar product qualities, North Sea crude oil production has a 150x range of carbon intensity per barrel of oil. This high variation is also seen in the fuels and materials of the future. For instance, nickel ranges from 8mt of Carbon Dioxide emissions per ton produced, all the way up to 160mt per ton.

These differences are rarely reported and are frequently buried in absolute emissions at the corporate level.

As a result, buyers, financiers and regulators alike often default to a “standard” average factor based on product type, obscuring what is a vast gradient of “high” vs “low” carbon commodities and often underestimating total emissions impact.

This vast range is largely driven by energy source, efficiency measures and abatement technologies (or lack thereof), most of which can be addressed with investment but are not prioritized without the business case to support it. As a result, valuing low-carbon commodities has tremendous potential to unlock the “low-hanging fruit” of emission reductions in existing supply chains.

Valuing carbon intensity not only creates a new area of competition for producers within the same product, but can underpin value of low and zero-emission materials of the future.

Actuals over averages: Carbon intensity at work

We can already see initial signs of commodity markets incorporating carbon intensity values in trade to drive commercial decisions and behaviour change. For example, lifecycle emissions declarations are already impacting manufacturing industries such as automotives and plastics, whereby accuracy is paramount for reporting, but also for competitiveness in the end user market. As a result, some buyers are already beginning to price premiums into low carbon feedstocks.

There are also a growing number of regulatory frameworks driving transparency in reporting. The European CBAM (Carbon Border Adjustment Mechanism) will be the world’s first border tax based on the carbon intensity of import materials.

While pricing impact begins only in 2026, reporting began in late 2023, with companies already requiring supplier declarations as a standard of trade. CBAMs will continue to shape global markets as countries seek to maintain the competitiveness of domestic manufacturing whilst increasing the ambition of domestic carbon pricing schemes. The UK announced a CBAM to begin in 2027, and Australia and the US are now discussing their own implementation plans.

Regulatory frameworks involving Scope 3, or supply chain emissions, are also growing in prevalence. The first legislation begins in 2025 with the European Corporate Sustainability Reporting Directive (CSRD), requiring Scope 3 disclosure for large and listed companies, including banks for the commodities they trade finance. Scope 3 frameworks will continue to grow in count, with the most recent legislation proposed in California.

Enablers for carbon intensity markets

Reporting is only one piece of the puzzle — action is key. Encouragingly, commodity markets have tackled similar challenges before.Look no further than oil markets and the gradual desulphurization of refined products, whereby sulphur is now a key value component for crude oil.

Here’s what’s needed to make this happen for carbon intensity:

Standardization

Standardized accounting does not exist for many industries, including how to define asset boundaries, methodologies and processes involving multiple products. That said, in some markets, standardization is being driven by regulators (such as with CBAM) and voluntary declaration standards, such as the LNG methodology the International Group of Liquified Natural Gas Importers developed in 2022, with additional sectoral approaches (for instance, for steel and cement industries) already underway.

Sell-side declaration

Differentiated trade can be accelerated by widespread supply-side declarations, enabling objective benchmarking instead of generic descriptions such as “low carbon”. This can arise via voluntary declarations from producers, mandates in procurement processes or by regulation. For instance, during COP28, 50 companies representing over 40% of global oil production launched the Oil and Gas Decarbonization Charter, a key element of which is “increasing transparency, including enhancing measurement, monitoring, reporting and independent verification of greenhouse gas emissions”.

Buy-side incentives

Buy-side declarations can create baselines for competition, whether for capturing end-user premiums, attracting competitive finance pools or enabling tax rebate incentives. There are already examples of voluntary approaches in sustainable finance, procurement pledges, like the World Economic Forum’s First Movers Coalition, and low carbon consumer offerings at work, but acceleration will come from increased regulatory measures, such as CBAM and Scope 3 footprint disclosures as described above.

From emission reductions to future energy

Beyond existing supply chains, carbon intensity is also the natural language of what will be a highly diversified energy and technology mix of the future. Instead of policy or investments focusing on generic fuel or vehicle categories, opportunities can be judged on objective environmental impact. Enabling clear comparisons between disparate products, such as green hydrogen vs blue ammonia or e-methanol vs e-fuels, can clarify investment paths and widen the mitigation options, lowering transition costs.

This also extends beyond like-for-like energy comparisons to end-to-end supply chain assessments – for example, evaluating a vehicle conversion investment based on the integrated savings of the combination of the local grid mix or fuels alongside the materials used to build them.

Differentiated carbon intensity can leverage commodity markets to deliver investment into decarbonization and low carbon production at scale and speed, imbedding a new area of competition in traditional trade. However, this requires “actuals over averages” — enabling buyers, financiers and regulators to discover of low versus high carbon sources. Reporting and incentives, by voluntary consortia or regulation, can accelerate investments to deliver carbon reductions today — and underpin capital flows into the new energies and technology mix of tomorrow.