A cost on carbon is looming in the U.S. as urgency to address climate change intensifies. What are the implications of this for our energy-hungry Cloud industry?
California implemented a cap and trade program in 2012 introducing a market-based price tag on carbon pollution(1), currently at $13 per ton. A bill in the U.S. Senate, the Climate Protection Act, would establish a fee on manufacturers, producers and importers of carbon-emitting substances. And it's not just governments taking action to account for carbon pollution. Last year, 700 businesses signed a declaration, including Akamai, urging national action on climate change. A growing list of major companies, including nine major oil and gas companies - think Exxon, BP, Shell - are applying an internal cost of carbon ranging from $6-$60 per ton, to account for this inevitable cost as part of their financial analysis of projects.
How would a fee on carbon affect Internet-intensive companies like Akamai? Carbon fees typically apply to "primary emitters", energy-intensive industries that burn fossil fuel, or emit other regulated greenhouse gases (GHG). That said, climate change regulations like the United Kingdom's Climate Reduction Commitment also require companies above a set threshold of energy usage to report direct and indirect (electricity-associated) carbon emissions. The graph below, from a May 2009 Goldman Sachs SUSTAIN report, highlights the industries with the most exposure from their carbon-intensiveness as a function of market capitalization.
Source: Goldman Sachs SUSTAIN report: Change is coming: A framework for climate change - a defining issue of the 21st century, May 2009, Exhibit 10, page 9.
Less carbon-intensive industries such as Akamai will be impacted indirectly through higher operational and supply chain costs as the cost of carbon to primary emitters becomes folded into the cost of goods and services. Servers, networking and data center infrastructure, and the electricity to power them will likely be more expensive. How much more will be a function of the fee on carbon, and the amount of carbon emissions embedded(2) in purchased infrastructure and associated with electricity consumed.
Last year, Akamai collaborated with Life Cycle Analytics to calculate the embedded carbon emissions of a representative network server. It was estimated to be 368 kg CO2e. If we assume that that value is accurate for all of our 140,000 network servers, that is 51,520 metric tons of CO2e. At $20 per ton that's over a million dollars in embedded carbon costs. The carbon cost of electricity to power that server is a function of the carbon intensity of that electricity. According to the EPA's most recent eGrid data, California's collective electricity generation averages 0.300 kg CO2e /kWh while Colorado's coal-based electricity generation averages 0.833 kg CO2e /kWh. If the analyzed server consumes 230 watts year-round it would be responsible annually for 0.6 tons CO2e in California and 1.7 tons CO2e in Colorado, and cost about $12 and $34 per year, respectively, $2.8 to $7.9 million across our server network including data center-related CO2e(3). That's not chump change.
No matter your industry, getting smart now about the carbon footprint of your supply chain, operations, and product line is an important step towards understanding your financial exposure to a cost of carbon. Incorporating an internal cost of carbon into your project financial analyses is also a good idea. Akamai has always seen the wisdom in maximizing the performance per watt of our server infrastructure. Because, as we have seen, when you multiply even a small number by a very large number the result is motivating. Since 2009 we've had a target to reduce our network energy and carbon intensity by 30% per year. To date, we've achieved net 83% and 76% reductions, respectively, as shown in the graph below. In addition, through server hardware and software productivity initiatives, we've decreased the number of servers needed to support network traffic by nearly 70%. Both efforts continue to contribute to reducing Akamai's cost of carbon exposure, improving the sustainability of our network and business.
In estimating the financial impact of a cost of carbon we should not lose sight of the fact that this cost reflects what has long been an externalized cost, that of emitting carbon pollution into our atmosphere that drives climate change, the ultimate cost of carbon. Our environment has borne the brunt of the consequences to date. But we now know the true cost of carbon can no longer be ignored if we are to stave off the worst ill-effects of climate change.
Nicole Peill-Meill is director of environmental sustainability at Akamai.
1. Technically, carbon dioxide equivalent (CO2e) relative to each gas's global warming potential for six regulated greenhouse gases: carbon dioxide, methane, sulfur hexafluoride (SF6), nitrous oxide (N2O), hydro-fluorocarbons (HFC's), and perfluorocarbons (PFC's).
2. "Embedded carbon" is defined as the aggregate greenhouse gases emitted during the production phase of a product from raw material extraction to product delivery.
3. This calculation assumes Akamai's third-party data centers network-wide average a Power Usage Effectiveness of 1.7 (70% of IT electricity consumption).