Demand for cooling systems is soaring in Asia, but the biggest manufacturers of energy-guzzling air conditioners are failing to respond to climate concerns.
Global energy demand from cooling technologies is expected to triple by 2050, but the companies that make air conditioners are not innovating to rein in the sector’s monster carbon footprint, nor are they promoting their most energy-efficient products.
The cooling sector represents a significant revenue opportunity for companies, with increasing demand expected for cooling products in the coming decade as a result of rising temperatures, population and economic growth, and rapid urbanization. The increase in cooling products will vary in different regions, depending on how these demand drivers develop.
China, India, the US, and Japan are principal markets for residential cooling appliances for this universe of companies. China accounted for the largest share with an estimated two-thirds of air conditioning unit sales by volume. China is still growing but at a slower pace, particularly for air conditioning, and companies more exposed to rapid growth markets, such as India, are better positioned.
The rising demand for space cooling drives growing electricity demand with carbon emissions from space cooling tripling since 1990, according to the IEA. Based on the IEA baseline scenario to 2050, space cooling becomes the strongest driver of growth from buildings electricity and is expected to place a significant burden on peak electricity demand in a number of countries. This comes at a time when electrification is expected to provide solutions to decarbonize other sectors, shifting away from fossil fuels such as transport.
Space cooling has an integral role to play in terms of health and community issues. The cooling sector is at the center of climate change, health, and consumer behavior and preferences. As health issues are amplified by the current coronavirus pandemic, the link of heat stress and human well-being, as well as the role of cooling for vaccine availability, could come more to the fore. Space cooling will be needed most where temperature rise is disproportionately high, such as in India.
Given the growing societal demand for cooling technologies, companies delivering these cooling products and services will need to innovate to deliver significant emission reductions through step-change solutions to technology, or introducing system solutions, incorporating renewables, such as solar panels, to reduce grid-emission factors.
As with most product sectors, the key emissions are from Scope 3 use of sold products–in this case 20 percent directly from refrigerants with high global-warming potential, such as HFCs, with 80 percent indirectly from the energy used by products.
To address these emissions, the sector has attracted regulation to phase down fluorocarbon refrigerants (the Kigali Amendment) and Minimum Efficiency Performance Standards (MEPS) to improve product efficiency and labelling.
Two key metrics used in this report to evaluate companies–product efficiency and innovation–reveal the sector is behind the curve. There is a significant gap between deployment of best available technologies (BAT) and MEPS and a lack of innovation. This is reinforced by financial ratios such as R&D spend and CapEx-to-sales ratio, which show the sector lags other capital goods sectors. There are three key areas, which are aligned with the recommendations from the TCFD–transition risks, transition opportunities, and climate governance, and strategy rank.
- Trane Technologies, LG Electronics, and Mitsubishi Electric lead the companies.
- Product regulation is recognized as a key substantive risk for this sector and, therefore, measuring and managing the carbon emissions of product portfolios is critical.
- Ninety-five percent of emissions in the lifecycle are mostly in Scope 3 use of sold products, which is exposed to product regulations including minimum energy-performance standards (MEPS), energy-rating labels, and refrigerant requirements.
- Only seven companies have over 50 percent of sales in better-regulated markets, with financial incentives for energy-efficient products, including the US, the EU, and Japan.
- Despite citing product regulation as a key risk, CapEx-to-sales ratio is relatively low, averaging 1–2 percent, with higher spending by diversified companies in other business areas.
- Cooling-specific R&D as a percentage of net sales only averaged 2.2 percent, which falls well below the capital goods average of 3.5 percent.
- Product-efficiency analysis reveals a significant gap of 58 percent on average between MEPS and BAT for the popular category of split ACs.
- Across the full suite of split AC products, the gap is on average 17 percent.
- Gap between MEPS and BAT is prominent in countries like India, despite MEPS updates as recently as 2020.
- Scope 3 emissions disclosure is strong relative to other sub-sectors within capital goods. Sixty-one percent of companies disclose use of sold products.
- Despite Scope 3 accounting for a significant proportion of the sector’s emissions, just six companies have Scope 3 emissions reduction targets on use of sold products.
- Four companies have set targets to reduce emissions throughout the value chain by 2050: Hitachi and Mitsubishi Electric are targeting an 80-percent reduction, while Daikin Industries and Electrolux aim to achieve net-zero emissions.
- There is a lack of innovation in residential cooling technologies, with little evidence of alternative technologies to vapor-compression systems.
- Despite innovation being key to managing the growing emissions for the sector, most companies’ sustainable innovations only deliver incremental efficiency gains.
- This is reflected by the fact 60 percent of patents filed were focused on compressor design, which is incremental in nature.
- Only 5 percent of innovations are evaluated as being transformative, as this requires integrating scalable demand management solutions, such as smart grid and renewable sources.
- Thirty-five percent of innovations are evolutionary, including ultra-low GWP refrigerants, in line with the Kigali Amendment ambitions.
- Only five companies have comprehensive product take-back or end-of-life refrigerant-management programs.
- Twelve companies have some form of climate-related objectives in incentive schemes for senior executives, but these are mainly short-term, with long-term incentives needed for commitment to advance low-carbon performance.
- Overall, disclosure quality is high, with almost 60 percent of disclosing companies achieving a CDP score of an A- or higher. This compares with 45 percent for capital goods and 53 percent for consumer goods sectors.
- Companies in the sector are relatively well positioned for financial resilience. Forty-four percent of companies have free cash flow/sales ratios over 5 percent and 44 percent of companies have net debt/EBITDA ratio below 1.
Pathway to zero for the cooling sector
The next round of international climate negotiations is planned for COP26 in 2021, and needs to accelerate collective efforts on the pathway to a healthy, resilient, and zero-emissions future. In addition to national commitments, crucial contributions are also needed from real economy actors. Cooling is one of the key sectors where deep transformation is most needed.
The findings highlight the availability of climate-friendly air conditioners, but there is a significant gap between what is technically possible and current minimum energy-efficiency standards.
However, with a radical step-change in efficiency standards, innovation, and R&D, the cooling sector can make a valuable contribution to reducing emissions.
The cooling market is valued at around USD 300 billion. There is a huge opportunity for cooling businesses to innovate, compete, and find economies of scale–serving the cooling needs of people all over the world. And in response to the economy-wide call to action for zero-emissions commitments for COP26, cooling companies have an opportunity to build on their incremental climate performance to date, and to position the sector at the forefront of climate action. The world looks forward to climate-friendly cooling for all who need it, and to the multiple benefits for health, recreation, and productivity that the cooling sector provides.
Based on Playing it cool, a CDP-Disclosure Insight Action report.