Supply Chain Decarbonization
The next corporate action for a net-zero world
Supply chains account for the vast majority of the emissions in customer-facing sectors. Decarbonizing them must therefore be the primary strategy in corporations’ efforts to fulfill their climate change commitments. Reducing supply-chain emissions offers companies an opportunity to multiply their climate impact several times over and to use their supply chains to scale decarbonization throughout the global economy.
The Greenhouse Gas Protocol Corporate Accounting and Reporting Standard categorizes emissions in three scopes:
Scope 1: Emissions from operations under a facility’s control, including onsite fuel combustion.
Scope 2: Emissions from usage of electricity, steam, heat and cooling purchased from third parties.
Scope 3: Upstream and downstream value-chain emissions or supply chain emissions.
Of these three, Scope 3 is by far the most important for customer-facing companies: they can have ten times as much impact by decarbonizing supply chain emissions as they have by decarbonizing direct operations and power put together.
Jacaranda Capital focuses on supply-chain emissions that happen upstream in the course of creating products or services.
Addressing supply chain emissions offers companies the opportunity to multiply their climate impact several times over.
For consumer brand companies, only about 5% of their emissions footprint is generated during direct operations (scopes 1 and 2). Emissions generated by their suppliers are ten times higher.
A net-zero supply chain multiplies climate impact several times over, accelerates emissions reductions in hard-to-abate sectors, and scales climate action around the world.
A Chance to Lead
Larger multinationals’ supply chains are geographically dispersed. Decarbonizing these supply chains will have a significant impact around the world. These actions will trigger emission reductions in countries that would otherwise not take the initiative due to low regulatory pressure.
Western economies import significant volumes of emissions from around the world. Efforts to decarbonize supply chains by relatively few end-consumer companies in Europe and the US will have a significant impact in the emissions profile of growing economies.
Source: Boston Consulting Group
Supply Chain - Scope 3 upstream
Operations and consumer power - Scopes 1 and 2
Eight supply chains account for over 50% of global emissions
The supply chains for food, construction, fashion, fast-moving consumer goods, electronics, automotive, professional services, and freight account for more than half of CO2 emissions worldwide. Solutions to get us to net zero are already available across these eight major value chains.
Food alone accounts for roughly a quarter of all global greenhouse gas emissions, the most of any supply chain in the world. Raw material inputs from agriculture drive the majority of the emissions. Livestock grazing, for example, is responsible for significant emissions of methane and nitrous oxide, both powerful greenhouse gases.
Source: Boston Consulting Group
The low cost of decarbonizing supply chains
For each supply chain, decarbonization requires a different combination of abatement levers. The World Economic Forum distinguishes eight major categories. They are listed below in ascending order of average cost per ton of CO2 emitted.
Source: Boston Consulting Group
Costs are often cited as a major reason why companies don’t reduce emissions. This argument is flawed. About two-fifths of all emissions could be abated with affordable levers. Many of the abatement technologies described above are readily available and highly affordable. For fast-moving consumer goods, about 40% of all emissions could be eliminated with measures that either yield savings or come at abatement costs below €10 per ton CO2e.
Stopping deforestation, investing in reforestation, and adopting efficiently implemented regenerative farming practices could result in cost savings with short payback times.
Net-zero supply chains are achievable with increases in end-consumer costs of only 1-4%.
In addition, end-consumer prices would be only marginally impacted. This is because raw materials represent such a small share of the final product prices for these eight industries. In the food industry, even with aggressive upstream reduction goals, the impact on end-price is less than 4% for a zero supply chain emissions target.
On a €20 food basket, the increase in cost would be €1
The moderate cost of cleaning up supply chains is more than offset by consumers’ willingness to pay more for sustainable products.
Given these low costs, decarbonizing supply chains offers companies a significant advantage. Research shows that more than 50% of consumers are willing to pay more for sustainable products. Point-of-sale studies of different consumer goods products indicate that “sustainable products sell well even with premiums of around 40%” (World Economic Forum). In other words, consumers would be willing to pay many times what it would cost to achieve zero-emission supply chains. The World Economic Forum further reports that “demand for sustainably marketed products grew around seven times faster than the demand for their conventionally marketed counterparts over the past five years.”
Why is supply chain decarbonization not being done?
Decarbonizing supply chains presents some major challenges.
The supplier landscape is highly fragmented and it’s impossible to trace commodities to their sources.
The lack of transparency at the supplier level obscures the economics of decarbonization, giving the false impression that decarbonizing is expensive or will interfere with a company’s goals.
More importantly, farmers and producers are distributed around the world and far detached from the company. This presents several challenges:
a consumer-facing company may only deal with tier 1 suppliers (distributors) and have little insight into the rest of the supply chain;
these tier 1 suppliers may buy from different producers from one year to the next;
the producers may not be aware of the company’s sustainability standards or have no incentives to adhere to them,
many countries lack government support and regulations that promote environmental changes.
Even in the cases where farmers and producers are identified, triggering action can be very challenging. Farmers need to invest upfront and allow the land to rest. Yields lower in the short-term before production increases and land regenerates. Without reassurance from the market that customers will pay more for their produce, or that they will be paid for the carbon they sequester, this can be the gap that prevents action.
Supply chain decarbonization is not being done because it’s impossible to accomplish alone.