In an earlier blog post we discussed “Trends in Carbon Pricing and Costs,” and explored the increased engagement of both public- and private-sector organizations to consider pricing of carbon emissions in the lead-up to the 21st Conference of Parties to the Kyoto Protocol (COP21).
It also appeared that companies were outpacing national, regional, or city governments in carbon pricing mechanisms. 150 major companies, including utilities, and oil and gas companies, were pre-empting regulations by using in-house shadow carbon prices (from USD6 to USD80) in their strategic investment decisions.
If you are in procurement, the next question you might ask is: “How do these prices affect a company’s supply chain?” (This is also called “Scope 3 emissions” – see sidebar for definition.)
Scope-3 GHG Emissions could represent the bulk of emissions for a majority of companies. Here are the top 3 impacts that procurement teams may see related to pricing supply chain carbon emissions:
1) Communications and reporting:
As public awareness grows about supply chain impacts, CSR and KPI reporting must adapt to be more inclusive and accurate about those impacts.
Not understanding Scope 3 emissions has led some companies to miscommunicate a company’s actual emissions impact, and with negative consequences. For example, in a 2008 Wall Street Journal article, Dell Inc was slammed for miscommunicating the impact of its carbon neutrality program for which it did not include Scope 3 emissions (up to 10 times Dell’s Scope 1 & 2 combined). While Scope 3 emissions include various sources of indirect GHGs, this blogpost zooms onto supply chain emissions, or embedded carbon.
2) Cost savings
At the very least, understanding the level of carbon embedded in a company’s supply chain can expose opportunities for material cost savings; the higher percentage of supplier materials in the product/service, or the lower the product profit margin, the bigger the opportunity. And opportunities extend beyond tier 1 suppliers (tier 2, 3…). This CDP Supply Chain 2015 report explains that companies who engage with suppliers are twice as likely to see a financial return from emissions reductions.
As carbon pricing gains traction both across major governments and economic entities, and the price of carbon increases, material costs can be expected to rise due to the suppliers’ higher cost of energy (from the price-in of carbon) during manufacturing. These increases can be expected to match the value of the newly priced carbon externality. In fact at first, the costs may be greater since a majority of companies are unprepared for carbon pricing, and will have to spend to gather reliable data and create management systems for carbon when pricing regulations kick in.
3) Regulatory readiness
An additional overlay to this carbon pricing trend is the theme of a Global Carbon budget, coined in the Intergovernmental Panel on Climate Change report IPCC AR5. If the world’s governments agree to a legally binding warming target of 2 degrees Celsius, humans would have about 30 years of fossil fuel consumption left. For some, a legally binding warming target may be politically unpalatable, but existing trends in carbon pricing (from regulations, regional pricing mechanisms, corporate in-house shadow prices, etc.) are already moving towards supporting that carbon budget, though these efforts will fall short of the consequences from a legally binding target.
Simply stated, trends in carbon pricing suggest higher material cost for unprepared companies. Investing now and over time to understand corporate supply chain emissions can achieve supply chain savings, security, and foster innovation for prepared companies.
Here are a few more questions for CPOs and their procurement teams to ponder:
- What is the percentage of the value/material content of my company’s products/services that come from its supply chain?
- How much do I know about the carbon embedded in my company’s supply chain (tier 1, 2 and beyond)?
- In the context of global supply chains, to what extent is my company prepared for stricter carbon pricing regimes across major economic cities/countries?
EcoVadis’ ratings system facilitates the conversation between companies and their supply chain, allowing companies to understand and manage their supply chain emissions, and prepare for carbon pricing trends, so as to unlock materials cost savings, and with the aim to foster innovation between companies and suppliers.
Authors: Sheng Ou Yong and Mike Schwartz
First published in the Sustainable Supply Views blog from EcoVadis
EcoVadis is the CSR rating platform for supply chains spanning 150 sectors and 110 countries of Global-500 enterprises like Verizon, Coca Cola Enterprises, Johnson & Johnson and 120 others. EcoVadis Scorecards make it easy to understand, track and improve suppliers’ environmental, social and ethical performance. www.ecovadis.com