Last month, the Boston Consulting Group and the World Economic Forum released a report on supply-chain decarbonization. The report identifies opportunities for consumer-facing companies to reduce the carbon emissions across their supply chains and the significant challenges they are facing. While it points out that a lack of government policy support is one of the challenges, it does not recommend any specific climate policy. The report’s conclusions show why a carbon price is needed to create incentives for achieving supply-chain decarbonization. To effectively mitigate climate change, it’s not sufficient to just rely on the private sector’s taking the initiative to go green.
The report focuses on supply-chain emissions, defined as the upstream portion of scope 3 emissions. According to the greenhouse gas protocol, scope 3 emissions are generated from a company’s suppliers (upstream) and customers (downstream). The report refers to the scope 3 upstream emissions as “supply-chain emissions, covering procured products, transport of suppliers and business travel.”
The report finds that decarbonization is significantly less expensive for companies at the end of any value chain for at least two reasons. First, carbon-intensive materials only account for a small share of end consumer prices. Second, consumer-facing companies typically have higher net income per ton of emissions produced. In fact, across the eight value chains analyzed in the report, “full decarbonization would lead to an increase of no more than 4% in end consumer prices.” However, while 40 percent of the total emissions across the analyzed supply chains can be abated at a very low cost, it would require “very costly measures” to achieve full decarbonization.
The direct carbon emissions of the consumer-facing companies are typically much lower than those of their suppliers that produce raw materials or intermediate goods. For example, the report finds that upstream supply-chain emissions account for 90 percent of the fast-moving consumer goods industry’s total emissions. Suppose consumer-facing companies work with their suppliers to decarbonize the supply chains, according to the report, these companies will generate much higher climate impact than just focusing on their own direct carbon footprint.
Despite the opportunities, there has been limited progress in supply-chain decarbonization as there are significant barriers. One major challenge is carbon accounting. It may be relatively easy for a company to monitor its carbon footprint. Still, it is much more complicated for a company to get access to all its suppliers’ carbon emissions. This would be especially challenging for a multinational corporation with a vast number of suppliers across multiple regions.
Another challenge is the lack of a business case for supply-chain decarbonization. As explained in the report, if a company takes the initiative to fund an upstream raw material supplier for its costly decarbonization process, the company’s competitors will have access to the same supplier’s cleaner products without having to bear the decarbonization costs. The report also points out that a lack of government policy support is a major barrier to achieving supply-chain decarbonization as it may require collective action by an industry.
A carbon price would create incentives for companies to decarbonize both their direct emissions and their supply-chain emissions. A carbon tax, or a cap-and-trade emissions trading scheme, prices the externalities imposed on society mainly from fossil fuel combustion. With a meaningful and durable carbon pricing mechanism, companies that produce cleaner goods or services would have a competitive advantage over their carbon-intensive rivals. Consumer-facing companies would have incentives to make long-term investments in technologies and processes to decarbonize their supply-chain emissions, as it would help them bring down the carbon emissions and costs of the upstream goods that go into their production process as inputs.
Supply-chain decarbonization has good opportunities but also significant challenges. Companies cannot fully take advantage of the opportunities or overcome the challenges until there is a meaningful economy-wide carbon price.