Supply Chain Decarbonization

Meeting the climate target set out in the Paris Agreement, limiting global warming to 1.5 degrees above pre-industrial levels, will require significant changes in both supply chains and consumer demand over the next few years. To achieve this goal, several key transformations are likely to take place.

Decarbonization

Supply chains will need to undergo a transition towards decarbonization and sustainability. This involves reducing greenhouse gas emissions throughout the entire supply chain, from production to transportation and distribution. Companies will adopt cleaner energy sources, invest in energy-efficient technologies, and implement sustainable practices, such as circular economy principles and waste reduction strategies. Supply chains will also prioritize the use of low-carbon materials and sustainable sourcing methods, considering the environmental impact of raw materials and production processes.

There are many new technologies that are being adopted by supply chains to decarbonize and reduce their emissions. Here are some examples:

Blockchain is a technology that enables secure and transparent data exchange across supply chains. It can help to track and verify the carbon footprint of products and services, as well as to facilitate carbon trading and offsetting schemes.
Artificial intelligence is a technology that can help to optimize supply chain operations and logistics, such as demand forecasting, route planning, inventory management, and energy efficiency. It can also help to identify and mitigate risks and opportunities for decarbonization.
Renewable energy is a technology that can help to power supply chain activities with clean and low-carbon sources, such as solar, wind, hydro, and biofuels. It can also help to reduce dependence on fossil fuels and improve energy security.
Circular economy is a concept that aims to minimize waste and maximize resource efficiency by designing products and services that can be reused, repaired, recycled, or regenerated. It can help to reduce emissions from raw material extraction, production, consumption, and disposal.

Consumer Power

Consumer demand will play a crucial role in driving the necessary changes. Consumers will increasingly prioritize sustainable and eco-friendly products, prompting companies to shift their offerings towards more environmentally friendly options. This will require greater transparency and labelling, enabling consumers to make informed choices about the carbon footprint and sustainability of products. Additionally, there will be a growing demand for renewable energy solutions and energy-efficient appliances, encouraging the development and adoption of cleaner technologies.

As proof of the ability of consumers to influence the decisions of large corporates as regards their supply chains here are some examples:

The fashion industry has faced growing pressure from consumers to reduce its environmental impact and improve its social responsibility. Many brands have responded by setting ambitious targets to reduce their emissions, use more sustainable materials, and support circular economy practices.
The food industry has seen a shift in consumer preferences toward more plant-based, organic, and locally sourced products, which have lower carbon footprints than animal-based, conventional, and imported products. Some companies have also committed to eliminating deforestation and land conversion from their supply chains.
The transportation industry has witnessed a surge in demand for electric vehicles, bikes, and public transit options, as consumers seek to reduce their personal emissions and air pollution. Some companies have also invested in zero-emission freight transport solutions, such as hydrogen trucks and electric delivery vans.

Government Regulations

To support these changes, governments and policymakers are expected to implement regulations and incentives that promote sustainable practices and reduce carbon emissions. This could include carbon pricing mechanisms, stricter emission standards, and subsidies for clean technologies. Such measures will shape the competitive landscape and provide guidance for companies in aligning their supply chains with the climate targets of the Paris Agreement.

Here are some examples of successful government regulations designed to decarbonize supply chains:

The UK government has introduced a new law through the Environment Bill to prevent illegal deforestation in the supply chains of UK businesses1.
The European Union has adopted a Green Public Procurement policy that encourages public authorities to procure goods and services that have a reduced environmental impact throughout their life cycle2.
The California Air Resources Board has established the Low Carbon Fuel Standard program that requires transportation fuel providers to reduce the carbon intensity of their fuels by 20 percent by 20303.
The Chinese government has launched the Green Supply Chain Initiative that aims to improve the environmental performance of industrial enterprises and their suppliers through information disclosure, capacity building, and financial incentives4.
The New Zealand government has introduced a Climate Change Response (Zero Carbon) Amendment Act that sets a target of net zero emissions of all greenhouse gases (except biogenic methane) by 2050 and requires public organizations to measure and report their emissions and to set reduction plans5.

Supply Chain Finance

Supply chain finance (SCF) is a set of financial solutions that aim to optimize the cash flow and working capital of buyers and suppliers in a supply chain. SCF can also be a powerful tool to support the decarbonization of supply chains, by providing incentives and resources for suppliers to adopt low-carbon practices and technologies.

One way that SCF can contribute to decarbonization is by linking the financing terms to the environmental performance of suppliers. For example, buyers can offer lower interest rates, longer payment terms, or higher advance rates to suppliers that meet certain sustainability criteria, such as reducing their emissions, using renewable energy, or sourcing from certified suppliers. This can encourage suppliers to invest in green solutions and reward them for their efforts.

Another way that SCF can contribute to decarbonization is by facilitating the access to green finance for suppliers, especially small and medium-sized enterprises (SMEs) that may face barriers to obtain conventional loans or grants. For example, SCF platforms can connect suppliers with green lenders, investors, or donors that offer preferential financing for low-carbon projects or products. Alternatively, SCF platforms can leverage the creditworthiness of buyers to secure financing for suppliers at lower costs and risks.

A third way that SCF can contribute to decarbonization is by enhancing the transparency and traceability of supply chains, which can enable better measurement and reporting of environmental impacts and risks. For example, SCF platforms can use digital technologies, such as blockchain, smart contracts, or internet of things, to track and verify the carbon footprint of products and services along the supply chain. This can help buyers and suppliers to identify and address hotspots of emissions, as well as to communicate their achievements to stakeholders.

A Note of Caution

The movement of 90% of all global trade depends on the shipping industry. It is vital for logistic supply chains and has two million seafarers working in it, but it also has to deal with serious environmental and social issues. Every year, the shipping industry emits about 3% of the global GHG emissions and around 15% of some of the main air pollutants. To prevent irreversible harm from climate change and meet the Paris Agreement’s target of keeping global warming below 1.5°C, the shipping industry needs to cut its emissions to zero by 2050.

It is possible, but not easy, to run large container shipping on renewable and clean energy. The main challenge is to find a suitable alternative fuel that can provide enough power and range for these ships, which typically travel long distances and carry heavy loads. Some of the options that are being explored include:

Methanol is a liquid fuel that can be produced from renewable sources or sustainable biomass. It can be used in dual-fuel engines that can also run on conventional fuels. Methanol has a lower energy density than fossil fuels, so it requires more storage space and frequent refuelling.
Ammonia is a gas that can be produced from renewable electricity and water. It can be used in internal combustion engines or fuel cells. Ammonia has no carbon emissions, but it is toxic and corrosive, so it requires special handling and safety measures.
Hydrogen is a gas that can be produced from renewable electricity and water. It can be used in fuel cells or combustion engines. Hydrogen has no carbon emissions, but it is highly flammable and has a very low energy density, so it requires large tanks or high-pressure storage.

These are some of the renewable and clean energy options that are being tested or developed for large container shipping. However, they are still not widely available or commercially viable, and they face technical, economic, and regulatory barriers. Therefore, more research, innovation, and collaboration are needed to make them a reality.

Perhaps Less is More

The least popular solution to the urgent problem of decarbonizing supply chains and meeting Paris Agreement climate targets is to encourage less consumption of non-essential items and to restrict the global reach of many supply chains. Here are some examples of how this policy might be implemented:

Each country should focus on growing more of its own food rather than importing food. Getting certain fruits and vegetables all year round is lovely but the climate costs are high. Investment in agriculture and education is key to making the move to more localised and sustainable food policies.
If large container ships cannot be run on renewable energy, then their use should be severely restricted to the transport of essential goods such as food, medicine and essential technology.
Trading with neighbouring countries using environmentally friendly transport must be prioritized in supply chains.
Governments must regulate large corporates that use insidious versions of planned obsolescence to artificially stimulate sales. We don’t need to update our smart phone every year; and the planet doesn’t want the carbon pollution attendant on getting these unnecessary pieces of tech to the far reaches of the world.
The fashion industry produces about 10 percent of annual global carbon emissions, which is more than all maritime shipping and international flights combined. What’s more, fashion’s emissions of harmful greenhouse gases are projected to grow by more than 50 percent by 2030. Textile production and garment production can be localised to counteract this carbon pollution. Recycling and upcycling clothes are obvious solutions. It is possible to look fashionable without ruining the health of future generations.

In Summary

Meeting the climate target of limiting global warming to 1.5 degrees above pre-industrial levels will require significant transformations in both supply chains and consumer demand. Supply chains will need to decarbonize, adopt sustainable practices, and prioritize low-carbon materials and energy sources. Consumer demand will increasingly drive the shift towards sustainable products and services, influencing companies to offer more environmentally friendly options. Government regulations and incentives will also play a crucial role in supporting these changes. Supply chain finance will nudge companies into doing the right thing. By collectively embracing these shifts, supply chains, governments, finance organisations and consumer demand can contribute to achieving the climate goals outlined in the Paris Agreement. And if this is not enough to reach climate targets then a re-think of ‘consumer demand’ on a deep cultural level will be required.