Carbon Footprinting in Supply Chains

Climate change is a key issue in sustainability, as it may lead to dangerous increases in temperature and sea level, flooding, droughts, etc. Scientists all over the world are providing information supporting the fact that the climate is changing and that this change is partly due to human activities through the release of greenhouse gases (GHGs). “Carbon” is often used as shorthand for GHGs, as carbon dioxide is the main GHG released by human activities. As a consequence, the activity of measuring GHG emissions is often referred to as carbon footprinting.

A carbon footprint may concern an organization, a value chain, or a product as per Carbon Trust 2014. The organizational carbon footprint accounts for emissions from all activities across an organization (including building energy use, industrial processes, and the company’s vehicles). The value chain carbon footprint includes also emissions outside the organization’s own operations (i.e., emissions from both suppliers and consumers, including product use and end-of-life emissions). Finally, product’s carbon footprint includes emissions over the whole life cycle of a given unit of product or service, from the extraction of raw materials and manufacturing to its use and final reuse, recycling, or disposal.

According to the Intergovernmental Panel on Climate Change (IPCC), climate change refers to any change in climate over time due to natural variability or as a result of human activity. The scientific community has collected substantial evidence that the climate is changing, as a result of the increased concentration of GHGs in the atmosphere, which is due in part to human activity. The main greenhouse gases are water vapor, carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride. Some of these GHGs are naturally present in the atmosphere and are responsible for the greenhouse effect, a natural phenomenon responsible for warming the atmosphere and allowing life on Earth. However, in recent times, GHG emissions have increased, among others, due to industrialization and changes in agriculture and land use. Carbon dioxide, for example, is emitted by the combustion of fossil fuels such as coal, oil, and gas. Methane mainly comes from agriculture, livestock, and landfills. Nitrous oxide is found in large quantities in nitrogen fertilizer and chemical processes. These human-made GHGs known as “anthropogenic GHGs” intensify the greenhouse effect.

In order to measure the climate impact of GHG emissions, the life-cycle assessment (LCA) community has developed an impact category called the global warming potential (GWP). GWP is the recommended metric to compare future climate impacts of emissions (IPCC 2007). It refers to the heat trapped in the atmosphere by a given amount of GHG over a given time period, relative to that trapped by an equivalent amount of CO 2 during the same period. Below table shows the GWP of some GHGs over 100-year and 20-year periods, respectively

Using the GWP enables us to aggregate GHG emissions into a single metric commonly expressed in carbon dioxide equivalent (CO2 e) or in carbon equivalent. These two metrics should not be confused: 3 million tons of carbon equivalents are equal to 11 million tons of CO2 e. The conversion between carbon equivalent and CO2 e is related to the ratio of the atomic mass of a carbon dioxide molecule to the atomic mass of a carbon atom, i.e., 44/12.

This has immediate implications for carbon footprinting and reporting as the carbon footprints for different companies and especially at different points in time may be based on different GWPs. An analogy in financial accounting is the effect of currency exchange rates: financial statements are published in a single currency, using whatever collection of exchange rates is appropriate at that time, but changes in reported financial metrics may result in part from changes in exchange rates rather than in actual performance. Despite these shortcomings, using the GWP to aggregate different GHGs into a single metric expressed in CO2 e is the most common approach to carbon footprinting.

Motivations for Carbon Footprinting

Carbon footprinting has become more widely used than other environmental footprints, such as the ecological footprint, land footprint, water footprint, etc. The main reasons for this can be linked to legislation around carbon emissions, public awareness of climate change risks, and investors’ expectations for carbon emission reporting. Consequently, some companies ask their suppliers and subcontractors to provide data on their emissions. For instance, DHL requires all its carriers to enter data on vehicles used, distance traveled, fuel efficiency, etc. not only to calculate total carbon emissions but also to screen the carriers for environmental performance Reducing carbon emissions can also lead to lower costs. For instance, a survey of the Consumer Electronics Association (CEA) found that companies measuring their carbon footprint were able to reduce their electricity consumption by 5–25 % per million dollars of revenue.

As a result, many governments are taking steps to reduce carbon emissions through regional or national policies including the introduction of emission trading programs. Under a trading system, permits are required for a given company to be allowed to emit GHGs, and the number of available permits in the market (regional, national, or international) is limited. Other companies report their emissions in order to be prepared for future regional, national or international climate policies (Carbon Trust 2014). Moreover, global companies doing business in China and South Korea such as Alstom, Bayer, and Canadian Tire Corporation are closely monitoring emerging Chinese emission trading systems that will soon put a price on carbon (CDP 2014a).

Investors also require that the long-term risks related to environmental externalities are managed in order to protect their long-term investments. For instance, the CDP Investor Initiatives backed in 2015 by more than 822 institutional investors representing over US$95 trillion in assets, provide investors with a global source of annual information to support long-term objective analysis, including evidence and insight into companies’ carbon footprint and strategies for managing climate change.

The CDP’s Carbon Action initiative (backed by 190 investors) asks companies in heavy emitting industries to take actions on carbon emission reduction every year, by setting emission targets and making reductions while generating return on investment (CDP 2014b).

Supply Chain Carbon Footprinting

The supply chain carbon footprint corresponds to Scope 1, 2, and 3 emissions. Accounting for Scope 3 emissions, and therefore the value chain carbon footprint, need not involve a full-blown inventory of all products and operations, which would generally be infeasible. Usually, it is most valuable to focus on the major GHG generating activities. The structure of Scope 3 emissions varies from one industry sector to another, and consequently, it is difficult to provide generic guidance on which Scope 3 emissions to include in an inventory. 

However, some general steps can be articulated as per WRI and WBCSD 2011a are as below:

  • Describe the value chain. It is important, for the sake of transparency, to provide a general description of the value chain and the associated carbon emission sources.
  • Determine which Scope 3 categories are relevant. Only some types of upstream or downstream emission categories might be relevant to the reporting company. They may be relevant, for example, because they are large (or believed to be large) relative to the company’s Scope 1 and Scope 2 emissions, they contribute to the company’s carbon risk exposure, they are deemed critical by key stakeholders (e.g., feedback from customers, suppliers, investors, or civil society), etc.
  • Identify partners along the value chain. E.g., customers or users, product designers, manufacturers, energy providers, etc. This is important when trying to identify sources, obtain relevant data, and calculate emissions.
  • Quantify Scope 3 emissions. While data availability and reliability may influence which Scope 3 activities are included in the inventory, it is accepted that data accuracy may be lower. It may be more important to understand the relative magnitude of and possible changes to Scope 3 activities. Emission estimates are acceptable as long as there is transparency with regard to the estimation approach, and the data used for the analysis are adequate to support the objectives of the inventory. Verification of Scope 3 emissions will often be difficult and may only be considered if data is of reliable quality.

Automobile Industry

Based on the GHG Protocol, direct (in- house) and limited indirect carbon emission boundaries were considered, while downstream stages of distribution, consumers, disposal, and recycling were excluded. The first step is to identify the key suppliers’ carbon footprint. HMC (Hyundai Motor Company) set up guidelines and provided measurement manuals to key suppliers. Based on this, each supplier conducted Scope 1 and 2 emission measurement and reporting, using a direct measurement methodology. The scope of the guidelines prepared by HMC includes raw material suppliers, manufacturers, and distributors. In the second step, a carbon process map was established to identify each component and part at each stage of the simplified supply chain. This process helped HMC and its suppliers to calculate the carbon footprint of each component and part. The carbon process map also helped HMC and its suppliers to identify components and parts with high carbon burdens.

Finally, in the third step, HMC and its suppliers calculated the products’ carbon footprint by adding the carbon emissions of the supply chain stages. Regarding the front bumper product, for example, it was found that through the simplified supply chain, the raw material stage accounts for 18% of the carbon emissions, the manufacturing stage accounts for 70%, and the distribution accounts around 12%.

Emission Allocation in Supply Chains

When allocation is inevitable, companies should select the allocation approach that:

  • Best reflects the causal relationship between the production of the outputs and the resulting emissions;
  • Results in the most accurate and credible emission estimates;
  • Best supports effective decision-making and GHG reduction activities; and 
  • Otherwise adheres to the principles of relevance, accuracy, completeness, consistency, and transparency.

It is preferable to use a physical relationship between the multiple inputs/outputs and the quantity of emissions generated, through allocation factors such as mass, volume, energy, chemical, number of units, or others (e.g., protein content of food coproduces or floor space occupied by products); otherwise, the remaining options are to use economic factors (by value) or other relationships. This is because physical factors are expected to best reflect the causal relationship between the production of the outputs and the resulting emissions. Clearly, different allocation methods are prone to yield significantly different results.

By way of for collecting and allocating GHG emissions from suppliers, two basic approaches are suggested:

  1. Supplier allocation: Individual suppliers report pre-allocated emission data to the reporting company and disclose the allocation metric used.
  2. Reporting company allocation: The reporting company allocates supplier emissions by obtaining two types of data from individual suppliers: 

(a) Total supplier GHG emission data (e.g., at the facility or business unit level) and

(b) The reporting company’s share of the supplier’s total production, based on either physical factors (e.g., units of production, mass, volume, or other metrics) or economic factors (e.g., revenue, spend).

Many GHG emissions are the result of joint processes by multiple parties in a supply chain. A typical product goes through numerous manufacturing and transportation stages operated by a number of companies in a supply chain. Although joint production can occur anywhere, it is likely to be particularly common in indirect goods and services, which do not become part of the final product or service. Consequently, further reductions in emissions in addition to those of a firm’s own operations can be achieved by the joint effort of multiple parties in a supply chain through collaboration, coordination, or information sharing.

This brings in also additional cost-saving opportunities. The CDP 2015 supply chain report notes that companies that engage with one or more of their suppliers, consumers, or other partners are more than twice as likely to see a financial return from their emission reduction investments and almost twice as likely to reduce emissions, as those who do not engage with their value chain.

Nevertheless, when a number of firms jointly affect total emissions, they face a critical and nontrivial challenge in measuring their share of the responsibility for emissions (or that of the emission reductions): How should the emissions is allocated to the various value chains, organizations, final products, or services? The CDP 2011 supply chain report found that 86 % of respondents have a collaborative process in place to jointly reduce carbon footprints with suppliers (up from 49 % the year before), but suppliers face difficulties in allocating their emissions to their multiple customers (CDP 2011).

Conclusion

However, sustainability cannot be reduced to carbon emissions. For example, water scarcity, its quality, and the regulations affecting it are a growing business problem (The Economist 2014). Other environmental dimensions of sustainability, as well as social impacts, should not be overlooked because of too much focus on carbon emissions. 

The strong current focus on carbon emissions may be an opportunity for other environmental indicators to be developed and adopted, in the sense that platforms and accumulated experience related to carbon footprinting can be beneficial. One important observation here is that the capability developed through carbon footprinting may not necessarily be directly transposed to other sustainability aspects.

Indeed, companies, non-governmental organizations, and governments need to take into account that the other sustainability aspects might have different characteristics than carbon emissions. For example, location and timing play a major role in water footprinting, but not in carbon footprinting. Moreover, extending the capabilities which are being built up for carbon footprinting to other dimensions of sustainability shall present an exciting opportunity but one that should be approached thoughtfully.