January 9, 2009

Cost Reduction Through Supply Chain Greenhouse Gas Management

The idea of accounting for a company’s greenhouse gas emissions is a relatively new concept and many companies have yet to complete such an important yet unfamiliar project. Even if a company does not invest in an outside consultant, the inventory process represents a cost (labor and time) with no immediate return. However, it is a necessary entry point to the various opportunities that do offer significant returns, including energy efficiency improvements and the cost savings thereof, the intangible value of public and investor perception, and even potential revenue from the sale of “carbon credits” and “greenhouse gas allowances.”

Greenhouse gas emissions accounting has been broken down into three categories by the industry standard “GHG Protocol” authored by the World Resources Institute (WRI) and the World Business Council on Sustainable Development (WBCSD). The majority of companies that undertake a greenhouse gas emissions inventory estimate their Scope 1 (direct emissions from on-site combustion and other on-site sources) and Scope 2 emissions (indirect emissions from electricity use via a utility provider where emissions occur remotely), but not their Scope 3 emissions (emissions from business travel, contractor emissions and other supply chain related emissions). While the companies are not required to assume ownership or responsibility for these Scope 3 emissions, supply chain greenhouse gas management is a strategic cost-saving measure.

Greenhouse gas emissions are a good analog for the fossil-fuel intensity of a company’s operations, and reducing emissions will reduce fossil fuel use, resulting in lower costs and less risk from the price volatility associated with fossil-fuel consumption. Accounting for, and subsequently managing, Scope 3 emissions allows a company to identify up- and down-stream cost-saving opportunities and also helps the company decrease its risk exposure due to future spikes in the price of fossil fuels. While Scope 3 emissions are, by definition, outside of a company’s operational control, many companies have found a way to set strict guidelines for their suppliers.

Wal-Mart, for example, is leveraging their buying power to encourage their suppliers to manage greenhouse gas emissions. Wal-Mart CEO Lee Scott recently said “we expect from suppliers a firm commitment to meet strict social and environmental standards, to be open to rigorous audits, and to publicly disclose all appropriate information.” And why would a company like Wal Mart embrace such an approach? In Lee Scott’s own words: “We are confident that this effort will be good for business.”

The price of a barrel of oil is currently hovering in the low $40s but was as high as the $140s in July of 2008. A barrel contains 42 gallons of oil (159 liters) and combustion of a barrel of crude oil will result in roughly 475 kilograms of carbon dioxide emissions, or about half a metric ton. We can see from the recent declines in both the price of oil and in the price of “carbon credits” or “verified emission reductions” (VERs), that the price of greenhouse gas emissions is closely tied to the price of oil. This is because a high oil price helps justify energy efficiency projects that would otherwise not be economically feasible.

But when we consider that the credits required to offset the combustion of one barrel of oil (1/2 metric ton) are worth around $1, or 1/40th the price of the oil itself, we see why accounting for greenhouse gas emissions in the supply chain is far more important to a company than previously realized. A company that understands its fossil fuel intensity (a measure of fossil fuel per unit of product or per dollar of revenue) can work to reduce its intensity through better supply chain planning that reduces transportation distances and favors more efficient transport modes, such as container ships (43 times more efficient than air cargo) and trains. The use of such criteria in the selection of vendors can not only reduce supply chain greenhouse gas emissions, but identify the innovative and lean suppliers that will help keep costs low.

Pablo Päster is the Vice President of Greenhouse Gas Management Innovations at ClimateCHECK and is based in San Francisco, CA. Pablo specializes in supply chain greenhouse gas management and product-level greenhouse gas life cycle accounting. He is also the author of the sustainability question and answer column, “Ask Pablo.”

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