Supply Chain Decarbonization: A Comprehensive Guide

What is Supply Chain Decarbonization?

Supply chain decarbonization refers to the process of reducing or eliminating carbon emissions associated with the various stages of a supply chain. This involves identifying carbon-intensive activities within the supply chain, from the extraction of raw materials to the production, transportation, and disposal of products, and implementing strategies to reduce these emissions. The goal is to minimize the overall carbon footprint of a company's operations, particularly those emissions that are generated indirectly through activities outside the company’s direct control but within its value chain.

Why Supply Chain Decarbonization is Essential

Supply chain decarbonization is critical for businesses aiming to meet their sustainability goals because a significant portion of their carbon footprint often lies beyond their direct operations, within their supply chains. This includes emissions from raw material extraction, manufacturing, transportation, and product disposal. Addressing these emissions, known as Scope 3 emissions, is essential for a comprehensive climate strategy. Decarbonizing the supply chain not only reduces the overall environmental impact but also mitigates risks related to supply chain disruptions, regulatory changes, and shifting market demands. Furthermore, it positions businesses as leaders in sustainability, responding to growing stakeholder expectations for responsible corporate behavior. By reducing emissions across the supply chain, companies can achieve their sustainability targets more effectively.

Supply chain carbon emissions are a part of Scope 3 emissions and often represent the largest portion of a company’s carbon footprint, especially in industries with complex supply chains.

Differences Between Direct and Indirect Emissions (Scope 1, 2, and 3 Emissions)

To understand supply chain decarbonization, it’s important to differentiate between direct and indirect emissions, categorized into three scopes:

1. Scope 1 Emissions (Direct Emissions):

   • These are emissions from sources that a company directly owns or controls. This includes emissions from company-owned facilities (like factories) and vehicles (like trucks). Examples include emissions from fuel combustion in boilers, furnaces, and company vehicles.

2. Scope 2 Emissions (Indirect Emissions from Energy):

   • Scope 2 emissions are indirect emissions associated with the purchase of electricity, steam, heating, and cooling consumed by the company. Although the company doesn’t directly emit these GHGs, it is indirectly responsible for them because they occur during the production of the energy the company uses.

3. Scope 3 Emissions (Other Indirect Emissions):

   • Scope 3 emissions are all other indirect emissions that occur in the value chain of the company, both upstream and downstream. These include emissions from activities such as the production of purchased goods and services, transportation and distribution, waste disposal, employee commuting, business travel, and even the use and disposal of the company’s products by consumers. Scope 3 emissions often represent the largest portion of a company’s carbon footprint, especially in industries with complex supply chains.

Carbon Hotspots in the Supply Chain

Carbon hotspots in a supply chain are the areas where greenhouse gas (GHG) emissions are the highest and therefore offer the most significant opportunities for reduction. Identifying these hotspots is a crucial step in supply chain decarbonization because it helps businesses prioritize their efforts and resources in the areas with the greatest impact.

Key Areas Where Emissions Are Most Significant

1. Raw Material Extraction:

   • The initial stage of the supply chain often involves the extraction of raw materials, such as mining minerals, harvesting timber, or extracting oil. These activities can be highly energy-intensive and often rely on fossil fuels, leading to significant carbon emissions. Additionally, the environmental impact varies depending on the material, with some, like aluminium and cement, being particularly carbon-intensive.

2. Manufacturing and Production:

   • Manufacturing processes can be another major source of emissions, especially in industries like steel production, cement manufacturing, and chemical processing. Energy use in factories, emissions from chemical reactions, and the generation of waste are all contributors. This stage also includes emissions from the production of components and parts that are assembled into the final product.

3. Transportation and Logistics:

   • The movement of goods through various stages of the supply chain, from raw materials to finished products, involves transportation that often relies on fossil fuels. This includes road, air, sea, and rail transport. Logistics emissions can vary depending on the mode of transport, the efficiency of the logistics network, and the distances involved. Long-distance shipping and air freight tend to have higher carbon footprints than more localized or less energy-intensive options.

4. Energy Use Across the Supply Chain:

   • Energy consumption is a common thread across all supply chain activities, from powering machinery in factories to heating and cooling warehouses. The source of this energy (e.g., fossil fuels vs. renewables) has a significant impact on the overall carbon footprint. Therefore, areas with high energy use, especially those relying on non-renewable sources, are critical carbon hotspots.

5. Waste Management and Disposal:

   • The way waste is managed can also be a significant source of emissions, particularly when materials are not reused or recycled, leading to landfill use or incineration, both of which generate emissions. Efficient waste management practices and circular economy principles can help reduce these emissions.

Tools for Identifying and Quantifying Carbon Hotspots

1. Carbon Footprint Calculators:

   • Carbon footprint calculators are tools that help businesses estimate the total GHG emissions associated with their operations, including supply chain activities. These calculators can assess emissions from energy use, transportation, manufacturing, and other processes, providing a baseline from which to measure reductions. Many calculators also allow businesses to input specific data about their operations, giving a more accurate picture of their carbon hotspots.

2. Life Cycle Assessment (LCA):

   • Life Cycle Assessment is a more comprehensive tool that evaluates the environmental impacts of a product, process, or service throughout its entire life cycle, from raw material extraction to disposal (cradle-to-grave). LCA helps identify carbon hotspots by analyzing each stage of the product's life, determining where emissions are highest, and assessing the overall environmental impact. This analysis can guide businesses in making more sustainable choices, such as selecting lower-impact materials or optimizing manufacturing processes.

3. Supply Chain Mapping Tools:

   • These tools allow businesses to visualize their entire supply chain, identify where different activities take place, and assess the associated carbon emissions. By mapping out the supply chain, companies can identify which suppliers, processes, or logistics routes contribute the most to their carbon footprint. This visualization aids in prioritizing areas for decarbonization efforts.

4. Environmental Product Declarations (EPDs):

   • EPDs provide standardized information about the environmental impact of products, including their carbon footprint. These declarations are based on LCAs and can help businesses understand the carbon intensity of different products or components, guiding decisions on procurement and design to reduce overall emissions.

Overview of the Science-Based Targets Initiative (SBTi)

The Science-Based Targets Initiative (SBTi) is a global partnership between CDP (formerly the Carbon Disclosure Project), the United Nations Global Compact (UNGC), the World Resources Institute (WRI), and the World Wide Fund for Nature (WWF). The SBTi provides companies with a clearly defined pathway to reduce greenhouse gas (GHG) emissions in line with the latest climate science.

Aligning Business Goals with International Frameworks

Aligning business goals with international frameworks such as the Paris Agreement involves setting targets that contribute to global efforts to mitigate climate change. The Paris Agreement aims to limit global temperature rise to well below 2°C, with efforts to keep it under 1.5°C. To align with this, businesses need to set emissions reduction targets that reflect their fair share of the global effort.

Importance of Setting Both Immediate Actionable Goals and Long-Term Strategic Plans

Short-term goals (e.g., 1-5 years) are critical for immediate action and maintaining momentum, while long-term goals (e.g., 10-30 years) provide a strategic vision and ensure alignment with global climate targets.

• Immediate Actionable Goals (Short-Term):

  • These goals generate quick wins, build momentum, and demonstrate commitment to stakeholders.

  • Short-term goals also help to establish a culture of sustainability within the organization.

  • They allow companies to start reducing emissions immediately, which is crucial for meeting longer-term targets.

• Long-Term Strategic Plans:

  • Long-term goals are necessary to align with global climate targets and ensure that short-term actions contribute to broader, more substantial outcomes.

  • They provide a roadmap for sustained emissions reductions, technological innovation, and adaptation to future regulatory changes.

  • Long-term plans help businesses invest in significant infrastructure or operational changes that require time to implement.

Examples of Achievable Milestones

1. Short-Term Goals:

   • Reducing Scope 1 and 2 emissions by 25% by 2025: This could involve measures such as improving energy efficiency, switching to renewable energy sources, and upgrading company-owned vehicles to electric or hybrid models.

   • Increasing the use of renewable energy to 50% by 2023: Transitioning to renewable energy sources in company operations can significantly reduce Scope 2 emissions.

2. Long-Term Goals:

   • Achieving net-zero emissions by 2050: This would align the company with the global target of net-zero emissions, incorporating Scope 1, 2, and 3 emissions reductions.

   • Eliminating Scope 3 emissions by 2040: This could include working with suppliers to reduce their emissions, redesigning products for a lower carbon footprint, and influencing customer behaviour.

Strategies for Decarbonizing the Supply Chain

1. Improving Energy Efficiency: Enhancing energy efficiency is crucial for reducing emissions and costs. Businesses can upgrade machinery, optimize production processes, and minimize energy waste through regular audits. This not only cuts the carbon footprint but also lowers operational expenses.

2. Shifting to Renewable Energy: Transitioning to renewable energy sources, such as solar or wind power, significantly reduces emissions. Companies can generate their renewable energy or purchase it through renewable energy credits (RECs) or power purchase agreements (PPAs). Encouraging suppliers to adopt renewables further amplifies the impact across the supply chain.

3. Sustainable Sourcing: Sustainable sourcing involves choosing low-carbon materials and suppliers committed to sustainability. By prioritizing products with environmental certifications and considering the entire lifecycle of materials, businesses can reduce emissions throughout the supply chain.

4. Rethinking Transportation and Logistics: Optimizing transportation routes, consolidating shipments, and using low-carbon transport options like electric vehicles can significantly cut emissions. Digital tools for logistics management and partnering with eco-friendly logistics providers also contribute to lower carbon footprints.

5. Implementing Circular Economy Practices: Adopting circular economy principles reduces waste and extends product lifecycles. Designing products for easy repair and recycling, and establishing take-back programs, can minimize the need for new materials and reduce emissions associated with raw material extraction, manufacturing, and disposal.

Common Challenges

1. Financial Constraints: One of the most significant barriers to decarbonizing the supply chain is the financial cost associated with implementing sustainable practices. Upgrading equipment, investing in renewable energy, or adopting new technologies often requires substantial upfront capital, which can be a deterrent, especially for small and medium-sized enterprises (SMEs). Additionally, there can be ongoing costs related to maintenance, training, and process changes that add to the financial burden.

2. Lack of Supplier Cooperation: Decarbonizing the supply chain requires collaboration across multiple suppliers and partners. However, not all suppliers may share the same commitment to sustainability, leading to resistance or slow adoption of green practices. Some suppliers might be unwilling to invest in necessary changes due to their financial constraints, lack of resources, or differing priorities. This lack of alignment can hinder the overall decarbonization efforts of the business.

3. Technology Adoption Challenges: Implementing new technologies is essential for reducing emissions, but it can be challenging. Companies may face difficulties in selecting the right technologies, integrating them into existing systems, or scaling them across the supply chain. Additionally, there may be a lack of expertise or resources to manage these technologies effectively. The rapid pace of technological advancement can also lead to concerns about obsolescence and the risks associated with investing in unproven solutions.

Examples of Companies Successfully Navigating Obstacles

• Unilever has effectively addressed financial constraints by leveraging its scale to negotiate favourable terms for renewable energy and by incorporating sustainability into its core business strategy. Unilever’s Sustainable Living Plan has helped the company achieve significant cost savings while reducing its carbon footprint.

• Walmart has demonstrated strong supplier engagement through its Project Gigaton, which aims to reduce one billion metric tons of emissions from its supply chain by 2030. Walmart works closely with suppliers, providing them with tools and resources to set and achieve their own emissions reduction targets.

• Siemens successfully navigated technology adoption challenges by investing in digitalization and smart manufacturing technologies across its supply chain. Siemens’ use of digital twins and advanced analytics has improved efficiency and reduced emissions, showcasing the potential of integrating cutting-edge technologies into supply chain operations.

Solutions and Best Practices

1. Addressing Financial Constraints: To overcome financial barriers, companies can explore various funding options, such as green financing, grants, or government incentives designed to support sustainability initiatives. Additionally, businesses can adopt a phased approach to decarbonization, starting with low-cost, high-impact changes like energy efficiency improvements before moving on to more capital-intensive projects. Another strategy is to calculate the long-term return on investment (ROI) from sustainable practices, highlighting the potential for cost savings and risk reduction over time.

2. Enhancing Supplier Cooperation: Building strong relationships with suppliers is key to overcoming resistance. Companies can engage suppliers early in the process, clearly communicate the importance of decarbonization, and provide support through training or shared resources. Offering incentives, such as long-term contracts or preferential terms for sustainable suppliers, can also encourage cooperation. Additionally, setting clear sustainability criteria in procurement processes ensures that suppliers understand the company’s expectations from the outset.

3. Facilitating Technology Adoption: To address technology adoption challenges, businesses should start with a thorough assessment of their needs and the available technologies, focusing on those that offer the greatest benefits and alignment with their goals. Partnering with technology providers for training and support can help smooth the implementation process. Additionally, companies can pilot new technologies on a smaller scale to test their effectiveness before rolling them out more broadly. Continuous learning and staying informed about emerging technologies also help businesses remain adaptable and ready to integrate new solutions as they become available.