Be keen to talk green

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The Stern Review on the economics of climate change was published by the UK government at the beginning of November amid considerable publicity. It takes the prospect of significant and deleterious man-made climate change, principally through increasing emissions of carbon dioxide, pretty much as a given. Although there are still many scientists – not all of them in the pay of the oil companies – prepared to dispute the scientific basis for Stern’s apocalyptic warnings, that is beside the point. Man-made climate change is politically now an article of faith and the policies of national governments and international bodies from the EU to the World Bank will be increasingly informed by that orthodoxy.

Stern is an economist and the thrust of his report is on the relative costs of the global economy doing something effective tostabilise carbon dioxide levels versus the costs of inaction. The cost of action he estimates at one per cent of GDP on average and more in some countries. The costs of inaction are vastly greater, he says. Stern says policies to reduce emissions which would be globally coordinated, although countries may place different weight on each strand, should be based on three essential elements – carbon pricing, technology policy and the removal of barriers to behavioural change.

Energy and the chain
Supply chains have an amorphous position in likely future policy. On one hand they are of course the mechanism whereby energyintensive products are conveyed to often equally energy-intensive markets. They are responsible for a significant proportion of the developed world’s energy consumption through the transport of products, ancillary uses such as refrigeration, and increasingly in the West, the fuel consumption of consumers accessing markets.

On the other hand, most supply chains have a well dispersed pattern of consumption. There are not generally many specifically energy-intensive points in the chain. The result of this is that policy impacts on supply chains are likely to be either the by-products of policies with other targets or the sort of headline initiatives that governments are tempted into to show that ‘something is being done’, but which risk being ineffective or even counterproductive.

Therefore it is important that supply chains engage in the policy debate, even or especially when our operations do not appear to be the target.

What policies might supply chains face? Carbon pricing through tax or trading or more likely both is a certainty. The Emissions Trading Scheme is already the centrepiece of EU emission-cutting efforts and it is widely expected that the UK government will introduce a scheme targeting less energy-intensive users. How deep this could go is a moot point. The Carbon Trust has suggested hitting users with an annual energy bill of around ?22,000 which would take in most cold stores and distribution centres.

A model put to the UK government by NERA and Enviros, two consultancies,  suggests that all sites with half-hourly metering – at least 27,000 in the UK and rising- not already in the ETS could be covered and required to bid for emissions allowances through annual auction.

One could imagine carbon permits on an enterprise rather than site level capturing the total energy useage of DCs, offices, shops and transport fleets. This has its attractions. For example, a frozen food company might be encouraged to do something quite radical on transport in order to free up allowances for the cold store, which is something you can’t economise much on. But the administration would be horrendous, not to mention the wrangles on allocations for outsourced service providers or multi-user facilities.

Tax will certainly play its part although it is hard to imagine a transport operator that isn’t already seeking every efficiency, given current fuel prices. But tax is a blunt instrument and often has unintended consequences, as does any intervention in a market.
For example, on some estimates 44 per cent of the direct carbon dioxide footprint of groceries is caused by consumers driving to supermarkets. Site-based permits might encourage a move back to smaller scale, more local outlets, reducing consumer motoring. But it might also promote manufacturer to shop distribution, which might or might not improve energy efficiencies in distribution. Higher fuel taxes might work the other way, promoting the efficiencies of concentration although probably not to the point whereby more fuel efficient rail distribution is greatly advantageous.

The balance between carbon pricing, fuel duties and other measures may also have complex effects on supply chain-related activities such as recycling, a virtuous activity but one which is often irreducibly energy-intensive.

Some sort of climate change legislation is widely expected in the Queen’s Speech, although the details may not be there. The UK government is also proposing to be a climate change champion in the EU and elsewhere.

Even if the supply chain is not a prime fiscal or regulatory target – and it might be – we have a role in ensuring that the options are available so that carbon costs can be mitigated through changed behaviour, not merely treated as general taxation. At the same time we need to be in a position to alert legislators to the unintended consequences and collateral damage that some proposals might imply.

Key points

  • Regardless of the science, carbon dioxide-induced climate change is likely to be a principal legislative driver in the UK, EU and elsewhere (yes, even in the US). 
  • Some proposals – for example duties on aviation fuel – will impact the supply chain directly. Others may only affect the largest operators. Still others might have different targets – for example in energy-intensive industries – but have large and unexpected implications for the supply chain. The scale, location and structure of supply chain operations might all need to be reviewed.
  • Supply chain management will have a vital role in ensuring that saving the planet and saving the global economy are not mutually exclusive. But we need to be involved in policy creation, even in areas that don’t appear directly to affect us.
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