Analyst Insight:Consumers are showing increasing concern about carbon emissions from the procurement of goods and services. As a supply chain organization, you are uniquely positioned to impact your own emission-reduction goals, as well as those of your upstream and downstream partners — so-called Scope 3 emissions.
A growing number of executives have come to see the reduction of greenhouse gas emissions as a business necessity. When conducting a GHG inventory, companies usually find the majority of their emissions falling into Scope 3 upstream categories. As a result, they turn to their supply chain organization to support broader reduction goals. That function then turns to the direct supply base to help with this important initiative, only to quickly discover that Tier 1 suppliers produce a relatively insignificant portion of total Scope 3 emissions. In a multi-tier supply chain, the far larger opportunity for reducing emissions is buried many tiers upstream, seemingly out of reach of direct influence. Still, net-zero remains attainable, and solutions are emerging that will help companies tackle the Scope 3 challenge.
Suppliers’ Scope 3 emissions become inputs of the companies that buy from them. To reduce such emissions, companies are pursuing what’s called supplier engagement— for example, by supporting a trucking company’s electrification of its fleet — and industry collaboration,working collectively to create lower-carbon industry standards. The bad news is that these approaches cover only around 37% of most companies’GHG Scope 3 inventories.
So what about the remaining nearly two-thirds? How can companies get to net-zero when mostof the emissions they need to manage lack the visibility, materiality and influence required for direct intervention?
A law firm, for instance, might purchase a laptop and look to its computer supplier to reduce the emissions arising from laptop production — and even be willing to pay higher prices or switch suppliers to get what it wants. But what might seem a minor technical challenge could quickly turn overwhelming, involving thousands of components made by hundreds of companies, scattered across dozens of countries, extending from the most sophisticated microprocessor manufacturing all the way back to mineral extraction for the batteries. Even if a lawyer in Poughkeepsie could locate the lithium mine for her laptop battery in Peru, how would she have any influence over the carbon intensity of its production processes?
Thankfully, the problem can be far less complex — and more centralized — than it seems. The production of a relative handful of carbon-intense commodities — electricity, steel, cement, organic chemicals and synthetic dyes, to name a few — is responsible for more than 90% of the U.S. economy’s totalGHG emissions. These sources dominate theScope 3 footprint of nearly every product andevery company.
A company can use the same data from Scope 3 calculations to help identify and quantify which of these high-intensity commodities drive a given product or service’s overall carbon footprint. Back to the laptop example: Our law firm might attribute 30% of its GHG inventory to “computer hardware,” which is itself more than 80% Scope 3-related, and infer the source and quantity of upstream Scope 1 emissions — how much comes from assembly, component manufacturing, and all the way back to minerals extraction. What appeared to be an endless recursion of suppliers’ Scope 3 emissions can now be expressed exclusivelyin terms of upstream Scope 1 and 2, under the control of producers of the relevant commodities.
Now we can decide how to reduce those emissions. A potential next step is to apply a technique used by many companies to address their Scope 2 emissions, from purchased energy, mostly in the form of electricity. Companies can generally consume only the power their local utility provides, but thanks to well-established financial instruments called virtual power purchase agreements (VPPAs), they can pay for green electricity from renewable capacity elsewhere to claim a zero-emissions profile in their market-based Scope 2 inventory. (These instruments have been very successful: In 2020, they funded almost 60% of total U.S. solar capacity.)
VPPAs work because companies know exactly how much electricity they use; it doesn’t matter where that electricity is generated. And now that a company can infer its own “commodity bill” and estimate the associated Scope 1 emissions, it can similarly aim to reduce those emissions even if, for instance, our law firm doesn’t know which specific mines provided the metals in its laptops. While VPPAs allow companies to pay, and claim credit, for the generation of green electricity they need but didn’t use, virtualcommoditypurchase agreements (VCPAs) could allow companies to pay, and claim credit, for the production of low-carbon versions of the commodities they rely upon but have no way to purchase directly. By encouraging and financing low-GHG production, VCPAs could help finance the undeniably expensive transition process.
Efforts are underway to enable this third GHG reduction strategy: call it ecosystem activation. In this case, a company with a “commodity bill” for aviation fuel might join theSustainable Aviation Buyers Allianceto enable it to financially support the production and use of low-carbon aviation fuels, even though its employees might not be on the actualplanes that are using that fuel. TheZero Emissions Maritime Buyers Allianceis a similar initiative focused on fuels for oceanic shipping, while the World Economic Forum’sFirst Mover’s Coalitionis addressing seven heavy-emitting sectors at the ecosystem level.
