Climate Change has external costs for Supply Chains

Roger OakdenLogistics Management, Procurement, Supply Chains & Supply Networks

Variability in supply

Change will happen in supply chains by 2030

An earlier blogpost concerning Climate Change and Supply Chains, provided an outline for action by businesses. A new urgency has been provided by the International Energy Agency (IEA) report Net Zero by 2050 released in May 2021. This report states that investment in fossil fuels should stop from 2021 and that substantial decreases in global emissions occur by 2030.

Findings from the report will be input to two international meetings of governments in 2021 that will consider new targets for the Paris Accord on Climate Change. The outcomes from these meetings will likely be signals for greater change in economies (and therefore businesses) and at a faster rate.

An example of fast change followed the national ban by Australia on the export of recyclable waste. By the end of 2021, it requires processing on-shore about 4.4m tonnes of waste that was previously exported. In this case, the pressure is increased, because inbound materials continue to arrive at the processors. But, to achieve acceptable outcomes from rapid change requires: time to plan, gain approvals and invest in buildings and equipment; obtain finance to support changes; modify supply chains including new business contracts and create demand for new, remanufactured and refurbished products.

For most other businesses, the timeline for change may not to be so tight, but 2030 is only eight years away. For governments and business (and consumers), change is often not pleasant, but as demonstrated through the COVID pandemic, it can happen in a short amount of time, if there is sufficient urgency about the outcome. However, for Climate Change the effects are not immediate, so there is currently not the same urgency – yet!

‘Externalities’ effect on business

The objective to keep global warming under 1.5 degrees C is likely to result in an unknown destruction of financial value for businesses. In part, this is due to what are called ‘externalities’. These are actions required by external parties, which may be poorly implemented or not done. Therefore, the cost of transition to a net-zero economy must be absorbed by individual businesses, that can reduce cash flows and asset valuations. Examples of ‘externalities’ are:

  • The majority of greenhouse gas emissions are inadequately (or zero) priced. National governments could implement a carbon emissions trading system based on a fully costed carbon price or enable carbon taxes; implement road usage pricing and eliminate subsidies for fossil fuel businesses and fuels.
  • A report from CDP has concluded that few cities are prepared for future weather extremes. More than 90 percent of the 800 cities worldwide state that residents, buildings, and infrastructure face significant threats from the changing climate. Yet, more than 40 percent of cities, with a combined population by 2030 of about 400 million people, do not currently have plans for adaptation.
    • The minimum adaptation measures proposed are: urban tree planting; hazard-resistant infrastructure; reducing risks of damage from flood and sea level rise and retrofitting homes to combat energy poverty and protect against heat waves.
  • Transport (mainly road) accounts for about 24 percent of CO2 emissions. In the world’s 100 largest cities, increases in the use of eCommerce could result in an increase of delivery vehicles by more than 35 percent to 2030. Currently, the majority of cities would not apply congestion charges to these vehicles. In addition, if all these vehicles were powered by internal combustion engines (ICE), emissions will increase by more than 30 percent.
    • National governments and city authorities could enact regulations that limit truck and van purchases, require electric or hydrogen power, control periods for travel and deliveries and price vehicle emissions.
  • A February 2021 report from the Transition Pathway Initiative concluded that ‘hard to decarbonise’ industrial sectors (i.e. no ‘easy’ low-carbon replacement technology for their products or processes), are responsible for about 25 percent of total energy emissions.. The industries are: diversified mining, steel, cement, paper, aluminium and chemicals
    • An example of time to change, is smelting steel using ‘green hydrogen’ energy from renewables. Pilot projects are operating and being constructed, but achieving scale is considered to take about 15 years.
    • If these industries are unable to achieve sufficient reduction in emissions, a concern for businesses in other industries will be the increased rate of decarbonisation for the whole industrial sector and therefore a disproportionate amount on businesses that are not ‘hard to decarbonise’.
      • This will require drastic reductions in emissions between 2030 and 2050. However, the more emissions reductions are achieved prior to 2030, the less drastic (and expensive) will be the changes between 2030 and 2050.

If and when these actions are enacted, will influence supply chains for affected products and materials. In addition to ‘externalities’, changes to supply chains could be via regulations:

  • Producers are made financially responsible for minimal emissions product and packaging design and material selection. Design for reuse, repair and refurbish, with no easy path to landfill
  • A ‘right to repair’ for all products. Companies to supply repair parts for sharing and reuse businesses
  • ‘Return and Earn’ schemes for consumers. Some jurisdictions’ have this for returned bottles and cans. It could be extended to apparel

Risks from the environment

People, jobs and the economy are not separate from the environment. Without a healthy environment, humans cannot exist. For example, in the 20 years since Australia enacted a national environmental law, it is reported in the Melbourne Age newspaper, that an area larger than the State of Tasmania (7.7m hectares) has been logged, bulldozed and cleared. Supply Chains could be required to take account of environmental damage caused by their operations and of their tier 1 suppliers and customers.

Research by McKinsey examined how industry value chains are exposed to risks, including climate events. The report notes that “Areas for manufacturing in Korea, Japan, Taiwan, or other hubs in the western Pacific, can expect that hurricanes sufficient to disrupt their suppliers will become two to four times more likely. Some of these disruptions may last for several months. South East China will experience extreme precipitation events twice as often by 2030”. The consequences will be increasing risks concerning the supply of critical materials and components from a single source supplier or many customers affected by the inability of supply for commoditised products e.g. consumer electronics.

As negative climate events occur, businesses will have to increase investments in climate adaptation, in preference to operational efficiency. The Supply Chain Map for your organisation will become increasingly important (and maybe required by financial and insurance firms) because it will be the base document that describes your organisation’s supply network and the environmental influences upon it.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...