Many companies have started scrambling to understand their indirect emissions -- specifically, emissions in their supply chain -- and for good reason.
According to a report by McKinsey that examined consumer goods makers, high-tech players, and other manufacturers, 40 to 60 percent of their total carbon footprint resides upstream in their supply chain. Knowing about the emissions in your supply chain can help you prioritize opportunities for reduction and understand the risks if carbon emissions are regulated.
But as the dialogue around carbon accounting increases, so does our awareness of the challenges and limitations in measuring indirect emissions and distributing the burden among multiple parties.
Take the Carbon Disclosure Project's (CDP) 2009 supply chain report. The CDP's supply chain initiative is one of the few global attempts at collecting primary data from companies in an effort to understand climate risks in a supply chain. Yet only five of the 100 companies in China contacted by the CDP fully responded to the CDP's basic questions about climate management. Clearly, there is a gap in knowledge and data necessary to successfully accomplish this goal.
This raises many questions about accounting for indirect emissions: What are the emissions hot spots in a supply chain? Will companies downstream be held responsible? How much "ownership" should they claim? What should they be doing about it?
Effectively managing and reducing the total carbon footprint of your products and operations ultimately means getting answers to these questions.
Accounting for Supply Chain Emissions
To understand where we are in answering these questions, consider the two emergent methods for determining a company's total carbon footprint: observed emissions accounting and model-based accounting.
The first method involves counting the observed emissions in a company's supply chain — emissions that the company can arguably impact through its business decisions. This method typically requires tallying the measured emissions of a company's direct suppliers, at the "point source," and having those suppliers tally the measured emissions of their direct suppliers, and so on up the supply chain.
The second method is to count emissions based on the materials and processes used as a product moves from raw material extraction to manufacturing to end-use. This method is typically based on a lifecycle analysis of the product and uses models to estimate the embedded emissions.
Both methods can produce useful measurements, but neither provides a comprehensive picture based on primary data from the actual companies in a given supply chain, and neither provides information in a format that is comparable and cheap to produce.
Both of these methods will need to evolve to address what we call the ABCs of effective supply chain carbon accounting: allocation, boundary-setting, and the complexity of supply chains.
The ABC Framework
Allocation
Companies and their stakeholders need common systems for acknowledging their role in creating the emissions in their supply chains -- or "allocating" emissions between different businesses and individuals.
Assigning ownership of emissions is a challenge at many levels. For example, China's climate negotiator, Lia Gao, recently suggested that countries that import goods created in Chinese factories should be accountable for the related emissions. While this viewpoint is subject to international debate, it emphasizes the need for understanding the interconnectedness between producers and consumers, and all the actors in between.
Emissions allocation can be based on many things, like percentage of business your company does with a supplier compared to the supplier's overall revenue, or units your company purchases as a share of the supplier's overall production volume. Each method of allocation has benefits and drawbacks, and no single method makes sense for all business types.
Boundary-Setting
As the McKinsey report indicated, the emissions occurring within a company's four walls are likely to be the tip of a much larger iceberg. The chain of supply goes on continually upstream and downstream, and it even becomes circular as products and materials take on second lives. This presents a significant challenge for accounting methods that prescribe the size of a footprint, as it's nearly impossible to pick a clear beginning and end for a supply chain.
At a company level, you must decide which business units to include in your carbon footprint. For example, drawing your boundaries based on operational control can produce a very different result than using boundaries based on the amount of equity you hold in different entities. If companies in a supply chain are taking a different approach to boundary-setting, their footprints can't be meaningfully allocated or aggregated among companies because there is a good chance emissions are being double-counted or going unclaimed.
Complexity of Supply Chains
Supply chains are more like webs than linear chains of activity, and the lifecycle of facilities in the network can be short and intermittent — both characteristics that make emissions accounting complex.
In consumer products and electronics industries, for example, brand-name companies procure from similar supplier bases, and the goods those suppliers provide come from different sources around the world that can change every day based on market conditions. It's even likely that one company is both a buyer from and supplier to the same company.
Neither of the most common accounting methods can credibly deal with these complexities. Even the most progressive uses of the observed emissions accounting method would be challenged to factor in all the variables of the dynamic landscape, and the time it would take to track down the necessary information from suppliers makes it infeasible. Similarly, model-based accounting methods, which often rely on macro-level data that is several years old, are not designed to register operational changes or discrepancies among facilities.
A Way Forward
While the hurdles are significant, we believe that companies should start working immediately to understand their supply chain emissions for two reasons.
First, discussions on emissions ownership and the field of supply chain footprinting are gaining momentum, and business will be well-served by taking its place at the table. The World Resources Institute and World Business Council for Sustainable Development, for example, have kicked off a two-year process to develop the Greenhouse Gas Protocol's "Scope 3" accounting standards, including a methodology for supply chain emissions accounting.
Companies that are taking the steps to collect data will be in a much better position to influence the global dialogue on topics like boundary-setting and allocation methods. Ultimately, the decisions that flow from these conversations will have significant cost implications for whoever is deemed "the owner."
Second, this doesn't have to be painful! Based on our work to date, we offer the following tips to reduce the burden and improve the outcome of your efforts:
Betsy Fargo is associate of advisory services and Ryan Schuchard is manager of environmental research and innovation at Business for Social Responsibility.