This document discusses supply chain exposure from carbon pricing. It begins by outlining different greenhouse gases, their lifetimes, global warming potentials, and contributions to total emissions. It then presents a framework for assessing an organization's ability to adapt to carbon pricing based on culture and impact. Different carbon pricing scenarios are evaluated for their status and scope. The document concludes by stating that supply chain exposure is determined more by culture than new costs, and that both risk and opportunities exist for early adapters and late movers.
1. Stream 2.2
Evaluating supply chain
exposure from carbon pricing
Marc Newson Nathan Roost
Partner Director
Ernst & Young Ernst & Young
2. What is the ‘carbon’ being priced
Type of gas Sources Lifetime GWP % of
(years) 590mt
Carbon Dioxide Burning fossil fuels (coal, 100 1 82.7%
(CO2) oil, natural gas) – 65%; and
deforestation – 35%
Methane (CH4) Rice paddies, ruminants, 12 21 10.0%
landfills, swamps
Nitrous oxide (N2O) Fertilisers, explosives, 120 310 5.6%
burning vegetation
Perfluorocarbons Aluminium and semi- 6500-
(PFC) conductor production 9200
Hydrofluorocarbons Refrigeration, air- 140-
11,700 1.7%
(HFC) conditioning
Sulphur Electricity dist., magnesium 23,900
hexafluoride (SF6) & semiconductor prod’n.
At ambient temperatures, 1 tonne of CO2 fills a typical 3 bedroom house
1
3. H1: Supply chain exposure from carbon pricing is
determined by your culture and not a new price impost
POOR EXPOSED PASSIVE
Ability to
adapt
RISK
GOOD
OPPORTUNIST
MITIGATOR
HIGH LOW
Impact of carbon price
2
4. How we can explore this
Supply chain themes
Everyone pays
Everyone can play
Consumers do respond
Bigfoot is my Frankenstein
Virtue as a weapon
A B C D
Carbon scenarios
3
5. A. We will have to buy permits to emit carbon from
July 2012
$
$
Cost of
doing
Cost of business
doing
business with
carbon
permit
costs
2009 2012
Carbon permit prices will be determined by market
demand and government policy
4
6. B. We are significantly exposed to increased input costs
as a result of a carbon price from July 2011
$
Carbon Energy Goods &
Market Market Services
Energy $
Intensive
Product
Creates New permit Market INPUT costs
new carbon cost changes increase per tonne
permit cost energy costs Energy costs output
increase per
tonne output PLUS direct energy
costs increase
PLUS new permit
cost
5
7. C. We use energy in our business, costs are increasing,
but these increases are relatively small
300.00
Wholesale
electricity
price -
$/MWh
200.00 Increase of
only 44 % of
Avg Qld Electricity Price (Nominal Dollars) CPI using
1955 price escalated at full CPI 1955 base
100.00 93.65
78.75
23.40 22.15
1955
1959
1963
1967
1971
1975
1979
1983
1987
1991
1999
2003
1995
Source: AGL data 6
8. D. We are committed to carbon neutrality as part of our
corporate social responsibility
Yahoo purchased offsets from hydropower in rural Brazil and wind turbines in
India because “…investing in a clean power project here seemed critical and
timely…..only recently, the village school was powered by a small diesel
generator – dirty, noisy, threatening to young lungs, and not very reliable”
t/CO2e
Total In-house Offset remaining emissions through
emissions abatement acquisition of credits at $5 to $7/tonne
Source: Yahoo quote from ‘Forging a Frontier’ by Ecosystem Marketplace and New Energy Finance
7
9. Carbon scenarios Status Scope
A We will have to buy permits to Proposed 170 +
emit carbon from July 2011 (~1000 sites)
B We are significantly exposed to Proposed ?
increased input costs as a result
of a carbon price from July 2011
C We use energy in our business, Current 5,000,000+
costs are increasing, but these
increases are relatively small
D We are committed to carbon Current ?
neutrality as part of our
corporate social responsibility
8
11. Our electricity supply is the most economically challenged
(tonnes per $ million of revenue)
10000
8000
6000
Emissions
4000
2000
ly le e p e
igs
l s y
pp inium catt d lim hee ttl P oa ct ina ppl
u S yc
a c du lum su
ty s lum eef t an ir a ck pro A s
ici A B n Da Bl ic Ga
tr e m
ec em ra
El C Ce
Source: AGL data 10
12. Cost of electricity by fuel source
Generation cost CO2 intensity
($/MWh) – no (t/MWh) 1.4
carbon price
included
$80
1.0
$40 0.6
0.2
ro
e
al
r
s
d
as
al
al
CC
a
in
as
in
rm
yd
co
co
le
lG
rb
W
om
s
uc
iH
he
Ga
tu
fil
n
k
ac
N
ow
Bi
ot
nd
in
s
Bl
Ga
M
Ge
Br
La
Source: AGL data 11
13. The price of a carbon changes the merit order
Generation cost ($/MWh) CO2 intensity 1.4
with $25/t carbon price (t/MWh)
imposed
$80
1.0
0.6
$40
Pre carbon
0.2
e
ro
r
al
s
al
al
CC
d
al
a
in
as
in
co
co
co
le
yd
rm
rb
om
W
uc
s
iH
k
n
Ga
k
tu
he
ac
ac
ow
N
Bi
in
ot
s
Bl
Bl
Ga
Br
M
Ge
Source: AGL data 12
14. Rising investment in low carbon energy assets
5%
growth
59%
$150bn growth
58%
growth Representing
10% of global
$100bn energy
68% infrastructure
growth spend
$50bn
2004 2005 2006 2007 2008
Source: New Energy Finance 13
15. Through electricity pricing everyone pays!
But at $25/t the
$120
average end-user price
Unit cost increases by 25%
($/MWh)
$80
At $25/t,
wholesale prices
increase by 50%
$40
n n n ry il ) )
a tio utio sio to et
a
C O2 CO
2
er b is la R ex l
n tri sm gu ( (in
c
Ge Di
s
r an Re t al a l
T To T ot
Source: AGL data 14
16. BUT, by 2012 we will be used to this…..
NSW 22% increase on 1 July 2009
QLD 30% increase over 2007-2010
VIC 20% increase over 2007-2010
WA 25% increase on 1 July 2009 (112% over 3 years)
SA 22% increase in 2004 and 17% 2007-2009
UK 26% increase in 2008 alone!!
…..and this is before an ETS and carbon permit pricing!
15
18. Will these price increases be enough to effect change?
Power generation
Coal to gas
Nuclear
End-use efficiency
Generation efficiency
Carbon Capture
& Storage (CCS)
Renewables
Biofuels in transport
Fuel mix in buildings
CCS in fuel
and industry CCS in transformation
industry
Source: International Energy Agency estimates of abatement sources to
stabilise emissions at current levels by 2050 17
19. Everyone can play – the most cost-effective energy
initiatives are in our homes
Cost-effective energy 80%
reduction potential
60%
40%
20%
l g n
tia y ial ing ur
e
rin tio
y
cit ly
n rc y n lt u c ri
side pert me ert Mi i cu fa
ct stru ect upp
Re pro Com prop A gr nu on El s
Ma C
Investments with 8 year payback or less
Of these, the following have a 4 year payback or less
Source: Adapted from Council of Australia Governments –
National Framework for Energy Efficiency 18
20. It’s not just about energy emissions ….. other industries
will be exposed to carbon pricing from direct emissions
8000 Note: road transport
equates to 71,000kt
of which 45,000kt is
6000
from passenger cars
Emissions (kt)
4000
2000
n n n n n g n n se
ctio atio ctio ctio atio imin c tio c tio e u
odu avi du rodu iger ral l
o p odu odu ston
pr ivil pr fr ltu pr pr me Example
el C t m e u e e i
e n iu R
ri c til m L
St me min
e u g ru Li industries
C A ic
A l
h et
nt
Sy
Source: AGL data 19
21. However, for these industries the cost impact of a carbon
permit can be drowned out
ing
Percentage increase per tonne
20% 21%
il d
bu
of output (based on $40/t)
21% p
10% 14% S hi
17%
14% 5%
Raw Input % fabrication
9% steel costs costs
20%
3% 23%
ans
e lc
10% 14% S te
te l ) d)
um re ee ed
i ni St l c le
m nc yc cy
c
A lu Co re
c
( re
3%
el( m Raw Input % fabrication
te iu
S in steel costs costs
um
Al
Source: UK data from Cairneagle 20
22. Overall, a modest carbon price on its own is unlikely to
change consumer behaviour
Domestic fuel (home heating)
Electricity
Private transport fuel
Increase in UK consumer
spend (based on $40/t)
Public transport & vehicle purchases
Food & drink
20% Clothing etc
Other utilities
Rent & maintenance
Household goods & services
Financial and other services
10% Health & hygiene
Alcoholic drink,
Typical CPI tobacco & narcotics
3%
£600bn
Annual UK consumer spend, £bn
Holidays
Recreation, culture,
Communication restaurants & hotels
Education
Source: UK data from Carbon Trust, Cairneagle 21
24. What lenses do we apply to better understand consumer
behaviour?
Dollar value of product features
Fit
CSR lenses Shock absorption
No child labour
Breathability
Sole durability Australian responses
No dangerous working conditions only (n=162)
Ankle support
Weight
Brand (Nike)
$5 $10
Economic Short-run energy demand is in-elastic in end-use sectors:
lenses • long-lived capital equipment limits options
• limited fuel switching capability
• willing to absorb the price increases to maintain lifestyle
• unattractive attributes of energy saving devices
• incomplete information on energy use / savings
Source: data from AGSM and US Energy Information Association 23
25. Can’t be a premium product – cost, convenience,
affordability, reliability all come first
100%
50%
Willing to pay more for products Would actively seek low carbon
that help me minimise my footprint products if as cheap/convenient
Source: LEK Consulting and Tesco, 2008 24
26. Information partially fills the gap and language is critical
“Renewable” – industry expert
language
“Alternative” – implies lifestyle
change
“Green” – too political
“Clean” – favoured, but
reliability of ‘clean energy’ is
questioned (when compared to
fossil fuels)
“Carbon” - ?
25
27. Incentives to mitigate transaction costs and bounded
rationality are key
Cost of Avoided
energy carbon Incentives:
saving cost government
initiatives funding; new
carbon assets
Carbon
cost
$
NEW
Cost of Cost of Cost of cost of
energy energy energy energy
Pre-ETS Post-ETS Post-ETS
(Scenario A) (Scenario B)
26
28. Consumers responding: household solar PV growth since
$8000/kW rebate in June 2007
kW
4000
3000
2000
1000
2000 2001 2002 2003 2004 2005 2006 2007 2008
27
30. “Design for recycling” is already here, but what are the
hidden carbon implications……
Back panel of front seat
Pyrotechnic Devices Easy removal for recycling
Designed for easy
neutralisation prior to Boot sill cover
dismantling Easy removal
for recycling
Draining
Operating fluids
positioned for easy All materials
access and labeled
drainage This enables
easy sorting by
type
29
31. ….. is your global carbon footprint going to be your
Frankenstein?
.
er
ty
at
ild
ili
m
s
ut
bu
al
g
r
in
le
ic
er
se
ild
ai
em
od
at
ou
t
Bu
Re
Fo
W
Ch
H
Reasons why:
• Impacts outside business
20% Carbon value-at- boundaries ie supply chain
stake (typically
% of operating
disclosed)
profit (global)
• Free allocation of permits
Carbon value-at- • Lack of carbon regulations in
stake (typically many countries
hidden)
• Management awareness
60% • Ability to pass costs through to
consumers
Source: analysis by Cairneagle (based on $40/t price by 2013) 30
32. The majority of your product emissions might not be
your direct carbon liability
Production Electricity Transmission
Consumption
& purchase generation & distribution
Gas Gas-fired Gas leaks Use of gas
Source
processing electricity from by
activities generation pipelines customers
gas / elec
Produced
1.1 1.3 1.9 9.1
MtCO2e MtCO2e MtCO2e MtCO2e
Purchased
1.4 0 0
gas / elec
34.6
MtCO2e MtCO2e MtCO2e MtCO2e
Source: Origin Energy 31
34. Agreeing the areas which can make a difference
Material selection
Design & Plan Component modularity
Timing of customisation
Lifecycle emissions
Procurement & Supplier location / distance
Supplier carbon output
Sourcing
Supplier collaboration
Enterprise
carbon Energy usage
emissions Energy source
Shipment size and frequency
Operations
Transported distance
Transport mode
Inventory holding / replenishment policies
Warehouse management
Brand image changes
Marketing & Packaging
Customer Downstream emissions
Recyclability / re-useability / disposability
33
35. Communicating the results to customers and
shareholders
Reduced footprint of bag of Walkers Breakdown of 7% carbon
crisps footprint reduction
5% 6%
Over 85g of 11%
CO2 Less than 80g
of CO2 41%
37%
2007 carbon footprint 2009 carbon footprint
Manufacturing gas consumption
Manufacturing electricity consumption
Total savings of up to 9,200 tCO2-e Lightweight corrugated boxes
Potato Transport
Other
34
36. Benefits can quickly become evident across a portfolio of
business units or locations
Aviation example:
Site C
Energy ØIncreased fuel efficiency Site B
efficiency ØNewer aircraft
Site A
ØNew fuels (in long term)
Supply ØGround activities and
chain & other support services
capital ØRoute configurations Indicative
issues ØInvest in low-carbon benefits
economy
Energy efficiency
Supply chain & capital issues
Source: Adapted from Cairneagle 35
38. ‘By default’ or ‘By design’ - which approach will your
customers and shareholders expect?
Cost of Avoided
Carbon costs carbon
hidden in carbon
reduction cost
supply chain initiatives NEW carbon
assets
$
NEW NEW
Cost of cost of Cost of cost of
product product product product
Pre-ETS Post-ETS Post-ETS
(By default) (By design)
37
39. New carbon assets – their value can be greater than the
value of the underlying product
Current proposition Low-carbon proposition
Lighting
Price: 50c Price: $4 New asset: $6
80kg CO2 pa 20kg CO2 pa
Hot water
Price: $1000 Price: $3000 New asset: $1500
6 MWh pa 2 MWh pa PLUS rebate: $1600
38
40. New carbon assets – application in the property sector
Example: energy efficient lamp
5 watts/m2 saving for 4000 hours of usage p.a.
(10 year life of bulb)
Energy/carbon saving across 100 homes 4,750 MWh
Value @ $24.50 per certificate $104,500
Example: double glazing
3.9 tonnes saving from high-spec window p.a.
(25 year life of windows)
Energy/carbon saving across 100 homes 9,750 tonnes
Value @ $24.50 per tonne $239,000
PLUS improved Green Star/ABGN rating = improved tenancy,
rental income and divestment value
Note: assumed CO2 intensity of electricity (0.9t/MWh)
Sources: Accurate data and Isaacs, 2007 39
42. Emerging key messages
Everyone pays Carbon pricing will result in increased energy
costs – something we all use
Everyone can play Energy efficiency is the low hanging fruit for
all of us
Consumers do respond While information helps, consumers will
require financial incentives to change
behaviour
Bigfoot is my Frankenstein For business, there is large value-at-stake
hidden in the supply chain
Virtue as a weapon New asset classes can provide a competitive
advantage
41
43. Where could an ‘ability to adapt’ provide you with a
strategic advantage over the next 2 to 5 years?
Supply chain themes
Everyone pays
Everyone can play ü
Consumers do respond ü ü
Bigfoot is my Frankenstein ü ü ü ü
Virtue as a weapon ü ü ü
A B C D
Carbon scenarios
42
44. “By design” or “By default”
A. We will have to buy permits to emit carbon from July 2012
B. We are significantly exposed to increased input costs as a result of a
carbon price from July 2011
C. We use energy in our business, costs are increasing, but these increases
are relatively small
“By design” or
“By default” Contract review
Consumer Substitution of
incentives inputs
43
45. Thank you
Dr Marc Newson is a partner in the Climate Change & Sustainability
Services team and for the last 11 years has been enhancing aspects
of performance through environmental efficiencies, corporate
governance controls and behaviours, corporate social responsibility,
research and analysis, business development and associated change
management implications.
Nathan Roost is an executive director in the Advisory Services team
and has over 10 years experience in supply chain projects around the
world, specifically in strategic sourcing, procurement, vendor
management, operational planning, logistics strategy and post
merger integration. He has managed engagements across numerous
industries and has also worked for Cap Gemini Ernst & Young, Wyeth
Pharmaceuticals and ICG Commerce.
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