Processing carbon emissions

Processes for creating products and services are being scrutinised carefully for any negative contribution to overall carbon footprints, and carbon accounting and management has fast become a part of the Australian business landscape.

The introduction of the National Greenhouse and Energy Reporting Act 2007, which covers around 700 medium and large corporations for the 2010–11 reporting period, flags the seriousness of government to legislate emission reduction. The Garnaut report and governmental green paper also confirm that the environment is now a legitimate compliance issue for business. In addition, talk of introducing a low carbon economy, including a national emissions trading scheme (Carbon Pollution Reduction Scheme — CPRS) in 2010, has businesses looking at how they can further leverage current investments in green technology to participate — and potentially benefit — from carbon emission reductions in a larger way.

National Greenhouse and Energy Reporting (NGER) is predominately concerned with measuring a company’s carbon footprint within its ‘four walls’. This is defined by three scopes of emissions set out in the National Greenhouse Accounting (NGA) factors and guidelines — essentially a workbook for calculating greenhouse gas (GHG) emissions from the energy, industrial process and waste sectors. Only two out of the three scopes are compulsory — and these predominately relate to the four walls footprint.

• Scope 1 covers direct emissions from sources that are controlled within the boundary of an organisation’s operation, such as fuel combustion and manufacturing processes.
• Scope 2 covers indirect emissions from the consumption of purchased electricity, steam or heat produced by another organisation.
• Scope 3 includes all other indirect emissions that are a consequence of an organisation’s activities but are not from sources owned or controlled by the organisation. Examples would be supplier emissions involved in creation of raw materials and/or services or employee travel to and from work.

Only scope 1 and 2 emissions count towards the allowable emission thresholds set out by NGER. But in saying that, we expect at least some of the first organisations subject to NGER to pursue non-compulsory scope 3 cuts, for reasons other than compliance. These reasons may include to enhance brand value, institute carbon labelling of products, or as a demonstrable promotion of corporate social responsibility.

For process-driven organisations, the challenges are two-fold.

For the companies subject to NGER, one way of reducing emissions to meet the NGER thresholds will be to break their company-wide footprint down to a process level to get an understanding of what elements are contributing the most carbon to the overall footprint, and to determine whether certain elements can be substituted to avoid the financial and reputation penalties of exceeding the established thresholds.

Secondly, external suppliers in the extended chain (scope 3) will also likely find themselves under increased scrutiny in the next three to five years, as companies look for ways to make emissions cuts across their supply chains, not just within the four walls. Where the boundaries of this extended supply chain lie and how process-driven organisations can minimise the risk of falling victim to supply chain-wide cuts made by their customers should be top of mind.

Setting boundaries

The assessment of a product (or process) carbon footprint is typically conducted using a methodology known as life cycle analysis (LCA). A product carbon footprint that follows this methodology, for example, should be all-encompassing and include all possible causes that give rise to carbon emissions — from raw material production through to the final product consumption and disposal. It should include all scope 1 direct (on-site, internal) and scope 2 and 3 indirect (off-site, external, embodied, upstream, downstream) emissions from all product-associated materials, processes, services and facilities required to manufacture or deliver the product or service.

It seems pretty straight forward, but this definition isn’t internationally recognised — and there is indeed no international standard for defining the life-cycle ‘boundary’. ISO 14040/14044 and BSI PAS 2050 offer some guidance on moving beyond immediate organisational boundaries and into the extended supply chain for a product or process carbon footprint — but an international standard still appears to be some way off.

Four major boundary settings have emerged in the interim:

• Cradle-to-grave — the assessment from manufacturing (cradle) to use phase and disposal (grave). Typically incorporates raw materials, manufacturing process and distribution, recycling of the product, re-manufacturing into another product all the way through to final disposal to landfill or incineration.
• Cradle-to-gate — a partial full assessment that typically includes sourcing of raw materials (cradle) and manufacturing process, but excludes all activity outside of the manufacturing factory (gate (1)) or sale of goods (gate (2)).
• Cradle-to-cradle — this is typically conducted for one product only — the point of recycling into a secondary product is not included.
• Well-to-wheel — this incorporates all the transport emissions associated with the distribution of goods, including emissions from petrol supply (well) through to consumption (wheel).

A well-defined boundary is critical to obtaining meaningful results as it provides a framework for comparison between similar processes, products and measurement indicators. If two different processes or products are measured according to different boundaries, the results can’t be compared. It is also important to establish the scope and goal of the LCA — a poorly defined goal or scope will directly affect the value and quality of information obtained in the process or product footprint and can greatly affect the carbon value associated to the product or functional unit.
There are key issues with traditional LCA methodologies: product or process LCAs can only be compared if there are constant assumptions and context between them, and any change in the product’s materials or processes will require a new LCA to be conducted to capture this information in the footprint. This means traditional LCA methodologies can be expensive and time consuming.

Accounting for carbon

An alternative approach is to use accounting principles such as activity-based costing (ABC) and economic input output (EIO) to account for carbon. Supply Chain Consulting has incorporated these principles and developed a new methodology to allocating carbon emissions to processes and products, the Carbon Allocation Process (CAP) methodology.

The CAP methodology is an acknowledgement that the processes needed to build a product or provide a service occur not only within the operational boundaries of an organisation but also extend across the supply chain. The processes from the supply chain and from the organisation each contribute to the overall process carbon footprint of the organisation; the continued collection and expansion of the extended supply chain emissions forms the backbone of this calculation.

CAP is particularly useful as a way of identifying areas of high overhead costs per unit (carbon ‘hotspots’) and directing attention to find ways to reduce these costs or to charge more for costly products. This means organisations can start realising carbon emission reduction benefits that impact all process or product footprints (not just one, as in traditional LCA) and can predicatively detect carbon abatement opportunities or emission issues.

Avoiding the cut

The danger in not adopting a broader definition of supply chain boundaries for carbon footprinting — particularly for suppliers classed as scope 3 emitters — is that they risk being removed from the chain altogether as companies (their customers) look for places to trim emissions across their entire (extended) carbon footprint.

Suppliers in China are a case in point. Many local companies have outsourced manufacturing contracts to China purely on price. While this may have saved costs in the short-term compared to manufacturing products locally, these savings may be offset in the near future by the higher carbon costs embedded in the processes of manufacturing or even importing products from China to Australia. These processes — and by inference the suppliers that use them — will come under increased scrutiny from local companies looking to find ways to make reductions to their overall carbon footprint, across their extended supply chains.

As Chinese suppliers increasingly go global, they are under pressure to formally adopt a corporate social responsibility (CSR) strategy which complies with the demands of foreign investors and large multinationals wanting all suppliers to fit into their CSR framework. Wal-Mart, for example, initiated a pilot project with a group of suppliers in September 2007 to look for new and innovative ways to make the entire retail product process more energy efficient. We expect these types of mandates will become more common, and any suppliers that don’t extend the boundaries of their own carbon footprint measurement to the fullest extent could find themselves cut out of both existing and new business opportunities — only to be replaced by one of their competitors.

In summary, as NGER carbon footprint measurement progresses, companies will increasingly look to break down their four walls footprint to determine the processes and products that contribute the most emissions, and whether certain elements of those processes can be swapped out to reduce this footprint. This idea will naturally evolve in three to five years as the same companies demand the same level of detail from their extended supply chains. Maintaining a broader view of the extended supply chain boundaries will be critical to effectively calculate process and product footprints and ensure that your business remains competitive on both price and carbon outputs.

*Dr David Beale is senior environmental consultant at Supply Chain Consulting. For further information go to www.carbon-view.com.

Supply Chain Consulting
www.supplychain-consulting.com