Supply Chain Frontiers issue #39
Greenhouse gas emissions trading systems might seem far removed from the everyday challenges of managing supply chains, but the integrity of these markets influences the actions that companies take to make their operations more environmentally sustainable. A research project headed by Dr. Youyi Feng, a researcher at the Zaragoza Logistics Center, Zaragoza, Spain, is exploring the link between the world of carbon credits trading and the practicalities of building green supply chains.
Current research on the economics of sustainability tends to focus on the economic efficiency of emissions trading systems or the evaluation of clean energy technologies, “but it does not attempt to connect the two,” Feng says. “We know very little about how profound the influence of emissions trading will be on the business operations strategies of manufacturing and logistics companies,” he adds.
Yet understanding these connections is vital to achieving sustainable economic growth. The two sides — credits trading and operations management — must be in synchrony when the goal is reducing greenhouse gas emissions.
The markets provide a mechanism for linking different industries and individual emitters across countries and regions, Feng explains. For example, a European manufacturer can acquire emissions credits by investing in pollution reduction programs in Asia. Strategies such as these create new challenges and opportunities for supply chain managers.
As Feng points out, if the systems for trading and allocating pollution credits are generally fair and efficient, greener supply chains that cut the consumption of fossil fuels, for example, can generate credits for the parent companies involved. A problem that has to be solved, he says, is how to convert the emissions reduction yielded by such a supply chain into carbon credits that can be traded on international open markets.
A system capable of performing this conversion reliably and equably will foster the financial incentives companies need to develop low-carbon supply chains. However, as the recent global financial meltdown underlines, much work remains to be done before existing markets are able to deliver this type of service, Feng believes.
Still, the rewards for those that succeed are considerable; limitless opportunities exist for businesses to generate profits and meet global sustainability targets. “For instance, an airline can purchase carbon emission credits from a steel maker for the purpose of launching new services,” Feng says.
Further, with such a regime in place it will be easier to make commercial decisions about green alternatives. “Emissions trading systems can reduce fuel consumption and create incentives to adopt renewable sources of energy,” notes Feng. For example, a company that can manufacture a product using new processes that are less polluting than established methods will be able to produce more units for a given number of credits. The operations department will be in a position to make a cost comparison between the two production strategies to determine which one is the most viable.
Feng’s Greensupplychain2009 research project is supported by funding from the European Union, and aims to help companies and regulators build credits markets that promote greener supply chains. In addition to exploring the principles that underlie the distribution of pollution credits, the project is studying how supply chains are planned and executed. For example, the researchers are reviewing production and inventory planning practices in the context of green markets, since enterprises such as steel makers have to regulate short- and long-term production output in accordance with emissions caps imposed by trading systems.
The research team will make recommendations on how to create a fair emissions credit trading system, and by implication, low-carbon supply chains. One of the ultimate goals, Feng says, is to “reach long-term, socially beneficial goals” through effective collaboration across geographies.
For more information on the research project, contact Dr. Youyi Feng at email: yfeng@zlc.edu.es.