Supply Chain Carbon Emissions: Impacts and Risks

What are supply chain emissions?

Supply chain emissions are the greenhouse gas (GHG) emissions associated with the production and distribution of services and goods across a company’s supply chain. Typically, these emissions are generated by suppliers which companies purchase services or goods from — as well as from the customers which a company sells goods or services to.

Part of the GHG category Scope 3 emissions, supply chain emissions usually represent the largest portion of Scope 3 emissions. On average, they are 26 times higher than Scope 1 and 2 emissions — meaning that for certain industries and manufacturers, they are the most substantial part of a company’s carbon footprint, around 90%. This is why tackling supply chain emissions — by collaborating with suppliers to measure and reduce them — is one of the most important ways a company can lessen its environmental impact.

Transportation is often seen as being the biggest driver of supply chain emissions — however, it is raw material inputs from land use and heavy industries which make up the largest share of supply chain emissions worldwide. For example, producing one tonne of primary aluminum leads to average emissions of around 10 tonnes of CO₂e. Shipping this aluminum around the world, and back to where it started, leads to less than 1 tonne of CO₂e emissions.

Supply chains can be drivers of climate change and lead to issues such as water insecurity and deforestation, which is already impacting companies. However, tackling these emissions gives businesses power to accelerate climate action.

Why is it important to make supply chains more sustainable?

Supply chains generate the majority of emissions

Companies increasingly recognize that their environmental impact extends beyond their direct operations. Businesses cannot fully understand their climate risk without looking at their entire value chain. To create a net-zero global supply chain by 2050, companies need accurate emissions data to lower their carbon footprint, at every stage along the supply chain.

Businesses who source carbon-intensive commodities — including manufacturers, commodity traders, logistics firms and trade finance providers — face increasing pressure to take responsibility for tackling climate change by accelerating decarbonization across their value chain. For companies to calculate an accurate and complete carbon footprint, it is imperative for supply chain emissions to be considered.

Requests for carbon data are mounting

As mounting reporting requests for complete carbon footprints continue to rise, companies will struggle if they do not have access to accurate supply chain carbon data. Legislators are increasingly scrutinizing products’ climate impact, and developments such as the EU CBAM, the USA’s Foreign Pollution Fee Act and Australia’s carbon leakage review will require businesses to better manage their environmental impact.

In the EU, the Corporate Sustainability Reporting Directive (CSRD) is already impacting the way European companies disclose their sustainability reporting, while the International Sustainability Standards Board (ISSB) launched in 2021 is set to elaborate sustainability-related financial standards to meet investors' reporting needs.

Supply chains house hidden risks

On the road to net-zero, carbon-intensive sectors face significant disruption. It is important for businesses — such as those sourcing extractive or agricultural commodities — to measure and manage their carbon risk. Reporting supply chain emissions will also reduce both reputational and financial risks, as this will help companies understand how their business will be affected and where they can take action. Fossil fuel production is unpopular with the public and becoming increasingly expensive, while stranded assets also pose a global economic risk. 

Supply chain emissions are difficult to calculate — but companies who prioritize supply chain accounting will be in an ideal position to measure financial risks, comply with legislation and secure market share in the low-carbon economy. Commodity trade finance providers are in a particularly advantageous position to drive commodity emissions reduction at scale.

Sustainable finance favours sustainable supply chains

Measuring supply chain emissions accurately also provides companies with an opportunity to invest in more sustainable products or ESG-related loans. An estimated $150 trillion of the global economy is actively re-wiring to transition to clean energy to meet 2050 net-zero targets. When companies have a clearer idea of the embedded emissions in their products, they are in a position to future-proof their business model by prioritizing low-carbon solutions. CarbonChain provides detailed insight into the emissions of the most carbon-intensive industrial sectors so they do not get left behind.

Industry example, supply chain emissions: Metals — steel & aluminum

Measuring and reducing your supply chain’s GHG emissions is especially important for commodity traders, as polluting supply chains hide a range of carbon risks. 

Zoning in on the metals sector: steel is the foundation of our transport networks and built environments — and it is also one of the world’s highest-emitting materials. Steel products can be as small as screws and bolts and as big as major components of buildings and they are used in industries like construction and automotive, which are crucial to decarbonize.

Aluminum is a carbon-intense metal which is becoming an increasingly important component of low-carbon technologies, such as solar panels and wind turbines.

To understand the true carbon footprint of products made from steel or aluminum, or of a company who buys and sells aluminum or steel, the product needs to be tracked from the source — by taking a closer look at the full supply chain.

For many steel products, the largest contributor to production emissions does not come from forming components, transportation or installation — it comes from the initial production of the crude steel from iron ore. Around 80% of steel is made in blast furnaces, with average emissions of around 2 tonnes of CO₂e, per tonne of steel produced. Comparatively, steel transport, shaping, cutting, forming and installation — combined — may only add another 0.1-1 tonnes CO₂e, even if the product is transported through long distances. 

Aluminum emissions vary wildly depending on where energy is sourced from. Producing one tonne of aluminum could lead to between 3-20 tonnes of carbon dioxide equivalent in carbon intensity. The most carbon-intense step in aluminum production is smelting, which occurs via electrolysis — a process that uses high quantities of electricity.

For steel production, technologies are already available to reduce its carbon-intensity — such as direct reduction of iron ore, which does not require a blast furnace and using hydrogen generated from renewable sources. Nevertheless, the speed at which steel production is decarbonizing needs to be accelerated. 

Aluminum producers are switching power sources to more renewable options to reduce carbon emissions where possible, and modifying the relatively inefficient carbon anode production process. Other decarbonization methods for aluminum products include minimizing on-site waste and collaborating with suppliers to decarbonize their processes and energy procurement.

It is clear that product design decisions can have a large impact on steel emissions downstream. For example:

• For steel car parts, reducing the total weight of the car will result in fewer emissions from fuel, making this one of the best methods to reduce life cycle emissions from the car.
• In a building, designing eco-consciously and choosing materials that lower the need for heating and cooling can also help lower total emissions, in addition to choosing alternative materials with lower embodied carbon emissions, such as wood.
• At end-of-life, improving recyclability is often the best way to reduce emissions, as recycling steel reduces the need to produce primary steel from iron ore, and therefore results in lower emissions for future steel products.

Due to variations in emissions, supply chain tracking in the metals sector needs to be as specific and accurate as possible. The global regulations outlined above are targeting the metals trade — to capture embedded emissions in goods and put a price on them. This is also why companies who buy and sell steel and aluminum are starting to differentiate with carbon transparency and targets to cut emissions.

By choosing CarbonChain’s platform, commodity traders and manufacturers can fill supplier data gaps, identify hotspots and screen assets, which will enable them to achieve emissions reductions more effectively.

CarbonChain helped aluminum company Fusina make procurement decisions to reduce their product footprint and commit to sourcing low-carbon inputs for its aluminum production facility. Learn more in the video below.

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How to reduce the carbon footprint of your supply chain

What isn't measured cannot be managed. The first step to reduce your emissions is to know what they are. High-quality data is key to accurately understanding the emissions along your supply chain.

Once you've measured your supply chain emissions, you can identify hotspots, which are the largest areas of carbon emissions where focus will lead to the most meaningful reductions. There is little point in reducing emissions at a certain step in your supply chain if these emissions are insignificant over the whole product value chain.

As soon as companies know their hotspots, they can work out a plan to reduce them. This may involve working with suppliers to reduce their emissions, or buying a larger percentage of inputs from low-carbon suppliers. It may also involve on-site efficiencies to reduce material losses, or to make products last longer.

However, calculating supply chain emissions is known to be extremely challenging, due to the need for supplier emissions reporting, which can be incomplete or non-existent. There is also the difficulty of obtaining asset-level emissions factors instead of global averages. The methodologies for supply chain carbon accounting require expertise that many businesses do not have in-house. 

The global carbon disclosure platform CDP enables companies to engage suppliers in emissions reporting, while CarbonChain leverages big data and technology for companies to close their supply chain carbon data gaps quickly and accurately, by using a vast independent database of asset-level emissions factors. Leading manufacturers, commodity traders and their banks are already tapping into this tool — and using CarbonChain's supplier engagement module for CBAM reporting.

How can CarbonChain help make your supply chain more sustainable?

Decarbonization efforts are only as strong as the information powering them. Supply chain emissions are tricky to calculate, and over 90% of companies are currently not measuring emissions correctly.

By using CarbonChain’s platform and validated carbon accounting methodology, companies can obtain accurate Scope 3 emissions data and lower their carbon footprint at every stage along the supply chain. Gunvor Group, one of the world’s largest independent commodities trading houses, met customer demand for carbon disclosure using CarbonChain for accurate supply chain footprinting.