Decarbonising the logistics supply chain: What’s on the mind of industry leaders?

This insights article has been co-authored by Sophie Punte, Founder and Board Member, Smart Freight Centre, and David de Picciotto, CEO and Co-Founder, Pledge.

Leading companies saw the writing on the wall long before the words “transition away from fossil fuels” appeared in the UAE Consensus at the conclusion of COP28.

Emissions from global logistics are set to increase by 42% by 2050 – making it the highest emitting sector by 2050 if nothing changes – yet need to halve by 2030 and reach zero by 2050 to meet Paris Agreement goals. At COP28, Pledge and the Smart Freight Centre (SFC) brought together leaders from global logistics to discuss the industry’s best routes to decarbonisation and share thoughts on how they can meet these targets. Here are ten insights from their discussion.

1. Voluntary initiatives help, but cannot be a full substitute to regulatory drivers

While voluntary initiatives, such as the SFC’s Global Logistics Emissions Council (GLEC) Framework, play a crucial role in fostering collaboration amongst industry leaders to elevate climate ambitions and strategise implementation, they cannot serve as a complete substitute for regulatory frameworks. Voluntary initiatives contribute to industry standards and best practices, as exemplified by the GLEC Framework—developed collaboratively by leading business, academic and industry experts. This framework, rooted in the GHG Protocol and integrated into CDP disclosures, forms the basis for the recently (2023) published ISO14083 standard, demonstrating its widespread adoption by businesses, accounting firms, and accredited emission calculation software solutions like Pledge.

However, for comprehensive impact and a level playing field, regulations are indispensable. They provide the necessary structure to ensure uniformity and offer investment certainty across the entire sector. The GLEC Framework's influence is evident in regulatory schemes such as the EU Corporate Sustainability Disclosure Directive (CSRD) and the proposed regulations by the US SEC, illustrating the symbiotic relationship between voluntary initiatives and regulatory measures in advancing harmonised logistics emissions accounting.

2. Kick off your emissions measurement journey even if the data isn’t perfect

Calculating emissions, particularly scope 3 emissions from freight suppliers, can be a daunting task for companies grappling with incomplete or varied data quality. Analogous to initiating financial budgeting for a new project, companies should begin with available data, adopt a conservative approach, and progressively implement processes for more comprehensive and accurate calculations over time.

The GLEC Framework and the SFC-accredited calculation tools exemplify this approach by assisting companies in transitioning from default emission factors, such as fuel type, to more sophisticated modelling, like average fuel use per trade lane. Eventually, companies can move toward utilising primary data collected directly from suppliers, including fuel usage by supplier fleets and ideally by individual vehicles. This evolution in granularity and accuracy enhances a company’s capacity to pinpoint reduction opportunities and substantiate investments. For instance, a company achieved confidence in the efficacy of fuel switching by meticulously registering the types of freight vehicles, thereby validating the potential for emission reductions.

3. Help stakeholders understand the value of decarbonisation initiatives

While measurement is crucial, effective communication presents its own set of challenges. Management often scrutinises the costs associated with climate action, and hesitates when these costs are presented as absolute figures or percentage premiums compared to the current status quo.

To simplify decision-making, it's essential to identify indicators that convey the value of decarbonisation initiatives in ways stakeholders readily grasp. Consider the case of sustainable aviation fuels (SAF), which may be 2-5 times pricier than fossil jet fuel. However, when SAF replaces only a small percentage of fuel, the per-flight cost premium for an airline carrier or freight forwarder becomes more manageable. Similarly, when persuading shippers as freight buyers to invest, presenting per-unit costs can enhance understanding and buy-in. For instance, a business heavily reliant on air freight for importing mobile phones might be deterred by a large annual sum for SAF. Yet, if the premium investment translates to a modest increase like 50 cents per mobile phone, it becomes more palatable. Embedding emission reduction costs into the cost structure of products lays the groundwork for a business-focused decarbonisation strategy.

4. Scope 3 emission measurement unlocks significant reduction opportunities on the journey to net zero

However, despite this challenge, scope 3 emissions typically contribute to over 70% of a business’s carbon footprint. This means that even small, quick wins in scope 3 emissions can exert a substantial impact on the total emissions profile. Remarkably, some companies find that the costs associated with decarbonisation measures are now lower for scope 3 emissions compared to their own operations and electricity use (scope 1 and 2). In scope 1 and 2, where many cost-effective measures like efficient machines and solar panels have already been implemented, scope 3 offers untapped potential for impactful initiatives. For instance, modal switching stands out as a strategy allowing companies to significantly reduce scope 3 emissions with minimal disruption to existing supply chain dynamics.

5. Procurement is the lynchpin for scope 3 decarbonisation

Scope 3 emissions from upstream and downstream transportation typically fall under the purview of sustainability teams, but a pivotal role lies with procurement teams that make purchasing decisions – like freight. The relentless focus on lower prices by procurement has led to a race to the bottom, leaving carriers with limited room for future planning or investments.

To bridge this gap between financial incentives and emission reduction opportunities, integrate climate considerations into procurement. This can involve adding carbon emissions costs to the product's overall cost, embedding sustainability metrics in the procurement process, and making emissions data sharing and reduction targets standard in every supplier contract.

6. Don’t be blinded by technological solutions, decarbonisation needs to be approached holistically

While the logistics industry focuses on electric trucks and renewable energy for sustainability, relying solely on technological solutions won't suffice. The root problem, especially in road freight, is the low utilisation of trucks. The solution demands a holistic approach that combines technology (e.g., electric trucks) with operational strategies (e.g., fuller trucks, modal shift, supply chain redesign).

While technological advancements are crucial, a balanced approach integrating operational efficiency often proves more financially attractive than technological measures alone.

7. Collaboration across the logistics supply chain is crucial

Systemic change in the logistics sector necessitates collaboration among multiple shippers to signal demand, co-invest in decarbonisation solutions, and enable shared freight suppliers to optimise logistics supply chains. Increased visibility of scope 3 emissions through calculation tools and data exchange platforms can be a catalyst for this transformation.

Internal collaboration within companies is equally vital, requiring the integration of decarbonisation into various functions, from accounting and communication to legal compliance, staff training, procurement, and logistics operations.

8. The growing importance of NGOs in supporting climate action across the value chain

Non-Governmental Organisations (NGOs) have been instrumental in elevating climate change on the agendas of businesses, governments, and investors. It's legitimate for NGOs to monitor how companies fulfil their climate commitments. Yet, it's crucial to recognise that companies are learning through action, and not every misstep is necessarily greenwashing.

The peril lies in "greenhushing" – where companies quietly invest without communication, impeding collaboration and shared learning. NGOs play a crucial role in facilitating data and knowledge exchange, mobilising financing, advocating for supportive policies at government and industry levels, communications and coordination as well as implementation of key industry initiatives.

9. Support for market mechanisms to help finance the transition

Companies are willing to invest in decarbonising their supply chain but seek recognition for it. A limited supply of sustainable fuels like SAF or maritime biofuels poses challenges for freight operators, and solutions like 'book and claim' are emerging – where a company that, as a customer, chooses SAF or maritime biofuels that has been “booked” into an emission tracking registry and “claims” the attributes of that low emission service as its own. Emission trading schemes and voluntary carbon credits are also utilised by companies, requiring clear accounting standards, interoperability and government regulations to ensure credibility. Clear and unambiguous accounting standards (including the GHG Protocol that is to be revised), government regulations and rules under Article 6 of the Paris Agreement are critical to guarantee the adoption of, and trust in, these schemes.

10. The imperative for adoption and scale of sustainable logistics: You need to build the business case

While regulations set minimum requirements for adoption, a robust business case is essential for effective and credible climate action. Decarbonisation should be framed in terms of both monetary and environmental impact. Considerations like total cost of operation (TCO), return on investment (ROI), and emissions reductions per invested dollar play a pivotal role.

The financial return on investment (ROI) is key, and for this the total cost of operation (TCO) should be considered alongside initial investment costs. Another consideration is emission reductions per invested dollar, which is why SFC introduced the term “total emissions of operation” (TEO) in parallel to the TCO. Finally, who pays for emissions reporting and decarbonisation measures will influence the business case (see "Additional discussion" below).

For example, electric heavy-duty trucks cost 2-3 times more than diesel trucks, but the TCO is in some cases already at par with diesel trucks. For vans and light-duty trucks the business case is even more solid. The TEO very much depends on the energy type used for power generation. Carriers normally buy trucks but leasing options including ‘trucking as a service’ can remove the investment barrier.

Who bears the costs of reporting and decarbonisation measures influences the business case, but we can’t wait for things to be perfect to get started – We need forward-thinking businesses to lead the way toward efficient and zero-emissions global freight and logistics.

Additional discussion: Who ends up paying the bill for environmental reporting obligations?

The impact and cost allocation arising from environmental reporting obligations – exemplified by initiatives like the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), Carbon Border Adjustment Mechanism (CBAM), and the EU Emissions Trading System (EU ETS) – ripple across the value chain, affecting virtually every participant. Here's a high-level overview:

Manufacturers and Producers

Direct Emissions (Scope 1): Manufacturers and producers with direct emissions may confront elevated compliance costs under schemes like EU ETS, potentially influencing production costs and pricing strategies.

Indirect Emissions (Scope 2 and 3): Indirect emissions tied to energy consumption and supply chain activities may trigger increased reporting and compliance obligations, exerting cost pressures.

Transportation and Logistics Providers

Fuel Costs: CORSIA-covered industries, e.g., airlines, might bear additional costs for sustainable aviation fuels or carbon offsets. CBAM could similarly impact transportation costs based on product carbon intensity.

Compliance Costs: Entities in the transportation sector may need to invest in new technologies and practices to meet emissions reduction targets, thereby amplifying operational costs.

Importers and Exporters

Carbon Costs: Importers might grapple with carbon costs for products under CBAM, contingent on their carbon footprint. This could potentially reshape pricing and competitiveness.

Supply Chain Adjustments: Exporters may face the imperative to enhance supply chain sustainability to align with environmental reporting obligations, translating into additional costs.

Consumers

Price Changes: The extent to which companies absorb or pass on costs associated with environmental reporting could bring about fluctuations in prices for goods and services, affecting consumers.

Product Availability: If environmental regulations catalyse alterations in production practices or supply chain dynamics, the availability of certain products may be impacted.