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Carbon exposure in supply chain


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  • 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
  • 10. Everyone pays 9
  • 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
  • 17. Everyone can play 16
  • 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
  • 23. Consumers do respond 22
  • 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
  • 29. Bigfoot is my Frankenstein 28
  • 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
  • 33. “End-to-end” value chain engagement and collaboration Walkers engineering Walkers recycling Potato & corn consultants producers Walkers plant management Walkers’ waste Sunflower / vegetable management partner oil manufacturers Walkers energy management Corrugated cardboard Walkers manufacturers Walkers’ waste management partner marketing Raw Procure Disposal Manufacture Distribute Consumers materials supplies Recycle Raw material producers Walkers network Walkers logistics & strategic planning network planning 32
  • 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
  • 37. Virtue as a weapon 36
  • 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
  • 41. Responding to supply chain exposure 40
  • 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. 44