CHAPTER 1: INTRODUCTION
1.2 V ALUE OF C ARBON F OOTPRINT
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performance and consumer preference to a high extent; therefore, product life time is shorter than other consumer goods. Tai sun, a major player in the food and drinks industry, has recently released a series of environmental friendly products, most acknowledged is the popular Twist water. As a maker of food and drinks itself, Taisun is directly involved in the carbon footprint assessment and labelling process.
Because of the simplicity of the product, the product life time will be longer than that of electronic goods. These product and business model difference results in different approach to implement carbon footprint labelling scheme.
1.2 Value of Carbon Footprint
Carbon footprint label offers both monetary and intangible value to businesses.
This section discusses the numerous benefits of carbon footprint label. The most important strength of business is being able to hear the voice of consumers and align business capabilities with the commitment declared to consumers. The three circles that make up a business are voice of consumers, business capabilities and commitment to consumers. The degree of overlap of the three circles determines the degree of success of a business.
Figure.1.1 Three circles make up business
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With increasing awareness of climate change, consumers are demanding for new business practices and products with lower environmental impacts. The new need challenges businesses’ capabilities to deliver products requiring change in manufacturing process and communication language. To overcome this challenge in time and meet its commitment to consumers, businesses must adopt the new way of thinking and develop the new capabilities needed for the new demand. As mentioned earlier, the new factor affecting consumer choice is green-ness. 1) As climate change starts to impact the world and causes harm and dramatic loss both economically and socially, consumer demand for green products escalates rapidly. To meet consumer demand, businesses must shift toward sustainable practice to produce goods and services and build good corporate image. 2) Green-ness can be reflected by the corporate’s overall image and its products or services. Therefore, having green products can build a good corporate image. 3) Next, cost reduction opportunities.
Cost optimization has been the persevering goal all businesses are after; by assessing product carbon footprint, businesses can identify the hotspots for efficiency improvement and thereby reduce operating and manufacturing cost. Furthermore, as governments implement measures to reduce carbon emission, new kinds of litigation cost will get imposed on businesses. 4) Opportunities for improvement. As emission hotspots are identified, businesses can use the resulting data to make their next step, such as improving the manufacturing efficiency or transportation efficiency, so that both cost and emission reduction can be achieved.
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1. Corporate image
Corporate image is important to both the external public and internal employees and investors. According to Walkers (a UK subsidiary of PepsiCo), 44%
of consumers surveyed stated that Carbon Trust Carbon Reduction Label used on the company’s crisps makes them feel more positive about Walkers. Consumers considers the product maker’s corporate image for two reasons 1) to lower moral hazard risk, the risk of buying products made immorally or contains harmful substances 2) consumer’s belief is in alignment with the corporate image. Buying the product allows consumers to express their beliefs. For internal employees, corporate image attracts talents with the same belief and gives better career development opportunities. For external investors, a good corporate image means the business is doing well and is expected to get better and means higher stock price. Therefore, investors also want business with good corporate image. Having carbon footprint label on products informs consumers of the socially responsible behaviour of the corporate and builds and shapes the corporate image into a socially responsible brand.
2. Consumer demand
Consumers are the major drivers of the economy and constitute the biggest portion of the society; therefore, it is crucial for businesses to offer products and services matching the needs of consumers. In a study done by Carbon Trust on consumer perception of carbon footprint label, 79% of the subjects surveyed agreed with the statement: “it makes me more aware of the environmental impact of the products and services I choose to buy” and 71% agree that the Carbon Reduction Label: “helps me to reduce the carbon footprint of my regular shopping items”.
Consumer perception of carbon footprint label is positive among shoppers.
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According to a study done by TianXia (天下) magazine, the most important factors in Taiwanese consumer purchase decision are environmental-friendliness and price. The younger the consumer is, the more concerned this consumer is about price;
the more senior, the more concerned the consumer is about environmental-friendliness. Among the subjects investigated, the 30+-year-old group is the only group that is more concerned about brand rather than environmental friendliness.
Women and consumers above 50 years old put environmental-friendliness as the first priority for purchase decision. Furthermore, man puts price as the first priority while woman looks at environmental friendliness first. In addition, 84.7% of Taiwanese subjects surveyed first consider whether a product is water or electricity-conserving.
This is also the highest consensus among subjects surveyed regardless of age, region, and sex. According to Mr.Zhang Yangqian, the blog chief editor of Delta Electronics Foundation, consumers are most concerned whether green products can help save money. The products which save water and electricity and can receive government subsidy are most favoured by consumers even if not for environmental reasons. As can be seen from this investigation, cost saving is a key factor associated with environmental friendly products in consumers’ mind. Because utility comprises a significant portion of Taiwan consumers’ daily income, therefore, consumers favour products that will help them save cost in the future.
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3. Supplier Engagement
Furthermore, consumers’ engagement in sustainable development will lead to both environmental and economic benefits. When consumers demand for products and services that caused the least harm to the environment, while businesses meet consumers’ needs, businesses are also helping to reduce harm on the environment.
Labelling emission related information can first engage consumers in the supply chain and reach public commitment. When public commitment is reached, a sense of urgency will spread across the whole supply chain and compel all parties along the supply chain to follow through with emissions reduction measures. Second, consumers’ engagement in emission reduction. According to GfK NOP, 67% of UK consumers surveyed are more likely to buy a product with low carbon footprint and 44% would switch to a lower-carbon product even if the product was not their first choice (LEK Consulting Carbon footprint report 2007). However, consumers often comment that not enough information is disclosed for them to make the sensible decision. Although they are concerned with carbon emission of the product, they do not have the necessary information to make the right choice. Therefore, having carbon footprint information disclosed allows businesses to differentiate from other substitutes and allow consumers to make their decision carbon-wisely.
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4. B2B demands
Due to the complexity of the value chain, most businesses outsource their material from and production to different suppliers. For each material and production procedure, there are numerous suppliers and partners to choose from. For these upper-stream players along the supply chain to win orders from their B2B partners, they need to play according to their partner’s rule. These brand-companies are in turn need to play according to their consumers’ rule. When consumers determines they want a low-carbon market, brand-companies need to produce products and services with low emission and upper-stream players need to provide low emission products and services to brand companies, so that the overall carbon emission can be lowered.
As the graph illustrates, the end consumers are the major force pulling the brand companies and upper stream players. The size of the circles is relative to the size of the player in the market. Consumers are the largest proportion, then suppliers, then companies. Upper stream players are bigger in size than brand companies, because each brand company can have numerous suppliers to choose from. Therefore, becoming a competitive supplier to meet the needs of brand companies is the key to its survival. Suppliers with emission related information ready can save the time and cost businesses need to take in order to design their products and assess the overall product carbon footprint. Therefore, businesses will more likely to choose suppliers that have this information handy.
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Figure.1.2 Forces driving implementation of carbon footprint labelling scheme Wal-Mart, the largest retailer in the world, has announced clearly of its sustainable development goals. In the 2009 Sustainability Report, Mike Duke, CEO of Wal-Mart, stated that sustainability is not a philanthropic program; sustainability is completely aligned with their model, their mission and culture. Sustainability is built into their business because it is good for their business. To facilitate the adoption of a sustainable supply chain, Wal-Mart has provided the initial funding for the establishment of the Sustainability Consortium. The consortium is composed of universities that will collaborate with NGOs, governments, suppliers and retailers to develop a global database that will include product life cycle emission of all products.
As a major client to the suppliers, Wal-Mart’s strong bargaining power is able to drive supplier cooperation on the sustainable development initiatives.
5. Regulatory Risk
As carbon related policies begin to kick into effect, more businesses will be faced with the barrier to production and operation. Kyoto protocol has been an important compulsory means reinforcing countries’ engagement in the carbon reduction effort. Under the Kyoto protocol, each country must set reduction goals, and must act to achieve the goal. The cap and trade system assigns each country an emission quota; countries emitting over the quota will need to trade off the excess carbon emission with another country, whose carbon emission is within the assigned quota. The country quota then gets allocated to industries, and businesses will then be assigned a quota. Similar to the county wide system, businesses will need to manage their emission within the assigned quota, or they will need to trade or reduce their emission, or the worst scenario, cease operation. Industries with high emission level, such as food manufacturing, steel, aluminium, construction material, oil, need to be
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extra careful with carbon emission management, because, if not handled well, these businesses might have to go out of business due to government restrictions. Carbon labelling informs the public, the business's effort in carbon reduction, and it is in alignment with government's development policy. In Taiwan, the carbon footprint labelling practice has been actively promoted by the government as one of the efforts to reduce emission. When companies engage in carbon foot printing, businesses are demonstrating their support for government policy and in turn, face less regulatory risk in the future, when official legislation comes into place. There is a possibility that carbon foot printing can become a compulsory practice when it becomes a major factor influencing consumer behaviour. By then, businesses which have never been exposed to the practice will then react slower and less readily and lose their competitive edge when they play in the new low carbon market. During their adoption to the practice, others who have completed and learned the practice will play agilely in the new market, and respond faster to the changing consumer need, while the late-comers go through the learning curve and get stuck with the time-consuming application process. The European Union's Emission Trading Scheme issued allowance to companies to manage their emission level within the allocated amount. If the business emits more than it's allowance, the business must buy allowance from others in order to proceed with its operation, or it can buy carbon credits, which is derived from investment in abatement practice within the country or outside the country in which the business operates. The carbon credit allows the company to emit over its allocated allowance. For example, a major food manufacturing enterprise was restrained from production capacity expansion due to its high emission level. This can have devastating effect on the business, as businesses want to produce more to meet consumers’ demands. Therefore, it is faced with the
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option to buy allowance from others, reduce emission through operational improvement or buy credits. All of these are new costs influencing businesses operation. Cost optimization has been an everlasting goal for businesses and implementing the carbon foot printing practice now will be a new way to save future costs. Leading companies such as General Electrics, Alcoa and Excelon have called for rapid enactment of abatement schemes as they want to prepare themselves better for the future regulatory risks and strengthen their competitive edge, by adopting the practice earlier than their rivals.
6. Carbon Taxation system
A carbon tax is an environmental tax that is levied on the carbon content of fuels. Carbon taxes are one of the policy measures that can be used in reducing greenhouse gas emissions from fossil fuels. They help to address the problem of emitters of greenhouse gases not facing the full (social) costs of their actions. A number of countries have implemented carbon taxes or energy taxes related to carbon content and many have considered and proposed the implementation of carbon/energy taxes.
It is still a premature assumption that low carbon products are necessarily associated with a reduction in carbon tax. However, if both carbon tax and low carbon products are introduced, more understanding on the relationship between the two could be obtained and hopefully will make carbon footprint labelling and low carbon products an incentive for businesses to lower their cost.
7. Litigation Risk
Carbon related litigation risks are similar to those in tobacco, pharmaceutical and asbestos industries. Five of America's largest power suppliers are being sued and demanded to lower their carbon emission. Following the 2005 Hurricane Katrina,
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victims from Mississippi filed class action suit against operations of energy, fossil fuels, and chemical industries in the United States for causing the emission of greenhouse gases that contributed to the global warming. The victims claimed compensation and punitive damages from multinational companies including Shell, ExxonMobile, BP and Chevron. Other companies named in the suit include Honeywell and American Electric Power, with the residents charging that "the defendants' greenhouse gas emissions caused saltwater, debris, sediment, hazardous substances, and other materials to enter, remain on, and damage plaintiffs' property".
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