Sustainability & Social Responsibility

The Green Game Has Changed in a Marketable Way: Examining California's Cap and Trade Program

Author(s):

Marcia Daley, Ph.D., C.P.M.; Airano Mays; John Wilkerson, CPSM

May/June 2011, eSide Supply Management Vol. 4, No. 3

A new environmental policy in California will require procurement professionals doing business in the state to address carbon cap and trade or face additional cost pressures.

The passage of the California Air Resource Board Carbon Emissions Trading Policy on December 16, 2010 means the roles of supply managers, buyers and purchasers will change measurably this year. Enterprises and suppliers doing business in California must address carbon cap and trade in a meaningful way or face additional cost pressures.

What Is Carbon Emissions Trading?

Emissions trading — better known as carbon cap and trade — is a global administrative approach used to control air pollution by providing economic incentives for achieving greenhouse gas (GHG) reductions. Simply, the California Air Resources Board (CARB) plans to implement State Law AB 32 and set caps on the pollution which can be emitted by an enterprise. As California-based manufacturers', retailers' or distributors' emissions approach or exceed the approved limits in the future, companies must purchase a carbon permit. California State Law Assembly Bill (AB) 32 could impact suppliers throughout North America.

Carbon Management Implications

Multinational supply chain partners (manufacturers, transportation and energy distribution firms, for example) must prepare carbon emissions reports as part of de-carbonizing the California supply chain. Currently, more than 360 California known enterprises have not developed a comprehensive compliance program. By late 2011, all top carbon cap and trade emitters should expect business model changes in 2012. Supply management will no doubt be called on to reduce costs in the wake of potential cost increases. As such, now is the time to collaborate with strategic suppliers or face near-term cost and performance pressures.

Getting Started

Many North American suppliers have developed some sort of active or inactive sustainability program in varying degrees. Supply managers develop a supplier roadmap by prioritizing and analyzing the supply base. Tools such as spend analysis, market complexities or supplier-segmentation matrixes are popular tools in the buyer's toolkit. Once collaborative priorities are set, the first step is to determine the supplier's current sustainability program state.

Current state. Defining a supplier's current state of sustainability can be difficult to assess without a site visit to the supplier's facility. If the supplier can provide evidence of collecting the following carbon management categories, rest assured he or she can pass the "smell" test:

• Electrical consumption
• Natural gas consumption
• Propane consumption
• Transportation mileage by mode
• Waste consumption
• Recycling/waste diversion
• Business travel mileage by mode.

Future state. The supply manager's second step in developing an eco-friendly supply base will be to define a future state with current and prospective contract terms and conditions in mind. The process of exploring, engaging and enacting is a methodology adopted from the Six Sigma approach that is frequently used by many enterprises. Here's a macro perspective:

Explore: After collecting carbon emissions data, business leaders typically develop a change management business case. Sustainable business cases should include marketing strategy, management infrastructure and a return on investment (ROI) time line. ROI is an obvious mandate in the current economic climate.

Engage: The step following the exploration phase is to design a sustainability program that incorporates collaboration with suppliers. Developing a vision, team roles and carbon reduction targets are natural next steps in an enterprise and facility level carbon management optimization plans.

Enact: Sample supplier considerations such as marketing, sales and retail logistics program alignments are critical long-term carbon cap and trade program implementations.

Execution. As suppliers transition from current to future states, the final step is the execution phase, where the "rubber meets the road." This involves several factors that need to be addressed:

• Each supplier's employees are key to achieving the 2012-2015 carbon cap and trade goals and sustainability cost reduction strategy. Executives, senior management and first-line leaders must ensure employee alignment from the boardroom to the factory floor.
  
  
• Supplier branding, risk management and renewable energy options are all equally important execution considerations. It should be recognized, for instance, that corporate branding is just as important as bio-fuel or wind energy.
  
  
• Suppliers must transition from carbon emission data collection to broad sustainability reporting categories: direct carbon emissions, indirect carbon emissions (energy sources) and indirect carbon emissions (other sources).
  
  
• Operational efficiency should be each enterprise's near-term solution. Once this goal has been reached, this is a sure sign that your supplier has arrived. Reducing energy dependence reduces costs and carbon emissions.

Near-term benefits. By adopting the current state, future state and execution approaches, supply managers, buyers and purchasers can develop a near-term cost avoidance strategy from the California carbon cap and trade policy. The immediate benefit of developing a compliance strategy is twofold: proactive suppliers and cost management.

The CPO will be called upon to reduce the impact of the new air-quality law in 2011. In our current climate, the time for action is now.

Dr. Marcia Daley, C.P.M. is an assistant professor of decision science at the Clark Atlanta University School of Business Administration in Atlanta.

Airano Mays is the green supply chain team leader at Clark Atlanta's School of Business Administration.

John Wilkerson, CPSM is supply chain, sustainability practice leader for Bellwether Services in Stockbridge, Georgia.

To reach these authors, please send an e-mail to author@ism.ws.

For more articles and resources on sustainability and the supply chain, visit the ISM articles database.

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