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Coal and Climate Change: Carbon reduction in supply chain

Coal power

President Trump’s executive order this week reversing what former President Obama put in place around carbon emissions was typical of the political theatre dominating headlines these days.

Trump called it an end to “the war on coal”, which makes a great sound bite, but clouds the issue. What really matters is finding an energy strategy that will work for the future.

The best way to do that is to follow the money.

Oil is Fading into History, But Coal is Almost Gone

Two years ago, I wrote a column arguing that oil is in steady, irreversible decline in terms of importance to the world economy. Its premise was basically that megatrends driving growth in intellectual property businesses like technology, bioscience and media are inevitably reducing the economic role of oil.

The clearest proof of this can be seen in the huge increase in GDP per barrel of oil since 1980, which shows ever more money being made without reliance on petroleum.

Coal is in even worse shape as an economic agent going forward. Where once coal drove the industrial revolution in Britain and fuelled decades of expansion in the United States, its recent history reads more like that of the horse and buggy.

Coal’s top three current uses, according to the World Coal Association, are electricity generation, steel production and cement manufacturing. These are not exactly IP-intensive, futuristic industries.

Electricity generation alone accounted for 91% of total US coal consumption in 2015, according to the US Energy Information Administration. Of course, now that the country is awash in natural gas, and alternative energy continues to gain ground in terms of availability and efficacy, coal’s appeal to its top customer is waning badly.

Throw in the Keystone and Dakota Access pipelines, now set to add to US energy supplies, and coal’s future is pretty bleak.

So far, I haven’t said a word about climate change – just that coal’s value proposition isn’t that great. Carbon reduction in supply chain, however, is another story.

Follow the Smart Money

Last December, no less a supply chain and business luminary than former Walmart Chairman Rob Walton published an opinion piece on why the Bentonville giant was “doubling down on its commitment to climate change”. The story includes $1 billion in savings in a single year on fuel, plus massive investments in alternative energy in its operations.

Not willing to stop there, Walmart is driving back into its supply base with a public commitment to remove 1gigaton of carbon from its supply chain by 2030.

Why would Walmart do this at the same time that it’s facing an existential threat from arch-rival Amazon? It can only be because it sees business value.

Walmart is not alone. Data collected by SCM World in our annual Future of Supply Chain survey finds that nearly half of all respondents say they’re investing in renewable energy because it “has financial payback”. In fact, the most enthusiastic support for investment in renewables is among the heavy energy users in the industrial sector.

It’s also the case that, across all sectors, the share of supply chain executives who say they see payback has risen substantially in the past year.

All the evidence says that climate change need not be scientifically proven beyond question for business to see benefit in spending money to reduce emissions.

Carbon emissions in supply chain terms is a proxy for waste. This lesson is well understood at companies with strong sustainability track records like Procter & Gamble, Unilever, General Mills and PepsiCo, all of whom save money on logistics, packaging and waste while working against climate change.

Equally important, energy as a supply chain input is a big component of total cost. Volatility in energy prices is a problem, since it can dramatically and unexpectedly affect margins. Google, for instance, maintains a highly-diversified portfolio of sources in support of its data centres to limit exposure to energy price swings.

The Sky is Not Falling

Political theatre suggests an environmental movement on the ropes. This is misleading. The business case for working against climate change in supply chain is too strong to kill with the stroke of a pen.

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