A framework and risk analysis for supply chain emission trading
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Reports show that it is necessary to control greenhouse gas emissions from the supply chain perspective. Numerous authors have already started quantifying the impacts of emission trading on supply chain performance in terms of cost and emissions. However, rare effort is made to conceptualize this implementation. This paper generates firstly one conceptual framework for supply chain emission trading through a review of previous work and then asserts how practically it could work out. In addition, the risks confronted by firms and supply chains under emission trading are identified considering each step involved in the framework. These risks are further classified based on the concept of supply chain risks. Results show that the implementation of emission trading on supply chain would raise additional risks into existing supply chain risk portfolio. At last, this paper provides some risk mitigation measures for those identified risks.
KeywordsEmission trading Supply chain greenhouse gas emissions Risk analysis Supply chain emission trading
In order to be prepared for future environmental regulations and to improve market competitiveness, companies are realizing that they have to reduce greenhouse gas (GHG) emissions from a supply chain perspective. Supply chain GHG emissions account for around 75 % of the whole GHG emissions from an industry sector, while companies’ direct GHG emissions average only 14 % of their supply chain GHG emissions prior to use and disposal across all industries . The United States Environmental Protection Agency (USEPA)  released one report certifying that managing supply chain GHG emissions can effectively avoid exposure to lack of preparedness for complying with carbon regulations. In fact, numerous firms from the electronic industry (i.e., HP and DELL) and retail industry (i.e., Walmart) have already devoted themselves to voluntary supply chain GHG emissions reduction programs. Although there is so far no policy targeted on supply chain GHG emissions reduction, researchers have recognized that companies in pursuit of green supply chain strategies could leverage the opportunities offered by market-based instruments such as emission trading. Gupta and Palsule-Desai  mention that considering the social cost of carbon emissions in greening supply chain is one of future research opportunities. Long and Young  study intervention options to enhance the management of supply chain GHG emissions in the UK. They clarify supply chain tax, emission trading, and credit schemes as economic instruments among others to control supply chain emissions.
The general principle of emission trading is giving a limit, also called ‘cap’ on the overall amount of GHG emissions . Initial permits under this cap are allocated to firms. One permit gives a right to emit one unit of GHG emissions. At the end of a certain period, emission producers have to surrender permits in equivalent to their accurate emissions. Entities subject to emission trading are allowed to exchange permits via carbon markets with a certain price as needed. The price of permits is theoretically decided by the demand and supply in the market but also aligned to government regulation.
To construct a framework for supply chain GHG emissions reduction under emission trading and clarify the practical implementation, and
To identify the risks confronted by companies and supply chains subject to this system and to classify them into existing supply chain risk groups.
The rest of the paper is structured as follows. In Sect. 2, it proposes one concept and one framework for supply chain emission trading and discusses how such a scheme might be implemented practically. In Sect. 3, it identifies risks confronted by companies and supply chains in this system, classifies risks, and provides mitigation measures. Section 4 gives a conclusion concerning contributions and deficiencies of this work.
2 Including supply chain GHG emissions into emission trading
2.1 A framework for supply chain emission trading
Literature shows that emission trading might be employed as one cost-effective instrument for supply chain emissions reduction. Benjaafar et al. (2012) employs a lot sizing model to analyze two modes of emission trading coverage on supply chain. They find that imposing supply chain-wide emission caps is more cost-effective than individual cap installation on each firm and it also increases the value of collaboration . Jin et al.  propose the mixed-integer linear programming to investigate the impact of three carbon policies on supply chain design. The result shows that it costs the retailer less under cap-and-trade to significantly reduce the emission (e.g., by 50 %) compared to the other two policies. Fareeduddin et al. (2015) present one optimization model based on carbon regulatory policies for a closed-loop supply chain design. Optimal results show that cap-and-trade is the most cost-effective one among others . Zakeri et al.  present an analytical supply chain planning model to examine the supply chain performance under two policy schemes. They find that emissions reduction in a carbon trading scheme follows a relatively linear trend with a nonlinear cost increase . Carbon trading scheme results in better supply chain performance in terms of emissions generation, cost, and service level than carbon pricing. Chaabane et al.  provide a multi-objective mixed-integer linear programming model to address supply chain design problems and justifies that emission trading market may be used to reduce the carbon abatement cost.
Supply chain emission trading—this concept is extending emission trading to cover firms in the range of supply chains. It means, entities covered by emission trading scheme (ETS) could be not only single firms and installation, but also supply chains. Supply chain emissions as a whole are limited to a certain amount (so-called cap). Permits under this limit are allocated to supply chains for free, or for certain auction cost. Supply chains have to get permits equivalent to their accurate GHGs. At the end of a regulated period, supply chains have to buy emission permits from markets as any other organizations if their accurate emissions exceed the amount of allocated permits. Vice versa, supply chains could bank their extra emission permits for the use of next periods or sell for an earning.
2.2 Discussion for the practical application
How is responsibility assigned within the supply chain?
Who is responsible for the whole supply chain GHG emissions?
The largest company or the one with the most power among the supply chain.
Actor downstream in the supply chain where the goods are consumed.
Actor upstream in the supply chain where the goods are produced.
How to set one supply chain emissions reduction target?
3 Risk analysis for supply chains under emission trading
3.1 Risk identification
Risk is generally understood as a negative impact on the objectives of a company that is associated with disadvantages, damages, and losses. Risks within the supply chain are mainly triggered by disruptions of the material, information or capital flow between the partners . Kersten et al. (2006) define supply chain risk as follows. “Supply chain risk is the damage—assessed by its probability of occurrence—that is caused by an event within a company, within its supply chain or its environment affecting the business processes of at least one company in the supply chain negatively” . The task of supply chain risk management is “a collaborative and structured approach to risk management, embedded in the planning and control processes of the supply chain, to handle risks that might adversely affect the achievement of supply chain goals” .
Literature addressing supply chain emission trading in operational research points out that supply chain collaboration is one of the biggest risks to realize the implementation . Employing emission trading in the whole supply chain would result in cost-effectiveness as well as cost shift among supply chain partners. How to distribute the spared cost to supply chain partners is the key to get supply chain partners collaborated. Besides, emission trading is a politically established market-based instrument to reduce GHGs. Applying emission trading on the range of supply chain is subject to potential risks not only from market variation, but also from political interventions as well .
Agreement risks (responsibility allocation dispute)
Green investment risks (green investment uncertainty)
Volume risks (emissions accounting failure)
Market risks (trading market instability)
Policy risks (trading policy uncertainty)
3.2 Risk categorization
Supply chain risks can be categorized in many different ways and from different perspectives. One possible way is the classification of supply chain risks into two types: operational risk and disruption risk [25, 26, 27]. Operational risk is defined as “the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events” . Examples of operational risks are quality, delivery or service problems . Disruption risk is referred to natural or manmade disasters such as terrorist attacks, sociopolitical instability, strikes, earthquakes, hurricanes and floods [26, 27].
Supply chains under emission trading are exposed to additional risks. Being subject to the cap-and-trade, supply chains are confronted with risks from both policy and market perspective. By committing to reduce emissions under the cap, supply chain firms encounter new risks of green investment uncertainty and emissions accounting failure. Accounting failure would result also in surrendering not enough permits at the end of a certain period. In addition, supply chain firms must be exposed to the risk of responsibility allocation dispute when assigning the emissions reduction responsibility among supply chain partners. This risk is also raised by distributing the spared cost or extra benefit to supply chain partners.
3.3 Strategies for risk mitigation
To engage supply chain into emission trading based on leading firms in each supply chain. Leading firms are powerful to encourage supply chain partners to collaborate in reducing emissions together. And leading firms could also set emission reduction targets for other partners due to its large power and business attractiveness. Therefore, leading firms could be targeted as main subjects in the first step of including supply chains.
To learn experiences from existing ETS to set the supply chain emission limit so called cap. The cap could either be drafted by firms and permitted by governments or directly issued by governments. Permits could be allocated to supply chain partners according to the method ‘benchmark’ which benefits green firms and punishes others.
To jointly regulate permits price by market system and governmental intervention at the beginning. Too high or too low price would prohibit the goal of supply chain emission reduction. Proper intervention from the government is necessary to keep the price fluctuate in a reasonable range.
To clarify benefits and costs of green technologies through official third parties. Professional parties have experiences and experts to verify emission savings and costs of main green technologies, and these parties could be connected to the department of permits verification in existing ETS.
To import offset/credit concepts within the range of supply chain. It means, the leading company in the supply chain could get credits by investing into emissions reduction projects within the board of other supply chain firms. These credits could be used as additional permits in the existing emission trading market. Credit projects could also be invested by other supply chain firms and sold to the leading companies at a certain price.
To add agreements in business contracts among supply chain partners concerning cost/benefits allocation. There are many kinds of contracts that could compensate the loss of firms induced by emission trading, such as product price discount, operational contract extension, and so on. It would also offer mind share to refer to some quantitative models in operational research.
It is well recognized that in order to combat climate change, GHG emissions need to be managed from the supply chain perspective. This paper moves one more step forward on the base of literature by introducing one concept—supply chain emission trading and one framework in addressing emission trading in the context of supply chains. To implement the supply chain emission trading, this paper proposed to assign the responsibility of supply chain GHG emissions to the focal company in the supply chain by including the scope 3 emissions of the focal company into ETS. Moreover, this paper discerns itself from others by identifying risks for supply chains under emission trading program. From a corporate perspective, these risks are from policy instability, market variation, supply chain agreement dispute, green investment uncertainty, and supply chain GHG emission accounting failure. Moreover, based on the concept of supply chain risks, this paper attributes green investment risks to internal and external risks, policy and market risks to supply chain environmental risks, accounting risks to internal risks, and agreement risks to external risks.
The concept proposed in this paper lays the foundation for future research to address further qualitative issues involved in employing emission trading in the context of supply chain, such as analyzing the challenges and opportunities within the implementation processes. Besides, supply chain companies could follow the detailed steps and instructions provided in the framework when they are considering leveraging the opportunities offered by emission trading to manage their supply chain GHG emissions. Furthermore, having an overview of companies’ risks provides mind share for policy-makers before they start implementing emission trading in the context of supply chain. For example, they could make efforts to decrease the accounting failure risk by importing one unified supply chain GHG emission measurement tool or standard. Last but not least, this paper contributes in connecting supply chain risk management and supply chain emissions management through classifying identified risks into each group of supply chain risks. By doing so, it makes the resources and experiences in the area of supply chain risk management accessible to facilitate the implementation of supply chain emission trading, and paves the way for future research in risks assessment and evaluation.
However, this paper is just a first step towards realizing the employment of emission trading in the context of supply chain and it has limitations. The supply chain emission trading proposed in this paper works on the base that there exists a focal company in the supply chain. Nevertheless, it doesn’t apply to supply chains that are composed by many small and equally powerful companies.
Future research might consider conducting an analysis of challenges and opportunities involved in the implementation processes. For instance, the Monitor, Review, and Verify (MRV) system of ETS has to be extended to adapt for the supply chain scale in supply chain emission trading. In addition, it is worthy to explore other mechanisms to realize supply chain emission trading concerning different supply chain organizational structures. As suggested in this paper, supply chain credit scheme that incorporates the concept of credit/offset into the supply chain emission trading would provide flexibility. Furthermore, it is interesting to assess and evaluate those identified risks and investigate how they interact with the existing supply chain risk portfolio.
Authors appreciate reviewers for providing constructive comments on this paper. Besides, this paper is supported by Research Grants for Doctoral Candidates and Young Academics and Scientists from Deutscher Akademischer Austauschdienst (DAAD).
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