Chapter Four: Cars and How Corporations Can Make Their Supply Chains Green

Overview of the Episode

Before doing Episode 4 of the podcast, I watched this Ted talk by Jens Burchardt about how the green premium for many products is smaller than we may think. Mr. Burchardt and his team at Boston Consulting Group have been calculating what it would cost to produce products that are CO2-neutral. For an average European mid-size sedan with a price of 30,000 euro, the green premium would only be 500 euros. The explanation is that the extra cost from the supply chain is low compared to the cost to the final consumer — only about 40% of all expenses come from suppliers. However, a large part of that goes to shipping and production. Ultimately, only 15% of the price of the car comes from the materials in it. That means that even if a company has to pay 50% more for the steel, it is only a fraction of the final sales price to the customer. The low extra cost is also something consumers could be willing to pay, but companies are held back because of price competition (Burchardt, 2021).

The Political Environment is Driving Supply Chain Developments

The policies in most countries are evolving to limit emissions from industries. In California, new laws will force a “40% reduction in the carbon intensity of cement” by 2035 (compared to 2019). It creates an incentive for companies to innovate and can guide other large cement-consuming countries such as China and India with new laws (Lobet, 2021). Likewise, most of the world’s countries have pledged to be carbon neutral by 2050 (Wallach, 2021). To do that, legislators will have to be busy making new laws similar to the ones made in California but across industries.

Hybrit and the Difficulty for Politicians to Choose Optimal Investments

One of the main questions I had to Thomas Hörnfeldt was his view on the critics on Hybrit by Professor Magnus Henreksen. Prof. Henreksen calls Hybrit “environmental nationalism,” as they decrease Swedish carbon dioxide emissions but increase emissions on a global level (Törnwall, 2021). The argument is that the enormous amounts of electricity required to produce “green steel” would be more helpful to export to Germany and Poland to outcompete “dirty coal power.” Instead, Prof. Henreksen and his affiliates argue that legislating higher costs on carbon emissions would incentivize companies to recycle steel instead of producing new. According to Prof. Henreksen, the additional problem is that the state has decided to invest so heavily in Hybrit, and he sees similarities with significant investments in ethanol cars during the 2000s.

Dealing with the Complexity of Supply Chains to Reduce Emissions

Not only do states and governments need to choose policies that favor specific technology, so do companies. In the conversation with Miranda Hadfield, it became clear that corporations can change how they make their products. Although the consumer price may be slightly higher, emissions go down, making them comply with increasingly challenging policies.

Figure 1: Nine supply-chain initiatives chief executive officers should push for (World Economic Forum, 2021).

References

Ahlberg, M. (2013). Linking Different Emissions Trading Systems — Current State and Future Perspectives. German Emissions Trading Authority, 21.

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Johannes Frosteman

Johannes Frosteman

Publishing my book on “Green Premiums”, analyzing the podcast episodes in Green Premiums Podcast. Student at Minerva University. Contact me: frosteman@gmail.com