The Business Case for Carbon Footprints
- jamesalexanderfawc
- Aug 20, 2023
- 5 min read
Updated: Sep 18, 2023
Included:
We should all now be well aware of the environmental cost of carbon. To give us the best chance of avoiding the severe consequences of climate change, we must keep global temperatures from rising above 1.75°C. Carbon Dioxide (CO2) is intrinsic to global warming, trapping heat in the atmosphere because it is a greenhouse gas (GHG). To stop the effect of CO2 and other GHGs, many countries have committed to decarbonising (NetZero).
A planet sized problem, with nation sized players. But what does this mean for your brewery?
Total decarbonisation at 2050 was decided principally on the lowest yet adequate and realistic carbon budget that would be required to transition to NetZero. This budget however has depleted at a greater rate than expected putting pressure on the years to come.
“I’m absolutely convinced that we do not have until 2050” Jaap Spier
co-founder of an international expert group responsible for drafting the 'Oslo Principles on Global Climate Obligations'
If a country is to meet it’s climate obligations, so must the corporations that exist within it. We must prepare for government intervention that will incentivise decarbonation.
I’d like to explain some of the business implications of decarbonising, and hopefully provide you with another reason to build sustainability into your company strategy.
Let’s look at what’s on the table.
Carbon Tax
The UK ETS is the carbon tax that is currently enforced in the UK. It currently only applies to aviation and power generation. There is a cap on trade meaning that a finite carbon budget is available. This carbon budget is reduced by 5% every year making it more aggressive than it's EU counter part.
If the government is to meet their obligations, the scope of this tax will need to extend. It is likely that this extension will encompass Goods & Services which is where we come in.
Generally speaking, this could be applied following either a “downstream” or “upstream” approach.
Downstream
After a thorough life cycle analysis of the product, identifying all possible carbon contributions, the carbon emissions associated with the final product will be taxed. The recipient of this tax therefore will be the consumer, or your customer. The obvious implications of this is that the more carbon intensive the production and supply chain of your beer is, the more expensive it’ll appear on the shelf (unless you’re willing to take a hit). This is a “downstream” carbon tax.
Accounting for carbon in supply chains like this provides a lot of opportunities for error, fraud and inaccuracy. It is also, in a way, as Michael Liebreich put it, a form of “collective punishment” focusing on liability (and possibly awareness), rather than reduction. A fantastic way to understand the carbon related risk in the supply chain, but perhaps not the most effective way to actually decarbonise.
Upstream
An “upstream” tax levy places the additional cost on the consumer of the fossil fuel. In other words, a tax-at-use if there was a green alternative. This is much easier to account for as the emissions from fossil fuels are well known and meter readings are generally pretty precise.
Breweries that use gas will be hit the hardest with this approach, however it will also cause price spikes in your supply chain if some of your partners are particularly carbon intensive.
Whether downstream or upstream is on the horizon the fact remains that we should all be aware of the carbon intensity of our brewhouse and supply chain in the interest of security. A precariously carbon intensive supply change could pose a serious threat to the survival of our breweries (think the recent energy crisis). Re-calibrating and decarbonising sooner rather than later before a tax avoidance rush would be wise as green suppliers may not be able to cater for all.
There is reason to suggest that the application of these taxes may be limited. For one, it may be rather unpopular to put responsibility on the consumer/producer rather than the fossil fuel supplier, despite the fact that it does makes sense not to leave change in the hands of those with the most to lose. There is also the risk that introducing carbon taxes will discourage economic growth. However, undesirable as it may be, extending the scope of the carbon tax may very well be a necessity.
So if a Carbon Tax is the stick, let’s look at the carrot.
UK Taxonomy
In 2020 the European Union introduced the EU Taxonomy, it’s primary objective to encourage legitimate sustainable investment.
In 2025 it will be mandatory for all corporations with over 500 employees to disclose their sustainability credentials using the Corporate Sustainability Reporting Directive (CSRD).
In 2026 this will extend to “all large companies” and subsequently in 2027 to all Small and Medium sized Enterprise).
The reporting will demonstrate what if any of the corporations Capital Expenditure (CapEx) and Operational Expenditure (OpEx) contributes to 1 of 6 Environmental Objectives without compromising another. If they do, this will highlight them out as a sustainable business, providing verification to support Environmental, Social and corporate Governance (ESG) investment criteria.
Currently the CSRD does not account for the manufacturing of consumer goods but this will almost certainly be added before 2025.
Although yet to be implemented, the UK Taxonomy will adopt many aspects from the EU Taxonomy. It will no doubt be informed by the feedback received by the EU Taxonomy but it is unclear how this will manifest. If the manner in which the UK adopted the EU Carbon Tax is anything to go off, the UK version will be more aggressive. And since it is anticipated that a final implementation decision will be made later this year, nearly 3 years after the EU Taxonomy was implemented, it’s likely the UK government will be keen to make progress.
Reporting to these taxonomies will be the vehicle in which your breweries and other companies will access finance in the future. As greenwashing is clamped down on, investors will want, and have to, see verified sustainability reporting. Green Bonds will only be available to companies with the correct verification. This clearly goes for attaining green grants from the government as well.
Completing this reporting and being able to verify your sustainability could also be an excellent marketing tool. Indeed it’s not inconceivable that it may be the only way you can market your sustainability. There is a president for this with organic certification as it would provide another non-penal incentive, something that will be attractive to the government as it would not negatively affect growth in the same way that other incentives like carbon penalties would.
That being said, sustainability is not the only parameter investors are interested in, and there is a distinct lack of any negative reinforcement in the EU taxonomy. This may, as all of these factors, change as the pressure increases to meet NetZero obligations.
Conclusion
In short, your breweries are going to experience a lot of financial pressure in the near future as a result of decarbonisation. Whether from taxes on your use of gas, sudden price spikes from your carbon intensive supply chain or losing a competitive edge due to lack of investment, the way that decarbonisation translates to economics will create conditions that are incredibly difficult for some of your breweries to carry on as normal. Indeed, it is likely that we will all experience the squeeze as the whole supply chain transitions to NetZero.
Understanding your carbon footprint makes sense both for the environment as well as your business. In order to ensure that our breweries are robust enough to thrive and survive in the future, it is essential that sustainability is integrated into the business plan.
Would you like to work on your sustainability strategy? Get in touch and we can see what needs to be done.
Good luck out there.
James
Jaap Spier on Corporate Responsibility
Useful info on Carbon Tax
Heat Pump Decarbonation from Michael Liebreich
Useful explanation of EU Taxonomy
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