Resource

Transportation and Climate

May 10, 2004

The Big Picture

The global flow of goods and people presents significant challenges in reducing greenhouse gas emissions. Transportation uses a quarter of the world’s energy and accounts for approximately 25% of total CO2 emissions — 80% of which can be attributed to road transport. Not surprisingly, the transportation sector is the fastest-growing source of greenhouse gas emissions; GHG emissions from transportation are expected to exceed 1990 levels by 32% in 2010 and 53% by 2020, if current trends continue.

Some of the most promising opportunities for GHG mitigation in the transport sector arise from the need to address a wider range of concerns about the sector’s social and environmental impacts. A growing number of companies realize, for example, that to achieve their environmental goals and satisfy stakeholders’ expectations, they will need to look beyond their own facilities and analyze their environmental management in terms of the supply chain. One of the key impacts of any supply chain is the distribution of products to the marketplace and incoming transport of raw materials to manufacturing. While manufacturing has migrated to countries and regions with low labor costs, the largest markets for the products have remained in developed countries, resulting in a longer journey from source to market.

Of course, the ground freight industry is not the only business source of emissions that contribute to the carbon footprint associated with road transport. Company motor pools, transportation fleets, passenger carriers, delivery services, and all types of road transport are relied upon for the purposes of commerce and industry. Companies leading the way in this field are upgrading their fleet of vehicles and measuring the results of their efforts. For instance, one near-term solution is to use alternative fuels or more efficient means of transport (e.g., biodiesel instead of gasoline, rail instead of trucking). In the long term, technologies being developed offer the potential to radically reduce transportation’s impact on climate change.

In addition to the progress being made by voluntary company efforts, policy mechanisms to reduce emissions are also being adopted. Businesses will play a key role in these efforts simply because businesses and industry account for such a large percentage of carbon dioxide emissions. In countries where the Kyoto Protocol is the overarching approach, regulators will seek to reduce their emissions through a variety of means that will impact businesses either directly (e.g., a cap on emissions) or indirectly (e.g., taxing emissions). In the U.S., the effect on businesses will depend on the extent of the emissions reductions sought through legislation or regulation. Regardless, the result over time will be a carbon-constrained economy in which businesses that have reduced their emissions will benefit.

Key Players

Companies. Transportation is an issue for every company. From reducing fuel costs through fuel efficiency improvements to offering employees incentives for taking transit to work, companies are discovering the benefits of reducing their transportation-related impacts. As new business metrics emerge for correlating emissions output with product transport performance, leadership companies will have a powerful added incentive for assessing the environmental impacts of their shipping activities.

Government. With a carbon-constrained future growing more likely every year, governments are beginning to create policy frameworks for addressing climate change. International, national, state, and local governments are exploring the impact they can have on transportation. California’s landmark legislation covering automobile greenhouse gas emissions will entail changes in the manufacturing of automobiles to increase fuel efficiency and encourage the production of low- and zero-emissions car models.

Public-private partnerships. Partnerships between governments, companies, and research institutions are leading the way with innovative solutions to reducing greenhouse gas emissions. New technologies, such as hybrid vehicles, are increasing the options for companies and creating cost-savings opportunities. The domestic U.S. effort to identify emissions performance standards or best practices, and to create a voluntary recognition program for improvement, is likely to be joined by accompanying efforts in the private sector. Multinational company (MNC) shippers seek to understand and begin to harmonize similar goals for their product carriers in the supply chain globally. Some MNCs believe that their capacity to positively influence the environmental performance of their product transport can and should be advanced with international coordination between countries with similar environmental goals.

The Upside

Reducing the contribution of transportation has many benefits for companies:

Higher cost savings through fuel efficiency: Increases in fuel efficiency for company vehicle fleets, shipping companies, and commuters have direct benefits from reduced costs for fuel. Many companies are beginning to calculate their savings and accelerate their low-emissions vehicle purchases. By concentrating on realizing efficiencies in the flows of products around the globe, companies are integrating climate management strategies into the logistics and procurement operations.
Strengthened brand identity: By positioning themselves as innovators, companies are tapping into a demanding market of environmentally aware consumers. Recognition programs highlight company contributions to climate change solutions and provide an avenue of communication that enhances brand identity.
Alignment with investor expectations: Shareholders, institutional investors, and socially responsible investment companies are demanding increased disclosure of business risks associated with climate change. Companies that respond to these concerns are more attractive investment opportunities. An expanding number of analysts, researchers, and investors now understand factors such as tons of carbon dioxide and kilowatt-hours of electricity from coal-fired power stations. In addition to looking at financial issues, they are undertaking risk analyses that look at how exposed a company is to emerging policy develoments around climate change and how much progress it has made toward managing emissions and registering reductions.
Increased revenue: Carbon offsets may prove to be a lucrative product that companies can use to increase their return on investment for reducing emissions. The World Bank’s “State of the Carbon Market 2004” report, a carbon market intelligence study, shows that the carbon finance market is establishing itself as one of the lynchpins in the fight against climate change. Halfway through 2004, more than 64 million tons of carbon dioxide equivalent (CO2e) were traded — which adds up to nearly three quarters of the 78 million tons transacted in all of 2003.

Reality Check

Uncertain government policy: There remains an uncertainty around international accords to address the threat of climate change. Although the Russian Duma has ratified the Kyoto Protocol, the future of the agreement is called into question by the United States’ refusal to ratify and developing countries concerns that limiting greenhouse gas emissions will stunt economic development. Europe’s emissions trading scheme goes into effect in January 2005, but its effectiveness remains to be seen. In the United States, state and regional efforts to address climate change create market distortions that may increase the regulatory burden of companies. On September 24, 2004, for example, the California Air Resources Board announced that they had approved a landmark regulation that requires automakers to begin selling vehicles with reduced greenhouse gas emissions by model year 2009.
Carbon markets in their infancy: The Chicago Climate Exchange serves as a marketplace for emissions allowances (a specified amount of carbon emissions allocated to a company under a voluntary cap and trade system — a company must either sell excess allowances or buy enough to equal actual emissions). However, the exchange only covers companies that have volunteered to participate, which limits the market’s value. In the United States, emissions reduction credits, which are verifiable reductions in greenhouse gas emission from a specific project compared to a business as usual baseline, face similar hurdles because U.S. credits cannot be traded on world markets. In isolation, market demand and the price for reduction credits are limited.
Market barriers to entry: Industrialized countries have highly developed infrastructure for production, distribution, and consumption of fossil fuels. Alternative fuel vehicles, such as hydrogen-powered fuel cell automobiles, must start from scratch. Although some efforts have begun at developing an infrastructure, market demand will be constrained until the infrastructure exists.

Action Plan

Make a commitment. By setting a goal for reducing emissions companies will have a concrete target for measuring progress, and a opportunity to earn recognition and respect.
Assess your footprint. Determine baseline emissions from business activities and have the accounting verified.
Find partners. Partnerships between governments, companies, and research institutions are leading the way with innovative solutions to reducing greenhouse gas emissions.
Reduce emissions. In an increasingly a carbon-constrained economy, businesses that have reduced their emissions will benefit.
Investigate GHG-reduction markets. Carbon offsets may prove to be a lucrative product that companies can use to increase their return on investment for reducing emissions.
Seek recognition. Recognition programs highlight company contributions to climate change solutions and provide an avenue of communication that enhances brand identity.

Leads

TransportEnergy, a U.K. nonprofit, offers grants for reducing greenhouse gas emissions from road transport.
SmartWay Transport is a U.S. voluntary program encourages ground-freight industry to reduce emissions and improve fuel economy.
The Climate Neutral Metrics Worksheet includes calculations for emissions from commuting, business travel, and product transport.
U.S. DOE’s Fuel Economy Calculator computes the gas mileage, fuel costs, and annual greenhouse gas emissions of a wide variety of vehicles.
The Teleworking Impact Estimation Tool allows users to estimate the net environmental impact of teleworking.
The report Changing Drivers: The Impact of Climate Change on Competitiveness and Value Creation in the Automotive Industry examines how the value of the world’s leading auto companies will be affected by emerging global policies about the auto industry’s role in climate change.
Questionnaires for the Purchase of Environmentally Sound Transportation are designed to help business evaluate and eventually reduce the environmental impacts of its shipping.

The Bottom Line

The sheer necessity of moving goods and people means the opportunities for companies to address their transportation footprint are plentiful both in terms of emissions reductions and corporate social responsibility. Increasingly, government regulation of industrial greenhouse gas emissions will put high-emitting companies at greater financial liability risk. As production facilities move farther away from major markets, companies that have the means to efficiently ship and deliver products — and transport workers — while minimizing greenhouse gas output will be far ahead of the game.