Competitive Strategy for Green House Gas
~ Why Blockchain fits to the tracking of Green House Gas? ~
Control and reduction of Green House Gas (GHG) emissions is undoubtedly the greatest challenge of the 21st century. Dr. Yoshiro Manabe was awarded the Nobel Prize in Physics in October 2021 for his work on the model to predict the impact of GHG on global climate change. He’s been sounding the alarm on the necessity to reduce GHG emissions since 50 years ago, when computer processing speed was 1/100,000th of what it is today.
Carbon Neutral is a familiar theme in our daily business activities. In recent years, there has been an accelerating trend for companies to demand that their suppliers in the supply chain make efforts to reduce GHG emissions. For example, Volkswagen has made it a bidding condition to use LNG-fueled ships and claims that this will reduce GHG emissions by 40%. This way, the initiative to reduce GHG is not only for protecting the global environment but are beginning to influence over corporate relations.
In this piece, I would like to explain the social trends surrounding GHGs and introduce how we can make the best out of Blockchain as a powerful tool for GHG tracking.
Japan is a leading country in GHG emissions disclosure!?
First, let’s look at GHG-related developments. In fact, Japan is leading the world in terms of GHG emissions disclosure. There are more than 2,600 companies and institutions worldwide accepting the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD), an international framework for GHG emissions disclosure. The number of Japanese companies/institutions who supports TCFD is 527 as of October 2021. This is the largest in the world, ahead of the UK (384) and the US (345).
In addition, Financial Services Agency (FSA) in Japan considers making the disclosure based on the TFCD recommendations mandatory for the listed companies (especially in the “prime market” participants after April 2022). About 4,000 companies listed in Japan may be subject to disclosure sometime down the road.
Challenges in calculating GHG emissions
The number of companies declaring the commitment to Carbon Neutral is expected to increase in the future. On the other hand, a difficult task awaits them on the ground level. This is so-called Scope 3 calculation.
GHG emissions generated by the entire supply chain are divided into Scope 1, 2 and 3.
Scope 1 covers direct GHGs generated by the company itself, such as stationary combustion. Since they are under the company’s control, the emissions can be easily calculated. Scope 2 refers to indirect GHGs such as electricity, heat, steam, etc., which are also consumed by the company and can be captured by checking the electricity meter. The problem is Scope 3. This is the emissions generated upstream or downstream of the supply chain. Unlike Scope 1 and Scope 2, it is different in a sense that nothing can be done by self-help efforts. For this reason, the only way to calculate them is to ask your suppliers and buyers to report the emissions. In industries such as construction, automobile, food, fashion, and FMCG (Fast Moving Consumer Goods), it is said that the Scope 3 GHGs exceeds 80% of the total emissions.
Companies will need to calculate their GHG emissions more quickly and accurately to disclose them in Integrated Reports that will have to be audited like Financial Statements sooner or later. This is an arduous task. The question is, does it get our money’s worth with the huge cost of calculating and disclosing these emissions? Is there any way for GHGs somehow to contribute to differentiating ourselves?
Kazumasa Sakurai of Boston Consulting Group comments in his book, BCG Carbon Neutral Management Strategies (Nihon Keizai Shimbun Publishing), that “the integration and recombination of supply chains that transcend the relationship between suppliers and customers can be an irreversible advantage that, once realized, cannot be easily broken (NOTE1). In light of this, it is hoped that the collaboration between suppliers and buyers that will begin with the Scope 3 collection is to be sublimated into efforts to enhance competitiveness as a whole supply chain.
An era to compete in “Low Carbon”
Collaboration is key in the trend of capitalizing data and digital technology. Ministry of Economy, Trade and Industry (METI) in Japan, in its DX Report, proposes to create a common platform for data collaboration among companies.
Prime example of the common platform that has already been implemented in Japan is “NEXCHAIN”, which is working on multiple use cases. One of them is a one-stop moving service that has been in production since January 2021. This is a service that aims to reduce the complexity associated with procedures such as change of address when moving by linking up data between companies.
NEXCHAIN is building convenient services from the consumer’s point of view, beyond the boundaries of companies. In this sense, we may say that the digital society is approaching an era in which a group of businesses, rather than a single corporation, competes against another group of companies by maximizing the use of data and digital technologies.
In the same context, visualizing and reducing GHG emissions through the collaboration will help all companies in the supply chain to build competitive edge in the value of “Low Carbon”. Obviously, data and digital technology is a prerequisite to achieve this.
Compare channels using GHG emissions as a key
From here, I discuss the supply chain competitiveness by illustrating an example. Supposing a company, Japan Auto ltd, which manufactures automobiles. To produce a car, the company purchases parts (a car body in this case) from a supplier through multiple commercial channels. Let’s assume that there are two channels, Channel 1 and 2.
Channel 1 emits 1,000kg-CO2 for the delivery to Japan Auto ltd.
Company A (500 kg) + Company B (300 kg) + Company C (200 kg) = 1,000 kg-CO2.
While Channel 2 emits the CO2 of 1,100kg for the same car part.
Company X (500 kg) + Company Y (400 kg) + Company Z (200 kg) = 1,100 kg-CO2.
Since Channel 1 and 2 are composed of different companies, even if they produce the same part, they have different GHG emissions. If Japan Auto ltd, as a buyer, can grasp the difference in emissions, it is clear that Channel 1 is more competitive and valuable. With this, Japan Auto ltd is able to make a decision to increase the purchase amount from Channel 1 and reduce it from Channel 2. As such, the supply chain competitiveness can be evaluated by comparing the channels with “visible” GHG emissions.
Issues in Scope 3 collection
However, it is not easy to aggregate the Scope 3 emissions needed for the channel comparison. Currently, it is “a grand bucket relay in an honor system” that is conducted across supply chains.
Supply chains are allied by trust based on corporate relationships. However, this is where the problem arises for suppliers. GHG emissions can be used not only for disclosure, but also for the decisive factor to be selected by buyers. Each supplier has an incentive to make its GHG emissions appear lower than they are.
Let’s say, in the situation above, Company Y in Channel 2 reports its GHG emissions to Company Z honestly. However, Company Z, the final supplier to the buyer, wants to appeal to Japan Auto ltd with their parts being a low-carbon product. In this case, Company Z may show the buyer a lower amount of GHG emissions than Company Y reported.
In this way, when GHG emissions are used and seen as a benchmark for buyers to choose suppliers, it is likely that “creative” GHG emissions might occur. Such cases may be rare, but as long as there is an incentive, we need to take some actions to prevent it. So, how can we prevent such falsification and ensure that we are receiving the exact amount of emissions generated? This is where Blockchain can intervene.
Implementing Compliance
For instance, Corda, a Blockchain developed by R3, can be used to solve this problem: When GHG emissions themselves are passed on in the form of data, the following features can be implemented.
- GHG emissions data can be recorded in a database only when both supplier and buyer agree to it. Logics can be coded to automatically approve the transaction when it meets explicit approval actions or some other predetermined criteria (so-called Smart Contract).
- Once recorded, GHG emissions cannot be arbitrarily changed for the convenience of one party. In case of discrepancies or errors, the two companies will agree to update the records again (the update history will remain).
- Suppliers at the higher end can pass on the recorded GHG emissions to the lower end suppliers without being overwritten. Buyers are able to see a breakdown of which suppliers emit and how much.
If GHG emissions can be passed across supply chains on Corda in this way, it will also help to ensure the authenticity of Integrated Reports. Tracking GHG emissions is something that can only be solved through the collaborative efforts of multiple companies and is a system that benefits all companies in the supply chain. Put it the way round, it is important to keep in mind that suppliers who fail to report their own GHG emissions on the system may not be able to do business with in the first place.
Finally
Many companies are now busy calculating their GHG emissions. Many of them are seeking “the correctness of the calculation logic”. Yes, it is necessary to establish the logic first for the immediate pressing disclosure demand. However, the day will come soon when we will be able to make decisions based on GHG emission figures. At that time, will we be able to clearly answer the question, “Is the data really accurate? If the data is backed by Blockchain, the answer to this question will be different.
（NOTE1）日経BP 日本経済新聞出版本部, BCGカーボンニュートラル経営戦略 ”脱炭素”で成長する「守り」と「攻め」の取り組み, 日本経済新聞出版, 2021, P.37
