August 16, 2023

Climate Change and the Supply Chain


climate changeDay in and day out, my newsfeed is full of headlines about companies that are looking to make sustainability an integral part of their business. It’s good to see these companies recognizing the impact of climate change, and changing their policies, sourcing, and manufacturing practices to reduce emissions. According to the United Nations, climate change refers to long-term shifts in temperatures and weather patterns. Such shifts can be natural, due to changes in the sun’s activity or large volcanic eruptions. But since the 1800s, human activities have been the main driver of climate change, primarily due to the burning of fossil fuels like coal, oil and gas.

Burning fossil fuels generates greenhouse gas emissions that act like a blanket wrapped around the Earth, trapping the sun’s heat and raising temperatures. The main greenhouse gases that are causing climate change include carbon dioxide and methane. These come from using gasoline for driving a car or coal for heating a building, for example. Clearing land and cutting down forests can also release carbon dioxide. Agriculture, oil and gas operations are major sources of methane emissions. Energy, industry, transport, buildings, agriculture and land use are among the main sectors causing greenhouse gases.

Simply put, humans are responsible for climate change, which is why so many companies and countries are installing policies to help reduce the impact. For example, the Inflation Reduction Act (IRA) was signed into law a year ago this week. The IRA puts the US on a path where reaching its climate change commitments is actually within reach. There were three main components to the IRA: health policy, ta policy, and climate and clean energy provisions.

The key health policy changes in the IRA included an increase in tax credits to subsidize the purchase of health insurance in the Affordable Care Act (ACA). The key tax provisions in the IRA include a minimum tax on corporate income, an excise tax on stock buybacks, and an increase in resources for Internal Revenue Service (IRS) enforcement.

The most well-known features of the IRA are the climate and clean energy provisions. The main goals are reducing greenhouse gas emissions from usage of fossil fuels and transitioning to cleaner sources of energy. The dominant strategy the IRA employs to lead the clean energy transition is subsidies, which means paying US businesses, households, and even sub-national governments when they make investments that will lead to reduced greenhouse gas emissions.

Similarly, the EU has implemented a tax structure to cut emissions. In 2005, the EU instituted a cap-and-trade system for businesses as a way to cut the emissions that drive climate change. Under this program, power plants and factories that emit carbon dioxide have to buy so-called allowances to account for the damage they cause. It’s a way to make companies pay to pollute. But the EU was basically handing out free allowances to certain industries out of fear of these companies would leave for countries with looser environmental rules. Now, the EU has decided to phase out the free allowances, and the taxes will depend on where a company manufactures its goods. For example, if a company manufactures a product in the US, the importer in the EU will be taxed for that pollution at the same rate a European company would pay for emissions under the cap-and-trade system.

While the impact on planet Earth is evident, and companies and countries are making strides to reduce emissions, climate change is also wreaking havoc on global supply chains. And there are a variety of ways in which climate change is affecting supply chains. Perhaps the biggest threat is rising sea levels. This can cause massive flooding for coastal cities, impacting manufacturing and shipping times. This can also damage coastal infrastructure, from roads and rails to bridges and ports. All of these can have disastrous effects on the supply chain.

But coastal sea levels are not the only issue. The instances of extreme weather events continue to grow on a yearly basis. This includes deep freezes in southern parts of the US, more named storms during hurricane season, and extreme heat around the world. All of these events can also lead to massive supply chain disruptions, and often times there is little to no warning before an event happens.

As I wrote about a few weeks ago, the Rhine River, which has been a reliable shipping lane for centuries, is at risk due to climate change. After brutal heat waves scorched southern Europe, the river at Kaub, a key waypoint west of Frankfurt, has hit levels this summer that mean some ships could carry only about half of normal capacity. While recent rains have eased the strain, even small changes can have a major impact. A drop of 10 centimeters (four inches) means about 100 fewer tons can be transported per ship. However, just a few years ago, heavy rainfall and snowmelt caused some banks of the Rhine River to begin to burst, triggering a halt in river shipping for several days.

In an equally troublesome bit of news, the number of vessels waiting to cross the Panama Canal has reached 154, and slots for carriers to book passage are being reduced in an effort to manage congestion caused by ongoing drought conditions that have roiled the major shipping gateway since the spring. The current wait time to cross the canal is now around 21 days. These types of disruptions can grind supply chain to a halt.

Another example is the flooding in central China last summer that disrupted supply chains for commodities such as coal, pigs, and peanuts⁠, and forced the closure of a Nissan automobile plant. SAIC Motor, the country’s largest automaker, announced that these disruptions caused a “short-term impact on logistics” at its giant plant in Zhengzhou, capable of producing 600,000⁠ cars a year.

These are just a few examples of how climate change can impact supply chains. New legislation and policies geared towards reducing carbon emissions and greenhouse gases are steps in the right direction. However, beyond policies and lip service, people need to step up and take a stand against climate change. Without improvements, supply chains, and the world as we know it, are in serious trouble.


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