Double Counting in Supply Chain Carbon Footprinting

Abstract

C arbon footprinting is a tool for firms to determine the total greenhouse gas (GHG) emissions associated with their supply chain or with a unit of final product or service. Carbon footprinting typically aims to identify where best to invest in emission reduction efforts, and/or to determine the proportion of total emissions that an individual firm is accountable for, whether financially and/or operationally. A major and underrecognized challenge in determining the appropriate allocation stems from the high degree to which GHG emissions are the result of joint efforts by multiple firms. We introduce a simple but general model of joint production of GHG emissions in general supply chains, decomposing the total footprint into processes, each of which can be influenced by any combination of firms. We analyze two main scenarios. In the first scenario, the social planner allocates emissions to individual firms and imposes a cost on them (such as a carbon tax) in proportion to the emissions allocated. In the second scenario, a carbon leader voluntarily agrees to offset all emissions in the entire supply chain and then contracts with individual firms to recoup (part of) the costs of those offsets. In both cases, we find that, to induce the optimal effort levels, the emissions need to be overallocated, even if the carbon tax is the true social cost of carbon. This is in contrast to the usual focus in the life-cycle assessment (LCA) and carbon footprinting literatures on avoiding double counting. Our work aims to lay the foundation for a framework to integrate the economics-and LCA-based perspectives on supply chain carbon footprinting.

Technology Choice and Capacity Portfolios under Emissions Regulation

“…The same is implicitly true in Caro et al (2013) at the firm-process level. These papers therefore do not consider firms' portfolio decisions and the implications of those decisions, which is our focus here.…”

“…Drake (2015) does so with a focus on discrete technology choice and border adjustment without uncertainty, whileİşlegen et al (2015) do so with a focus on the impact of emissions price uncertainty on competition and trade when firms do not have a technology choice. Caro et al (2013) study joint abatement efforts by supply chain partners (abstracting from production and capacity decisions), finding that emissions must be over-allocated among firms in order to induce optimal abatement effort from each. However, in Krass et al (2013) and Drake (2015) each firm selects a single technology in deterministic settings.…”

OM Forum—Sustainable Operations Management: An Enduring Stream or a Passing Fancy?

“…When one coproduct is imported into an emissions-regulated region protected by a carbon tariff and the other is consumed in the (unregulated) region in which it was produced, the authors find that allocating emissions to coproducts based on their relative price can counterintuitively lead to increased production and emissions. Caro et al (2013) study a setting where a product's GHG emissions result from a supply chain's joint effort-i.e., the emissions from at least one process are determined by the efforts of multiple partners. They find that, in such settings, emissions must be overallocated to achieve welfaremaximizing abatement efforts.…”

Managing Carbon Footprints under the Trade Credit

“…Though both types of measures can reach carbon reduction, adopting high-energy efficiency technology commonly requires a lot of investments. On the contrary, adjusting the firm's operations is costless but has been largely ignored until recently [16].…”

“…Hua et al [21] also use an EOQ model to examine the how the firms manage carbon emissions in inventory management. Furthermore, Caro and Corbett [16] explore how the supply chain coordinates to reduce carbon emissions and allocate the carbon emissions among each individual firm.…”