A Scope 3 bombshell!

To understand why this slide is a bombshell you first need to read the following excerpt from an email sent from a buyer to their supplier discussing participation in their carbon reduction and reporting program.

“It’s not urgent that you join now, but this will become more important in the future as we have to take Scope 3 seriously… So, no worries on not joining right now, but don’t be surprised when it comes round again.”

This exchange echoes countless others between buyers and suppliers on carbon reduction and reporting programs. It’s why most programs struggle to drive emissions reductions fast enough to meet their 2030 commitments and, as a result, pose massive cost risks for both parties.

The Misconception of Optional Compliance

What it reveals, is that many buyers think joining these programs is an optional compliance ‘ask’ for their suppliers, lacking urgency or intrinsic value in the supplier-buyer transaction. It is not in their view, a core part of the value-cost equation. This sentiment permeates the majority of Scope 3 programs today (we should know we manage 50 such global programs).

Neither buyer nor supplier recognises the carbon reduction program for what it really is; an invitation of support from the customer to help the supplier make their business more cost-competitive.

Enter the bombshell slide. (A very similar slide was recently shared by the pioneering Chris Low from Haleon.) Using Ecoinvent data, the Manufacture 2030 Sustainability Team has calculated the carbon price at which the cost of embedded carbon exceeds 5% of the total cost of various commodities found in products typically bought and sold across the value chain.

The Alarming Cost Implications

The insights from this data should be alarming. For example, by 2026, a company importing aluminium foil products into Europe from a non-regulated geography, would have to pay for carbon credits to off-set the carbon embedded in the aluminium. (Jan 2026 is when CBAM bites!) At an EU Emissions Trading System (ETS) carbon price of only $11 per tonne, the cost of the carbon will have added 5% to the overall cost of the aluminium foil.

But of course, today’s EU ETS traded price is much higher than $11. It is approximately €60 per tonne of carbon. The chart below shows the actual cost increase for three commodities exposed to CBAM at that price.

The Looming Carbon-Cost Time-Bomb

Looking ahead to 2028/29, we can expect that public corporations, in particular, will need to buy carbon credits in order to meet their Scope 3 commitments. Failing to hit their emissions targets will have an impact on share price and increase the cost of capital, prompting CFOs to seek off-sets.  Furthermore, it is highly likely that other regions will establish their own import carbon credit regimes to match CBAM. The increased demand will drive up the price of carbon credits.

The chart reveals a looming carbon-cost time-bomb, and the buyer-supplier emails we see show that most suppliers and buyers on the ground remain oblivious to this fact! They both believe carbon reduction and reporting is an optional compliance ask, when, it should be seen as a business-critical strategy for remaining competitive. Such programs should really be seen as collaborative journeys shared by buyer and supplier, essential for enhancing cost competitiveness and navigating the impending carbon-centric, value-cost equation.

Reducing carbon across supply chains at a sufficient pace to prevent these carbon costs spiralling is not only achievable but is economically sensible in the short term. Professor Steve Evans at Cambridge University’s Institute for Manufacturing has clearly demonstrated this. As his research shows, Toyota’s UK operations have “been reducing the energy it uses to manufacture a car by at least 8% every year for 14 years, resulting in over 70% reduction over the period.”

The company can now make four cars for the energy it used to take to manufacture one car 14 years ago. And crucially, Toyota has done this by identifying improvements to energy usage, not by depending on a major new technology to revolutionise the business.”

Whilst really significant carbon cuts are feasible, it‘s important to note that it’s a gradual process to achieve them cost-effectively. Suppliers cannot suddenly slash carbon-cost just a couple of years before 2030 without incurring significant costs. It needs to be systematically addressed over time, which also brings short-term economic advantages.

That is why supply chain reduction programs, like the ones we manage at Manufacture 2030, should not be seen as optional compliance asks. Rather, they should be regarded as an invitation of help from customers – companies like Toyota who have demonstrated expertise in this area - to their suppliers. These programs offer a managed journey that will make them carbon-cost competitive. Buyers and suppliers need education to understand that those that don’t participate and start their emission reduction journeys now will become uncompetitively expensive for their customers soon.

We’re facing a ticking economic time bomb in manufacturing. It’s time to wake up and act before it’s too late.