Carbon equals cost: Why businesses must act now

Getting buy-in for supply chain carbon reduction is tough. It can almost seem as difficult as addressing Scope 3 itself. But as companies enter the budget cycle for 2025, convincing your CFO to give your team sufficient resources is imperative.

Carbon is a cost that is getting bigger quickly. Failure to reduce emissions will impact multiple areas of an organization – not just the sustainability department. Companies that do nothing will face several new costs in the next three to five years.

With peers already acting, supply chain decarbonization is a cost that business leaders cannot afford to ignore. From hidden expenses in carbon taxes to the inevitable price hike for offsets, this article covers six factors to communicate urgency to your CFO.

Be the first to hear about how a $14 billion consumer goods company, Haleon, is factoring in the cost of carbon with suppliers to support sourcing decisions. Join the Dynamic PCF waitlist.

Risk 1: Carbon taxes reveal hidden costs

• Multiple markets are introducing carbon tariffs for importing goods.
• Companies must factor the carbon costs into sourcing decisions to keep costs low.
• Those that act now will gain a competitive advantage over their peers.

New carbon taxes are emerging. These tariffs mean importers must pay the same carbon price as domestic producers, removing the cost-advantage that carbon-intensive imports may enjoy.

The EU Carbon Border Adjustment Mechanism (CBAM) is the world’s first carbon border tax system. Already underway for reporting purposes, the tariff becomes chargeable in 2026. 

Other markets are following suit. For example, the UK is bringing in a new levy to level carbon pricing in 2027. And Japan will introduce an official carbon tax by 2028-2029. It is expected that more countries will take similar steps soon.

Importing products with high levels of carbon embedded will become expensive. As CBAM ramps up, PwC estimates it will increase the cost of carbon for many goods by five times.

Besides import/export carbon taxes such as CBAM, there are also carbon price risks related to standard country-level carbon taxes. If a company is buying from a high-emitting supplier in a location that has (or will soon apply) carbon tax, then these costs will be passed to the buyer.

Global state of carbon pricing mechanisms (2024)

As the cost of carbon increases, hidden costs will also increase.

Ultimately, these additional costs mean that companies will need to factor the price of carbon into their sourcing decisions and the total cost of ownership for the goods they buy.

Those that fail to calculate carbon costs will fall behind their peers.

Risk 2: Climate-related financial reporting requirements

• Climate-related financial reporting requirements dictate the direction of travel.
• Companies must measure and disclose supply chain emissions to operate in the EU.
• Non-compliance can result in fines, penalties, lawsuits, and even market bans.

Governments worldwide are bringing in more regulations on supply chain carbon emissions.

Reporting requirements such as the EU’s Corporate Sustainability Reporting Directive (CSRD) aim to share information on sustainability-related risks and opportunities in financial reporting. The purpose of these rules is to help users of financial reports make investment decisions.

Businesses impacted by the EU’s CSRD and CSDDD (Corporate Sustainability Due Diligence Directive) must report their 1.5C-aligned carbon reduction pathway – including supply chain emissions – with a reduction plan in place by 2025. 

Meanwhile, the UK’s Sustainability Disclosure Standards will also require similar carbon reporting and reduction plans. These rules are based on the IFRS standards, which are being adopted and modelled into law by more than 50% of the world’s economy.

And even though the USA’s SEC does not require the disclosure of Scope 3 emissions, it does require disclosure of climate-related risks and plans to mitigate this risk. A company’s upstream carbon footprint (which covers production and manufacturing) could be seen as a risk.

It’s also worth keeping in mind California's Climate Corporate Data Accountability Act, in which companies (with a total annual revenue of $1 billion or more) will need to publicly disclose Scope 1 & 2 emissions from 2026 and Scope 3 emissions from 2027.

These types of regulations are only going to get tougher. 

Ignoring Scope 3 emissions reporting requirements may result in fines, penalties, and legal action. In some cases, companies that do not comply may find themselves unable to trade.

As the world gets closer to 2050, carbon regulations will continue to grow both in number and severity. It is likely that companies will be mandated to measure and reduce supply chain carbon emissions in multiple markets.

Businesses that get ahead of the curve stand to keep costs much lower than those who wait.

Risk 3: Reputational damage

• Failing to tackle emissions can lead to fines, lawsuits, and a negative reputation.
• A poor brand image can reveal hidden costs such as loss of trust or retaining top talent.
• With the right tools to support suppliers, reputational damage can be minimized.

Investors, regulators, customers, and employees all have different needs, but they all want companies to reduce their environmental impact. Failure to meet emissions reduction targets can lead to reputational damage and a loss of trust among stakeholders.

One example of the cost of reputational damage is the Volkswagen emissions scandal:

In 2015, the Environmental Protection Agency found many Volkswagen cars sold in America had been installed with a “defeat device” that could cheat NOx emissions tests. The engines were found to emit pollutants up to 40 times above what is allowed in the USA. 

As a result, Volkswagen was fined up to $37,500 per vehicle involved in the scandal, a maximum fine of around $18 billion. Numerous media outlets ensured strong coverage around the world.

In the days following the scandal, Volkswagen's shares lost up to 37% of their value.

According to YouGov BrandIndex Volkswagen’s Buzz score (a measure of the positive and negative things said about a brand) fell by 5.4 points in the first week of the scandal. In more practical terms, the brand fell from third in a list of 32 car brands to 31st in seven days.

While incidents like Volkswagen’s are extreme, they are not in isolation. Cummins was ordered to pay a $2 billion settlement for installing similar devices to cheat emissions tests.

Failure to tackle emissions properly also makes it harder to:

• Attract and retain top talent. Most employees want their employers to take action on carbon reduction and will seek out companies that live up to their word.  

• Build customer loyalty. Plenty of citizens are concerned about the environment and want to buy lower carbon products. They’ll call out brands that lie about caring for the planet. Just look at the campaign against Lululemon and its use of coal-fired production.

These examples show the potential cost of reputational damage associated with emissions.

Risk 4: Share price

• Failing to make supply chain carbon reduction a priority impacts investor confidence.
• Missing reduction targets leads to investors downgrading share prices.
• Companies that show they’re on track will give investors the assurance they need.

As investors look towards environmental policies to manage risk, the Science-Based Targets initiative helps them evaluate the credibility of corporate climate goals. 

For instance, companies in scope of the EU’s CSRD must report their 1.5°C pathway, which falls in line with science-based targets. Companies that can show they are on track to meet their targets are likely to be more appealing to investors. 

Missing a science-based target can also impact how investors see a company’s ability to manage carbon-related risks and costs. When negative information on carbon risk is released, investors may react negatively, leading to a potential crash in stock prices.

Look at what happened to Amazon. Four years into its carbon reduction plan, the retailer lost the endorsement of the Science Based Targets initiative (SBTi). This move raised questions around Amazon’s status as a preferred stock among ESG funds.  

Some investors are pulling out of entire industries due to lack of environmental progress. ASN Impact Investors sold €70 million of investments after implementing a stricter policy for the apparel sector in August 2024. The Dutch group sold its stakes in 12 companies, including retail giants H&M, Inditex, and ASOS. 

Other companies are reducing emissions as a way to boost value.

While Starbucks’ stock price dropped by 7% in Q2 2024, the coffee giant is now focused on its carbon targets to win back investor appeal. It is aiming for a 50% absolute reduction in Scope 1, 2, & 3 emissions by 2030 from a 2019 base year.

Nevertheless, concern over climate change is the most common reason for investors to exclude companies from their portfolios. Recent findings from a coalition of non-profit environmental and sustainability groups show 40% of exclusions are motivated by climate issues.

Risk 5: Cost of capital

• Failing to meet carbon reduction targets costs businesses more money.
• Lenders are increasingly focusing on supply chain emissions reduction.
• Companies that meet or exceed their targets will keep costs low.

Some companies are seeking green bonds with interest rates linked to environmental performance. For example, a leading UK grocery retailer secured a $3.2 billion loan in which interest rates rise or fall in line with its Scope 1 and Scope 2 targets. 

Meanwhile, a growing number of lenders, such as Enel or Grupo Bimbo, are issuing loans where interest rates are tied to Scope 3 targets. While reducing indirect emissions is one of the biggest challenges, companies that make progress stand to gain more than their peers.

Businesses that meet or exceed their carbon reduction targets can access cheap money (lower cost of capital) while those that fail face more expensive money (higher cost of capital).

Risk 6: Carbon offsetting costs 

• The voluntary carbon offsetting market is expected to grow to $100 billion by 2030.
• As demand increases, so will the price of carbon credits and offsets.
• Companies can reduce costs by focusing on driving supply chain decarbonization now.

To keep global warming to no more than 1.5C - as called for in the Paris Agreement - emissions need to be reduced by 45% in 2030 and reach net zero by 2050. 

In keeping with this, thousands of companies have committed to science-based targets.

As a result, those working in line with SBTi can only offset a maximum of 10% of their total emissions – limiting the use of carbon offsets to neutralize unavoidable emissions only.

While interest in science-based targets is growing, broader “carbon neutrality” targets are a popular alternative. Some companies even have both in place. With less stringent criteria than science-based targets, companies can take more immediate action through offsetting.

As companies get closer to critical reporting milestones, demand for carbon credits will also increase. And as demand increases, so will the cost of carbon offsetting. 

In fact, the voluntary carbon offsetting market is expected to grow from $2 billion in 2020 to nearly $100 billion by 2030, and as much as $250 billion by 2050 (Morgan Stanley).

It is likely to be far more cost-effective for companies to focus on driving decarbonization in their supply chains now than it will be to buy carbon credits in the future. Helping suppliers to reduce emissions is inevitable – businesses can either be leaders or laggards.

Carbon reduction cannot wait – your peers are already acting

Supply chain carbon emissions are a sleeping giant. Most companies know this is where the bulk of the problem lies. But only a few understand the growing cost and are taking action.

The reality is that the need to cut carbon isn’t going to go away. It’s only going to get bigger. 

Regulations will get tighter. More taxes will come. Stakeholder pressure will keep rising. Carbon offsets will become unaffordable to many. Share prices and the cost of capital will be impacted.

Join the first movers in getting ahead of the curve now. Be the first to hear about how Haleon, a $14 billion consumer goods company, is working with its suppliers to make this happen. Join the Dynamic PCF waitlist.