As customers, investors and regulators continue to pay close attention to corporate measures taken to combat climate change, environmental, social and governance principles have come to the forefront of business and investment decisions.
While consumer and investor demands are prompting many companies to reduce their supply-chain emissions, governments around the world increasingly rely on taxes, incentives and regulations to influence corporate behavior around ESG and promote emission reductions.
These forward-thinking corporations are taking steps towards a sustainable future by using technological efficiencies to reduce energy demand, shifting their energy portfolio to rely more heavily on renewables, and developing strategies to reduce emissions throughout their supply chain, including both upstream and downstream emissions.
Historically, corporations have focused first on reducing their Scope 2 emissions, such as those from company facilities, fleet vehicles or other assets owned/controlled by the company.
This has helped to accelerate decreases in these emissions as companies evaluate their current emissions footprint and invest in emissions-reducing technologies, as well as power-purchase agreements for renewable energy.
While diesel combustion from company vehicles and electricity usage in offices are obvious sources of supply-chain externalities, employee commutes and the treatment of products at the end of their lifecycle are less tangible for most businesses.
CBAM currently applies to direct emissions generated throughout the value chain, but the European Commission intends to consider extending the scope of CBAM to include indirect emissions soon.
While the majority of the current tax regimes focus on reducing carbon emissions, the tax landscape is becoming increasingly complex with the introduction of new taxes targeting waste reduction and product reuse, such as plastics taxes, which have been introduced in several jurisdictions.
Companies are using tax credits and incentives to accelerate investment in clean technologies and help their businesses develop greener operating procedures, particularly in the industrial manufacturing, utility and commercial sectors.
government has awarded billions in incentives to manufacturers that produce emissions-reduction technologies or re-equip their manufacturing facilities to be more energy efficient in an effort to reduce upstream emissions.
Incentives can also be leveraged for investments in supply-chain activities that generate the most dispersed Scope 3 emissions, like transportation, distribution and commuting.
The recently enacted Infrastructure Investment and Jobs Act includes over $375 million in funding for recycling programs. Of this funding, $25 million will be invested in demonstration grants to develop innovative technologies for battery recycling.
Even with no direct control of a third-party supplier, however, corporations can still develop strategies that encourage decarbonization, with incentives playing a critical role in these strategies.
Supply-chain leaders that best manage their supply-chain emissions and improve savings through effective tax approach, empowering the economic business case, may be the ones who reach their emissions goals fastest while realizing the greatest return on investment and best operational outcomes.