Carbon Tax – How is it affecting your supply chain?

What is carbon tax?

Carbon tax is a ‘cap and trade’ scheme that is regulated by the UK Emissions Trading Scheme (ETS).?It replaced the EU ETS from January 2021. Many refer to it as a set tax, like VAT for example but this is not the case. Businesses deemed within the scope of the scheme are provided with a free allowance (e.g. ‘the cap’) for emissions. Any emissions they create above the cap ?can be traded to offset further omissions they create. The price when trading fluctuates and is measured in ￡/tonne of Co2. The ETS’s purpose is to incentivise businesses to find ways to reduce emissions or undertake carbon negative activities which can be traded. Failure to comply with the Scheme can result in financial penalties.

Who is caught by the scheme?

The scheme applies to certain regulated activities which are defined in Schedule 2 of the Greenhouse Gas Emissions Trading Scheme Order 2020. These are typically energy intensive processes, for example:

·??????Production of cement clinker in rotary kilns with a production capacity exceeding 500 tonnes per day or in other furnaces with a production capacity exceeding 50 tonnes per day

·??????Production of pig iron or steel (primary or secondary fusion) including continuous casting, with a capacity exceeding 2.5 tonnes per hour

From a construction perspective, many of the regulated activities impact the ways in which materials are produced. Companies such as concrete block and steel manufacturers are good examples of how this tax can directly impact construction project costs.

Many of the regulated activities will also have an indirect impact on construction project costs. For example, the production of Nitric Acid is considered a regulated activity by the scheme. Nitric Acid is used to ‘pickle’ stainless steel and is also used in the manufacturing process of mirrors.

So how much will carbon tax cost my project?

Unfortunately, there’s no easy answer to this question and often the cost impact of ‘carbon tax’ will be hidden within your supply chain costs. The reason for this is that the cost impact for a business depends on the number of suppliers deemed to be in the scope of the scheme and likewise, the supplier’s approach to mitigating their carbon footprint. The fewer carbon emissions they produce the less likely it is they’ll need to buy carbon credits on the UK ETS market.

However, to provide some context to the issue, to create 1m3 of traditional concrete, 0.17 tonnes of Co2 is produced. The trading price for a tonne of Co2 (using the EU ETS which is comparable and has been around longer than the UK system) was €22.00/tonne in May 2018. This cost has now increased to be consistently over c.€50/tonne.

Source:Ember-climate.org

Since the 2012 Olympic Park used c.500,00 m3 of concrete, it’s easy see the carbon tax cost implications on the supply chain if supplying a mega project. Although before any panic sets in, the example above is a simplification of carbon tax, and there are other factors that negate or contribute to the cost.

So why should procurement professionals care?

Putting aside the environmental case for reducing carbon emissions, the ever increasing cost of ETS carbon credits can add additional financial stress to the supply chain and increase the risk of underperformance and failure. In a market where price certainty and fixed rates are being sought, we should consider interrogating our suppliers’ carbon reduction investment plans to ensure they can deliver on their price promises.

For example, supplier A may look the cheapest initially, however Supplier B is investing in carbon capture technology and renewable energy for its manufacturing site. Supplier B’s costs may be initially higher to pay for the investment, but long-term Supplier B will not be impacted by ETS volatility.

Closer collaboration between clients and the supply chain regarding carbon emissions output can have wider project benefits, for example improved material performance and early adoption of modern methods of construction.

To establish carbon focussed procurement criteria and supply chain procedures is challenging, but there are clear benefits in doing so.

What should I do about this?

It’s important to understand your supply chain and identify key risks. Initial steps should include:

·??????Identifying long term supply chain partners and undertaking market engagement exercises to highlight issues and potential opportunities.

·??????Mapping critical suppliers and interdependencies between projects and regulated activities.

·??????Monitoring market trends and correlating with cost indices

·??????Establishing long term relationships for portfolio suppliers that reward low carbon planning and discourage ETS trading.

If you want to find out more about how the carbon tax may apply to your business or how to ensure you are procuring best value, then do not hesitate to get in contact with us at [email protected].