Key messages
- Shippers are willing to pay a premium for sustainable transport offerings if key expectations are met. However, several barriers prevent green transport offerings from scaling up, including a lack of clear demand signals and industry-wide standards, and high premiums for sustainable offerings versus conventional ones.
- Two mutually reinforcing enablers can create a cycle of positive reinforcement to accelerate transport decarbonization: A standardized book-and-claim framework enables demand for green offerings by separating physical products from virtual credits, while green supply-chain coalitions improve the cost and accessibility of green offerings.
- Several enablers can help accelerate transport decarbonization: committing to the long term, reshaping customer behavior, collaborating with peers and shippers, establishing supply-chain emission transparency, and responding to market demands early.
Industries and sectors around the world have set emission-reduction targets to limit global warming to a 1.5°C increase—as outlined in the Paris Agreement—as this could significantly reduce the risks and impacts of climate change.1 The transport sector, which accounted for 7.2Gt of carbon dioxide emissions (roughly 21 percent of the global total) in 2020, is not on target to achieve this reduction.2
Shippers (the owners of goods) and their carriers (transport providers) such as airlines and shipping lines have a role to play in accelerating decarbonization. But the industry is in a catch 22. Some shippers want lower-carbon supply chains and are willing to pay a premium for green services, but carriers need to secure sufficient demand through long-term commitments in order to invest in lower-carbon assets and infrastructure. Furthermore, even if a carrier does invest in green assets, that specific vehicle may not be in the right place at the right time to serve the shippers who paid for it.
In addition to policy measures that could accelerate decarbonization, shippers could signal their demand for green services more clearly to carriers. This would allow carriers to build a better case for making investments across their fleets to decarbonize freight transportation, which can in turn be funded through green premiums paid by shippers who demand such services. Such actions could further enhance funding for carriers to invest in freight decarbonization.
This article makes the case for a demand-driven approach that helps shippers and carriers collaborate, developed with the World Economic Forum (WEF) Supply Chain and Transportation Industry Action Group. It proposes two enablers which reinforce each other: 1) a standardized book-and-claim framework, and 2) green supply-chain demand coalitions (see sidebar, “Two mutually reinforcing enablers can green the supply chain”). It also suggests several actions for the sector’s stakeholders to consider for implementing these enablers.
The case for a demand-driven approach to accelerating zero-emission transitions
Supply-chain emissions (Scope 3) make up a significant portion of all emissions across multiple sectors. According to selected companies’ sustainability reports and Carbon Disclosure Project (CDP) reporting, the percentage of these emissions within business-to-consumer industries, including consumer staples and consumer discretionary categories, range from 93 to 99 percent.3 Transport-related supply-chain emissions represent a common and sizable opportunity to address decarbonization.
Many companies, across a wide variety of industries, are setting emission-reduction goals and targets, particularly for supply-chain emissions under their indirect influence. For example, more than 1,400 companies have set science-based targets as of May 2022. A target is considered to be science-based if it is consistent with the level of decarbonization required to keep the global temperature increase within 1.50C to 20C.4 The cumulative number of companies having approved science-based targets increased at an annual pace of 119 percent between 2017 and 2021, 96 percent of which have targets covering Scope 3 emissions (Exhibit 1).5
Shippers are also taking steps to reduce their carbon footprint. A group of front-running shippers indicated in interviews that they are willing to pay a premium of between 5 and 10 percent for sustainable logistics services. These shippers recognize the difficulties faced by carriers who need to make significant upfront capital investments in lower-carbon infrastructure. Therefore, they are willing to help remove carriers’ uncertainty by paying a green premium or entering into longer-term green logistics contracts. However, they also expect that the sustainable solutions offered are backed by reliable industry sources, and that the green premium could be reduced over time.
Despite increasing awareness and willingness to take action, prices of sustainable fuels remain high due to insufficient scale. The Mærsk Mc-Kinney Møller Center for Zero Carbon Shipping estimates that the total cost of ownership of sustainable alternatives—such as bio-diesel, green ammonia, hydrotreated esters and fatty acids (HEFA) fuels, e-methanol, and other power-to-liquids (PtL)—will still be 1.3 to 1.9 times higher than that of fuel oil in 2030.6
This lack of scale is caused by several factors. First, there is limited infrastructure to support sustainable offerings globally. For instance, as of February 2022, only 32 airports regularly offer Sustainable Aviation Fuel (SAF).7
In addition, demand-side commitments from shippers remain sporadic. This is due to the higher cost of green offerings and the lack of agreement on an industry-wide standard. Stronger demand signals would prompt carriers to make capital investments in green offerings.
A demand-driven approach may make it easier for carriers to participate in the sustainable supply chain via aggregating demand from shippers to enable capital expenditure commitments, and by scaling up sustainable supply-chain and transportation services.
Creating a cycle of positive reinforcement to scale up green transportation offerings
Interviews with supply-chain and transportation companies regarding the challenges in accelerating decarbonization highlighted the need for the industry to develop a set of mechanisms that incentivize mass adoption of green investments. These mechanisms would maintain competition between transport providers, have industry-wide backing, foster cross-industry collaboration, and facilitate access to green capital backed by a clear demand signal. Two mutually reinforcing enablers—a standardized book-and-claim framework, and green supply-chain coalitions—can meet these needs and create a cycle of positive reinforcement in greening the supply chain (Exhibit 2).
1. A standardized book-and-claim framework
A standardized book-and-claim framework decouples physical green offerings from virtual carbon credits. Enabled by digital tracking, buyers of green transport offerings pay a green premium in exchange for credits that allow asset owners to claim lower Scope 1/ direct emissions, or forwarders, shippers, and end consumers to claim lower Scope 3/ indirect value-chain-related emissions for a particular shipment’s transportation. These credits should be backed by reliable industry sources. The premium goes up the value chain and is reinvested as capex to fundamentally enhance access to, and reduce the cost of, green transport offerings, and allows the funding of “insetting” projects (emission-reduction projects within the sector’s own value chain) (Exhibit 3).
While standards are being developed—such as the Sustainable Aviation Fuel Certificate (SAFc) framework, and related book-and-claim guidance—no single multimodal standard currently exists for book and claim.8 There is an opportunity to change this by developing industry-compliant credits that are recognized by the market and backed by reliable sources. If industry-wide participants reported to one standard, this would enhance the credibility and comparability of different sustainable programs, and lower participants’ cost in validating the legitimacy of their emission-reduction initiatives. The WEF and Smart Freight Centre’s project to develop a framework and accounting guidelines for the sector is a direct response for such need for a multimodal standard.9
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2. Green supply-chain demand coalitions
Green supply-chain demand coalitions aggregate and scale commitment to buy green. Through such coalitions, a clear and firm demand signal is conveyed up the value chain to inform research and development and carrier’s capex decisions. The signal also indicates improvements in transport sustainability to other stakeholders, such as policy makers and financiers (Exhibit 4). Procurement decisions remain with individual shippers, maintaining competition among carriers, while allowing for mechanisms for large-scale purchasing such as offtake agreements to be set. Establishing a sustainability-rating system to rank and select carriers can also foster cooperation among competitors in a coalition. For example, such collaboration has been undertaken for over a decade in Clean Cargo initiative by Smart Freight Centre that represents data from 85 percent of the container shipping industry, and more recently, the BICEPS network.10
Today, there are a number of green demand coalitions including the First Movers Coalition (FMC), Cargo Owners for Zero Emission Vessels (coZEV), BICEPS, Sustainable Aviation Buyers Alliance (SABA), Eco-Skies Alliance, and the Clean Energy Buyers Association (CEBA). Each differs in its member composition and scope. CEBA members, for example, buy renewable energy from a diverse set of industries, whereas SABA members are limited to aviation companies.
Supply-chain focused coalitions—covering multiple transport modes—would greatly reduce complexity, enabling shippers to participate in decarbonization efforts. They would also allow visibility of different projects and highlight opportunities to direct funds more efficiently across projects. Examples of such collaborative effort already exist. For instance, the FMC was launched by President Biden of the United States and the World Economic Forum at COP26 to decarbonize the heavy industry and long-distance transport sectors responsible for 30 percent of global emissions. This coalition now includes more than 50 leading companies, and countries such as Denmark, India, Italy, Japan, Norway, Singapore, Sweden and the United Kingdom are joining the US as government partners to create early markets for clean technologies through policy measures and private sector engagement. In another example, the Smart Freight Centre, in partnership with the World Economic Forum, BSR, and leading companies, launched the Sustainable Freight Buyers Alliance (SFBA), to accelerate freight decarbonization initiatives by uniting freight buyers.11
Collective action is key
To bring a standardized book-and-claim framework to life, and further the development of green supply-chain demand coalitions, sector stakeholders may need to work together in each phase of execution—from planning, and establishing pilots, to perpetual operationalization.
There are several actions for shippers, carriers, and the broader supply chain to consider when implementing change.
Actions for shippers and forwarders
The shipper community plays a key role in financially supporting supply-chain decarbonization by contributing to the cost of investment. Shippers can consider four actions in this regard:
- Sign longer-term contracts, thereby alleviating providers’ uncertainty, and increase procurement budgets to factor in the higher cost. Shippers can also participate in buyers’ coalitions to aggregate their commitment towards buying green offerings, although procurement decisions must ultimately remain with shippers to maintain competition and routine anti-trust compliance.
- Proactively require logistics partners to provide sustainable offerings to accelerate decarbonization. For example, in April 2021, Salesforce announced that its supplier contracts now require suppliers, including logistics partners, to set carbon-reduction goals and deliver products and services on a carbon-neutral basis.
- Embark on a mission to engage with end consumers, particularly about the environmental impact of their choices, and proactively shape consumer behavior. For instance, companies can incorporate sustainability into their brands and steer consumers towards greener freight transportation. Small nudges can be powerful—a study shows that including sustainability messaging in a restaurant menu could increase diners’ choice of vegetarian dishes by between 35 and 100 percent.12
- Get involved. Shippers and forwarders can join buyers’ coalitions to gather critical mass in supporting freight decarbonization, as well as engage in piloting the book-and-claim framework, together with the broader freight transportation community.
Actions for carriers
Carriers may need to start planning for, and investing in, sustainable offerings now to avoid losing long-term market share. There are three things they could incorporate into their business practices to achieve this:
- Offer sustainable solutions, as the first step. This action is becoming more feasible, as many shippers at the forefront of sustainability have indicated willingness to pay a premium for sustainable products and services. Customers are willing to pay for green offerings too. For example, a consumer survey indicated that 57 percent of respondents are willing to pay an extra 10 percent, or more, for eco-friendly shipping and packaging.13 Carriers could also work to push down the costs of sustainable offerings, which is key to driving returns on such offerings.
- Enhance emission transparency through technology, as shippers are seeking emission transparency for their own sustainability reports, and are looking to compare sustainable offerings from different vendors. The maritime sector developed the Clean Cargo initiative by Smart Freight Centre that enables companies to benchmark their performance using a standardized reporting mechanism. Following this initiative, various companies have enhanced their own digital reporting and made it available to their customers, based on the underlying reporting framework of the CCWG. Maersk, for example, launched a digital dashboard to track carbon emissions in mid-2021.14 The dashboard enables its customers to track their carbon footprint across the entire supply chain and shows where they can take steps to lower emissions. Other shipping companies such as Hapag-Lloyd have also deployed emissions calculators, which enable their customers to obtain data on their emissions throughout the transport chain. These tools—like Hapag-Lloyd’s EcoCalc—are being further developed to provide more comprehensive and detailed emissions data.15
- Work together. While sustainability is, and should be, an area of differentiation, there is undoubtedly room for collaboration. In particular, carriers can support customers in joining buyers’ coalitions, and engage in piloting the book-and-claim framework.
The freight transport sector has an opportunity to accelerate decarbonization by transitioning from compensating for emissions to abating emissions. To achieve this abatement, stakeholders across the supply chain can actively explore options to reduce emissions, particularly those that are backed by industry-compliant sources, such as book-and-claim systems. Finally, as universal access to sustainable transport offerings is a prerequisite to achieve decarbonization, it is necessary to scale sustainable solutions and reduce their cost to affordable-to-all levels.
This article is an extended version of How a demand-driven approach could accelerate zero-emission freight transportation, published by WEF in July 2021.