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Understanding the Hidden Cost of Carbon Emissions

 | January 5, 2023

Sustainability regulations play a critical role in accelerating the shift to a net-zero economy and signal an opportunity for manufacturers. Globally, one-third of consumers surveyed say they are willing to pay a premium for environmentally friendly products. And to help meet their own sustainability goals, Apple, GM, and other manufacturing brands are requiring their suppliers to meet net-zero emissions objectives.

Green manufacturing can be good for businesses and the environment. The largest U.S. firms (S&P 500  companies) see a multi-trillion-dollar opportunity in the net-zero economy, according to CDP. American firms surveyed project the financial benefits to be 15 times higher than the risks associated with not transitioning business practices to decarbonization.

However, manufacturers that don’t take active measures to reduce their carbon footprint may incur additional expenses via carbon tariffs and taxes. And regulatory mandates are requiring businesses to disclose their sustainability plans – and results – to provide customers and investors with the transparency required to make informed decisions.

Track the True Cost of Carbon Emissions

Governments across the globe are instituting climate policy measures to meet Paris Agreement targets to reduce greenhouse gas (GHG) emissions by 43% by 2030 and to net zero by 2050. To meet this United Nations (UN) directive, the public- and private-sector leaders are using myriad incentives and deterrents to help reduce global warming. Here are a few ways that companies are already paying for their carbon footprint.

Cap & Trade Costs Curb Manufacturing Revenues

China and the European Union (EU) use the “cap-and-trade” model. The EU Emissions Trading System (EU ETS) sets an annual limit (cap) on the metric tons of carbon dioxide (CO2) and other GHGs emitted by participating organizations. Organizations/institutions that don’t use their annual cap can sell their allowances to other institutions that have exceeded their caps.

The EU ETS generated €16.5 billion in revenues in 2020 ($17.5 billion). And the average annual price of EU carbon permits has increased significantly since EU ETS updates in 2018. The price of emissions allowances (EUA) traded on the EU ETS reached a high of €98.01 per metric ton in 2022, according to Statista.

And in December 2022, the EU announced that the EU ETS plans to expand its share of emissions covered by carbon pricing from 40% to 75%, and include maritime, road transports, and other sectors.

Carbon Taxes and EU Tariffs Loom for Manufacturers

A carbon tax is levied on the carbon emissions required to produce goods and services. This tax typically only applies to CO2 emissions but can also apply to other GHGs that can affect global warming – including methane and nitrogen oxide. Japan, Mexico, Canada, and other countries either have or are implementing carbon taxes, according to the World Bank.

Individual countries traditionally establish their own carbon tax to encourage emissions reductions and to fund sustainability initiatives. However, the EU is finalizing plans for a new carbon tax/tariff on imports from countries with lax GHG emissions rules compared to the EU.

The EU’s Carbon Border Adjustment Mechanism (CBAM) is designed to even the playing field between EU companies, which are subjected to strict environmental rules, and foreign businesses that can sell cheaper exports partially because they aren’t produced with the same sustainability requirements.

When the EU institutes the tax in January 2026, the biggest initial impact will be on high-carbon inputs including steel, cement, aluminum, chemicals, and electricity. Management consulting firm BCG estimates the EU tax could increase the cost of materials made by countries that are more reliant on fossil fuel energy sources such as China, Russia, and India by 15% to 30% overnight.

The EU CBAM is also designed to encourage trading partners with lower global warming standards to adopt the EU’s ambitious emissions rules. This carbon tariff is poised to strain trade relations with some partners. It’s sure to have implications for international trade — especially for countries that don’t have a set price for carbon emissions, like the U.S.

Reporting Mandates Provide ESG Transparency 

The European Corporate Governance Institution (ECGI) identified 25 countries that regulatory introduced mandates for firms to disclose ESG information, including Australia, China, South Africa, and the United Kingdom. (It appears that ECGI counted the EU as one entity.)

For example, European Green Deal’s EU taxonomy provides a sustainability reporting and evaluation framework to help drive economic business activities that contribute to meeting the EU’s environmental objectives to address climate change.

Public companies that meet EU disclosure thresholds are required to institute internal controls to identify and report on climate-related risks that may have a material impact. The companies are also mandated to provide their carbon footprint and report on their plans to support the EU’s GHG reduction efforts in their financial statements. Financial institutions, investors, and potential partners also use this sustainability reporting framework to standardize data collection across companies and make investment decisions.

This level of transparency is important – especially because 77% of NielsenIQ survey participants say they’ll stop buying products from a company found guilty of greenwashing  (making unsubstantiated or untrue claims about its environmental practices).

Some multinational companies will also face EU taxonomy reporting requirements. In 2024, non-European companies with a net turnover of €150 million and one or more subsidiaries or branches in the EU will need to provide sustainability reporting. (For more information, read our blog post “Are you Prepared for New EU Taxonomy Sustainability Reporting Requirements?

Integrate Sustainability into Product Design and Manufacturing

Successful manufacturers are incorporating sustainability into their product design, sourcing/supply chain, and manufacturing strategies. This enables manufacturers to understand a product’s CO2e impact during early design phases and then evaluate opportunities to reduce a product’s environmental impact.

For example, to plan for the EU’s upcoming carbon tariff, a company can use aPriori to simulate the projected cost and CO2e emissions to manufacture product “X” for the next year, five years, etc. And it can evaluate how changes in material selection, design, manufacturing process, and manufacturing location can sidestep or mitigate the tariff’s potential impact.

aPriori provides real-time insights for product development teams to measure, reduce, and help to report on their products’ carbon footprint during product design and production. By adding CO2e emissions data, aPriori provides the only manufacturing intelligence platform to optimize products for cost, manufacturability, and sustainability in real time.

Use aPriori to answer product development sustainability questions quickly and confidently, including:

  • How can I meet my profitability and sustainability targets?
  • Which materials are the most sustainable?
  • Which components have the highest carbon footprint in my product(s)?
  • Which manufacturing methods/processes have the highest energy efficiency and produce the least waste?
  • How will the factory location affect product sustainability?

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