{"id":9503,"date":"2016-11-03T21:53:52","date_gmt":"2016-11-04T01:53:52","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/our-problem-isnt-my-problem-passing-the-costs-of-carbon-mitigation-onto-supply-chain-partners\/"},"modified":"2016-11-03T22:25:10","modified_gmt":"2016-11-04T02:25:10","slug":"our-problem-isnt-my-problem-pushing-the-costs-of-carbon-mitigation-onto-supply-chain-partners","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/our-problem-isnt-my-problem-pushing-the-costs-of-carbon-mitigation-onto-supply-chain-partners\/","title":{"rendered":"Our Problem Isn\u2019t My Problem: Pushing the Costs of Carbon Mitigation onto Supply Chain Partners"},"content":{"rendered":"

In business, there is often little place for concepts of \u201cfairness\u201d or \u201cequity\u201d when seeking shareholder value. As carbon abatement policies emerge, firms face little incentive to bear costs that they could otherwise pass on to other firms within their value chain. This is a blog post about an Australian firm – Coles Supermarkets \u2013 which successfully passed on the costs of the ill-fated \u201cCarbon Tax\u201d to its supply chain partners.<\/p>\n

The principle behind a carbon tax is to accurately price an externality within a production system. Imagine a biscuit manufacturer who generates carbon pollution while she manufactures your favourite treat. Carbon pollution is a \u201ccost of production\u201d similar to the cost of cocoa beans. However, \u201cthe costs of pollution [are] externalised wherever possible and and thus borne by members of the wider community\u201d [1]<\/sup><\/strong>. This results in more biscuit production than is socially optimal, and shifts the burden of carbon pollution on the wider population.
\nPut a price on carbon, however, and suddenly the manufacturer has to incorporate these costs into her operations. In response to the higher price, she can either reduce the amount of biscuits she makes, or invest in technology to reduce her emissions. Either way, the result is a reduction in emissions and benefit for society as a whole:<\/p>\n

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\"carbon-price2\"<\/a><\/p>\n

This was the theory behind the Australian Labor government\u2019s \u201cCarbon Tax\u201d in July 2012. Suppliers suddenly found an input cost on the horizon, yet on the other end of the value chain the two largest supermarket chains refused to pass on any price increase to the end consumer [2]<\/sup><\/strong>.<\/p>\n

To understand why, consider the state of the grocery industry at the time. Coles had implemented an aggressive discounting strategy, which they funded by using their market power to extract rebates from suppliers [3]<\/sup><\/strong>. The strategy was extremely effective. Grocery price deflation ran at 2% per annum in Coles [4]<\/sup><\/strong> and drove significant like-for-like store sales growth versus their major competitor [5]<\/sup><\/strong>:<\/p>\n

 <\/p>\n

\"lfl-sales\"<\/a><\/p>\n

 <\/p>\n

As suppliers sought to pass on the cost of the tax in the form of higher product prices, Coles suddenly faced legislation that was diametrically opposed to their successful strategy. The main issue for Coles was the erosion of competitive advantage. Suppliers might successfully negotiate a price increase with Coles, yet fail to secure the same price increase in other retailers. That would cause Coles to either be price-uncompetitive in market, or face squeezed margins if they did not reflect the new price on shelf.<\/p>\n

To counter that, Coles relied on their \u201cprice justification process\u201d, a negotiating tool that forced suppliers to justify a price increase by listing their input costs. Coles would then go through line-by-line and refute increases that it felt were unjustified \u2013 one of which was the carbon tax.<\/p>\n

Furthermore, the credibility of the carbon tax was in question from the day it was introduced:<\/p>\n