Re-Engineering the Carbon Supply Chain with Blockchain Technology

WHITE PAPER

RE-ENGINEERING THE CARBON SUPPLY CHAIN WITH BLOCKCHAIN TECHNOLOGY

Abstract The effect of greenhouse gas emissions across the globe is forcing countries as well as companies to redesign their manufacturing processes and reduce their carbon footprint. However, despite international agreements, there is a lack of global and standardized system to measure carbon emissions and track where it is generated across the supply chain. Without such a system, sustainable strategies will have only a limited impact. This paper explains how blockchain technology can be used to measure carbon, calculate carbon credit, standardize emissions, and ensure fair carbon credit pricing through an integrated and standardized platform. It also discusses the current challenges in the carbon supply chain and how blockchain can address these. Introduction Across the globe, citizens are becoming across the globe which is similar to any are several companies/authorities such as increasingly aware of and concerned financial transaction. This carbon trade CarbonNeutral®, Bonsucro, carboNZero, about the impact of human activities on allows parties that emit higher amounts of Climate Registered, EarthCheck, etc., the environment. Recently, there have carbon than permissible limits to purchase that inform customers about the carbon been numerous initiatives that encourage or exchange credits from parties that have footprint of various products4. companies as well as countries to reduce lowered their carbon emissions than the Fuelled by the need to spread awareness of the emission of carbon and greenhouse permissible limits, thereby balancing out eco-friendly practices, many manufacturers gases across the entire supply chain. the amount of greenhouse gases emitted and retailers are taking active steps to One such key initiative accepted by 197 into the atmosphere. The World Bank reduce their carbon emissions and inform countries is the Paris Agreement. estimates that the carbon credit market, customers of the same. For instance, which is valued at less than US $50 billion The Paris Agreement or the Paris Climate Coca-Cola is implementing a strategy to today, will grow to US $185 billion by Accord has established a mechanism drive sustainability throughout its supply 20303,. of measuring and controlling carbon chain and reduce the carbon footprint of emissions by setting emission standards The effort for carbon credit system or ‘the drink in your hand’ by 25% by 20205. for every country or nationally determined. carbon trade has two fold values, first Casino, a French retail chain, displays The Paris accord by its framework it makes the planet a better place to the carbon labels of all its own products. establishes every country to have its own live (and for future generations) and Another French retailer, E. Leclerc, displays nationally determined contributions second it brings value to customers. The carbon labels on store shelves indicating aligned to their national growth objective. value of such systems is driven more for the carbon emissions per kilogram of The Kyoto Protocol of 1997 ratified the individual customers than just countries produce along with the price tag6. carbon credit system1. Both Kyoto protocol or companies. Today customers desirous It is important to note that the carbon and Paris accord paves way for a global of purchasing eco-friendly products trading system and carbon emission label acceptance and transaction of carbon have limited access to emission labels. are two independent initiatives. While credit system. The carbon credit systems This brings the focus on having relevant they each have their own challenges, awards credits to countries or companies information about the carbon footprint of manufacturers and governments (entities, in case of Group Company) each product through the means of carbon seeking to amplify impact need a unified that exceed the nationally determined emission label. The carbon emission label system that integrates the advantages emission quota standards by reducing or carbon label provides information on of both these systems. Here, blockchain their carbon emissions2. Currently, 1 carbon the amount of carbon dioxide produced technology can be a useful tool to unify credit is awarded to any group/ company during the process of manufacturing, these systems while reengineering supply that reduces their carbon emission by transporting, stocking, and delivering chain processes to effectively reduce equivalent of 10 tons of carbon di oxide a product to the consumer. The lower carbon emissions. or its equivalent gases. The carbon credit the value on the carbon label, the more system has paved way for the carbon trade eco-friendly is the product. In fact, there

External Document © 2018 Infosys Limited External Document © 2018 Infosys Limited II. Example: Reducing the carbon footprint of every phone Usually, smartphones have 5 main Now, this entire cycle involves multiple who embark on initiatives to reduce their components namely, the circuit board, parties and processes and at each step carbon footprint. LCD panel, battery, memory chip, and the there is a certain amount of carbon dioxide Let us say the circuit board, LCD panel and mobile case7. Each component is produced being produced. However, without a battery manufacturers were able to reduce using raw materials. Often, components are centralized system, there is no way for their carbon emissions beyond the preset produced by independent manufacturers manufacturers to identify and measure standard earning them carbon credits. (known as component manufacturers) who these different sources of carbon emissions However, the memory, mobile case and then supply these to a final equipment in order to calculate the total carbon final manufacturers were unable to do manufacturer like Samsung or LG. footprint of the final product. Further, third so. The second set of manufacturers can This manufacturer then assembles the parties such as component manufacturers, buy the carbon credit generated and sold components, adds its unique value, loads suppliers, distributors, and retailers may by the first set to offset their emissions, the requisite software, and ships it to not have a sustainable strategy in place thereby reducing the overall carbon distributors. The product may then travel to reduce their carbon footprint by re- footprint of the product. to various international, national, regional, engineering their manufacturing and and local distributors or service providers business processes or regulating sourcing. before being bought by a consumer. Such insight is crucial for manufacturers

Fig 1: How the carbon credit system works for a mobile manufacturer

Thus, it becomes important to build electricity used in its Mexican factories Clearly, carbon labeling and carbon synergies across the supply chain from wind farms and used spent coffee credit are two sides of the same coin. and create a unified process whereby grounds as a supplementary fuel in While accurate carbon measurement and manufacturers share information across all more than 22 of its factories5. According labeling will encourage companies to make their partners and vendors. This visibility to the Paris Agreement, each of these use of carbon credits, standardization will will help manufacturers leverage the measures generates a higher number of change the way carbon credits are used carbon trading system to share carbon carbon credits, which can then be sold or across the supply chain. As it becomes credits and lower their carbon label. For exchanged with other partners who are more institutionalized the carbon credits example, in 2014, Nestlé replaced 92% of unable to reduce their carbon emissions, can change the way we perceive things. its industrial refrigerants with eco-friendly thereby lowering the carbon footprint of natural refrigerants, sourced 85% of the Nestlé’s products.

External Document © 2018 Infosys Limited External Document © 2018 Infosys Limited III. Challenges in implementing low-carbon supply chains Carbon measurement and carbon credit generated by wind farms in India can investments and poor visibility, sharing and usage face certain challenges vary significantly from the price of compromising widespread adoption by such as: carbon credits earned from afforested companies land in Denmark or the reduction • Effort spent in tracking carbon The above challenges are universal across of carbon dioxide emissions from a emissions – Calculating the carbon countries as well products. For instance, chemical plant in China. Thus, pricing label of a product is complex and costly. Tesco shelved a proposed project to standardization becomes critical to Besides needing product provenance, label all in-store products with their achieve international acceptance of it also requires tracing each ingredient carbon footprints owing to the need for carbon credit and its price or component of the product from the extensive effort as well as lack of support beginning of their respective supply • Need for a single regulatory body from other supermarkets. However, such chains and across their manufacturing – The success of the carbon credit challenges are outside the scope of this processes to calculate the associated system depends on the establishment paper. Thus, the lack of transparency emissions. It requires various methods, of a single regulatory body that among partners, the absence of a universal technologies, personnel and is can standardize measure, price and ledger and the inability to track carbon extremely time consuming accordingly issue credits to companies credits among peers are some of the key and projects that require these to hurdles for global adoption of the carbon • High cost of measuring carbon succeed. Additionally, the verification measurement and credit systems. emissions – According to 3M, an process for carbon offsetting and American industrial giant that makes granting must also be accepted and over 55,000 different products, the cost standardized. Currently, the challenge of calculating the carbon footprint of lies in the lack of standards for credit a single product can be as high as US verification and grants10. Thus, there is a $30,000. Further, this may be a recurring need for better measurement, reporting cost6. The cost arises from the effort and verification to drive effective carbon spent in coordinating with various credit trading parties to glean specific information which may need to be paid to get • Lack of buy-in or awareness among access as well as not readily available consumers about green products – A study by Vanlay et al. (2011)11 showed • Lack of standardization in calculating that the overall change in purchasing emissions – The lack of carbon labeling behavior for eco-friendly products standards and a single globally with green product labels was small12. recognized methodology to calculate However, when green label products the carbon footprint is a significant were the cheapest, the shift was challenge7, 8, 9. As each country grapples substantial. This indicates that product with creating their own methodology, price is still a key driver for purchasing the market becomes flooded leading to behavior compared to lower carbon non-standardized calculation processes. emissions or green products. An Thus, companies are unable to reliably experiment by the Carbon Trust with compare the footprint of a similar carbon labels also indicates that carbon category of products across countries, labels are yet to inspire customers to creating further challenges when change their buying habits. According sharing carbon credits to the survey, while a brand may use • International differences in measuring carbon labels to increase its green and pricing of carbon credits – While credentials, consumers still fail to the carbon credit system attributes understand the significance of the a monetary value to pollution, its information13 measurement and pricing varies across • Limited governmental regulation and countries as seen in the carbon credit involvement – Limited transparency pricing of the Kyoto Protocol. For among governments for carbon credit example, the price of a carbon credit measurement and carbon credits is a earned for 1 megawatt of power key challenge. This leads to minimal

External Document © 2018 Infosys Limited External Document © 2018 Infosys Limited IV. The blockchain solution Blockchain is one of the most compelling In a blockchain network, each party will standardization through smart contracts and befitting tool to help companies be able to report the carbon emissions and verifiable transactions. Further, meet the demand for accurate, reliable, across their individual value chains based connecting blockchain to various source standardized, and readily available on standardized metrics, thereby creating systems such as ERP and SCADA will information for carbon emission a single platform for carbon measurement. simplify data gathering across the supply calculation. The design and architecture of Blockchain will provide standardized and chain, thereby improving visibility at blockchain technology promotes instant accepted algorithm to calculate carbon lower cost, time and effort. This will be an authentication, immutable data records emissions. This is going to be one of the answer to the high cost and huge effort and smart contracts. These features key benefits of integrated platform. This of calculating the carbon emissions across make it a fitting solution to integrate will help get the idea accepted across supply chain entities. suppliers, manufacturers, logistics service parties and around the world. The World Thus, blockchain provides a platform where providers, and stocking locations into a Economic Forum has already stated that every partner across the supply chain, i.e., single network for rule-based interactions carbon credits are the perfect candidates manufacturers, suppliers and distributors and value generation. The blockchain for crypto currency as these are data- can work together in a transparent and technology can readily transform the driven, rely on multiple approval steps accountable manner with the original individual efforts of the companies into a and are independent from the physical equipment manufacturer (OEM) or retailer network of effort with the primarily goal of impact to which they correlate11. As to drive a unified carbon ecosystem with overall carbon footprint reduction of the blockchain addresses all of the concerns accurate measurement and credits. final product. and challenges associated with lack of

External Document © 2018 Infosys Limited External Document © 2018 Infosys Limited V. Blockchain –: Architecture and details Blockchain offers two solution consumers within the blockchain network. and smart contracts. Standards for architectures to help companies achieve Some examples of open source blockchain emission calculation, acceptable terms an integrated carbon emission calculation systems that can be used in this scenario for the carbon credit system and well- process. These are: are Bitcoin, Ethereum and Multichain. defined criteria for memberships are the cornerstone of the permissioned Open blockchain architecture – Here, all In the previous mobile manufacturing blockchain. Participant entry is decided by channel partners and manufacturers can example, the open architecture system existing members, a regulatory authority join the open architecture blockchain will act as an application platform or a consortium. In the previous mobile network as members and must be verified that onboards all interested parties. manufacturing example, the mobile OEM before they can conduct trades. These Independent authenticators will verify the may initiate the blockchain and invite members can be generators as well as suppliers’ and manufacturers’ emissions all its suppliers, contract manufacturers, consumers of carbon credits. The carbon and issue carbon credits. It is important to logistics service providers, warehouse emission calculations are authenticated note that all suppliers and manufacturers operators, distributors, and retailers to join by independent authenticators and must agree to the credit system designed the permissioned blockchain network. The these results are then used to determine by the open blockchain before they agree blockchain will define its own emissions carbon credits. The calculation process to join. However, this solution architecture calculation standards, carbon credit system has to follow the blockchain network requires significant computational power and credit sharing mechanism, all of which accepted algorithm in order to standardize to maintain a large-scale distributed ledger are driven through smart contracts. Smart verification and sharing of carbon credits. and standardize calculations among contracts are the key here as permissioned numerous participants and authenticators. In this architecture, authenticators play blockchains do not involve independent Due to this challenge, open blockchain a crucial role as they must be technically authenticators. Some examples of private architecture may not be suitable for all competent consultants who can onboard blockchain networks are Hyperledger manufacturers. members, verify emissions and calculate Fabric and Oracle Blockchain Cloud credits. The authenticators must also Private blockchain network – This is a Services. ensure that calculation standards permission-controlled business-specific are consistent across generators and blockchain with controlled participants

Fig 2 – High- level view of how private blockchains provide a platform to reduce carbon footprint of products across the supply chain.

External Document © 2018 Infosys Limited External Document © 2018 Infosys Limited VI. Conclusion Accurately measuring carbon emissions is the key to driving the success of international agreements such as the Paris Accord that aims to reduce the carbon footprint within the manufacturing industry. However, different countries use different approaches to measure carbon and calculate carbon credits, leading to challenges such as high effort and cost, inaccurate pricing, poor regulation, and low adoption. Thus, while the carbon credit system is a step in the right direction, the lack of standardization limits its effectiveness. Blockchain technology leverages distributed ledger systems, auditable trades and smart contracts, making it a fitting solution to address these issues. Depending on the type of supply chain and channel partners, open blockchain architecture or private blockchain networks can be used. Its unique features make blockchain the best vehicle to enable standardization across carbon measurement and calculation, thereby driving the carbon credit system to reduce the carbon footprint of products across the entire supply chain.

VII. References 1. http://unfccc.int/kyoto_protocol/mechanisms/emissions_trading/items/2731.php 2. https://www.investopedia.com/terms/c/carbon_credit.asp 3. https://www.worldbank.org/content/dam/Worldbank/document/Climate/State-and-Trend-Report-2015.pdf 4. http://www.ecolabelindex.com/ecolabels/?st=category,carbon 5. http://www.borgenmagazine.com/fighting-climate-change-reducing-carbon-footprint/ 6. http://www.economist.com/node/18750670 7. http://www.fao.org/fileadmin/templates/ex_act/pdf/Policy_briefs/C_footprint_draft.pdf 8. Büsser, S., R. Steiner, N. Jungbluth (2008). LCA of packed food products – the function of flexible packaging. ESU-services Ltd., Uster, Switzerland. Report made for Flexible Packaging Europe. 9. Bolwig, S and Gibbon, P., (2009), Counting Carbon in the Marketplace: Part I – Overview Paper http://www.oecd.org/trade/ envtrade/42886201.pdf 10. https://www.nature.com/news/the-problems-with-emissions-trading-1.9491

11. Vanclay, JK, Shortiss, J, Aulsebrook, S, Gillespie, AM, Howell, BC, Johanni, R, Maher, MJ, Mitchell, KM, Stewart, MD & Yates, J 2011, ‘Customer response to carbon labelling of groceries’, Journal of Consumer Policy: Special issue on Putting Sustainable Consumption into Practice 12. http://www.ethicalcorp.com/business-strategy/carbon-labels-green-mark-too-far 13. https://www.weforum.org/agenda/2017/09/carbon-currency-blockchain-poseidon-ecosphere

External Document © 2018 Infosys Limited External Document © 2018 Infosys Limited About the author

Arnab Banerjee Arnab is a Principal Consultant with Infosys, consulting as a Program Manager or a Solution Architect. Previously he was a Supply Chain Program Manager with a communication device manufacturer. Overall he has more than 15 years of consulting and business experience in Manufacturing, Supply Chain and ERP domain in US, Europe and Asia. To his credit he has more than 26 international publications in the form of International Journals, Conferences, Case Studies, Book Chapters and White papers. He has 15 years of consulting experience with clients in Asia (Japan, China and Malaysia), North America (USA, Canada and Mexico), United Kingdom, and Western Europe (France, Germany and Sweden). His research interests include operations research and information technology applications in supply chain management, green/reverse supply chain, lean initiatives, theory of constraints, IT architecture, business operations, transformations and HR aspects in supply chain and humanitarian logistics. Arnab holds a Ph.D. in Supply Chain Management, a master’s degree in Industrial Engineering and a graduation degree in Mechanical Engineering. He is a certified six sigma black belt champion.

For more information, contact [email protected]

© 2018 Infosys Limited, Bengaluru, India. All Rights Reserved. Infosys believes the information in this document is accurate as of its publication date; such information is subject to change without notice. Infosys acknowledges the proprietary rights of other companies to the trademarks, product names and such other intellectual property rights mentioned in this document. Except as expressly permitted, neither this documentation nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, printing, photocopying, recording or otherwise, without the prior permission of Infosys Limited and/ or any named intellectual property rights holders under this document.

Infosys.com | NYSE: INFY Stay Connected