Emissions from their supply chains far exceed those from their direct operations for most companies. Decarbonising these supply chains offers a significant opportunity, then, to contribute to the necessary global halving of emissions by 2030.
At June’s UN Bonn Climate Change Conference (SB60), the Exponential Roadmap Initiative spoke with manufacturers and suppliers from H2 Green Steel, IKEA, Scania and Woodsland Furniture to explore the strategies and challenges in reducing emissions through the value chain and reaching net zero.
Key enabler: renewable energy
Sriram Rajagopal, Head of Climate and Air Pollution at Inter IKEA Group, highlighted the furniture company’s target of achieving 100 per cent renewable electricity across their supply chain by 2050.
Materials and energy constitute around 67% of our overall footprint. So, when I talk about energy, it’s both production plus transportation, and then materials and food ingredients, roughly about 50%. Moving towards 100% renewable energy is a key enabler for us getting to our net zero goals.
So if I start off with production, which is 10% of our footprint, around 60%t of the energy is consumed as heat, and we are really working with suppliers to phase out fossil fuels. We are moving towards complete electrification of production processes.
By FY25, we would have already phased out the use of coal on site and also the use of oil-based fossil fuels on site. Then we have an ambition to phase out natural gas completely by FY30. So, we have an ambition on the production side to reduce our emissions by 80 per cent by FY30 compared to our baseline year FY16. We are at 32% reduction now, so there’s a job to do in the next five years from now.
On the material side of things, which is the biggest part of our footprint, we have set a goal of halving emissions by FY30, and we are at 7% emissionS reduction now. We are working on various initiatives, moving towards using materials with lower footprint, moving towards more plant-based food when it comes to food ingredients, but also aiming to use only recycled or renewable materials by 2030.
Woodsland Furniture in Viet Nam has been a supplier to IKEA for more than 20 years and has a shared interest in bringing down the carbon footprint through introducing renewable electricity. Do Thi Bach Tuyet, Vice Chair at Woodsland Furniture, a privately owned company in Viet Nam that supplies wooden furniture to IKEA, said as one of IKEA’s suppliers, they are also taking action to minimise the negative impact to the environment from their activities by using renewable energy for production.
For us to produce a furniture product, the electric cost takes about two to three per cent of the total cost of the product. So, it’s very important to transfer to a renewable energy source. Woodsland has invested in solar panels on the rooftop of our factory buildings.
For IKEA production today, we are using 100% renewable electricity, of which 70% comes from the solar rooftop, and 30% comes from buying renewable energy certificates or RECs. Buying RECs is just a temporary solution for now, and we will explore the opportunity in the future to move up the renewable electricity staircase.
Materials footprint moving into the spotlight
Fredrik Nilzén, Head of Sustainability at heavy-vehicle manufacturer Scania, said that shifting production from internal combustion engine to electric vehicles was very important – and yet only the beginning of the decarbonisation journey.
In terms of emissions, we have 96% of the total emissions in the tailpipe perspective when our customers use our vehicles. So in that sense, it’s a huge task to shift the sales to electrification. We target to have 50% of our sales in 2030 in Europe from electric vehicles.
But shifting from a combustion engine over to electrification, we also see that there is a shift where the emissions come from. With that said, we have our hotspot materials. Hotspot materials are steel, cast iron, aluminium and batteries. They constitute almost 80 per cent of the total emissions from the manufacturing process.
A couple of years back, we looked into how in the world we can decarbonise these materials. Also acknowledging the fact that fossil free steel, for example, is not available in the market. There was limited demand, but also very limited supply. Therefore, one of our strategies has been to also sign offtake agreements with partners that are keen to make that supply happen.
Secondly, what we have done over the last years is to make sure whatever we produce, it needs to come from green electricity. We’re on 43% now towards our target of 50 per cent for 2025. But it doesn’t stop there; every 10th year, we need to halve the emissions in order to follow the Carbon Law. So, the direction is clear, but also we cannot do this alone. We need to advocate across the ecosystem.
Renewable electricity key to a new value chain logic for materials
One of Scania’s future suppliers of fossil free steel is Swedish start-up H2 Green Steel. Johan Mandaric Reunanen, Director of Sustainability, Strategy & Climate at H2 Green Steel:
Our purpose at H2 Green Steel is to decarbonise hard-to-abate industries and we start with steel. The reason being that steel is one of the dirtiest industries out there. It accounts for roughly 7 to 8 per cent of global emissions, mainly coming from the step before the steel production, which is actually the iron.
But while we use a lot of the scrap that is available, that’s not enough to cover the immense need for steel in the market. Roughly every year, 1,900 million tons of steel is produced and there’s only roughly 700 million tons of scrap. We lack two-thirds of the scrap.
So, we need to focus our attention on the iron-making step, which is the vast majority of the CO2 emissions in the entire steel value chain. We do that by looking at how we can produce iron by using green hydrogen instead of using coal and coke that is traditionally used, and how we can use electricity in creating the steel. With this, we need a lot of renewable electricity. So, the first plant that we’re building in Boden, Sweden, will at full capacity produce 5 million tons each year.
This is part of creating a new industry logic. Before, the iron-making plants and the steel plants were close to where you could get easy access to coal, where you could get easy access to coke. But now we need to establish these sites where we have access to green electricity. So, we get a new logic of global ecosystems and value chains for these materials.
Buyers and suppliers play roles in financing the transition
Renewable energy development, circularity, green hydrogen in hard-to-abate sectors and energy efficiency improvements require substantial capital investment. For H2 Green Steel, IKEA, Scania and Woodsland accessing funding was key towards a green transition.
To help decarbonise their supply chain, IKEA created a €100 million fund to finance renewable energy investments for their suppliers around the world. Sriram Rajagopal:
We did a survey around five years ago with our suppliers and found, typically with a small and mid-sized company, it was not lack of intent to accelerate the renewable energy journey, but it was also financing. So, in 2019, we put together a programme with a €100 million corpus to finance renewable energy investments for suppliers. We have a steering group looking at these cases and then we structure loans to our suppliers to really accelerate movement towards 100% renewable energy by 2030. So as of FY23, we recommended €33 million out of the €100 million corpus to our treasury to give out these loans to our suppliers.
One of the suppliers to make use of this offer was Woodsland Furniture in Viet Nam.
We invested in our first solar panel in 2020 from our finance,” said Ms Tuyet. “But in 2022, we got the finance support from IKEA for a three year loan, which is about $2.2 million. With that, we invested in a solar panel on the rooftop with a capacity of about 4.4 megawatt peak. This solar system can generate clean energy for IKEA production and help us to reduce about 4,000 tons of CO2 every year. Now we have a total of 10 megawatt peak covering about 80,000 square metres on the rooftop for all the factories. The benefit for this investment is that we not only reduce the carbon dioxide, but it also gives us a source of clean and free energy in the future. This is how we can consolidate our competitiveness in the market in a sustainable way.”
For H2 Green Steel, long-term offtake agreements, whereby a producer of a resource and a buyer of a resource enter an agreement to purchase or sell portions of the producer’s future production, enabled them to access the funding they needed to make green steel. Johan Mandaric Reunanen:
Investors would not have invested money in us. The banks and other creditors would not have loaned us the money. So, what we needed was the customer uptake and companies that take the climate crisis seriously and commit to a science-based targets initiative, that set really ambitious climate targets for themselves and want to decarbonise their value chains. Being able to get these long offtake agreements, seven to eight or nine years, we could unlock the funding that was needed. That is one of the key essential pieces of the puzzle.
For Fredrik Nilzén from truck manufacturer Scania, there is a clear advantage in being a first mover on decarbonisation.
We’re confident that there will be a lot of other companies out there that will also need to, but also want to, make sure that they decarbonise their value chains. And then we will all hunt for that material that is being produced in that new way. So sitting there will be a lot more risky if you don’t have anything in your books.
Maybe the remaining question then is, will the customers be ready to pay extra for a truck that is made by this steel? That we don’t know, but we do know that there are transport buyers around the globe that are also committed to this transition, to their decarbonisation targets. So, we know that they file already today requirements on how goods are being transported. That means that the carriers out there, they will also need to deliver fossil free transport services. We believe that it’s not only tailpipe emissions that will be included tomorrow when determining whether a transport service is fossil free, but also, in fact, the emissions that go into the vehicles that are being produced. So, there’s a strong business case.
