Sustainability Strategies Addressing Supply-Chain Air Emissions (2014)

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1 Sustainability Strategies Addressing Supply-Chain Air Emissions Background and Research Objectives Economic activity and growth are driven by trade. This trade is facilitated by highly com- plex, dynamic, time-sensitive, and integrated supply chain systems that move goods across the globe between producers, manufacturers, and consumers. To remain competitive, supply chains must offer rapid, reliable, and efficient service that meets the demands of the global marketplace. However, supply chains also affect the environment and local communities as a result of air emissions from freight transportation. These emissions can affect climate change and human health. Increased recognition of the environmental and human impacts of supply chain activities has led to public pressure for rapid action. In some cases, this has resulted in fragmented and multi-layered regulation aimed at reducing air emissions. The complexity of these regula- tions may make compliance challenging, impede supply chain innovation, and undermine the realization of air emissions benefits. The objective of this research is to identify potential strategies for accelerating environ- mental improvement, enhancing performance, and promoting social responsibility of supply chains. The research outputs are intended to improve the understanding of decisionmakers about the impact of environmental policies and regulations on the supply chain, focusing on the interrelationships between economic drivers and air quality and greenhouse gas (GHG) policy and regulations. Identifying sustainable approaches to mitigating the environmental and health impacts of freight transportation while supporting economic growth and job creation is a critical, yet complex, challenge confronting both the private and public sectors, neither of which can accomplish this objective on their own. Solutions, therefore, necessitate new ways of collaborating and problem solving that cross conventional jurisdictions and require close cooperation between different public agencies, as well as between the public and private sectors. Alternative approaches capitalize on the private sector’s capacity for innovation and their growing commitment to sustainable development. Study Findings The research findings were based on a literature review, stakeholder interviews, and case studies. They are organized around five themes described in the remainder of this section. Partnerships and Win-Win Opportunities Win-win solutions enable a balanced realization of environmental, social, and economic considerations objectives. GHG emissions reductions present the greatest opportunity for S U M M A R Y

2win-win outcomes because they are directly correlated with fuel consumed (a significant cost for carriers). Public-sector agencies have a role in supporting and reinforcing private- sector emissions reductions initiatives through regulations that establish a level playing field for private-sector emissions reductions efforts and incentivize sustainable practices. Public agencies can promote win-win solutions via a combination of enabling and restric- tive mechanisms; by cooperating closely with one another; by actively engaging the pri- vate sector; through sharing best practices; and in mitigating adverse impacts on business and the economy, were possible. The research shows that the characteristics of successful public-private collaboration generally include proactive approaches to private-sector and community engagement, shared access to reliable data, careful consideration of the impacts of options and alternatives, the use of performance-based standards, and the provision of funding for emissions reductions initiatives. Operational Optimization Operational optimization is in the forefront for private-sector shippers and carriers. These efforts often have emissions reduction benefits. There is scope for the public sector to lend support by coordinating collaborative optimization initiatives (e.g., by helping to coordinate information between multiple intermodal terminals to improve efficiencies). The research findings indicate that potential for emissions benefits from freight mode shift tends to be limited by the modest overlap between freight markets. In considering how to support mode shift to greener modes (e.g., rail and marine or short sea shipping), public agencies might address private-sector concerns about transit times and reliability of such modes. Both shippers and carriers alike are realizing benefits from efficient routing and equip- ment use, reduced packaging, and voluntarily reducing vehicle speeds, which also have emis- sions reduction advantages. Some ports have incentivized vessel speed reductions in an effort to reduce emissions. However, mandatory speed reductions in one location can result in vessels increasing speeds elsewhere, thereby potentially diluting emissions benefits. Road and rail carriers have embraced more fuel-efficient driving styles and have reduced vehicle idling. Aimed at reducing at-berth emissions, shore-power requirements at Californian ports evoked strong reaction from ocean carriers due to technology costs, the reported lack of proven alternative emissions-control technologies, limited use of this technology outside California, and questions as to the emissions associated with electricity generation. Where shore power is being considered, the costs and benefits of this approach, as well as options for achieving equivalent emission reduction should be given careful consideration along with the perspectives of the terminal operators, energy providers, and vessel owners. Equipment and Technology Transportation technology advances, including energy-efficient equipment, engines, and alternative fuels, have delivered operating cost reductions along with substantial air emis- sions (primarily GHG) reduction benefits. However, engine emissions and fuel efficiency standards can take several years to take effect due to the slow rates of fleet turnover. Fuels such as natural gas and hybrid or electric vehicles offer alternatives to conventional diesel- fueled vehicles. Key lessons for the public sector are to • Ensure that regulations are sufficiently flexible to allow for ongoing technological innovation; • Collaborate with the private sector and research institutions on the testing and demonstra- tion of new technologies;

3 • Streamline processes for the approval of new technologies and fuels to ensure rapid deployment; • Provide support for new technologies (e.g., through the promotion of natural gas refueling and charging infrastructure); and • Offer opportunities for the recognition of innovation via programs such as SmartWay. The Sustainability Brand Many U.S. and international corporations are actively working to improve the sustainabil- ity of their supply chains, and are measuring and reporting on their progress. The research found that shippers’ initiatives tend to be driven by economics (particularly reduced costs) and company policy, and that shippers are increasingly pushing sustainability requirements onto the carriers that work for them. For carriers, business costs along with regulatory and competitive factors are the main drivers for sustainability initiatives. Several carriers par- ticipating in the research stated willingness to adopt sustainable practices as long as they do not incur costs or suffer a competitive disadvantage as a result. Supply chain sustainability is just one of many factors shippers consider in their capital and operating decisions, and air emissions are just one part of the plethora of sustainability considerations. Shippers’ supply chain sustainability programs typically address activities across the end-to-end supply chain (including product sourcing, manufacturing, packag- ing, transportation, warehousing, etc.). Freight transport is typically responsible for only a small percentage (5% to 15%) of total supply chain GHG emissions, and freight emissions are often relatively low on the list of priorities when shippers are setting their overall air emissions reduction strategies. GHG emissions receive the lion’s share of attention in corporate reporting, partly because of the emphasis on GHG emissions in corporate sustainability reporting protocols (e.g., the Carbon Disclosure Project and the Greenhouse Gas Protocol), but also because GHG emis- sions typically correlate directly to fuel use and shipper and carrier business economics. The research found limited evidence of voluntary carrier and shipper criteria air pollutant (CAP) emissions reductions efforts. Percent reduction of CO2 emissions per year is one of the most commonly cited report- ing metrics for shippers. The main metrics carriers use include average fuel savings or fuel use per ton-mile moved and percent reduction in CO2 emissions per year. CAP emissions reductions are not commonly reported outside California. Annual sustainability reports are generally published by large companies, several of whom disclose results via collaborative forums such as the Carbon Disclosure Project. Public- and private-sector forums play a key catalyzing role in encouraging measurement, reporting, and reduction of air emissions, for example, through recognition and rewards programs. Reducing and reporting emissions can often be more difficult for small companies (that may lack access to expertise, resources, and technology). Public-sector initiatives (e.g., U.S. EPA SmartWay, along with funding and incentive programs under the Diesel Emissions Reduc- tion Act, and statewide programs (e.g., Carl Moyer Program), together with nonprofit ini- tiatives (e.g., Cascade Sierra Solutions) can provide smaller carriers with access to expertise and funding to reduce emissions. Avoiding Unintended Consequences Demand for freight transportation, freight miles traveled, and freight air emissions are affected by a diversity of policy and regulations, many of which are external to environmen- tal regulation and policy. Efforts to promote integration across public policy and regulatory

4initiatives to ensure that they are supportive of freight air emissions reductions and supply chain sustainability can help to reduce unintended consequences. Given recent regulatory activity in California, it is not surprising that the carriers and shippers consulted as part of this research provided the most examples of what they per- ceived to be unintended consequences from their experiences in that state. Although the Clean Air Act allows other states to adopt California standards, it is important that these states fully understand both the context within which California standards and regulations were developed, as well as the unintended impacts that resulted prior to adopting these standards to avoid duplicating any adverse consequences. Some of the underlying reasons behind the perceived unintended consequences of air emissions regulations in California lie in, for example, specifying technologies that may not be optimal under the circumstances. A further issue is the layering of regulation such as the North American Emissions Control Area (ECA) and California low-sulfur marine fuel requirements that, in combination, require international ocean carriers to use three differ- ent types of fuel during a single voyage. This necessitates separate fuel storage, more crew time, and additional recordkeeping. In other cases, regulation has not always resulted in the expected emissions reductions benefits. In some cases, this has occurred because a regula- tion was developed without the benefit of broad-based industry consultation, was perhaps less responsive to private-sector operations than it might have been, or because compliance was difficult to ensure (e.g., the Port Gates Appointment System at the Port of Los Angeles). Although the research did not find any indication that California’s cargo share has shifted to other locations as a consequence of recent environmental regulation, this may be because the regulations were introduced relatively recently and also due to the uniqueness of the Californian economy and context. Other locations that do not share California’s advantages, such as the size of the local market, its proximity to Asia, and its well-established road and rail infrastructure, which reduces the costs of transporting goods to destinations beyond state borders, may run a greater risk of cargo diversion with implementation of “copycat” standards and regulations. Assessing the cost-effectiveness of regulations can assist in reducing the occurrence of unintended consequences by allowing different approaches to emissions reduction to be compared (e.g., through assessing the cost of compliance per ton of emissions reduced). Pursuing the most cost-effective emissions reductions solutions can enable the benefit side of the cost-benefit equation to be maximized, thereby minimizing adverse impacts on eco- nomic sustainability. Further, the effects on the private sector of the cumulative financial, technical, and administrative impacts of the combination of emissions regulations also should be taken into account to better understand the full costs of regulation on industry and the economy. Suggestions for Policymakers The research identifies the following nine key factors significant to achieving a balance between environmental, societal, and economic needs: 1. Consult Closely with Stakeholders to Craft Win-Win Solutions—Close consultation and collaboration with stakeholders (including vehicle manufacturers, shippers, and car- riers) increases public agencies’ likelihood of accomplishing public policy goals. Mutual understanding of supply chain sustainability issues and working relationships based on trust are essential. The creation of a culture of consultation and cooperation (rather than simply one-off consultations) among public- and private-sector stakeholders, can result in more informed and effective decision making. Standing freight forums have

5 been successful in fostering a collaborative culture in some jurisdictions. This collabora- tive approach often requires proactive public agency outreach efforts to engage industry. It is suggested that public agencies might even consider procuring private-sector inputs in much the same way as consulting services are bought, thereby ensuring mutual com- mitment to the process and outcomes. 2. Analyze Trade-Offs and Options—Regulation of supply chain air emissions presents inherent trade-offs: local air Criteria Air Pollutant (CAP) emissions may need to be weighed against global GHG emissions impacts; costs for shippers, carriers, and consumers may need to be balanced against environmental and community health. The concentration of CAP emissions from less-GHG-intensive modes at critical points along the supply chain (e.g., ports and intermodal yards) can result in health impacts to adjacent communities. However, efforts to regulate and reduce CAP emissions also can result in shifts to more GHG-intensive modes, particularly if the regulations result in increased costs. Further, it is generally recognized that the external costs (including accidents and pollution) of freight transportation are not reflected in freight costs (GAO, 2011). Regulation can provide a framework for balancing the distribution of costs so that all carriers bear a proportional share of these costs, which can then be passed on to shippers and consumers. It is thus important that the potential impacts of emissions regulations are assessed in advance to ensure that trade-offs are well understood, that options and alternatives are considered prior to adoption, and that benefits of regulation are commensurate with costs. 3. Coordinate Across Jurisdictions—Supply chains and freight transportation routes cross multiple jurisdictions. Geographic differences in emissions standards and regulations can result in increased costs as well as operational difficulties for carriers, for example, by com- plicating equipment design and deployment. Consistent standards typically help to stream- line private-sector compliance efforts, allowing for more optimal supply chain operations, ultimately benefitting industry and consumers. Nevertheless, uniform national emission standards and regulations are not necessarily a straight-forward or appropriate solution, particularly in respect of CAP emissions that have local impacts. A right-sizing effort is therefore required that considers local or regional emissions issues within the context of broader national and international operating needs. Effective and well-established bodies such as the International Maritime Organization, U.S. EPA, and U.S.DOT, whose remits are multi-jurisdictional, as well as associations of global and national carriers, could provide helpful guidance and global operations perspectives to state and local agencies considering the introduction of customized standards and regulations. 4. Develop Supply-Chain Sustainability Metrics—An agreed-upon definition of supply- chain sustainability, and the metrics by which this might be measured, requires public- private resolution. EPA’s SmartWay is the most widely recognized success story of public- and private-sector collaboration in U.S. supply chain sustainability. One option may be to fund and task SmartWay (or an equivalent program) with leading a collabora- tive public-private effort to establish a standard definition for supply chain sustainability and measurement. This assumes SmartWay-specific concerns, such as data submission verification issues, standardization of reporting units, and methods for connecting vessel efficiency to shipper calculations could be addressed. 5. Set Performance-based Standards—Performance-based standards and regulations offer broader scope for innovation in air emissions reduction efforts, compared with a pre- scriptive approach specific to a single technology or solution. Performance-based stan- dards allow businesses to meet emissions requirements via the means best suited to their operations. They tend to better reflect the dynamic nature of the freight sector, the private sector’s ability to adapt to new technologies, and operators’ propensity to adopt innovative practices. An example is the EPA and National Highway Traffic Safety Administration’s

6(NHTSA’s) recently introduced fuel economy standards for heavy-duty on-road vehicles that leave manufacturers various compliance options and include flexibility such as fleet averaging, banking and trading of emission credits, incentives for advanced technology vehicles, and optional standards for smaller volumes/companies. 6. Provide Incentives to Change—Grants, tax credits, and pilot projects are all effective methods by which the public sector can shift shipper and carrier behavior to be more sustainable. Such incentives can stimulate innovation, promote confidence in new tech- nologies, enable small businesses to access cleaner and greener equipment, offset the costs associated with sustainable practices, reward sustainable behavior, and acceler- ate regulatory compliance. Incentives are especially relevant for Criteria Air Pollutant (CAP) reduction initiatives where there are often few direct economic benefits to the private sector from emissions reductions efforts, but that can require substantial capital investment or involve higher operating costs. Certification programs (e.g., SmartWay and the Environmental Ship Index) also incentivize sustainable practices through their recognition of carriers and shippers. 7. Push the Boundaries of Technology—Air emissions standards should be achievable. Technology forcing approaches, when adopted, should provide adequate time for an appropriate technology to be commercialized. Inputs from experienced federal, state, and international regulatory bodies, as well as research organizations and the public-private consultative process, can help in the testing and formulation of such standards. Public agencies can play a crucial role in pushing the frontiers of new technology development by partnering with the private sector and research institutions in the technology testing and application phases. The public sector also has a potential role in envisioning, plan- ning, promoting, and enabling a zero emissions (or near-zero emissions) future that accommodates growth in freight transportation without associated air quality, health, and climate change problems. 8. Redefine Operational Optimization in Metropolitan Areas—Cities present particular challenges. It is within these urban operating environments that CAP emissions concen- trations present the greatest health concerns. Urban environments are typically character- ized by a plethora of motor carriers (many of which are small businesses), and tend to lack a coordinating agency that is an engaged supply chain participant. Bringing together the operational expertise of private truck fleets, parcel carriers, and large motor carriers to address the constraints of urban environments offers untapped potential to improve effi- ciency and reduce air emissions in cities. A partnership of such companies, acting jointly with public agencies in major urban areas, could uncover and drive new practices to raise operating productivity within cities (from which small carriers would also benefit) and could yield environmental benefits. 9. Promote Sustainable Branding—Companies are using green programs to differentiate themselves, both with product consumers and corporate clients. The success of the EPA SmartWay program suggests that there may be other opportunities for joint public- private approaches in promoting, verifying, and branding sustainable supply chains. In the absence of such initiatives, potentially misleading efforts may arise that result in a less- than-level playing field or create imbalances between the achievement of environmental, social, and economic benefits.