Life-Cycle Based Climate Regulation Through Supply Chain Contracts

Abstract

Environmental action is a necessary component of any corporate sustainability efforts. While companies address many environmental issues, climate change belongs to the most pressing ones for them. Companies report on their scope 1 and 2 emissions, set ambitious reduction goals and adopt policies how to achieve those goals. However, reporting on scope 3 emissions, being methodologically demanding, is still in its infancy, despite the fact that in most industries scope 3 emissions and namely emissions from upstream supply chains represent the largest portion of companies’ emissions. An urgent question thus arises what can we do to reduce emissions in global supply chains without having a clear knowledge on their distribution among the supply chain tiers. The paper proposes that commercial contracting can be a viable tool. It provides a brief theoretical account for, some empirical evidence and simple numerical models all pointing towards the fact that there is a large potential for emissions reduction by using supply chain contracts, but that this potential is for now only latent due to, among others, the prevailing vagueness in the contractual language and a lack of regulatory drivers to that end. The paper concludes with a discussion on that this big but dormant potential of commercial contracting could be triggered through policy, law and amended contract drafting style.