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Obama Climate Change Plan and the Supply Chain
President Obama last week announced preliminary plans to reduce US carbon emissions, in part after on-going criticism from many environmental quarters that he was not doing enough to reduce US greenhouse gases.
Of course, almost anything to do with energy is likely to have some supply chain impact, and we look at some of the primary ones in the plan here.
An important point is that the president intends to develop new rules under the regulatory authority of the Environmental Protection Agency (EPA), rather than through legislation that must be approved by Congress.
In the first two years of the Obama presidency, when Democrats controlled both houses of Congress, the House approved so-called "cap and trade" legislation, but it did not move forward in the Senate. Since then, there has been very little in the way of CO2-related legislative efforts, and House control has been passed to Republicans since the 2008 elections.
So, the Obama plan will focus on regulatory tactics, and may or may not see push-back in the Congress.
Overall, the president has set a goal to reduce US CO2 emissions to 17% below 2005 levels by 2020.
In 2012, the EPA passed new CO2 limits for the construction of new power-generation facilities, currently the top emitter of greenhouse gases in the US. The new limits on CO2 have effectively banned new coal-powered plants, though did not address existing facilities.
The president's plan calls for the EPA to now issue new CO2 emissions rules for existing plants, rules which the Wall Street Journal has said may lead to as many as 30% of current existing power-generation plants being forced to close (though the rules have not yet been written).
The effect will be to continue an existing trend towards electricity generation based on natural gas, which emits about 40% less CO2 per energy unit in power plant generation than does coal. In the past couple of years, the low price of nat gas has made this an attractive option for many utilities even without new rules.
Will that continued migration to natural gas in the end lead to higher and more volatile electricity prices that negatively impact US manufacturers and consumers? And will the new and additional future rules push the US away from even natural gas, just as the US oil and gas sector is taking off and giving the US an energy cost and manufacturing competitive advantage?
The National Association of Manufacturers (NAM) thinks so. In a speech last week to Independent Petroleum Association of America conference, NAM CEO Jay Timmons said that "President Obama today revealed his most ambitious regulatory agenda yet, one that would remake the entire US economy. During the campaign, the President regularly touted increasing manufacturing jobs, and he rightly recognized that a strong and vibrant manufacturing sector is key to robust and sustained economic growth and job creation. Unfortunately, under his watch, he seems intent on taking actions that would put manufacturing in the United States out of business."
Timmons added that "The EPA is not going to stop with today's announcement. First, it will be coal. Then it will be natural gas. Ultimately, this plan will make the United States less energy secure, less affordable and unable to meet our future energy needs."
Conservative group The Heritage Foundation believes diverting more and more natural gas to energy production in place of coal will cause natural gas prices to rise sharply, negating the advantage the US has in natural gas costs current that has led to many new investments in factory construction here in areas such as chemicals and metals.
New Truck Mileage Standards
Regulations are already in place to require enhanced fuel mileage for heavy duty trucks, phased in through the 2014-18 model years. Obama's new plan calls for increasing those standards again for models after 2018. Heavy duty trucks, by the way, are the second largest CO2 emitted in the US, behind the power plants.
What these new standards would look like, however, is not clear, and whether the technology will really be available to meet them is far from assured. Recent regulations in this area have forced carriers and private fleets to make major investments in new equipment ahead of normal replacement cycles.
The same would likely be true through 2018 and apparently now beyond. One interesting aspect of this plan is that in combination with requirements for major improvements in automobile mileage for passenger vehicles, if even partially realized would substantially reduce the gallons of fuel used by vehicles in US, certainly on a relative basis in terms of miles travelled and perhaps even on an absolute basis.
That will reduce revenue flowing from gas and diesel taxes that are used to fund highway maintenance and construction. That will drive the federal government and states to look at significantly increasing those fuel taxes (as a number of states have recently started to do), or move to alternative funding strategies, such as a vehicle mile tax. The American Trucking Associations has been lobbying hard in favor of a rise in fuel taxes, not a VMT.
Also unclear is how mileage standards for heavy trucks will work as engine manufacturers and carriers move to non-diesel based fuels, such as natural gas. This to us is a major wildcard that needs a lot more clarification.
Trends in CO2 Emissions
It is important to put the proposed Obama plan in the context of overall US CO2 trends, says energy consultant John Miller on the Energy Collective web site.
US carbon emissions (from consumption of fossil fuels) peaked in 2007 at 6023 million metric tons per year (MMT/yr) and total emissions have since declined by about 12% (to 5,290 MMT/yr) in 2012, Miller says. This reduction in carbon emissions has been due primarily to reduced coal (switch to natural gas) and petroleum consumption (better fuel mileage). Natural gas consumption actually increased by almost 10% from 2007-2012.
Source: GreenSupplyChain.com, from DOE Data
As can be seen in the graphic above, the severe recession in 2008 and 2009 also was a factor, as economic activity decreased substantially in that period, from which the US has failed to fully recover.
However, that trend is likely to reverse itself from now through 2020, according to a recent report from the US Dept. of Energy. It predicts that U.S. total carbon emissions will increase to 5,455 MMT/yr by 2020. To get to Obama's goal of 17% less carbon emissions by that year than in 2005, the total would need to fall to just 4,979 MMT/yr in 2020.
However, that represents a difference of just 9%, meaning the president's plan is not that dramatically more aggressive than the current trajectory, and can probably be achieved with the plans for changing current power plant emissions limits and improved efficiency from heavy duty trucks, Miller says.
It is also notable that the goal is relative to 2005 emissions, not the high mark of 2007, which would present a much steeper challenge.
TheGreenSupplyChain.com will note in closing that from a global perspective, all this is sort of moot unless China, the word's largest CO2 producer, takes any real action to slow is growth in carbon emissions, which it shows no signs of doing. Many years of effort to slow CO2 emissions in Europe, including a cap and trade program, have not been successful in curbing CO2 emissions growth there to date, despite many years trying.
Finally, sharp reductions in CO2 emissions from power sources, and significantly improved truck mileages will enable many companies to meet their own CO2 reductions goals, without any special additional internal programs – that is something worth pondering.