The market for green logistics, while still nascent, is expanding quickly. Logistics companies are eager to meet customer demand, comply with regulatory targets, and capture this growth.
But decarbonising the sector - given its fundamental reliance on multi-modal transportation, which can be difficult to abate - will involve significant expenditure and capital investments.
Reducing emissions in an economically viable manner will require logistics companies to devise effective commercialisation strategies. Recent research has shown that many a logistics company does not yet even aim to derive profits from green logistics services. Instead, these companies’ focus is simply on recovering costs.
Will logistics companies ever escape the current market dynamics and begin to create profitable green solutions? Many importers and exporters alike are searching for ways to reduce their emissions. Their buying decisions regarding green logistics are largely based on how effectively a product can help them meet their own emissions targets.
A green logistics product may be most successful in addressing this need if its emissions reductions are auditable and significant enough to affect the customer’s overall emissions numbers.
Of course, customers are also looking for products that are affordable. But reducing emissions created by transport can be particularly expensive. For example, decarbonising cargo that is to be transported by air - using sustainable aviation fuel, which is about three times more expensive than standard aviation fuel - could increase the shipment’s costs by approximately 60 percent by 2030.
Implementing green logistics services can be challenging for many reasons. It requires significant capital expenditures, in an environment rife with uncertainty about which technologies will prevail and how soon those winning technologies may become viable.
It can also involve collaboration with complex networks of subcontractors that have their own incentives, which are not necessarily aligned with those of the logistics provider. Customers want green logistics products but aren’t willing to pay for them (or at least aren’t willing to pay the premium that would be required to fund them).
And these customers (global multinational organisations) generally enjoy strong bargaining power. Research has shown that more than 80 percent of logistics customers are not willing to pay even as much as a 10 percent premium for a green product.
As logistics companies encounter the challenge of commercialising green products, they must begin to gravitate towards models that could offer consistent profitability. The market for green logistics is changing fast. Time horizons are getting closer for many cargo owners’ decarbonisation targets.
Carbon taxes could rise for many logistics customers, while green solutions could potentially become cheaper. Now is the time for logistics companies to assess their strategies for commercialising green products - and to prepare themselves for the evolution of the market.
The writer is Trade, Logistics & Supply Chain Consultant, at Leverage Consulting.
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