Alternative fuels, electric vehicles, low-carbon fuels and sustainable packaging sound great to many companies and consumers.
And many sustainable solutions have no downsides, except one — the cost.
While the upfront costs of purchasing light- and medium-duty EVs have come down drastically, there are still several sustainable alternatives in freight and supply chains that are not being deployed quickly due to their hefty price tags.
Sustainable aviation fuel (SAF), for example, is currently three times more expensive than conventional jet fuel, according to the International Air Transport Association. Because 20% to 30% of airlines’ operating costs come from jet fuel, green premiums that high do not lead to fast adoption rates even though SAF can reduce CO2 emissions by up to 80%.
More futuristic fuels such as hydrogen or e-fuels could be “double digits of percentages higher than current technologies,” said Tyler Cole, director of carbon intelligence at FreightWaves.
“Green premiums exist because we are trying to jump-start new technologies or solutions that are necessarily higher price because we don’t have economies of scale working on our side,” Cole said.
He noted that there aren’t green premiums for other existing technologies because they have been built out and scaled up over decades or even centuries to reduce their prices as much as possible.
The market, especially the fossil fuel industry, “has not had to pay its fair share of the external impacts from operations,” Cole said.
He said when externalities are priced for operations, green premiums make more sense. Environmental and social costs of various operations downstream have gone unaccounted for, which Cole said is partially because the negative impacts typically happen over time and after the priced action (e.g., buying fuel to power a vehicle).
Survey says, consumers open to cost premiums, longer shipping times
In a recent survey by Sifted, 57% of 500 respondents said they were willing to pay an extra 10% or more for eco-friendly shipping and packaging. More than 90% said they wanted an “eco-friendly shipping” option at checkout when ordering products online.
Another potential green premium could not be related to price at all. Lower levels of service or longer shipping times could reduce emissions, depending on the industry. In the survey, 84% of respondents who placed a moderate or high importance on shipping speed said they would wait an extra day to receive their products; 66% said they would wait two extra days; and 18% said they would wait three if it meant lower transportation-related emissions.
How to counteract green premiums
Three parties hold the power to reduce green premiums: governments, companies and consumers.
Governments could tax the non-green premium solutions, which would increase their prices, reducing the price gap between more polluting and more sustainable solutions. Or, governments could incentivize the use of sustainable solutions by providing rebates or tax breaks, encouraging companies to innovate and make the switch to greener operations.
Companies could invest in R&D for sustainable technologies and fuels or prioritize using sustainable solutions, even if it is at a higher cost. As the survey indicated, consumers may be open to slower delivery times or higher prices for products purchased online if it means reducing emissions. If consumers are given the option for those choices at checkout, it could send market signals to companies about shifting preferences.
These strategies are not mutually exclusive.
This is good news because, as Cole said, “It’s going to take time, which we don’t necessarily have as much time as we all would like.” But, lowering green premiums would likely happen more rapidly if governments, companies and consumers collectively prioritized reducing emissions.
Many experts, including Cole, agree that industries should quickly deploy sustainable solutions with no, or small, green premiums. Then, the focus should be on R&D for solutions with extremely high green premiums, such as SAF, to bring the costs down, spur innovation and create economies of scale.
Cole mentioned on-site solar installations at warehouses as a great first step because the payback period is relatively short. The green premium doesn’t exist for this type of solar anymore since economies of scale increased and therefore reduced the cost.
“Public–private partnerships and collaborations across agencies may accelerate cost reductions by ensuring a diverse set of stakeholders are involved early in the solution to ensure it can address barriers for industry wide use,” said a Department of Energy report on SAF.