Policy Memo: A Good Look for Apparel's Industrial Decarbonization Path

The policy memos we publish distill what participants learn about stakeholders, terms and levers in the Policy module of the Financing and Deploying Clean Energy certificate program. We invite you to absorb the authors' thinking, reflect on how it clarifies issues in your own work, and consider applying or referring a colleague to join the next FDCE cohort. We're accepting applications here through March 13.

The apparel & textile industry ranks as one of the world’s worst carbon polluters; recent reports estimate the sector emits between 1.025, 2.465, and 3.990 gigatons (Gt) of carbon dioxide equivalent (CO2e), representing up to 8% of annual global greenhouse gas (GHG) emissions. This ranks the industry fourth behind the total economies of China, the United States, and India in annual CO2e emissions. It might be worse. Given the challenges in measuring apparel’s CO2e footprint ,  the industry's emissions could be even higher when you consider the carbon output from shoppers driving to stores and clicking through online options. 

Fortunately, the apparel industry is an economic powerhouse that has the resources to finance its own transition to renewable energy- if shareholders and executives bring the motivation and if policymakers will provide sharp enough incentives to make this change. 

First, consider how much money comes into the industry. Global revenue estimates range between $1.9 and $3 trillion. Americans are top consumers per capita of fashion; OTEXA (The US Office of Textiles and Apparel) reported that ‘Textile & Apparel’ U.S. imports totaled $111B in 2019, $89B in 2020, and $102B in the last twelve months as of June 2021. Quantis found that an individual “...consumes 11.4kg of apparel annually. This produces 442kg co2-eq emissions per capita, the same amount emitted while driving a car 1500 miles.” The US, as the largest consumer and highest emitter of carbon per capita, bears a critical share of the responsibility to facilitate a transition to sustainable practices. You can treat this responsibility as a moral obligation to encourage cleaner energy development in the markets where the majority of textiles are produced. You can also consider it a mandate for survival in a carbon-constrained world. 
This article lays out the rationale and a pathway for the US to incentivize the apparel industry’s decarbonization. I propose a preferential tariff on imports of apparel and textiles that are manufactured using renewable energy.

THE EXPORTING OF APPAREL MANUFACTURING ABROAD  Until 1995, US apparel manufacturing & trade worked under the Multifibre Arrangement (MFA) which heavily protected local & domestic markets. Manufacturing predominately remained within the Americas. But in 1995, the WTO’s Agreement on Textiles and Clothing (ATC) replaced the MFA. Over a 10 year period, the sector’s trade regulations globalized and integrated into normal GATT rules. By 2005, apparel manufacturing and processing were largely exported (mainly in China, India, and Southeast Asia. Today, the apparel industry relies on a complex network of supply chains woven throughout overseas manufacturing bases. Asia dominates production, while the US remains the largest market for final goods. The map above (Lu, 2017) shows trade flows of cotton sewing thread and illustrates common apparel trade patterns.

And to reach that policy decision, I advise investors, advocates and officials to use this framework:

1. Map the sector’s emissions and identify the hotspots across the value chain,

2. Identify high impact solutions to reduce these emissions

3. Convene system stakeholders to implement solutions at scale

CARBON HOTSPOTS WITHIN THE APPAREL VALUE CHAIN

Carbon emissions are not even across the supply chain. Of the estimated CO2e the apparel industry emits annually, more than 90% come from upstream processes- ie spinning, weaving, dyeing, and finishing fabrics - and are largely classified as Scope 3 emissions (more data here). The highest emissions come from use of fossil fuels for thermal energy & electricity generation to power the manufacturing processes. 

Clothing manufacturing is energy-intensive and electricity consumption accounts for up to 80 percent of the GHG impact within this phase of the supply chain. This makes intuitive sense given the location of manufacturing: developing Asian nations such as India, China, Cambodia, and Vietnam where coal dominates the economies and electric grids. (See figure below for a share of electricity from coal (2020) and for a dynamic map of all global coal plants & energy generation, see here).

IDENTIFYING HIGH IMPACT SOLUTIONS

To decarbonize, the apparel industry must address Scope 3 emissions and emphasize moving away from coal-powered manufacturing. A recent McKinsey study found that the use of 100% renewable energy and efficiency improvements could avoid 703 million tons (Mt) of GHG emissions and the WRI report I mentioned estimated a shift away from “coal used for thermal energy in Tiers 1 and 2 to a carbon-free source would reduce emissions by a total of 105 Mt CO2e.

A SYSTEMIC APPROACH

You can scarcely expect to change the inputs just with forceful data. A systems-based approach must be taken to transform fashion’s fossil-fuel dependent value chain. Given the complex network of manufacturing, stakeholders across the global value chain need to all work to transition manufacturing to renewable energy. Brands and retailers can play a key role in supporting the energy transition of upstream operations, if they see strong incentives & enforcement. While 130+ retailers have already committed to halving Scope 3 emissions by 2030 (as UNFCC Fashion Charter signatories), 80% of the sector by revenue has not adopted Science-Based Targets (SBTis) or set reduction targets.
Shifting to a sustainable industry will require a fundamental transformation across all stakeholders. It’s folly to hope that single retailers such as H&M, Nike, C&A, all with a constantly changing supply base of hundreds to thousands of mills and factories across the world, can independently finance a new basis for production and electricity generation. It will take a coordinated and collective approach. 

"By offering preferential tariffs to brands investing in clean energy within their supply chain, the US can motivate firms to invest in cleaner energy downstream..."

Aggregated approaches to funding large-scale transition to renewable energy exist- ie, virtual power purchase agreements (VPPAs) and crowd-funded direct conversion to renewable energy in manufacturing hubs.  These solutions could be adopted across the fashion industry, but require massive coordination and/or large upfront capital outlays.  These must be financially & politically incentivized. 
The transition to renewables at scale could be expedited by government intervention, but current political, regulatory, and trade frameworks do not incentivize the investment in sustainable products.  Given the US dominance in the industry and consumption of final goods, the US government can- and should- use its control over imports and taxation to shift the system towards clean energy. By offering preferential tariffs to brands investing in clean energy within their supply chain, the US can motivate firms to invest in cleaner energy downstream and encourage wide adoption of renewable energy use in the industry. 

THE USE OF PREFERENTIAL TARIFFS TO INCENTIVISE A TRANSITION TO CLEAN ENERGY

Tax breaks from the preferential tariffs can appeal to American firms on economic grounds. The US apparel industry operates as one of the lowest-margin industries, with an average pre-tax unadjusted operating margin of 5.23%. The apparel & textile industry also has one of the highest tariffs rates under the US Harmonized Tariff Schedule. Pew Research reports that in 2018, “the average tariffs on the dutiable portions were 18.7% for knitted or crocheted clothing and 15.8% for non-knitted or crocheted items – the two highest average rates out of 98 broad import categories. 

Given existing high tariffs, a reduction in the tax burden offers textile and apparel importers a substantial competitive advantage, making a preferential tariff an effective policy tool to leverage change. If the US were to offer a preferred rate on apparel imports manufactured using clean energy, retailers would see a financial incentive to implement more sustainable practices downstream and lose out relative to peers if they remained committed to fossil fuel production.  This would be fairly easy to do with a straightforward amendment to ​​Section XI, Textile and Textile Articles of the Harmonized Tariff Schedule to ​offer a reduction of tariffs on all apparel & textile imports processed in facilities using clean energy and/or imported by brands investing in programs to decarbonize apparel’s manufacturing base. This type of tariff reduction and incentive, under the current administration, deserves leverage. 

Given the US dominance in the industry and consumption of final goods, the US government can- and should- use its control over imports and taxation to shift the system towards clean energy.

It's worth diagramming how this leverage would happen. The Director of the Office of Textiles and Apparel in the U.S. Department of Commerce, International Trade Administration (OTEXA) shares authority with the White House, Congress and other officials to propose and enact changes to the Tariff Schedule (OTEXA runs agreements and preference programs for textile and apparel players. The Committee for the Implementation of Textile Agreements (CITA) handles issues affecting textile trade policy with OTEXA's chief chairing.)
The Director of the Office of Textiles and Apparel in the U.S. Department of Commerce, International Trade Administration, the Chair of the committee for the Implementation of Textile Agreements (CITA), the White House, and Congress have the authority to propose and enact changes to the Tariff Schedule.

OTEXA administers and enforces agreements and preference programs concerning the textile and apparel industry, and the Committee for the Implementation of Textile Agreements (CITA), chaired by the director of OTEXA, is responsible for matters affecting textile trade policy.

This type of tax policy would entrench support, as benefits increase over time, creating a positive feedback loop. Once the conversion to renewable energy in manufacturing facilities occurs, the practice becomes self-reinforcing. Energy savings will occur at the manufacturing facility and flow to the consumer. Therefore, this type of intervention will yield increasing self-reinforcing benefits.

And the private sector can help. OTEXA (Office of Textiles and Apparel) can partner with industry organizations such as Apparel Impact Institute, Fashion Makes Change, Responsible Business Coalition, Textile Exchange and others to structure bi-partisan legislation and preferential tariff incentive. (Disclosure: I work for Fashion Makes Change.) This policy change would support the UNFCCC Fashion Industry Charter for Climate Action, and US’s commitment to halve the country's emissions by 2030 while supporting key manufacturing countries to decarbonize the supply base. 

The apparel industry, through its scale and influence, has the potential to help mitigate climate change, and catalyze the adoption of renewable energy worldwide. Tactical use of the US import tariff code can be mobilized to adopt renewable energy at scale.