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Commerce · VII.05 · MMXXVI · daylight

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WORKBOOK — THE CORPORATE EXECUTIVE

Chapter VII.05 · Bioregional Economics

For the person who has to put this in a board paper. Applied to a P&L, a business unit and a procurement schedule, in the language of the firm, and built around where your own numbers already support the move.

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THE PREMISE, STATED COMMERCIALLY

You are not being asked to believe anything about bioregions. You are being asked to do something your finance function already does for currencies and does not yet do for physical goods: keep a position, by line, against a defined perimeter.

The commercial case has three legs and only the third is contentious.

1. There is money in the lines that are regional by nature and are not being sourced regionally. Freight above roughly a tenth of delivered value is the test, and the goods that fail it are being hauled at a cost nobody has itemised because it arrives inside a delivered price.
2. There is risk in the lines that are cheap to import and slow to substitute, and that risk is currently unpriced. It is an option, and you are short it.
3. There is a premium on everything else, and it is real, and if you pay it without the arithmetic you will be asked about it in eighteen months by somebody who has done the arithmetic.

This workbook is about doing legs one and two properly, so that leg three is a decision rather than a drift.

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PART ONE — DISCOVERY

Days 1–30: find what is already regional

Exercise 1.1 — Declare the perimeter (half a day)

Fix the boundary in writing: ecoregion, level, boundary version, date. The hierarchy publishes 15 regions at Level I over North America, 50 at Level II and 182 at Level III; globally 846 at the ecoregion grain. A Level I region averages 1,647,267 km² and a Level III region 135,764 km² — a factor of 12.1.

Choose the level that matches the decision. Then write, in the paper: "All figures in this document are computed at Level ___ of the ___ classification, boundary version ____." Without that line every number you produce is incomparable with every other number, including your own from last year.

Exercise 1.2 — The lines that are already short (one week)

Pull the top forty material lines by spend. For each, record the supplier's shipping origin and the mode. You are looking for two populations:

• lines already sourced inside the perimeter that nobody labelled as such;
• lines with freight above a tenth of delivered value that are sourced outside it.

The second population is your opportunity set. It is usually smaller than the sustainability team hoped and larger than procurement expected.

Exercise 1.3 — The surplus next door (one week)

Ask what your region produces in surplus. The point is not romance; it is counterparty availability. New York State, against what New York City alone would claim at the national per-capita rate, runs 316 percent in corn silage, 255 percent in milking cows and 115 percent in forage, while sitting at 11 percent in wheat, 2 percent in pork and zero in rice, peanuts and cane sugar. A surplus is a supplier base that already exists at scale; a structural zero is a line you will import for the life of the business.

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PART TWO — THE ARITHMETIC

Days 31–45: the numbers that decide

Exercise 2.1 — Build the balance by commodity (two weeks)

Three columns per line: regional demand, regional production, delivered cost gap. No aggregate percentage anywhere in the document except as a range across commodities. An aggregate averages a 316 percent surplus against a structural zero and returns a number that describes neither — and the aggregate is the figure that will escape onto a slide and be quoted back at you in a context where it is false.

Exercise 2.2 — The carbon ceiling, computed once (half a day)

Before any emissions claim is drafted, establish the ceiling. Weber and Matthews put the average US household's food footprint at 8.1 tonnes CO₂e a year: 83 percent production, 11 percent all transport, 4 percent final delivery. Their modal intensities per tonne-kilometre: container ship 14 g, rail 18 g, inland water 21 g, truck 180 g, air 680 g — truck 12.9× container, air 48.6×.

The rule this gives you is one sentence and it belongs in your procurement policy: if regional production is more than about 11 percent less efficient than the incumbent's, the localisation cannot be claimed as abatement.

Exercise 2.3 — Test it against the hardest published case (half a day)

Saunders, Barber and Taylor measured New Zealand against United Kingdom production, with 17,840 km of shipping included on the New Zealand side, per tonne: lamb 688.0 against 2,849.1 kg CO₂; dairy 1,422.5 against 2,920.7; apples 185.0 against 271.8. Lamb from the far side of the world arrives at a quarter of the emissions of lamb from down the road.

Then read the fourth row, which is why this exercise is here: onions reverse it, at 184.6 for New Zealand against 170.0 for the United Kingdom. Any executive who quotes the first three rows without the fourth will be corrected in public, and the correction will cost more than the candour would have.

Exercise 2.4 — The decision inequality, per line (one day)

   regional premium per tonne   <=   c x (E_far - E_near)  +  p x L

Worked, so your analyst can check the method. A premium of £42 per tonne; the incumbent arriving by sea over 11,000 km; the regional route 140 km by truck; an internal carbon price of £80 per tonne CO₂e. Incumbent freight 0.1540 t CO₂e per tonne, regional 0.0252, difference 0.1288, worth £10.30 — 24.5 percent of the premium. The carbon term does not carry it. The residual £31.70 requires an annual interruption probability of 7.9 percent at a loss of £400 per tonne.

That is a number a risk committee can accept or reject. An assertion is not.

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PART THREE — DESIGN

Days 46–60: the instrument

Exercise 3.1 — Sort every line into four categories (three days)

The seasonal row has a published number attached to it that will save you an argument: British tomatoes cost 3.79 kg CO₂e per kilogram to the regional distribution centre against 1.30 for tomatoes grown elsewhere in Europe and trucked in — a factor of 2.9 — because about 97 percent of British tomato energy goes to heating and lighting.

Exercise 3.2 — Draft the offtake (one week)

The instrument is a multi-year fixed-volume offtake with a producer cluster inside the named perimeter, with four load-bearing terms.

1. Perimeter — ecoregion code, level, boundary version.
2. Volume and tenor — nominated annual tonnage, three to five years, take-or-pay on around 70 percent. Three years is the minimum that changes a planting decision, and changing a planting decision is what you are buying.
3. Price — a published regional cost-of-production index plus a margin, collared against the incumbent's delivered landed cost. The collar is what bounds the exposure and gets this past the CFO.
4. The load-factor covenant — the premium is payable only in periods where the weighted average vehicle load factor clears a stated threshold, verified from weighbridge tickets or telematics. Below it, price reverts to the incumbent's landed cost.

The fourth term exists because of a measured finding, not a theory. Mundler and Rumpus found short chains running from 13.5 to 44.8 grams of oil equivalent per euro of product: the urban box scheme at 13.5, on-farm sales at 34.2, producer shops at 44.8, against a best long-chain comparator at 8.8. The covenant prices the difference between the best of those and the worst.

Exercise 3.3 — Settle the accounting before you sign (two meetings)

For the buyer this is an executory purchase commitment, disclosed as an unconditional purchase obligation under IAS 37 or ASC 440-10 rather than recognised as a liability. Two questions for the auditor, both early:

• Does the take-or-pay tranche create an onerous-contract provision if the collar binds? It can. The collar width is where that is controlled.
• Does any dedicated storage, plant or vehicle named in the agreement constitute an identified asset, and therefore a lease under IFRS 16? Keep the asset unidentified unless you intend the lease.

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PART FOUR — DESTINY AND DELIGHT

Days 61–90: make it hold

Exercise 4.1 — Get one line into the standing pack (two weeks)

One number, monthly, in the reporting pack: regional share of spend for the lines sorted as regional by nature, with the load factor beside it. Anything reviewed monthly persists; anything reviewed by exception does not.

Exercise 4.2 — Publish the line you do not want to publish (one meeting)

Put one line in the first annual balance that says buy this from four thousand kilometres away, with its arithmetic. This costs you nothing and it is the single thing that makes every other line in the document credible to a finance audience.

Exercise 4.3 — Check where the premium lands (one week)

If your firm sells to consumers, the localisation premium is a consumption tax and you should know its incidence. The evidence is genuinely contested and both sides belong in your paper: Fajgelbaum and Khandelwal find closing off trade costs 63 percent of real income at the tenth percentile against 28 percent at the ninetieth across forty countries — 69 against 4 in the United States — while Borusyak and Jaravel, measuring import shares directly in microdata, find them flat between 11.7 and 12.9 percent across the distribution.

What survives the disagreement is the instruction: measure where your premium lands. Institutional procurement can absorb it; a shelf price cannot choose who pays it.

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THE BOARD PAPER, ON ONE PAGE

1. Perimeter. Ecoregion, level, version. One line.
2. The balance. Twelve to forty lines, by commodity. No aggregate.
3. The sort. Four categories, test shown.
4. The opportunity. Lines regional by nature, sourced distantly, with the freight share and the annual value.
5. The exposure. Lines strategically held, with p × L priced.
6. The instrument. One offtake, one commodity, one counterparty, three years.
7. The claim you are not making. Where localisation does not clear the 11 percent ceiling, say so.
8. The denominator. What this balance did not look at.

Point seven is what gets it approved, and point eight is what stops it being unwound the year after.

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THE FAILURE MODES, NAMED

The level floats. Figures quietly recomputed at whichever level flatters the answer. Fix it in writing; change it only in a dated amendment that restates the prior figures.

The aggregate escapes. One percentage on a slide outruns the commodity table and is quoted where it is false.

The load factor is never measured, and the programme claims an improvement in the one variable it has not instrumented.

The first contract covers forty lines and nobody signs it. One line, one counterparty, three years. A framework nobody has signed is a document.

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THE NINETY DAYS ON ONE PAGE

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A WORKED BUSINESS UNIT

A food manufacturing unit buying 40,000 tonnes a year across forty lines. The balance finds six lines regional by nature — freight above a tenth of delivered value — totalling 11,000 tonnes, of which 7,200 tonnes are currently sourced outside the perimeter.

On the largest of those, 2,600 tonnes, the regional premium is £42 per tonne, so the annual premium is £109,200. Against it:

  carbon term   0.1288 tCO2e/t  x  £80/tCO2e   =   £10.30 / t
                x 2,600 t                      =   £26,790 / yr
  loss term     spoilage differential, measured =   from the shrink line
  risk term     p x L, p from the interruption record

The carbon term carries 24.5 percent. The paper therefore stands or falls on the second and third terms, and the discipline is to price them from the unit's own records rather than from a benchmark: the shrink line for the first, the ten-year interruption record for the second. At a loss of £400 per tonne, the residual £31.70 implies an annual interruption probability of 7.9 percent.

If the unit's own record shows three interruptions in ten years, that is 30 percent and the case is comfortable. If it shows none, the case is not made and the correct decision is to keep importing and buy a smaller option instead. Writing that sentence into the first paper is what makes the second paper believed.

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APPRECIATIVE QUESTIONS FOR YOUR LEADERSHIP TEAM

1. Which of our supply lines is already short without anyone having decided it should be — and who set it up?
2. When did a physical supply disruption leave us untouched, and what about how we were buying protected us?
3. If we published a commodity balance for this business, which line would we most want on the first page in three years?
4. Which single commodity, contracted for three years inside the perimeter, would most change what a supplier here is willing to invest in?