Amazon and Climate Change

Company and Sector

Amazon primarily operates two businesses: its traditional marketplace and its B2B cloud computing business (Amazon Web Services).

In 2015, Amazon’s marketplace saw just under $100B in global sales, shipped products from 172 countries to 189 countries, and incurs billions of shipping costs annually.

Amazon Web Services (AWS) originally supplied cloud computing services to startups, but has grown to over a million clients including some of the world’s largest brands (e.g. GE, Airbnb, Johnson & Johnson, McDonald’s, Philips, etc.).

Due to the logistical needs of its marketplace business, the power consumption needs of its cloud computing services and the rapid growth of both businesses, climate change is a key consideration for Amazon.

 

Threats and Opportunities Posed by Climate Change

A number of aspects of Amazon’s marketplace business will be impacted by climate change and by public opinion of climate change. For example, Amazon could very well be scrutinized for its need for vast amounts of transportation resources and packaging materials. Also, as the company continues to develop and produce more and more private label products, the public may consider the environmental cost of producing those products. Likewise, the various suppliers and sellers utilizing the Amazon marketplace could face similar challenges.

AWS requires considerable energy consumption. This dependence on energy production could entail massive future costs in the event of rising energy prices as well as in potentially negative public perception if Amazon’s power mix skews towards traditional energy sources. However, Amazon is also facing a significant opportunity in that the use of centralized data centers (e.g. AWS) is far more cost effective and energy efficient for corporate clients. Corporate clients under pressure to become more environmentally friendly would likely be more inclined to consider a transition towards off-premise solutions.

 

Steps Taken

Amazon has gone to great lengths to consider its role in energy efficiency and is actively engaged across a number of fronts to reduce both its, and its clients’, environmental impact.

In its marketplace business, Amazon has sustainability efforts on packaging and process improvement. Recently, Amazon has introduced “frustration-free packaging” that is 100% recyclable. Amazon states that most orders are shipped in corrugated packaging that is fully recyclable and is composed of 43% reclaimed materials. The company has also started working with other suppliers and vendors on its platform to provide free analysis and advice around packaging innovation with the ultimate goal of reducing resource needs. In addition to packaging efforts, Amazon has introduced a sustainability bent to its Kaizen Program. Under Kaizen, employees are encouraged to consider continuous improvement opportunities, including energy efficiencies and opportunities to reduce consumption. For example, employees redesigned the process by which trucks were filled with product ready to ship. The reconfiguration of product layout increased truck capacity by 20%, decreasing the net need for transport. Another example includes the selective operation of conveyors and lights based on employee presence and usage in lieu of continuous operations

Other efforts include Amazon’s emphasis on sustainable buildings and preference for LEED-certified facilities and Amazon Green, a cross-category program that includes a customer-generated list of the ‘best’ green products available on Amazon.

Amazon’s AWS business has confirmed a long-term commitment to achieve 100% renewable energy use for its global infrastructure footprint. Amazon sees three levers in regards to efficient power consumption: the number of servers running, the energy required to power each server, and the energy input type of each server. The company notes that in general, cloud solutions (e.g. AWS) consume 84% less power vs. on-premises solutions. This is driven primarily by two factors: large-scale server farms generally achieve 65% utilization vs. 15% utilization of on-prem solutions; and dated on-premise solutions are 29% less efficient in energy usage for comparable computing resources. Also, even as they consume less energy as compared to the technologies they’re replacing, AWS also uses a ‘less-dirty’ power mix, stating that their inputs are 28% less carbon intense. In 2015, 25% of power consumed by AWS was renewable, with a goal of 40% in 2016. To achieve this, Amazon has started to build/acquire their own power generation facilities. Amazon owns solar and wind farms across the US generating 1,660,000 megwatts of power annually (the equivalent power consumption of all homes in Cleveland, Ohio)

 

Additional Steps to Consider

Although Amazon’s efforts thus far have been commendable, there are a number of other steps they should consider:

  • Investing in additional power generation sources
  • Fulfillment efficiency and alternative means of fulfillment, in-housing logistics
  • Energy-efficient production of low impact, private label products
  • Leveraging supplier power to enable market-based influence of production
  • Incentivizing sale and use of energy efficient, low impact, products in new and emerging markets. Hopefully encouraging “leapfrogging” consumer behavior and tastes
  • Leveraging marketing spend to portray environmental efforts and contribute to global climate change awareness

Words: 798

 

https://www.amazon.com/p/feature/wnsdvqqghme982o

https://www.amazon.com/p/feature/gkkwdp34z5ou7ug

https://www.amazon.com/p/feature/c76chxvxrraw7hj

https://www.amazon.com/Amazon-Green/b?node=394379011

https://www.sec.gov/Archives/edgar/data/1018724/000101872416000172/amzn-20151231x10k.htm

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Student comments on Amazon and Climate Change

  1. I think the response required to ensure sustainable development of Amazon Web Services is far easier than managing the physical/environmental impact of the retail business.

    As technology becomes more efficient, it should be relatively straightforward to make improvements of the energy consumption at the data centres. As you mention, as Cloud Computing becomes more prevalent this has the added benefit of reducing use of inefficient on premise servers. There is another interesting blog post on the AWS business here: https://digital.hbs.edu/platform-rctom/submission/power-struggles-at-amazon-web-services/

    The retail business is an entirely different matter. The value chain is complex, involving a disparate base of suppliers, Amazon stakeholders and customers. The scope for a sustainability program here is much wider, and needs to take an integrated approach to ensuring efficiencies in more varied activities such as sourcing product, packaging efficiency and delivery/transport. I think you make an interesting point in your additional recommendations: can Amazon incentivize customers to adopt environmentally behaviour (through marketing) / make environmentally friendly purchases (through sales and incentives)? For me, the appeal Amazon has to its customer base is built on the pillars of wide choice, great value/low cost and convenience. It would be interesting to see if they could further improve their customer loyalty by offering environmentally friendly products/packaging/deliver, and whether this would further differentiate them from competitors, or whether they would lose appeal due to (potentially) higher costs. Personally I fear the effect may be the latter

  2. I agree with the previous commenter that improving the environmental sustainability of Amazon’s web services will prove far more straightforward than improving that of the traditional eStore. That said, I would argue the urgency lies in improving the latter.

    While consumers have already begun to criticize most shipping intensive businesses for the excessive amounts of cardboard used (Google Fresh, Blue Apron, Trunk Club, etc.), without a doubt Amazon bears the brunt of this criticism. This has, in turn, begun to taint the company’s reputation. As climate change becomes an increasingly salient issue globally, without a doubt the company will receive much more serious criticism, in extreme cases putting at risk Amazon’s loyal customer base.

    One possible solution to mitigate this proliferation of extreme cardboard usage is Amazon Lockers – local pickup locations where consumers can go and retrieve their purchased items from one of a number of convenient locations, thus replacing the need for cardboard shipping receptacles. While the program has slowly been rolled out, further scaling this can have a meaningfully positive impact on the company’s carbon footprint and help assuage many consumers’ concerns.

    http://www.nytimes.com/2016/02/16/science/recycling-cardboard-online-shopping-environment.html?_r=0
    http://www.mnn.com/money/sustainable-business-practices/stories/is-amazon-prime-eco-friendly-or-wasteful

  3. Great post Patrick! As the author of a post about the carbon footprint of cardboard packaging, this was very illuminating. While companies in general have made strides to rightsize packaging, the significant growth of e-commerce (of which Amazon is a not insignificant percentage!) has continued to drive demand for cardboard packaging, and because of the durability requirements, packaging can’t be made from 100% recycled material, and so requires the cutting of new trees. This certainly drives my guilt every time I take my recycling out for the week.

    It’s encouraging to see Amazon making an effort to reduce the amount of packaging and ensuring that it is all 100% recyclable, but I worry that our insatiable consumerism will only continue to exacerbate the problem. I wonder if there are ways Amazon can incentivize more eco-friendly consumer behavior like they’ve already begun to do with $1 credits on music/digital media for “no-rush” shipping, doing something similar to encourage customers to “batch” several products from a basket into a single box. I understand that there may be logistics issues if the three or four items in a customer’s basket are from different sellers, but I’m sure there is some optimization that could be done. I’ve often ordered several items at once, only to have them arrive at my house, each in their own separate boxes…

  4. The question of energy efficiency and dependence on fossil fuels by cloud computing services is an interesting one. Regardless of computing efficiency gains, data centers are huge consumers of energy. This is not even to mention the fact that most data centers need significant backup power in the case that they need to island from the grid. That power is typically derived from super dirty diesel gensets.

    One interesting, innovative thing that’s happening in the data center space is Facebook’s new “arctic data center.” [1] The idea behind the data center’s location is impressively simple. A huge portion of the energy consumed is devoted to cooling the servers. Why, not then, place the servers somewhere that Mother Nature can serve as the air conditioning: i.e. the Arctic? That’s exactly the tactic that Facebook has taken, and one that it might make sense for AWS to explore.

    [1] https://techcrunch.com/gallery/facebook-lulea/

  5. Patrick – thanks for your interesting post. I actually wanted to disagree with your and Stephen’s point above about the environmental cost of logistics and transportation. Let’s not forget the alternative world we lived in prior to Amazon – each individual customer would drive their entire car to a local supermarket to buy what they needed. The benefits to the environment of Amazon shipping goods to consumers is two-fold.

    First, by removing supermarkets as a “hub and spoke” of a community where every consumer must drive themselves, Amazon dramatically can cut down on the number of car-miles driven. Amazon ships their goods through their own logistics network or third party partners such as USPS, UPS, and FedEx. The benefit of this is that rather than the “hub and spoke”, third party delivery companies can be thought of as a “daisy chain” where one route can service a large number of households. Packages are grouped and delivered at once, dramatically cutting carbon emissions.

    Second, by pushing delivery logistics to a sophisticated company such as UPS over a non-transportation focused delivery agent such as your typical consumer, you are going to gain efficiencies since UPS I much more intelligent about saving fuel than your average consumer. UPS is known for highly intelligent route-planning which minimizes miles and time on the road, as well as for using highly fuel efficient vehicles, such as 1,300 LNG tractors and 2,000 propane package cars [1][2].

    I think when evaluating the environmental impact of companies such as Amazon, it is important to keep the alternative in mind. While shipping things by truck may seem environmentally unfriendly, because we aren’t moving from a prior alternative of, say, a bicycle based culture, this can actually be a net positive move in terms of fighting climate change.

    1. http://www.wsj.com/articles/at-ups-the-algorithm-is-the-driver-1424136536
    2. https://sustainability.ups.com/committed-to-more/fuels-and-fleets/

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