Who Ultimately Pays for Brands’ Carbon Reduction KPIs?

In October 2025, Chen Jianming, owner of a factory specializing in functional polyester knitted fabrics in Keqiao, Shaoxing, received an email from the sourcing department of a European outdoor brand he had worked with for five years. The email was politely worded but firm in intent: to align with the brand's 2030 science-based carbon targets, all Tier 2 fabric suppliers must submit third-party verified Scope 1 and Scope 2 carbon emission data by the end of 2025, and achieve 100% purchased renewable electricity (via PPA or RECs) by June 2026. Any supplier failing to meet these deadlines would be removed from the approved vendor list and excluded from new season development.

Chen did the math. His factory runs two stenter machines, two dyeing machines, one shrinking machine, plus workshop lighting and compressed air systems, consuming about 4.2 million kWh of electricity annually. To meet the requirement by purchasing I-REC green certificates, the cost per kWh would increase by approximately RMB 0.05, adding RMB 210,000 per year. That does not include the time and cost of hiring carbon accounting service providers, installing smart meters, and preparing annual carbon emission reports. Meanwhile, due to RMB appreciation and market competition, the brand’s next-season order price per meter of fabric was reduced by RMB 0.20—roughly equivalent to his current net profit margin.

RMB 210,000 may not sound like much. But Chen knows that with 80 workers under him and annual revenue just over RMB 20 million, his factory’s net profit is less than RMB 800,000 per year. Absorbing this carbon reduction cost would mean putting nearly a quarter of his assets behind a brand’s KPI.

Chen’s predicament is playing out simultaneously in thousands of textile fabric factories across China.

96% of Emissions, 4% Willingness to Pay

First, let’s lay out the data. According to estimates released by the World Resources Institute (WRI) in 2024, the global apparel and footwear industry emits about 1.025 billion tonnes of CO₂ equivalent annually. Of that, only 4% comes from brands' own operations (Scope 1 and Scope 2), while the remaining 96% falls under Scope 3—including purchased raw material production, fabric processing, garment manufacturing, transportation, and distribution. Within this 96%, approximately 80% is directly linked to the products and services brands buy, i.e., supplier production emissions (WRI China, “How Fashion Brands Can Implement Scope 3 Emission Reduction in China”).

In other words, if a brand only installs solar panels on its own office roof and switches sample transport to electric vehicles, even if it achieves operational carbon neutrality, it will still be 96 percentage points away from true carbon neutrality. To meet SBTi-validated science-based targets, brands must reach into their supply chains and require every tier of supplier—from yarn mills to dyeing and finishing plants to garment factories—to submit and achieve their own carbon emission reduction goals.

This logic itself is sound. The physical source of emissions lies upstream in the supply chain, so targets naturally need to be implemented upstream. The problem is how they are implemented.

The current mainstream practice among brands is to add a series of energy-saving and emission-reduction requirements and renewable electricity usage targets when updating procurement agreements, without changing unit purchase prices or providing dedicated funds. A study by carbon management consultancy ACT Group and CDP (2023) shows that from establishing a complete supply chain Scope 3 inventory system to seeing actual emission reduction results takes an average of 3 to 5 years; and as of 2022, only 40% of companies engage with suppliers on climate issues, and even fewer are willing to provide hard cash to support supplier decarbonization.

Brands often emphasize in their statements that they “help suppliers improve energy efficiency” and “conduct climate capacity-building training.” On the operational level, this translates to quarterly email reminders, online form-filling training sessions, and an online data platform account that the brand requires suppliers to use. Equipment investment? Electricity price differential? Certification and audit fees? These are not included in the brand’s procurement contract terms.

The Cost Account of Carbon Reduction Behind One Meter of Fabric

To understand why suppliers complain, we need to look at a typical fabric production chain and see how much a factory has to spend to reduce each ton of carbon.

Take Chen’s factory as an example. He mainly produces polyester knitted fabrics. From raw material incoming to finished fabric outgoing, the most energy-intensive processes are dyeing, heat-setting, and finishing. The typical process flow for polyester knitted fabric is: knitting → pretreatment (de-oiling) → heat setting → dyeing (disperse dye high-temperature high-pressure, 130°C) → reduction cleaning → finishing (hydrophilic, antibacterial, etc.) → final setting. Both the dyeing machine and stenter are heated by industrial steam from natural gas boilers; the stenter also requires electric power for hot air circulation.

Currently, for dyeing and finishing plants in Keqiao and Shengze, steam consumption is the largest source of carbon emissions. According to a 2023 analysis of the carbon emission structure of Zhejiang’s textile industry by the website Carbon Road, thermal-related processes account for over 70% of total emissions in the province, with more than 90% of thermal energy coming from fossil fuels, mostly coal or natural gas. The most direct way to reduce these emissions is to replace gas boilers with electric boilers powered by renewable energy, or to install industrial heat pumps to replace fossil fuel steam.

Let’s look at costs. A 2-ton electric boiler, including equipment purchase and installation, costs about RMB 300,000. For a factory with an annual gas consumption of about 200,000 cubic meters, a complete waste heat recovery heat pump system requires an investment of RMB 1.5 million to 2.5 million. This does not include factory renovation and three-phase power capacity expansion costs. According to a 2023 survey by Patagonia of 40 textile factories in mainland China, Taiwan, and Japan, deploying industrial heat pumps, electric boilers, and electrified processing equipment supplemented by renewable energy is the golden path for rapid decarbonization of textile mills, but the upfront investment discourages most small and medium-sized enterprises.

Chen also considered rooftop solar. He installed a 110kW distributed PV system on his factory roof, generating about 400 kWh on a sunny day—enough for part of the office and lighting. To meet production energy needs, he would need a larger PV and energy storage system costing at least RMB 3 million, and it is difficult for a factory like his to obtain long-term equipment loans from banks. Banks ask: Is your order stable? Will your customers pay you one cent more because you use green electricity?

In fact, not only do brands not pay a premium for “low-carbon fabrics,” but they also push costs down under the banner of “socially responsible sourcing commitments.” One international fast-fashion brand’s procurement terms require suppliers to commit to an annual carbon emission reduction of at least 3%, but the base pricing references “comparable traditional fabric market benchmark prices,” i.e., prices that do not include any carbon reduction investment. This means that suppliers who are the first to invest in green electricity and heat pumps have higher costs but must compete on price with factories that have not made such investments.

Isn’t this somewhat ironic? Brands announce in their annual reports: “By 2030, 100% of our supply chain will use renewable electricity.” But the full translation of that sentence should be: “By 2030, 100% of our suppliers will use renewable electricity, and we will not pay extra for it.”

Brands Talk Data, Suppliers Pay with Their Lives

Let’s look at a few more cold numbers to understand what “paying with their lives” means.

According to statistics from the China National Textile and Apparel Council (CNTAC) cited by platforms like Carbon Balance Technology, among the 330,000 textile enterprises in China, about 86% have annual revenue of less than RMB 20 million—commonly defined as micro, small, and medium-sized enterprises. Even for enterprises above the designated size with annual revenue over RMB 20 million, profit margins are razor-thin. In 2023, the revenue profit margin of cotton spinning enterprises above designated size was about 2.5%, and for cotton weaving enterprises about 3.8% (source: Orient Securities Research Institute report “Fast Fashion Apparel: Supply Chain and Traffic as Core,” October 2024).

A fabric factory with a profit margin of only 3% is forced to bear the investment required to reduce carbon emissions by 30%. How do you solve this math problem?

Brands are not unaware, but they have their own calculus. Reports by the French Institute for Sustainable Development and International Relations (IDDRI) and the Transformers Foundation both point out that when brands set supplier carbon reduction targets, they rarely conduct “ability-to-pay assessments.” Instead, they assume suppliers can absorb the costs through energy efficiency improvements, or even that “energy efficiency gains will save money.” This is a logic that has been disproven by practice. In China’s dyeing and weaving factories, after years of fierce competition, any savings that could be made have already been made. Waste heat recovery from stenters, pipe insulation, LED lighting—these affordable measures have already been adopted. The remaining emission reduction space requires changing the energy structure and replacing equipment—deep decarbonization with sharply rising marginal costs, leaving no possibility of “negative-cost emission reductions.”

Lululemon’s “China Supply Chain Green Energy Acceleration Meeting” held in Shanghai last year was a concentrated manifestation of this tension. After the meeting, Lululemon asked its core fabric suppliers to accelerate the proportion of renewable electricity usage, targeting an increase from less than 15% in 2023 to over 60% by 2026. Several suppliers expressed support at the meeting but complained bitterly in private. One nylon fabric manufacturer in Jiangsu reported that the main energy consumption in their factory is in the heat-setting process after nylon 66 weaving, which requires high-temperature steam; electric boilers cannot replace it, and the industrial park’s central heating still relies mainly on coal, which the company cannot change alone. To meet the brand’s requirement, the only option is to purchase Energy Attribute Certificates (EACs) to achieve a virtual compliance—costing an additional RMB 400,000 per year, directly eating up one-sixth of the factory’s total profit.

Here emerges an even more troubling contradiction: The “science-based carbon target” is intended to use hard data to ensure global warming does not exceed 1.5°C, emphasizing measurability and verifiability. However, when tools like green certificates become the primary means for brands to meet targets, real physical emission reductions do not occur. Factories spend money to buy digital compliance, while the carbon emission outlet still burns from the park’s chimney. Brands then use these numbers to report to SBTi and prove to investors that they are “leading the sustainable transformation.”

The money comes from suppliers; the credit goes to brands.

A Return-on-Investment Problem That Doesn’t Add Up

Let’s do a real calculation. Suppose a dyeing and finishing plant processing 15 million meters of synthetic filament woven fabrics annually has an annual emission of about 25,000 tonnes of CO₂, currently using natural gas boilers for steam. If it follows Inditex’s required annual reduction rate of 4.2%, it needs to cumulatively reduce emissions by about 30% by 2030. The most feasible path is to replace gas boilers with an industrial heat pump system plus green electricity. The heat pump system investment is about RMB 8 million, and purchasing green electricity costs about RMB 1.2 million more per year than conventional electricity. The total incremental cost over ten years is about RMB 20 million. The brand’s orders account for roughly 20% of the factory’s annual capacity, with an annual order value of about RMB 30 million—not enough to cover the technology upgrade cost. If the factory raises prices by 5%, the brand will shift orders to Vietnam or Bangladesh.

That’s the crux. Brands are essentially exploiting industry overcapacity and supplier fragmentation to “free-ride” on carbon reduction achievements. The highly order-based production and short-term contract nature of the apparel supply chain means that no fabric supplier dares to offend a major customer. The biggest incentive a brand offers is “priority order placement” or “designation as a strategic supplier,” but there is no long-term procurement guarantee or cost-sharing agreement. Once a supplier invests in emission-reducing assets, those assets become sunk costs under the risk that the brand may shift orders at any time.

This power imbalance has directly triggered industry discussions on “fair distribution of Scope 3 costs.” A 2024 investigative report by Eco-Business quoted complaints from multiple Asian suppliers: “Brands refuse to pay higher prices for lower-emission products,” “they rarely make long-term commitments, and once they find a cheaper supplier, they switch sourcing locations.” One garment factory owner in Bangladesh put it bluntly: “Brands come to us saying carbon emissions must be reduced. We ask where the money is. They answer it’s in your energy efficiency improvements.”

Patagonia Did the Right Thing, But Not Everyone Can Afford That “Outfit”

Are there any brands doing the opposite? Yes, but very few. Patagonia is a typical example of “directly providing funds to bear the cost of technology upgrades for supplier decarbonization.” It not only pays to help a raw material supplier in Taiwan install industrial heat pumps and electric boilers but also expects that supplier to reduce annual emissions by 27,500 tonnes of CO₂ and cut its operational facility greenhouse gas footprint by 30% in a pilot project. Patagonia even publicly states that it does not conduct business with any new supplier that uses coal as fuel. However, this “heavy asset intervention” model relies on Patagonia’s unique corporate structure and very stable supplier relationships, making it difficult for most publicly listed brands to replicate.

Most brands take a “financialization” route: partnering with banks to introduce green loan products, shifting the financial pressure back to suppliers. The supply chain decarbonization loan program jointly launched by H&M and DBS Bank in 2023 is essentially a commercial loan issued by the bank and repaid by the supplier. Although the interest rate is 0.2-0.5 percentage points lower than ordinary commercial loans, for textile factories with thin profit margins, any new debt is like walking a tightrope. Moreover, the repayment responsibility lies entirely with the supplier, and the brand provides no guarantee. Suppliers finance, brands collect the emission reduction results—this is another form of cost shifting, only wrapped in a green finance coat.

Suppliers’ Way Out: More Than Just “Accelerate Transformation”

Faced with such a dilemma, fabric suppliers certainly cannot just wait. Several directions are worth noting.

First, joint negotiation and cluster bargaining. Dispersed suppliers cannot bargain with brands, but they can if they unite. Textile printing and dyeing clusters in Shaoxing, Shengze, Nantong, etc., can establish regional carbon constraint alliances, unify carbon accounting standards, share new energy infrastructure, and negotiate with brands as a cluster to share energy transition costs. For example, several small and medium-sized dyeing factories in Keqiao could jointly invest in a distributed central heating system (e.g., biomass cogeneration), demonstrate the authenticity and scale effect of their emission reduction actions to brands, and request a “low-carbon premium” on brand orders. This requires industry association leadership and external organizational capacity, but it is not infeasible.

Second, make good use of domestic and international green finance policies. Under China’s “dual carbon” targets, channels such as green credit for small and medium-sized manufacturing enterprises, special refinancing for equipment upgrades, and energy-saving renovation subsidies have gradually opened. In 2024, the People’s Bank of China launched a carbon reduction support tool that provides 60% of the principal of carbon reduction loans issued by eligible financial institutions at an interest rate of 1.75%. Suppliers should proactively liaise with local economic and information technology departments to minimize the financial cost of technology upgrades. At the same time, the EU Carbon Border Adjustment Mechanism (CBAM) currently does not cover textiles, but once it is included in the future, embedded carbon emissions in exported fabrics will be taxed. Early deployment of low-carbon production capacity is not only a brand requirement but may also become a cost advantage in itself.

Third, differentiation and brand co-creation. Fabric mills should not just be passive OEMs. If a fabric mill can develop and mass-produce low-carbon fabrics such as dope-dyed polyester, plant-based dyes, recycled fibers, low-temperature dyeable nylon, etc., along with complete carbon footprint data (e.g., LCA reports), it gains bargaining chips for value exchange with brands. Would brands be willing to concede on price for a “fabric that reduces T-shirt carbon emissions by 40%”? Some outdoor and designer brands might. The key is for suppliers to shift from “just selling fabric” to “selling fabric + low-carbon data + brand narrative,” moving from a cost center to a solution provider.

Finally, and most fundamentally, supply chain fairness requires institutional progress at the industry level. SBTi’s current rules only focus on whether targets are “aligned with the 1.5°C pathway,” not on who bears the cost of achieving them. This is a major gap in standard setting. If in the future the “just transition principle” and “Scope 3 cost-sharing guidelines” can be incorporated into the SBTi textile sector criteria, requiring brands to provide funding, technology, or long-term contract commitments while setting supplier targets, the predicament might be fundamentally reversed. Under the premise of more transparent supply chain carbon emission information, brands can no longer boast “carbon neutrality” on their official websites while leaving fabric factories struggling on the edge of losses. That would be truly visible “sustainability.”

Conclusion

Old Chen later replied to the brand’s email, attaching his PV grid-connection certificate and carbon emission accounting report. At the end of the email, he wrote: “I’ve done the carbon reduction I can do on my side in advance. I hope the next season’s quote can include the extra electricity cost I’ve incurred. Otherwise, we might need to reevaluate our cooperation.” The brand did not reply.

Three months later, the new season development meeting proceeded as usual. Chen Jianming remained an approved supplier, but the RMB 0.20 per meter price cut pattern stood unchanged.

Carbon can be reduced, but profits cannot be lost. This is the most difficult balance in the textile industry today. When brands place the entire burden of decarbonization on suppliers’ shoulders while refusing to share costs, the resilience of the supply chain is being hollowed out little by little. True carbon neutrality should not exist only in a brand’s ESG report; it should also appear on the supplier’s invoice.