Carbon pricing is the mechanism by which the external costs of carbon dioxide or greenhouse gas emissions can be priced into business operations or financial decision-making. It has emerged as a key policy mechanism to curb and mitigate the impacts of climate change and drive investment towards cleaner, more efficient alternatives. The same principle can be applied within an organisation to enable the true cost of carbon emissions to be factored into its planning and to help create a budget that can be directed towards supporting its transition to a low-carbon future.
… the number of companies using or planning to use an internal carbon price (has increased) 80% over just five years. This includes nearly half of the world’s 500 biggest companies.Putting a price on carbon – CDP (Carbon Disclosure Project)
Financial institutions are increasingly using carbon pricing as a tool to evaluate their investments, for example including the cost of carbon in economic analyses of new projects. Reasons include to better understand and measure their carbon emissions and to integrate the negative externality of CO2 emissions into project appraisal as part of commitments to support low-carbon solutions through their lending portfolio.
For many organisations, the most significant consequences of climate-related risks will emerge over time and their magnitude is uncertain. As shifting regulatory and market dynamics influence the present and future cost of carbon, investors are demanding more consistent and transparent disclosures around a company’s approach to embedding this potential risk within their business decisions. Leadership is being shown by CDP, which has a module in its disclosure survey, and the Carbon Pricing Leadership Coalition (CPLC), a voluntary initiative that brings together leaders from various sectors to share best practice.
Carbon pricing can take multiple shapes and forms – no one size fits all. There are two potential approaches within organisations: a shadow price where a theoretical cost of carbon is included to inform decisions or an internal carbon tax where a real fee is charged to business units in order to build a climate change fund for investment in decarbonisation measures. At country level, the two main policy levers are emissions trading systems (ETS) and carbon taxes.
Key points to consider when implementing carbon pricing include:
- There’s no definitive answer to what a carbon price should be – implementation is unique to each business
- Identify the most appropriate “best fit” method by considering your climate or decarbonisation strategy and any specific constraints
- The most important starting point is to understand the business driver for setting a carbon price
Some benefits of carbon pricing:
|Prepares for future regulation |
Organisations that implement a carbon price are better prepared for a regulatory future where carbon is taxed
|Addresses sourcing requirements|
Organisations that source or operate nationally can better understand international carbon pricing policies
|Promotes carbon innovation and efficiency|
Pricing carbon bolsters innovation and supports the development of carbon efficient technologies, as well as disincentivising emissions intensive business practices
Pricing carbon facilitates emissions reduction pathways compatible with keeping global temperature rise to well below 2oC, in line with the Paris Agreement
As investors increasingly prioritise ventures that promote corporate sustainability, carbon pricing enables companies to respond to investors’ demands on climate
Setting a carbon price enables regulatory risk to be quantified when conducting scenario planning as part of transition risk evaluation
How we can help
Contact us to find out how we can help you develop and implement a carbon price for your organisation