Are you taking carbon pricing as seriously as leading companies and governments?
The climate change debate is over. How can this be when so many in the U.S. Congress would disagree? Because, inflammatory rhetoric aside, carbon pricing is becoming a mainstay in corporate board rooms and presidents’ and prime ministers’ cabinet meetings.
If companies like BG Group, Dow Chemical, and Microsoft are taking into account carbon pricing when making large-scale capital investment, R&D, and product development decisions, all but the most short-term investors should take possible future carbon pricing scenarios into consideration as well.
Private Sector Carbon Pricing
The number of companies, spanning all industries, that have established some form of internal carbon pricing has increased dramatically. This is neither just a handful of low-emitting, high-profile, consumer-facing companies nor a modestly growing list (while there are too many to enumerate, examples include: Anglo American Platinum (JSE:AMS), BG Group, Dow Chemical, ExxonMobile (NYSE:XOM), General Motors (NYSE:GM), Goldman Sachs (NYSE:GS), Google (NASDAQ:GOOGL), LG Electronics (KRX:066570), Microsoft, Nestle (VTX:NESN), Royal Dutch Shell (LON:RDSA), TD Bank Group (NYSE:TD), Vale (NYSE:VALE), and Walt Disney Company (NYSE:DIS)). In its most recent corporate survey, CDP (formerly the Carbon Disclosure Project) found that:
- 437 corporations disclosed that they use an internal carbon price, nearly triple the 150 that did so in 2014
- The number of U.S. and Canadian companies more than doubled in the last year to 97
- The number of Asian companies soared from 8 in 2014 to 93 in 2015
- As notably, another 583 companies intend to establish an internal carbon price within the next two years
With the most to lose, one might think the energy sector would be more recalcitrant on carbon pricing. But as the following figure illustrates, the need to plan for the likelihood of more sweeping policies and regulations is swaying business-as-usual mentalities.
Figure 1: CDP data on energy sector companies with internal carbon pricing
These internal carbon prices take many forms. Some, like Campbell Soup, set a lower return on investment (ROI) rate for energy efficiency projects to incentivize investment. Others, like BG Group and ExxonMobil, adopt a shadow price as a sensitivity analysis of the impacts of future regulation on significant capital investments. The most ambitious, such as Microsoft, incorporate a carbon price as a line item in company-wide operating budgets. As the following highlights from the CDP report illustrate, companies are motivated primarily by mitigating risks of future regulation and incentivizing investment in and scaling of clean energy technologies:
- BG Group (LON:BG): “We use a shadow carbon price ($ pt CO2e), or actual market/tax price where it exists (whichever is higher)…as sensitivity to determine the potential economic impact of climate change policy but also to identify the best technology to apply to optimise energy efficiency.”
- Campbell Soup Company (NYSE:CPB): “While we don’t put a fixed price per tonne on carbon, we do price it by lowering our internal ROI on energy conservation projects.”
- Dow Chemical (NYSE:DOW): “The capital allocation process uses a price on carbon for projects impacting jurisdictions where there is a current or projected carbon pricing situation. This process includes a long-term look at the impact of a carbon-constrained economy on all major projects across the company.”
- EDF (EPA:EDF): “For long term investment decisions CO2 prices form a vital part of the EDF’s analysis and decision making process.”
- Essar Oil (BOM:500134): “Though there is risk associated with the price of carbon for a high complex refinery like ours, we also see it as an opportunity to drive investment for low carbon options…”
- Microsoft (NASDAQ:MSFT): “Effective July 2012…Microsoft began charging an incremental fee…to individual business groups based on the emissions that they incur through their use of offices, software development labs, and datacenters, as well as business air travel. The funds that we collect through the fee go into a central fund that is subsequently invested in internal efficiency initiatives, green power, and carbon offset projects (to offset our unavoidable emissions) to ultimately enable Microsoft to reduce carbon emissions and be net carbon neutral.”
- National Grid (LON:NG): “We believe that a strong carbon price signal in the economy is essential to drive the right behaviours, so have adopted the shadow price of carbon in some of our investment decision making processes across our operations.”
- Walt Disney Company (NYSE:DIS): “By attaching a financial value to carbon, our businesses have an incentive to reduce their greenhouse gas emissions and to think creatively about new approaches and technology that will help reduce their carbon footprint.”
The sheer quantity and breadth of private sector carbon pricing led CDP to conclude that, “Climate change is now part of mainstream business decision-making and represents a bona-fide line item in the standard budget assumptions of successful companies.”
Public Sector Carbon Pricing
These corporate decisions are not being made in a vacuum. Rather, they are being influenced by — and are influencing — growing public (see, for example, the fossil fuel divestment movement) and regulatory pressure.
Such government action is the focus of the World Bank’s recently released State and Trends of Carbon Pricing 2015 report. Keeping pace with the increasing private sector action, the number of regional and national carbon pricing schemes has rapidly grown. The World Bank reports that:
39 countries and over 20 cities, states, and regions — representing almost 25 percent of global GHG emissions — are putting a price on carbon (see below)
Since 2012, there has been a nearly 100 percent increase in the number of carbon pricing approaches (carbon taxes or emissions trading systems (ETS)) already in place or planned to be implemented
The associated share of emissions covered by carbon pricing has increased threefold over the last decade, now covering about half of the emissions in these jurisdictions, or about 7 gigatons of carbon dioxide equivalent
Figure 2: World Bank data on public sector carbon pricing
As yet another indication of growing momentum, China announced Friday that it will institute a nation-wide carbon cap-and-trade system, making it the 40th and largest such regime.
Public and private sector carbon pricing decisions are mutually reinforcing. Government carbon policy creates incentives and pressure for companies to act, and companies’ actions lower the barrier for establishing additional regional / national regimes. While the private sector may not yearn for more regulation, it prefers a level playing field and less uncertainty. Both these priorities led the CEOs of oil & gas companies Shell, BP (LON:BP), Total (EPA:FP), Statoil (STO:STLO), Eni (BIT:ENI) and the BG Group, in a letter to world leaders, to state: “we need governments across the world to provide us with clear, stable, long-term, ambitious policy frameworks. This would reduce uncertainty and help stimulate investments in the right low carbon technologies and the right resources at the right pace.” With the added impetus of national emissions reduction commitments to be formalized in Paris this December (the World Bank notes that 57 countries, representing over 60 percent of global GHG emissions, have already submitted targets, ranging from 20-50 percent reductions by 2030), these positive feedbacks will only strengthen.
It’s not difficult to envision a very near future when private sector internal carbon pricing will be moot as all companies will be covered by a national and / or regional approach, which will ultimately be consolidated into a global pricing framework. And this is the point. Companies, or at least the exponentially growing number of forward thinking ones, are planning for this likelihood now, rather than waiting for a sudden shock to their ability to conduct business. Their very act of preparing for this eventuality will help ensure it becomes a reality.
Dan Saccardi is an expert in sustainable business strategy and a Senior Consultant at Element Capital Advisors. He has worked with corporations and NGOs for over a decade on corporate strategy, investment research and analysis, product and service innovation, policy analysis, and stakeholder engagement. Dan began his environmental career working on renewable energy policy at the Natural Resources Defense Council. Prior to joining Element and sustainability strategy consulting firms GreenOrder and Cleantech Group, he worked for the Wildlife Conservation Society, where he calculated its first carbon footprint and led conservation finance projects that took him to Rwanda, where he advised government agencies on management best practices. Dan is also an environmental blogger for online publications such as Politico, The Hill, Forbes CSR Blog, and GreenBiz.