Carbon Pricing: A Case for Transformative Climate Action
Carbon pricing – in the form of a carbon tax or an emissions trading system – has become a tool increasingly used by governments to address climate change. There’s also growing momentum in the private sector. The latest C2ES report, “The Business of Pricing Carbon,” finds that companies across sectors and geographies are increasingly adopting internal carbon pricing as one tool to prepare for the business-related physical and transition risks of climate change and take advantage of the opportunities in a low-carbon future. As an indicator of this trend rising on the corporate agenda, as of 2017, almost 1,400 companies disclosed to the CDP that they are currently using an internal carbon price or plan to do so in the following two years.
By putting a financial metric on a company’s greenhouse gas emissions, carbon pricing sends a price signal that incentivizes behavioral change and makes the business case to shift investments toward low-carbon options.
Companies take different approaches to internally price their carbon emissions:
A carbon fee: a monetary value on each ton of emissions charged to business unit(s), creating a dedicated source of revenue or investment stream to fund projects that help meet a company’s greenhouse gas reduction targets. For example, in recent years, Microsoft and the Walt Disney Company have applied an internal carbon fee of $5-$10 per ton and $10-$20 per ton, respectively.
A shadow price: a theoretical value used by companies in project planning processes to test the profitability of future investments and R&D expenditure in anticipation of future carbon regulations. BHP uses a shadow price of $24-$80 per ton to shift investments toward low-carbon options and increase the robustness of its portfolio. Other approaches used by companies include implicit carbon pricing, or a hybrid of these approaches.