Carbon Price Ask Transcends Corporate Politics

By Lance Pierce, President, CDP North America & Paula DiPerna, Special Advisor, CDP North America

The United Nations announced last week during the Bonn climate negotiations that it would take six European oil and gas companies up on their offer of support to establish a global carbon-pricing system.  The proposal, which came from firms including Royal Dutch Shell and Total SA, was both unexpected and encouraging.  But its significance transcends corporate policies.

Pricing carbon is key to investors’ understanding of the risks corporations face if they do not manage their climate change exposure, as well as new revenue opportunities inherent in addressing climate change head on.

Over the past 15 years, CDP has been gathering and synthesizing information on how companies have been using carbon pricing in their internal planning.  We’ve been able to keep a close track of this growing trend. In 2014 we published a report showing how 150 companies globally already incorporate a price on carbon emissions into their business decision-making. These companies fully expect carbon emissions will one day have to be capped and regulated worldwide.  Associating a dollar cost with each ton of carbon emitted now, before required, is a way to prepare for future regulation and a smart strategy for early adopters.

Our global carbon price publication contains clear examples of the companies’ tactics and rationales.  Almost all said they needed to make invisible costs visible so they could better understand future risks.  Similarly, the majority called for regulatory certainty.

It’s not just oil and gas businesses: Large companies in the strategic know, including Walt Disney, Microsoft and Alstom, are pricing carbon.

It is no coincidence that last year the number of investment dollars screened for some kind of environmental responsibility in the US jumped from $3.74 trillion in 2012 to $6.57 trillion – a 76% rise in just two years.  Increased scrutiny by investors of how well a company is managing its expected climate change risks is a worldwide trend. Investors are interested in carbon pricing as a way to gauge a company’s up and downside relative to expected weather and other disruptions.  Between investor and public pressure, it is prudent and no surprise that oil companies are asking governments to build carbon pricing into global climate policy.

Carbon pricing makes it more costly to emit, and more profitable to invent low-carbon approaches.  But carbon pricing can improve environmental conditions only if there are predictable, credible, and consistent regulatory policies worldwide – whether carbon markets, taxes or both.  So, the question is not if there will be carbon pricing – for that seems essentially inevitable – but rather how robust the regulatory caps governments establish can be.

Without a cap and strong enough penalties for breaching emission quotas, a carbon price would effectively be little more than an indicator.  This would not be sufficient to limit emissions quickly enough to maintain reasonable climate stability.

The importance of the oil company statement is that it illuminates a pathway and encourages government to act.