Setting an internal price for carbon may seem daunting, but when done correctly, it can be a useful decision-making tool to help companies realise cost savings, manage risks, drive innovation and demonstrate readiness for a rapidly decarbonising global economy.
What is carbon pricing?
In a nutshell, carbon pricing involves putting a cost on greenhouse gas (GHG) emissions to hold emitters responsible and help drive reductions. You can find a more detailed definition from the World Bank here.
Global carbon pricing initiatives
As of May 2018, 45 national and 25 subnational jurisdictions have implemented carbon pricing initiatives, usually in the form of carbon taxes and emissions trading schemes. Within South-East Asia, Singapore is the first country to implement a carbon tax starting from 2019 at approximately S$5 per tonne of carbon dioxide equivalent (tCO2e), expected to affect some 40 companies accounting for approximately 80% of Singapore’s national GHG emissions. A review is scheduled in 2023 where the cost per tonne is set to increase to between S$10 and S$15 by 2030. Carbon prices under regulatory regimes are only set to increase as economies decarbonise in line with the globally agreed transition to a 1.5 – 2°C pathway.
The business case for internal carbon pricing
Carbon pricing is not only restricted to national legislation. Based on a report published by the Carbon Disclosure Project (CDP) in 2017, over 1,300 companies, including 139 from Asia, have implemented or plans to implement internal carbon pricing within the next two years. So why have these companies decided – voluntarily – to put a price on carbon? Two words: Risks and Opportunities.
On the risk front, carbon pricing helps companies to manage financial impacts from carbon taxes, and increasing electricity and energy prices. Pass-through cost from the supply chain, logistics and travel can also have the potential the reduce a company’s profitability. Passing on these costs to consumers may result in reduced demand for the company’s products and services.
On the opportunities front, carbon pricing initiatives can help companies to meet its GHG emission targets, support disclosures as required by stakeholders (including investors), develop innovative solutions and gain a competitive edge. In 2015, Microsoft reported a carbon reduction of 7.5 million tCO2e and saved more than USD 10 million per year in energy costs as a result of its internal carbon price.
How do you set an internal carbon price?
There are generally four types of internal carbon pricing that companies can choose to adopt: internal carbon fee, shadow price, internal cap and trade, and implicit price (click here for definitions). An approach should be selected based on what the company hopes to achieve through carbon pricing. Microsoft uses an internal carbon fee collected to subsidize investments that help the company to reduce its emissions and achieve its goal to be net carbon neutral. Singapore energy and utilities company Sembcorp’s shadow price for carbon will be used to evaluate projects and stress test its portfolio.
Listed below are five steps companies can use to develop an internal carbon pricing strategy:
1. Measure your carbon footprint
Before putting a price on your company’s emissions, you need to know have a good grip on the scale and reach of your company’s carbon footprint. Do you have a proper system for collecting the data? Does the data include all your company’s operations?
2. Set clear objectives and define the business benefits
This is an important step as it will help support the business case for why a carbon price is needed. Do you want to be carbon neutral by 2025? Are you looking to reduce the risk of stranded assets?
3. Engage stakeholders on internal carbon pricing
Engaging internal stakeholders can help flag potential concerns or difficulties which will need to be addressed for a smooth implementation. Including representatives from the various departments/business units within a carbon pricing committee ensures ownership, accountability and governance. External stakeholders such as suppliers and customers should also be engaged to understand the implications on the value chain and identify opportunities for collaboration. It is also imperative at this stage to have board and senior management buy-in to support the company’s commitments.
4. Choose a carbon pricing approach and set the price
There are tools and guidance available online you can use to set an internal carbon price (see additional resources below). You can start low or base it on best practice and adjust as you go. The carbon price and approach should be approved by the board and senior management and socialised to internal stakeholders.
5. Measure, communicate and evaluate results
Results from implementation of internal carbon pricing such as reductions in GHG emissions and cost savings should be evaluated and reported internally and externally to showcase the positive outcomes of the approach and adjusted accordingly, if needed to help the company reach its objectives. Surveys such as CDP and DJSI as well the company’s sustainability report are ways in which a company can use to communicate progress.
To Price or not to Price?
Ultimately, implementing an internal carbon price with a proper strategy can help a company manage its climate-related financial risks and capitalise on opportunities. Do not worry too much about getting the “right” price but adjust accordingly to reap the intended benefits. The shift to a low-carbon economy is already on its way and carbon pricing might just be the decision-making tool you need to stay ahead.
Additional Resources for Carbon Pricing (including case studies and best practices):
- Webinar series on internal carbon pricing
- Carbon Disclosure Project
- Carbon Pricing Leadership Coalition
- Carbon Pricing Dashboard
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