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Corporate interest in carbon pricing is growing fast, particularly in Asia
While governments debate the merits of taxes and cap and trade systems as they seek to meet their climate commitments, many companies are moving ahead on their own and setting internal prices on carbon.
According to new analysis from the CDP, which helps shareholders and corporations in disclosing greenhouse gas (GHG) emissions, more than 1,000 companies worldwide disclose to CDP that they already have an internal a price on carbon, or plan to introduce one the next two years. In the UK, large companies have to report their emissions under the CRC energy efficiency scheme, and buy allowances for every tonne of carbon they emit. Rather than view it as an obligation, 638 companies reported to the CDP that they see business opportunities in carbon regulation.
“[Carbon pricing is] really the only viable tool for reducing emissions of carbon with a financial aspect,” says Paula DiPerna, carbon consultant for the CDP. “It’s an operational response to a practical reality. Greenhouse gases are the invisible hitchhikers in your car. They are free-riding parasites, and you need to identify where they are feeding on the economy.”
The biggest jump in corporate interest is an 11-fold increase in Asian companies engaging in carbon pricing, up from eight in 2014 to 93 in 2015, according to a 2015 CDP report. “In Asia, the number of countries and jurisdictions implementing a price on carbon is growing and the corporate sector is adapting to this new reality,” explains Carola Jonas, a spokeswoman for Climate Friendly, an Australian energy management company. Asia soon may be home to the world’s largest carbon marketplace. By 2017, China is planning to create a nationwide carbon market, with the potential to connect to international carbon markets. The country currently operates seven emissions trading pilot programs.
DiPerna adds: “Companies are much more sophisticated than they get credit for. [The 2015 Paris Agreement] has made it incumbent on all companies to react to climate change. Companies need to find a way to meet their Paris commitments. And there has to be millions of tonnes of carbon to make a difference.”
The Paris climate talks in December 2015 included an unprecedented amount of business involvement, says Hugh Welsh, president of the North American division of DSM, the Dutch nutrition and materials multinational. This included the launch of the Carbon Pricing Leadership Coalition (CPLC), a global initiative of governments, companies and civil society groups that aims to catalyse action towards implementing carbon pricing around the world, and getting companies to set their own internal carbon prices.
The group, which held its first meeting in Washington, DC, in April, is co-chaired by Feike Sijbesma, chairman and CEO of DSM, and Ségolène Royal, the French minister of ecology, sustainable development and energy.
As global negotiations to limit GHG emissions progress, and many governments move to pricing carbon, the signals that companies should consider a price on carbon in the future are strong, says Jonas. At present, multinational companies deal with the respective markets separately depending on the locations of their operations, an approach that Jonas does not see changing in the short term.
Hedging against risk
Currently, 40 national and 23 sub-national governments have put in place carbon pricing mechanisms and many other countries are planning to establish carbon markets. By setting an internal carbon price, companies hedge themselves against potential risks and costs associated with a future price on carbon and often have a competitive advantage in their industries, Jonas says.
It also helps corporations meet sustainability targets, such as increasing energy efficiency and moving to renewable energy, more quickly. “Most companies that have an internal carbon price also have ambitious renewable energy targets,” Jonas says.
This is the case for DSM, which has a target to improve its GHG efficiency by 25% between 2015 and 2025. As a member of the RE100 coalition of companies, which pledge to go to 100% renewables, it has an interim goal to power 50% of its operations with renewable energy by 2025.
At the beginning of this year, DSM’s executive board decided to use an internal carbon price of €50 per tonne of CO2e in its valuations of large investment projects. Once implemented, the company hopes that the pricing will steer investments towards low-carbon technologies, drive operational efficiency, pinpoint opportunities to save energy costs and raise the awareness of increased carbon pricing around the world, Welsh says.
“DSM believes that carbon pricing is a key policy to deliver on the Paris agreement at COP21,” says Welsh. “It is a critical instrument to unlock the private capital that is needed for the transition away from fossil fuels.”
DSM participates in We Mean Business, a coalition that promotes policies to reduce carbon emissions and frameworks to support them.
General Motors, which has committed to use 125 megawatts of renewable power by 2020, places a value on carbon throughout its operations, either through incentives on low-carbon solutions or by fixing an actual price on carbon. The company rates technologies by their cost per tonne of carbon and makes decisions about how to implement them on that basis.
For the environment and customer
“Not only do we look at how to reduce a tonne of carbon, but we look at how we can provide other customer benefits through that technology as well,” says David Tulauskas, GM’s director of sustainability. “If carbon emissions can be reduced through optimisation and greater efficiencies, costs go down, and that makes business sense.”
But even within GM, there is no single price for CO2. “It’s a challenge to set an internal price on carbon that would be equally applied to both operations and our products,” says Tulauskas. “There are variances like incentives, registration fees, fuel economy regulations and local market conditions that distort the ability to compare a total enterprise price, so we manage them separately.”
International food giant Nestlé employs carbon pricing as a tool to manage the risks and opportunities for its current operations participating in the EU Emissions Trading Scheme, according to Pascal Gréverath, head of environmental sustainability for the company. "This helps us to guide capital investment decisions for factories participating in EU ETS."
In 2015, Nestlé used a CO2 price of CHF15 (£11) per tonne to guide its investment decisions from 2020. “The purpose is to gain more insight into the potential role of shadow prices and price corridor, including their role for triggering investments, by analysing in particular the best way to stimulate low carbon investment, both in industry and across the economy," Gréverath says.
Food packaging company Tetra Pak has an internal carbon price to help achieve its goal of capping carbon emissions throughout its value chain at 2010 levels by 2020. The price is applied globally, projections are updated twice a year and the decided floor price is €10 per tonne of CO2, above the current European carbon price of about €6 per tonne. Tetra Pak buys renewable energy through GoldPower, developed by Climate Friendly as the world’s first global renewable energy certificate scheme. Since 2010, the company has used around 70,000MWh of GoldPower-certified energy to lower its operational emissions from electricity consumption by 50,525 tonnes of CO2e.
Businesses seek support
Now that many businesses are setting their own price, companies want governments to create more specific regulations for carbon markets to ensure fair, dependable exchanges with high prices.
In June 2015, Total and five other oil and gas companies urged governments and the United Nations Framework Convention on Climate Change to introduce carbon pricing systems and create policy frameworks that could eventually connect national systems.
“These would reduce uncertainty, correct distortions of competition caused by the diversity of situations worldwide and encourage the most cost-effective ways of reducing carbon emissions widely, especially lower-carbon resources such as natural gas, carbon capture and storage and renewable energies,” says Total, which has been assessing capital expenditure based on a carbon price of €25 a tonne for about a decade.
Corporations are right to say governments need to act on carbon pricing, says CDP’s DiPerna. “What’s been missing is a signal and regulatory system that would make [businesses] move faster than they normally would. What has been missing is a coherent regulatory mission.”
She adds that if businesses want more guidance from governments they have to be loud and visible. “Do companies go and lobby for carbon taxes?” DiPerna asks. “If they want regulatory certainty, to what extent are they out there lobbying for it?”
GM’s Tulauskas agrees that governments need to get their acts together. “Placing a value on carbon provides a financial incentive to behave a certain way, and behaviours are primarily driven by unique, local market characteristics,” he says. “For carbon pricing to be effective, it must align with local market characteristics, but also must have global coordination and, ultimately, harmonisation.”