A new C2ES report highlights lessons useful for companies and policymakers as more states and countries consider carbon pricing to spur innovative technologies and cut emissions at the lowest possible cost.

The report, written for the World Bank’s Partnership for Market Readiness (PMR), examines how three companies — Pacific Gas and Electric (PG&E), Rio Tinto, and Royal Dutch Shell — prepared for carbon pricing programs.

The PMR shares this type of information with developing countries to help them create their own market-based policies. We were pleased to partner with the PMR to explore how a few of the companies in our Business Environmental Leadership Council prepared for carbon pricing and we thank the companies for sharing their expertise.

The lessons they shared fall into two categories – what business can learn from other companies operating in carbon markets and what governments considering market-based climate policy can learn from business.

Lessons for companies include:

• Incorporate climate change into a company’s strategy. Regulations to curb greenhouse gas emissions can affect many industries, especially those that are energy-intensive. Companies need top-level support for a comprehensive climate change strategy that leverages expertise across the company. For instance, in 1998, Shell conducted its first formal study on the potential impact of climate-related regulations on its global business. Then managing director and later CEO Jeroen van der Veer was the driving force behind the study, which built an internal case for climate action.
• Monitor, report, and verify (MRV) greenhouse gas emissions. A first step is often to build a greenhouse gas inventory. The inventory helps a company understand its direct and indirect emissions and anticipate its exposure to new carbon pricing regulation. For example, some of Rio Tinto’s units started collecting inventory emissions as far back as the mid-1990s, several years before any regulations required them to do so. Today, Rio Tinto continues to measure and report on emissions from most operations, even in jurisdictions where there is no reporting requirement.
• Identify risks and opportunities. By engaging in the policymaking process, companies can reduce uncertainty as well as identify business opportunities.
• Build knowledge and skill early. There are many ways to increase company knowledge of future carbon policies, such as participating in a voluntary offset market to understand the methodologies, rules, and processes for acquiring carbon credits. PG&E gained experience with offsets in 2007 through its ClimateSmart program. Working with the Climate Action Reserve, PG&E supported the development of several offset protocols, and some of the protocols were later adopted by California’s cap-and-trade program. These activities can also build in-house expertise, including how to handle carbon trading transactions.

Lessons for policymakers include:

• Create a predictable regulatory environment. An environment of predictability, consistency, and flexibility is key to helping companies plan with confidence.
• Introduce early emissions reporting. Introducing reporting requirements in advance of carbon pricing regulations gives companies time to build an inventory of accurate emissions data.
• Include flexible market mechanisms. Certain design features, such as offsets and the banking and/or borrowing of allowances, can provide flexibility and improve the efficiency of a new program.
• Balance stakeholder interests. Each company and sector will have its own set of interests under a carbon pricing regime. The goal is to balance different interests and find solutions that benefit society as a whole.

The lesson for both companies and policymakers is that for an emissions policy to meet government objectives in a way that is also workable for the business community, it is crucial to create an open and transparent dialogue. This dialogue is essential as more states and countries look to carbon pricing.

Almost 40 countries and more than 20 cities, states, and provinces already use carbon pricing mechanisms or are planning to implement them. South Korea launched its carbon pricing program in January. China is running pilot carbon pricing programs in seven cities and two provinces and intend to release a plan for a national program next year. South Africa will also implement a carbon pricing program next year.

More than a quarter of the U.S. population lives in a state with a price on carbon, and some states may consider the policy as a way to implement new power plant emissions standards.

Getting ahead of the curve and preparing for these programs is just sound business strategy.