Business leaders know that climate change impacts are here and on the rise. They also know there are significant economic opportunities in the transition to a low-carbon economy. But factoring these risks – and opportunities – into corporate decision-making isn’t always easy.
An internal carbon price is increasingly being used by companies across sectors and geographies to translate the risks and opportunities of a low-carbon economy into business decisions.
Some companies set a theoretical price on carbon, or a “shadow price,” to evaluate investments, test assumptions, and guide business strategy. Some use a “carbon fee” to assign an explicit monetary value to emissions from business units to change behaviors and raise funds for clean energy and energy efficiency projects. Still others use a combination of these or other approaches.
A new C2ES brief, The Business of Pricing Carbon, examines how companies are using internal carbon pricing and why: to prepare for future regulation, reduce greenhouse gas emissions, respond to shareholder concerns, build more resilient supply chains, gain a competitive edge, and showcase corporate responsibility.
According to 2016 disclosures to the CDP (formerly the Carbon Disclosure Project), more than 1,200 companies worldwide are either pursuing internal carbon pricing or preparing to do so soon—up 23 percent from 2015. While most of these companies are based in North America and Europe, more companies in emerging economies, including Brazil, China, India, and Mexico, are exploring carbon pricing.
Among the leaders:
- Since 2012, Microsoft business groups have paid a fee, from $5 to $10 per metric ton, on the carbon emissions associated with their electricity consumption and employee air travel. The revenue is used to buy renewable energy, increase energy efficiency and e-waste recycling, and buy carbon offsets. Microsoft has been carbon neutral in its global operations since July 2012.
- Shell has used an internal carbon price of $40 to $80 per metric ton since 2000 to evaluate investment decisions. Its greenhouse gas Project Screening Value has influenced decisions to invest in carbon capture technology, natural gas, and biofuels. Shell reduced its direct greenhouse gas emissions from facilities by 2 million metric tons of carbon dioxide equivalent from 2015 to 2016.
- Mahindra & Mahindra (M&M), the world’s largest manufacturer of tractors, became the first Indian company to launch an internal carbon fee of $10 per metric ton in 2016. The funds help reduce waste, water usage, and carbon emissions through projects such as LED lighting, energy-efficient motors, and waste-to-energy projects. M&M’s goal is to reduce its greenhouse gas emissions intensity 25 percent by 2019 from 2016 levels.
- Mining company BHP has had a shadow price of $24-$80 per metric ton of carbon dioxide equivalent since 2004 to inform decisions to improve energy efficiency, reduce greenhouse gas emissions from its existing operations, and diversify its portfolio for a carbon-constrained future. The company reduced emissions 13 percent from 2015 to 2016.
Companies are using an internal carbon price to help advance their greenhouse gas reduction targets. For example, C2ES found that almost half of the companies committed to the RE100 (100 percent renewable energy) and Science-Based GHG Targets have adopted a carbon fee or plan to do so in the next couple of years.
Most companies that have adopted a shadow price use a level higher than current government carbon pricing levels (which according to experts is $10 per metric ton) to prepare for a transition to a low-carbon world. This is particularly true for companies in the oil and gas and metals and mining sectors, which use shadow price ranges that are compatible with the levels recommended by the High-Level Commission on Carbon Pricing ($40-$80 per metric ton by 2020 and $50-$100 per metric ton by 2030).
Setting an internal carbon price is just one tool in the toolbox for companies seeking to reduce their exposure to climate risks, increase their business opportunities in a low-carbon future, and show sustainability leadership to their shareholders, employees, and customers. We encourage more companies to explore the options.