Companies set their own carbon price to guide decisions

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 an internal carbon price 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 for governments 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.

Read the brief:.

Watch the webinar.

 

Why clean innovation makes business sense

Microsoft clean innovation panel

Left to right: Bob Perciasepe, President, C2ES; Seth Roberts, Global Director, Energy & Climate Change, The Dow Chemical Company; Michelle Patron, Director, Sustainability Policy, Microsoft; Peter Fuller, Vice President, Market & Regulatory Policy, NRG Energy; Paul Steffes, CEO and President, Steffes Corporation. Photo courtesy of Microsoft.

Companies have discovered that finding innovative ways to procure, generate, and store energy not only helps them meet their emissions goals, but also reduces energy costs.

That’s why the private sector is leading the charge to invest in clean technology as companies seek to engage suppliers through supply chains, increase competitiveness, gain access to new markets, and diversify to prepare for long-term decarbonization.

Reducing energy use at data centers has become a priority for Microsoft, as the company continues to expand its operations. Michelle Patron, Microsoft’s director of sustainability policy recently told an event co-sponsored with C2ES that the company considers this both a responsibility and opportunity.

Microsoft is using cloud computing and advanced analytics to meet its goal of procuring 50 percent of its data center energy from solar, wind, and hydropower by 2018, and 60 percent by the early 2020s. By using sensors to accurately collect and process real-time energy use data, Microsoft has reduced energy consumption by 15 percent in 125 buildings across its 88-acre Redmond, Washington, campus. The advanced data collection has also saved the company $10 million a year on energy.

Microsoft is also showing leadership in the drive to obtain more energy from renewable sources. A recent agreement with Seattle-area utility Puget Sound Energy (PSE) allows Microsoft to directly procure renewable energy in the region, rather than buying energy from PSE, which generates most of its power from fossil fuels. In return, Microsoft has committed to buying more renewable energy than required under Washington state’s current renewable portfolio standard. To make the deal beneficial for all ratepayers, Microsoft paid a $24 million transition fee that will be distributed back to PSE customers. The company will also continue to make payments to PSE’s energy efficiency and low-income assistance programs.

The Dow Chemical Company is also a leader in procuring renewable energy. Seth Roberts, the company’s global director for energy and climate change, told the gathering that the company has committed to supplying its Texas facilities with 350 MW of wind energy—equivalent to the electricity needed to power nearly 50,000 homes. Roberts pointed out that this would have not been possible a decade ago, when renewable energy prices were not competitive with fossil-fuels and natural gas in Texas.

On the production side, Roberts said the company is making insulation that goes into lighter, fuel-efficient cars. It’s also providing reverse osmosis technologies for water purification that use 30 percent less energy than other filtration technologies.

Peter Fuller, NRG Energy’s vice president of market and regulatory policy, said his company is making a significant investment in carbon capture, use and storage at the 240 MW Petra Nova project near Houston. As the world’s largest carbon capture project at an existing power plant, the facility captures more than 90 percent of carbon dioxide emissions and sequesters 1.6 million tons of CO2 annually.

Fuller said NRG is on track to meet its science-based goals of 50 percent reduction of absolute emissions from 2014 levels by 2030, and 90 percent reduction by 2050. The company had already reduced its emissions 36 percent by 2016.

Steffes Corporation, a North Dakota based manufacturer of residential and commercial electric thermal storage equipment, serves more than 200 electric utilities across the United States and Canada. “Thermal energy storage is an extremely efficient and cost-effective way of storing energy and managing the grid of the future,” said CEO and president Paul Steffes.

The company’s devices include ceramic storage units that can store 15 to 500 kilowatts of energy. Steffes uses tools such as Microsoft Azure to process big data in real time for more predictable energy regulation and greater integration of renewables, saving consumers money, reducing emissions, and contributing to a cleaner grid.

While climate change is one of the most pressing global problems, these companies have demonstrated that it also presents to them an opportunity to be a part of the solution by investing in clean technology that is good for business as well.

Video: Why Clean Innovation Makes Business Sense
July 19, 2017 at the Microsoft Innovation and Policy Center


 

What it means to be a climate leader in a post-Paris world

A post-Paris climate action panel at the 2017 Climate Leadership Conference (left to right): UNFCCC Executive Secretary Patricia Espinosa, Microsoft Director of Sustainability Policy Michelle Patron, Business for Social Responsibility Managing Director Edward Cameron, Climate Policy Initiative Executice Director Barbara Buchner, C2ES Executive Vice President Elliot Diringer.

Achieving the goals of the Paris Agreement requires not only commitments by governments, but also innovation and action by the private sector.

“This room is full of non-state actors,” remarked Patricia Espinosa, UNFCCC Executive Secretary, while addressing the audience at the Climate Leadership Conference in Chicago this month. Espinosa along with a panel of experts encouraged members of the private sector to not only continue these crucial efforts, but to take bolder steps as they turn the commitments made in Paris into concrete action.

Espinosa applauded the 12,000 voluntary climate commitments by companies, investors, cities, and sub-national governments, that are reported in the UNFCCC’s Non-State Actor Zone for Climate Action platform. She highlighted the positive domino effect of partnerships such as We Mean Business, C40 Cities, Under2 MOU, and the Global Covenant of Mayors in increasing ambition and encouraging transformational action to meet the Paris goals.

Solutions to mitigate and adapt to climate change

Michelle Patron, director of sustainability policy at Microsoft, who joined Espinosa on the panel, told the audience that climate action is good for business, good for the economy, and good for the environment. Nearly half of Microsoft’s data centers are now powered by wind and solar energy, and the company has committed to procuring half its electricity from renewable sources by 2018, and 66 percent by 2020.

The push for sustainability also extends to Microsoft’s customers. For example, the company collects and analyzes real-time performance from the bus fleet in Helsinki, Finland, using data generated by sensors on the vehicles. The results are reduced fuel consumption and costs, improved performance and safety, and a lower carbon footprint for the city.

To help with the Paris commitment to adaptation, Microsoft is providing cloud technologies to cities in the Middle East prone to heavy rainfall, to help improve flood management and reduce the costs of adapting to extreme weather.

Mobilizing private sector finance at scale

Barbara Buchner, executive director of the Climate Policy Initiative (CPI), told the group that although the total annual global public and private sector investment in climate finance is higher than ever at $392 billion, more is needed. She said funding levels of about $16.5 trillion by 2030 need to be mobilized to limit global temperature increase to 2 degrees Celsius.

CPI serves as the secretariat for The Global Innovation Lab for Climate Finance, created to  bridge the finance gap. It links investors—such as financial institutions, insurance companies, and national governments—with low-carbon climate-resilient projects. The lab works to design both the projects and financing tools to help reduce any regulatory risks and knowledge barriers that prevent access to private finance. Since its inception in 2014, the lab has raised $600 million for pilot projects in energy efficiency, climate change risk assessment, and agricultural supply chains across developing countries.

Shaping public policy and taking extra steps

Edward Cameron, managing director of Business for Social Responsibility, told the audience the private sector is designing the architecture of deep decarbonization for the world.

He said the world notices when Wal-Mart pledges to reduce emissions by 50 percent, remove deforestation from supply chains, reduce landfill waste, and obtain 100 percent of its power from renewable energy – or when Apple, Amazon, Google, and Microsoft voice support for the U.S. Clean Power Plan. Such actions, he said, send signals to markets and government, thereby shaping public policy.

However, if businesses want to distinguish themselves as climate leaders and drive transformational change in the post-Paris world, Cameron challenged them to take extra steps:

Act: The benchmark to act on climate has increased. Companies should transition from setting carbon intensity targets to establishing science-based targets across supply chains.

Enable: Be enablers of others’ success. Provide financial and technological solutions to climate change, not only for business operations and consumers, but also for the most vulnerable populations of the world.

Influence: Manage not only a company’s footprint, but also the handprint—the measure of its positive social and environmental actions. Advocating for public policies that accelerate climate action will influence a company’s captive audience, and help them be good consumers and citizens.

Espinosa said non-state actors, including the private sector, will continue to play a crucial role giving governments the confidence to ramp up ambition on climate action as they build toward the 2018 United Nations climate summit, COP 24. That’s when the international community will take stock of the collective efforts toward the goals of the Paris Agreement.

The business of pricing carbon

More companies worldwide are turning to internal carbon pricing as an effective tool to spur the transition to low-carbon technologies, and C2ES is helping organizations to explore this frontier through a new working group to share best practices.

By putting a price on the carbon pollution associated with business activity, companies can account for their operations’ climate impact and incentivize actions to achieve their emissions reduction goals. Pricing carbon also responds to stakeholder and investor calls for climate action and prepares businesses for future carbon pricing regulation.

According to CDP, more than 1,200 companies either currently price their carbon emissions, or plan to within the next two years. Meanwhile, more than 120 companies have joined the World Bank Carbon Pricing Leadership Coalition that brings together government, the private sector, and civil society to support effective carbon pricing systems and policies.

This movement isn’t restricted to developed economies. This month, Mahindra & Mahindra became the first Indian company to implement an internal carbon fee (US $10 per ton) to help achieve its goal of reducing greenhouse gas emissions 25 percent over the next three years.

There are a range of ways to implement an internal carbon pricing strategy. The most direct is an internal carbon fee, such as the one Microsoft uses in its pioneering program.

Microsoft, which pledged in 2012 to go carbon neutral, implemented an internal carbon price in 2013 to help reach its goal. Microsoft charges the fee on the company’s scope 1 (direct) and scope 2 (purchased electricity) emissions, including its global data centers, as well as a part of its scope 3 emissions (business air travel).

The fee has helped the company reduce its carbon dioxide equivalent (CO2e) emissions by 7.5 million tons, achieve $10 million in annual energy savings, and invest in 10 billion kilowatt hours of renewable energy as well as support carbon offset projects around the world.

TJ DiCaprio, Microsoft’s senior director of environmental sustainability, said the benefits of the internal carbon fee include:

  • It’s easier to target action. By quantifying the carbon emissions of different parts of the organization, it became clear where reductions were possible to meet the company’s carbon neutrality pledge.
  • It provides incentive to act. The fee for emissions is charged to each department’s budget. This motivates decision-makers to take meaningful action toward emissions reductions, find low-carbon alternatives, and invest in carbon-saving projects. Even simple steps, such as reducing airline travel, made a real difference in the final accounting.
  • It creates a dedicated funding source for action. The fees charged to departments are placed in a centralized fund that Microsoft uses for a variety of projects, from purchasing carbon offsets to investing in programs supporting e-waste recycling.

Among the key lessons for other companies from Microsoft’s experience:

  • Set clear objectives you would like your carbon pricing model to meet.
  • Align your carbon pricing model to support those objectives.
  • Anchor the carbon price across all business units to drive accountability, employee engagement, and a cultural and behavioral change.

While an internal carbon fee prices carbon pollution directly, companies are also using indirect strategies, such as shadow pricing and implicit pricing.

Shadow pricing—a more common approach—is used by companies including BHP Billiton, Duke Energy, EMC, Google, NRG and Shell, as a risk assessment tool. It is the hypothetical or assumed cost of carbon emissions used to evaluate large investment decisions and profitability of projects in light of government regulation and/or the impacts of climate change. Compared to the more direct approach that companies such as Microsoft are taking, however, shadow pricing is not actually reflected in a company or division’s profit and loss statement, thus it may not have the same incentivizing effect.

Implicit pricing, another form that is used by companies including Unilever and Novo Nordisk, is simply a price calculated based on how much a company spends to reduce its greenhouse gas emissions, including the cost of complying with regulations. Here, the price reflects actions taken, rather than being a charge that drives change. Recognizing how much a company spends to meet its internal greenhouse gas targets and/or regulatory requirements can encourage greater action. Some companies, for example, employ an implicit pricing strategy as the first step before establishing a direct carbon fee.  

Internal carbon pricing is a relatively new tool that can play a critical role in helping companies achieve aggressive greenhouse gas reductions. Through our Business Environmental Leadership Council, C2ES is engaging companies on internal carbon pricing strategies.  Please contact us if your company would like to learn more about internal carbon pricing as a business strategy.

For more information on the C2ES Working Group on Internal Carbon Pricing, contact C2ES Policy and Business Fellow Manjyot Bhan.

(Contributing: Ryan McCoy)

Business can help on the road from agreement to action on climate

Our "Beyond Paris" panelists (l to r): C2ES President Bob Perciasepe, Tamara "TJ" DiCaprio of Microsoft, Steve Harper of Intel, Alex Liftman of Bank of America, and Cathy Woollums of Berkshire Hathaway Energy.

The Paris Agreement is a roadmap for action on climate change, but how exactly will we get to the destination: a low-carbon economy?

Participants at a recent event (see video) co-hosted by C2ES and Microsoft, the newest member of our Business Environmental Leadership Council, at Microsoft’s Innovation and Policy Center in Washington, D.C., agree that business leadership will play a key role.

At the event, White House Director of Private Sector Engagement Rob Diamond praised companies for sending a strong signal of support for climate action in the run-up to Paris. More than 150 companies, including those on our panel – Bank of America, Berkshire Hathaway Energy, Intel, and Microsoft – have joined the American Business Act on Climate Pledge.

Diamond said he hopes more will follow their lead in pledging to reduce greenhouse gas emissions, expand clean power, improve energy efficiency, and finance climate action. “The amount of effort the private sector has taken is fantastic,” Diamond said. “Keep it up.”    

Business leadership has moved far beyond saving energy in a company’s own facilities. It now means investing in clean energy projects, reducing emissions throughout the supply chain, helping customers reduce their carbon footprint, and making an economic case for policies that address climate change.

As Steve Harper, Intel’s global director of environment and energy policy, put it: “The price of leadership has gone up. You need to do more, and you need to say more, and you need to advocate for more in order to continue to be seen as a leader in the corporate world on the climate issue, which we agree is society’s biggest challenge.”

Here’s what some leading companies are doing to step up to that challenge:

Bank of America: Alex Liftman, global environmental executive at Bank of America, said the Paris Agreement signals markets about the direction to go and provides a global roadmap for how countries plan to invest. Bank of America has increased its investment in low-carbon activities from $50 billion to $125 billion by 2025. The bank is also partnering with other financial institutions on an $8 billion Catalytic Finance Initiative to advance innovative financing structures for investments in clean energy and sustainability. Liftman said, “We’re trying to bring financial scale to the equation.”

Berkshire Hathaway Energy: Berkshire Hathaway Energy is the largest regulated owner of renewable energy generation in the U.S. It has invested more than $15 billion in renewable energy projects, and has pledged to invest up to $15 billion more going forward. Cathy Woollums, senior vice president for environmental services and chief environmental counsel, said the Environmental Protection Agency’s Clean Power Plan created a roadmap forward, and the Supreme Court’s stay creates uncertainty. “We wish that hadn’t happened,” she said, but there are still opportunities to move forward in the interim. “Rather than litigating, we are leading.”

Intel Corporation: Intel is one of the largest purchasers of renewable energy in the U.S. Since 2005, Intel has also cut in half its use of fluorinated gases, which contribute to global warming. As a technology company, Intel uses energy to make products, but Harper noted those products can also help others reduce their energy usage. Intel is engaging with states to incorporate intelligent efficiency into plans to implement the Clean Power Plan, and is working with countries such as China to push the development of markets for renewable energy.

Microsoft: Microsoft has been carbon neutral since 2012. Tamara “TJ” DiCaprio, senior director of environmental sustainability, said the company set an internal price on carbon that has helped it increase operational efficiency and invest in clean energy. Microsoft has purchased more than 10 billion kilowatt hours of green power, and reached more than 6 million people through the purchase of carbon offsets from community projects. The company is also engaging with customers to reduce their energy and resource use.

Existing and expected policies can get the United States close to its Paris Agreement goal of reducing net greenhouse gas emissions 26 to 28 percent below 2005 levels by 2025. But to get the rest of the way will take more – including business action. Through platforms such as the Business Environmental Leadership Council, C2ES will continue to work with leading businesses to support strong climate policies and show climate leadership.