Internal Carbon Pricing: Does it Work?

The fact is, carbon pricing works. At least, that’s the view of Canada’s Ecofiscal Commission, which released a report on the subject just this month.

It finds that carbon pricing reduces emissions, using evidence from the experiences in Canada, California and the UK, all the while supporting strong economies.

To ‘clear the air’, the Commission has put together a primer on just how carbon pricing works – and Karen Clarke-Whistler, TD Bank Group’s chief environment officer notes that businesses should be “accelerating the transition to the low-carbon economy, not only to help fight climate change, but also to mitigate their own risks.”

Internal carbon pricing – businesses putting a monetary value on their emissions – doesn’t sound enticing, but using the tool can keep companies ahead of future regulatory changes and, frankly, save them a lot of money.

Take Microsoft which boasts savings of $10m a year in energy costs thanks to its internal carbon price. For those firms who’d like a piece of that pie, the company released its Carbon Fee Playbook in 2012, with a ‘simple and repeatable’ five-step process for other organizations to implement, including how to calculate your carbon impact.

And the tech giant isn’t the only one – as it turns out, pricing carbon in business plans is the “new normal” for around 1,400 firms, including major corporations, according to recent research from CDP – marking an eight-fold leap in take-up in the previous four years.

In fact, the research finds that three-quarters of the energy and utilities sectors’ market cap is pricing carbon internally – even ‘industry heavyweights’ such as National Grid, EDF, Exelon Corporation, PG&E Corporation and E.ON SE – and more than half of the materials and telecommunications sectors also plan to jump on the wagon as early as 2019.

As the CDP’s CEO Paul Simpson puts it, ”carbon pricing makes the invisible, visible.” Thanks to changing regulation, businesses are fast tracking the low carbon transition into their business plans, he notes.

And investors are looking for firms who manage the environmental risks, which is why they want companies that carbon-price their business – i.e. factoring this risk into their mainstream strategy.

As Jack Ehnes, CEO of California State Teachers’ Retirement System (CalSTRS) says: “We hold portfolio companies accountable in managing and disclosing climate change risks, and ultimately demonstrating they are prepared for a low-carbon economy.”

But putting a dollar on carbon isn’t the end all. “There needs to be more transparency as to how a company actually uses the price and whether it is seen as an important part of business decision-making and forecasting,” notes Mark Lewis, head of European utilities equity research at Barclays.

If it sounds good, there are other tools besides Microsoft’s; Trucost’s Carbon Pricing Tool combines a company’s emissions and financial data with regional carbon pricing data to give insights on increasing carbon regulation in different countries. By getting ahead, businesses can build a business case around greener products and models.

Internal carbon pricing is working for many – and it’s as much about opportunities as it is about reducing risks.