As world leaders continue to implement or expand their carbon pricing schemes, a new report by the Carbon Disclosure Project (CDP) shows that a growing number of companies are adopting an “internal” carbon pricing mechanism.
The report, titled “Putting a Price on Carbon,” is an update from 2017 that utilizes data compiled in 2020 from over 5,900 corporate disclosures to CDP. In good news for climate action, CDP found notable increases across the board of companies taking on a carbon price as compared to previous years. Some key takeaways:
- An 80% increase in the number of companies planning or using an internal carbon price since 2014 (more than 2,000 companies exceeding $27 trillion in combined market capitalization)
- The number of the world’s largest 500 companies that are now planning or using an internal carbon price has more than doubled (226 companies) since 2017
- All regions, except Africa, reported an increase in the number of companies setting or planning a carbon price
- 11 of the 13 industries included in the report have an increase in the share of companies planning or using an internal carbon price between 2019 and 2020
In its analysis, the CDP report attempted to understand the motivations behind these corporate trends and actions. The report found a strong correlation between corporations that are currently facing or expecting governmental regulation for a price on carbon versus those that are not. Among the 2020 disclosures, CDP found that companies that disclose carbon pricing as a risk and face or expect pricing regulation by a government entity in their region are five times more likely to use an internal carbon price than those that do not.
CDP found that worldwide, companies were subject to 57 different regulatory carbon pricing schemes. Among them, the EU Emissions Trading System covered most of the companies reporting (425), followed by the Japanese national carbon tax (172) and the Tokyo Cap-and-Trade system (97), with the Korean Emissions Trading System(63) and the California Cap-and-Trade System (57) rounding out the top five.
Though there was considerable variability in the pricing of carbon among companies and across industries, CDP found that the median price disclosed was $25 per metric ton of caron dioxide equivalent. And among the various options that a company can take to price carbon, CDP found that “shadow” pricing remained the most popular with 50.8% of companies using it, followed by an Implicit price (19.3%) and an Internal fee (15%).
A shadow price is a way for companies to place a monetary value on carbon emissions to assess the risk of future investments and expenditures in anticipation of future regulations on carbon emissions. A recent example of this can be seen with BP (British Petroleum), which raised its carbon price forecast to $100/ton by 2030 from the previous $40/ton valuation. BP will use this price to conduct risk assessments and profitability forecasts with its future portfolio of oil and gas operations as they anticipate more aggressive global policies to transition to a low-carbon economy.[1]
An “implicit” price on carbon is based on how much it costs a company to implement projects that produce emissions reductions, such as the purchasing of renewable energy or the installation of energy efficiency retrofits. This instrument is calculated retroactively once the company achieves the emission reductions and often it can help inform the value for setting an internal carbon price. For example, Mahindra & Mahindra, an Indian automotive manufacturer, used an implicit carbon price to determine the final value of its internal carbon price which was to be used to invest in emission reduction projects for the company.[2]
An internal carbon tax or fee is simply a self-applied tax that the company charges itself for its own emissions using a variety of approaches. In 2012, Microsoft set an internal carbon fee that is paid by each division in the company, and with those funds, Microsoft invests in sustainability improvements. Currently, this fee sits at $15/ton and covers Scope 1-3 emissions. This carbon fee is only one tool of Microsoft’s larger climate and sustainability initiative, which has now set a goal for the company to be carbon negative by 2030.[3]
Overall, the report demonstrates positive trends for climate action from a corporate perspective. However, there is still considerable growth to be had in virtually every category, whether that is in the number of companies participating in internal carbon pricing schemes or in the number of companies using carbon pricing to cover scope 1-3 emissions. Corporate carbon pricing is voluntary, and yet CDP finds a strong correlation between companies that are facing or expecting governmental regulation on carbon pricing in their region.
This signal should be encouraging for world leaders attempting to implement effective carbon pricing regulations that push the private sector to act on climate change. Nearly 100% of companies that are currently implementing or planning to implement an internal price on carbon disclosed that they have integrated climate-related issues into their business strategy. And though there is still considerable variability between carbon pricing schemes worldwide, an effective price that can push entities to account for climate change in their operations is a positive sign for the global effort to tackle climate change.
[1] https://www.greentechmedia.com/articles/read/european-oil-majors-ready-to-scale-up-energy-transition-investment
[2] https://www.wri.org/insights/4-ways-companies-can-price-carbon-lessons-india
[3] https://blogs.microsoft.com/blog/2020/01/16/microsoft-will-be-carbon-negative-by-2030/