Setting an organizational carbon price

Craig Simmons, Chief Technical Advisor at Anthesis, hosted the round table on carbon pricing at this month’s The Crowd Forum event in London, an innovation and collaboration platform which Anthesis are sponsoring throughout 2017.

An introduction

If carbon pricing is new to you, here’s a whistle-stop tour.

Schemes typically fall into two basic categories; they either levy a pre-determined tax on each tonne of carbon emitted (a ‘carbon tax’) or set a total carbon emission limit and let the market decide on the value of these allowable emissions (a ‘cap and trade’ system such as the EU Emissions Trading System). Internal company schemes are usually based on a carbon tax; it is simpler to administer and easier to understand. However, many companies are also actively engaged with tradeable credits through their purchase of external carbon offsets.

There are, however, many variations on these themes. We have found that no one size fits all. Successful schemes do share some commonalities. Primarily, they succeed by creating a virtuous circle of carbon emission measurement, pricing and reduction. Typically, the process starts with a corporate GHG inventory (usually just scope 1 and 2; scope 3 is much harder to do). A levy is then put on the measured carbon with the resulting carbon price being used to incentivize investments which lead to carbon reductions. This is all led by a corporate carbon target and driven by a rolling carbon price and annual discount rate. If you’d like a little more of an introduction to carbon pricing, watch my 5 minute summary, filmed at an Anthesis event we held last spring.

Hearing from the table…

Mentioned in the Paris Climate Agreement, carbon pricing is generating renewed interest both at the company and country level (such as Canada). It was therefore timely to be hosting a round table on the subject at The Crowd Forum earlier this week. Table participants came with a range of exposure to, and experiences of, carbon pricing, and collectively shared an enthusiasm to set a carbon price in their respective organizations.

For example, a table guest shared their story of setting a carbon price within their business, instead of a central fund, and using this price to drive top level investment in energy reduction activities. The first step was to have good quality carbon and cost data, followed by a clear group-wide energy reduction target (in this case, a percentage carbon reduction by 2020). Detailed energy audits were undertaken to give the team a list of investment opportunities across the business. Following some research from the market, the figure of €40 was identified as the level which was likely to drive action. This additional lever tipped investment projects from being 4-5 year payback to 2-3 year payback which, as you can imagine, drove further investment. One key barrier encountered was getting buy in from the executive team, but once enough people were on board, a change of mindset occurred within the board and finance departments. Previously they had challenged investment in energy efficiency; now they challenge lack of investment. This mindset change is now central to the culture, with incentives given to drive down operational expenditure and meet carbon reduction targets. Managing Directors at the organization get ranked on their carbon reduction, which is proving crucial to the success of the program.

Weighing up the barriers and the plus points

It was fantastic to hear such a positive story, and the table agreed on a number of barriers to implementing a carbon pricing scheme which are likely to be common across organizations:

  • Getting management buy in (as above)there is often a lack of understanding at executive level, and so senior teams and leaders need proven examples of success to convince them putting an internal price on carbon is a worthy initiative.
  • Having targets only set at a high level – if there are a lack of divisional targets for carbon reduction, how can business units and individuals understand how to contribute, and be motivated to do so?
  • The potential for short-term competitive disadvantage – due to added costs incurred through the pricing.
  • Discord created where the commodity price is low but carbon emissions are high (e.g. sulfur hexafluoride) – with this situation, low financial savings through carbon pricing are hard to justify. Interestingly however, it appears putting a price on carbon can actually be disproportionately beneficial from a finance perspective.

The table also saw the clear advantages of getting a carbon pricing scheme in place:

  • Where supply chains involve operations in developing countries, more carbon can be saved for a smaller/similar investment – due to the higher carbon intensity of the grid in developing regions, it’s a way to get more bang for your buck, so to speak.
  • The likelihood of medium-term competitive advantage if a company is a first mover – having an effective pricing scheme means much more than just getting your finance team on board – with the support of operations, marketing and HR divisions, carbon pricing could have significant impacts on reputation and market share.

The challenges and questions

Of course, while our enthusiastic discussion gave us some answers, it threw up more questions, and highlighted a number of challenges organizations are facing too. What’s the interaction between carbon pricing and science-based targets and which should come first? How can scope 3 emissions be integrated into the carbon pricing scene? How can international organizations reconcile the issue of carbon prices varying across different regions? And how can organizations select the ‘right’ price? On this latter question, the UK Government publishes the Green Book which advises on this, but there are many prices for carbon – from £10 to £150 per tonne – taking the social cost of carbon into consideration to various degrees.

It’s a hot topic, and if you’d like us to help you get to grips with carbon management solutions for your business, please do get in touch, or alternatively, use our fill out form below.

Take a look at Anthesis’ short guide to carbon management or other blogs related to The Crowd Forum.

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