The Climate of Business #26: How will carbon pricing impact the world's decarbonisation agenda?

This week we go back to the topic of carbon pricing. Recently I spoke at an internal event organised by a large corporate and they asked me what I thought was the role of carbon offsetting vs carbon pricing. The short answer was: we need carbon pricing as it is the most natural mechanism in order to embed the unaccounted for costs to our economy. But let's get deeper.

Climate Change Reality

Satellite images show the Amazon rainforest is hurtling toward a ‘tipping point’ (Washington Post )

Six key lifestyle changes can help avert the climate crisis, study finds (Guardian )

Will climate change make us more violent? (CTV News )

Nature-based solutions in mountains can reduce climate change impact on drought (Phys Org )

Using the Ocean’s Power to Fight Climate Change (The Wall Street Journal )

Terrawatch: how carbon-eating rocks could help fight climate crisis (Guardian )

Not Even Gumbo Is Safe From Climate Change (FiveThirtyEight )

How a little-discussed revision of climate science could help avert doom (Washington Post )

Should we be growing trees in the desert to combat climate change? (TechCrunch )

Impact of climate crisis much worse than predicted, says Alok Sharma (Guardian )

Business Climate Reality

Energy Security, Prices Take Priority Over Climate Concerns In Crisis (Forbes )

The Economic Challenge and Climate Opportunity in Supporting Ukraine (New Yorker )

Environmental groups sue TotalEnergies over climate marketing claims (Reuters )

The political window in the US is closing on climate change (Boston Globe )

World's major companies lag on climate, some markets regress since Paris (Reuters)

Why climate solutions will fail without the help of social scientists (Vox )

African countries spending billions to cope with climate crisis (The Guardian )

In EPA Supreme Court case, the agency’s power to combat climate change hangs in the balance (Washington Post )

Thinktank linked to tech giant Canon under pressure to remove ‘dangerous’ climate articles (Guardian )

How the beef industry is trying to change the maths of climate change (Unearthed )

Reality Check

What is carbon pricing?

A popular mechanism that uses market drivers to address climate change, by creating financial incentives for organisations to lower carbon emissions or other gases like methane, nitrous oxide, and other gases that contribute to rising global temperatures. In a nutshell “cover a part of a country’s total emissions, charging C02 emitters for each ton released”.

21.7% of global GHG emissions are covered by carbon pricing in 2021, a major increase due to the introduction of the Chinese national carbon trading scheme.

What are the types of carbon prices?

• Carbon tax or fee
• Emission Trading System (ETS) - permit system for GHG emissions. This system sets limit of emitted carbon emissions per year per company. Company is given permits or allowances or must buy the right to emit. A company that emits below the limit may also sell their “unused” CO2. In Europe it “sets an overall limit on greenhouse gas emissions from energy-intensive industries (e.g. oil, gas, steel, iron, aluminium, cement, paper and glass) and intra-European commercial aviation. Currently in EU.
• Emission Reduction Funds - taxpayer funded schemes in which a government buys credits created by emission reduction projects. Currently in Australia .
• Cap-and-trade system - the government sets an emissions cap and issues a quantity of emission allowances consistent with that cap.
• Company Internal Carbon Tax - companies increasingly set a price for the pollution levels of their geographies / departments / products to align all employees around the larger net zero goals.

How is it calculated?

By capturing the external costs of emitting carbon -?the costs that the public pays, such as loss of property due to rising sea levels, the damage to crops caused by changing rainfall patterns, or the health care costs associated with heat waves and droughts - and placing that cost back at its source.

There are, however, different models and studies to advise policy makers on the carbon pricing calculations, as the prices depend on the various industries and the pollution levels, as well as the net zero goals of the particular countries.

The principles for successful carbon pricing (World Bank)

• Fairness - “Polluter pays” mentality and insurance that both costs and benefits are fairly shared.?
• Alignment of policies and objectives -? Carbon pricing cannot be implemented alone, it needs to be combined with broader policy goals, both climate and non-climate related.?
• Stability and predictability - We need a stable policy framework and be a clear and consistent message and system.
• Transparency - Openness about the calculation methodology and aimed goal that helps reach net zero for a particular country or industry
• Cost-effectiveness - What is the ROI? Does it makes sense in the grand scheme of things?
• Reliability - No fluctuation and transparent and reliable system for calculating the price
• Environmental Integrity - does the carbon price fit within the larger sustainability agenda?

What are the challenges?

• Bad policy
• Policy overlaps leading to confusion and/or loopholes
• Ineffective use of revenues from carbon price
• Carbon Leakage risk - an issue particularly with international companies. If businesses were to transfer production to other countries with less emission constraints, this would mean that technically the emissions were simply "exported" and while the company looks more sustainable the end damage for the planet is the same. This can be solved by a stronger framework.

Why is carbon pricing important?

• Average carbon prices could increase more than sevenfold to US$120 per metric ton by 2030.
• According to research from S&P Dow Jones Indices, carbon pricing could lead to significant costs for companies, amounting to as much as $1.3 trillion.
• Higher carbon prices could improve profit margins for clean energy generation in Europe, including wind, solar, and nuclear power plants.
• Carbon prices encourage investment in new technologies like carbon capture.
• At the regional level, 10 US states have active cap-and-trade systems, in which money raised from selling carbon credits to power plants go toward clean energy investments.

According to a 2019 World Bank report on trends in carbon pricing, a carbon price range of US$40-80 is necessary by 2020 to reach the goals set by the 2015 Paris Agreement.

Carbon Price

Bouncing back since the beginning of the war in Ukraine.