How to Manage Carbon Emissions — and Carbon Policy — Across the Value Chain

Carbon pricing, in the form of a carbon tax or a cap-and-trade system, is used by businesses and governments all over the world to cut greenhouse gas emissions and, according to proponents, grow the economy.

Critics say the opposite is true, but more on that later.

Carbon pricing pushes companies to invest in low-carbon business models and creates strong markets for low-carbon goods and services. More than 1,000 businesses currently price their carbon emissions — or intend to in the next two years — to try to meet their climate change risks, according to climate disclosures provided to CDP. It’s good for the environment and good for business. Microsoft, for example, says its carbon fee not only helped it achieve carbon neutrality, but it also saves the company more than $10 million per year.

Additionally, about 40 countries and more than 20 cities, states and regions have put a price on carbon, according to We Mean Business, a coalition of environmental sustainability organizations such as CDP and Ceres working with investors and businesses including Ikea, Starbucks, Nike, HP and Unilever.

Two US examples of this are California’s cap and trade program and the nine Northeastern and Mid-Atlantic states participating in the Regional Greenhouse Gas Initiative. Both are examples of cap and trade, in which a region sets an emissions limit and companies balance their emissions by buying carbon allowances. The total amount of allowances in the program — the cap — is reduced over time, reducing emissions and creating a price signal for allowances.

Washington state, on the other hand, is considering the first carbon tax in the US, which would require energy-intensive manufacturing operations — steel mills and food processers, natural gas power plants, refineries that use fossil fuels, and others — to pay $25 per metric ton of carbon emissions released.

A new carbon pricing partnership aims to address this challenge.

Environmental consulting firm Ecofys and the Generation Foundation, the advocacy arm of Al Gore’s sustainable investment firm, Generation Investment Management, have launched a partnership that will look at how carbon pricing can facilitate sustainable global economic growth. The research will extend over three years.

The partners say they will tackle carbon pricing from a new angle, exploring the role of carbon pricing along value chains up to the end consumers. At the end of the three-year investigation, Ecofys and the Generation Foundation say they will deliver “quantified insights into the role carbon pricing can play in achieving the goal of a 1.5 degree Celcius future.”

In an interview with Environmental Leader, Ecofys principal consultant Noémie Klein said despite the uptake in carbon pricing, harmonization of policies across different regions remains challenging for businesses. At the end-consumer level, the impact of carbon pricing is often insufficient to drive changes towards more low carbon consumption.

“Carbon pricing is often addressed from a country, a region and/or a sector perspective,” Klein says. “The research in our partnership will look at the implications of carbon pricing along value chains, which are typically across several regions and sectors. This approach will provide businesses with a better understanding of the distribution of potential emissions costs along the value chains of their products up to their end consumers, and of possible impacts of different types of carbon pricing instruments on a given value chain. This will help businesses prepare better for upcoming carbon pricing regulations.”

However, not everyone agrees cap and trade can work. The European Union, for example, has priced carbon so low that it is not actually cutting carbon emissions.

But in light of the Paris deal, the calls from businesses and activists to put a price on carbon are growing louder. To keep global warming below 2 degrees Celcius, the UN Intergovernmental Panel on Climate Change says the world will need to get to zero net emissions before the end of this century. Making polluting an operating cost by factoring emissions into bottom-line calculations through carbon pricing will be part of the solution.

Infographic Credit: We Mean Business

Don’t miss our Environmental Leader 2016 Conference in June.