Carbon Pricing

Setting the bar high: the case for carbon pricing

Using less fossil fuel is crucial in the battle against climate change. But businesses don’t have much of an incentive to make changes unless low-carbon technology is cost-effective. That’s where carbon pricing comes in.

It works by factoring the environmental harm done by fossil fuels into the cost of producing or consuming them. If carbon-based energy is more expensive, it discourages people from using it. At the same time, renewable energy – and investing in the technology to generate it – becomes more attractive.

But it’ll only work if the price of carbon is right. If it’s too low, it won’t incentivise businesses to use less energy or switch to renewables. If it’s too high, some economies may not be able to absorb the cost.

Creating a market

The opportunities for business go beyond just cutting emissions. Carbon pricing can help businesses stay competitive, create jobs and encourage innovation. It creates a market for developing and investing in low carbon products and services, like more efficiency lighting, electric cars and solar panels. And these investments give great returns. For example, the global, average internal rate of return on investments in low carbon technology is over 20% for the companies leading the field.

Carbon pricing schemes have prompted South African industrial company Barloworld to invest in 28 emission reduction projects. In 2014, the company estimated they’d save almost 2,500 tonnes of carbon – and made cost savings of over $200,000 a year.

Doing the math

Setting an internal carbon price can protect companies from sharp hikes in fossil fuel energy costs, and helps them plan the most cost effective low carbon investments. Companies that do nothing to prepare for carbon pricing may find themselves on the back foot.

Retail giant Walmart has already started doing the math. They estimate that the cost of a comprehensive carbon pricing system across all their markets, covering the entire retail industry, would be around $104 million.

Although this extra cost could be seen as a huge risk, Walmart choose to view it as an opportunity: by taking action early, they can claim a competitive advantage over other retailers who haven’t been as savvy.

Making the commitment

The idea of carbon pricing is starting to take off. It’s already being used by 40 countries and over 20 cities, states and regions. And over 150 companies (including Google, Microsoft, Mars and BSkyB) have their own internal carbon pricing schemes.

In 2014, 74 countries and 23 states, provinces and cities—together responsible for 54 percent of emissions and 52 percent of GDP—joined over 1,000 businesses and investors by signing the World Bank Group’s carbon pricing statement.

That means they’ve committed to setting an internal price on carbon that’s high enough to have a material effect on their investment decisions. They’ve also promised to publicly back carbon pricing policies, and to report regularly on their own progress with carbon pricing. Companies signed up include BT, Unilever, Nestle and H&M.

An international carbon price

A strong and positive business voice on carbon pricing in the run up to the Paris summit could prove a powerful influence on the climate change agreement.

The agreement won’t in itself set a global carbon price. But it’s an important part of the jigsaw: the national targets that will underpin the agreement, and the mechanisms that will be put in place to deliver those targets, will inform how carbon pricing works in the future. And that could ultimately lead to an international carbon price and market. So now it’s up to businesses to get involved – and to make sure the price is right.

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The Facts

  • In 2014, the total value of the world’s emission trading schemes was around US$30 billion. 
  • About 40 countries, more than 20 cities, states and regions have, or have scheduled a price on carbon representing 12% of carbon emissions
  • 150 companies reported using an internal carbon price in 2014, including Microsoft, Google, Mars, BskyB, National Grid, BP, Exxon Mobil, Delta Airlines, Disney.
  • US$35 is the average reported internal carbon price set by energy companies and utilities in 2014. 
  • US$3.7 billion, the annual tax revenues of Sweden’s carbon price – used, in part, to subsidize energy efficiency measures.
  • British Columbia has the lowest personal income tax rate in Canada (with additional cuts benefiting low-income and rural residents) and one of the lowest corporate rates in the OECD as a result of revenue-recycling from its carbon tax introduced in 2008.