The World Bank has long held the view that putting a “price on carbon” is, and would be, the most efficient and cost-effective means of reducing emissions, and ultimately addressing climate change . This outlook has been reiterated over the past few months by business leaders, senior political figures and institutional leaders - all of whom have called for increased use of carbon pricing.
But what is a carbon price...
A carbon price is a cost applied to greenhouse gas (GHG) emissions to encourage individuals, organisations and nation-states to reduce the amount they emit .
... and why do we need it?
Climate change is considered a market failure by economists because the huge costs and risks on future generations are not fully reflected in market prices. Economists widely agree that, to address this market failure, a cost (or carbon price) should be applied to GHG emissions to achieve deep decarbonisation for several reasons:
Interestingly, there are a number of carbon pricing already in existence at various levels.
At a global level
Perhaps the best known example is at a regional level, with the EU quota (or cap-and-trade) system. In this model, the total allowable emissions in a country or region are set in advance ("capped"). Permits to pollute are created for the allowable emissions budget, and either allocated or auctioned to companies. The companies can trade permits between one another, introducing a market for pollution that should ensure that the carbon savings are made as cheaply as possible. In this model, a ton of carbon currently costs approximately $5 .
At a national level
China is preparing to launch a national carbon market and California has established a cap-and-trade model. At this scale, there is a diverse range of carbon prices - for instance; from less than $1 per ton in Mexico to more than $100 per ton in Sweden .
At an organisational level
A number of companies are already exposed to a price on carbon emissions by participating in the above national or regional carbon markets. Further, implementing internal or shadow carbon prices in their own businesses can test whether investments will be viable in a world where carbon has a higher price, or as part of carbon reduction strategies. At least 150 major corporations have tested internal carbon pricing as of 2014, ranging from Google and Mars to Exxon Mobil. Some have disclosed the ‘internal’ or ‘shadow’ carbon price in their investment decisions, e.g. BP uses $40/tCO2, Google uses $14/tCO2, Mars uses $20-30/tCO2 and Microsoft uses $6-7/tCO2 .
Microsoft have announced the results of their first three years of an internal carbon pricing program and a related carbon fee investment fund. Within which, individual Microsoft departments have added a budget line item reflecting the financial value of their emissions. For instance, instead of a paper clip costing $1 a box, by including the hidden carbon cost the box is actually $1.20. Through this initiative, Microsoft report $10 million in annual energy savings - emissions reductions on the order of 7.5 million metric tons of carbon dioxide equivalent and 10.2 billion kilowatt-hours worth of new renewable energy investments .
The overall principles of carbon pricing
For more information, please contact Dr Jim Ormond or Jane Fiona Cumming.
NOTE: This article was originally written in 2016, therefore some of the data and prices may have fluctuated.
Image by Lewis Meyers - UNSplash
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