Putting a price on the future

Carbon pricing isn’t an economists’ plaything, it’s the best hope to get action on climate change

New York was THE place to be this September, at least if you are a member of that exclusive club – world leaders. Preceding the full UN General Assembly was the UN Secretary General’s Climate Summit – the latest stage of the extended process to get a global legal agreement by the end of 2015 on limiting temperature rise to a less than 2-degree Celsius. In all this the UN Private Sector Forum played a prominent part in the drama.

Enter stage left a blizzard of initiatives for big business to sign up to – the New YorkDeclaration on Forests, the six climate action initiatives of CDP, the Trillion Tonne Communiqué of the Prince of Wales’s Corporate Leaders Group, the Portfolio Decarbonization Coalition, and many more too numerous to cite.

As that old American sitcom, Soap, aptly put it at the head of each episode – “Confused? you will be!”

So here’s a handy tip – just focus on the price of carbon. My simple proposition is that until the costs of climate change are included in everyday financial decisions, no amount of worthy declarations will achieve change on the scale required.

One push in this direction is led by the World Bank – its Put a Price on Carbon initiative is ‘multi-stakeholder’, as the jargon goes. Another is Caring for Climate which is seeking to mobilise a critical mass of businesses to take action. Its Business Leadership Criteria on Carbon Pricing contains the single most important action in all this, namely “set an internal carbon price high enough to materially affect investment decisions to drive down greenhouse gas emissions”.

This is already happening much more than perhaps you’d think. Research by CDP shows major public companies using an internal price of carbon in their decision making, despite the lack of any regulatory requirement. ExxonMobil is assuming a cost of $60 per metric ton by 2030. BP currently uses $40 and Royal Dutch Shell too.

When Puma published its ground-breaking Environmental Profit & Loss, it used a more ambitious approach to account for the ‘social cost of carbon’ – the costs to society from current and future climate change.

Its carbon value coefficient calculation was based on $87 per tonne of CO2e. Interestingly, just 6 percent of the impacts arise in Puma’s own operations – valued at €8 million – with a further 9 percent caused by its direct suppliers. That leaves 85 percent of the impact outside the company’s own direct control or influence.

And that brings us back round to the role of governments, since using an internal price in business decision-making is only the beginning. Thankfully some governments are starting to implement their own carbon prices – for example the UK government’s fourthcarbon budget is using a forecast carbon price of £51 tCO2e on average over the full budget period.

All credit to the Stern Review back in 2006 which laid out the economic case – that the global costs of climate change if we fail to act will dwarf the costs of effective international action now. Putting an effective price on carbon is still the best way to drive that message home.

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