As global businesses manage economic risks related to climate change impacts, the need to navigate the changing landscape of global economics becomes increasingly important. These risks include those with direct impact on business operations, such as disruptions on global supply chains caused by the potential scarcity of natural resources. They also include indirect risks such as unfavorable policies set by governing institutions. Managing these risks means embracing business practices and economic mechanisms that prepare organizations and ensure their survival in this dynamic business landscape. Carbon pricing—a method favored by economics for reducing global warming emissions by charging those who emit carbon dioxide (CO2) for their emissions—is one such mechanism, and many global companies have started to embrace it by imposing internal carbon pricing within their organizations and supporting global initiatives that encourage the adoption of carbon pricing as an international standard among national governments.
Carbon pricing is a key element of the climate change agenda. In science and policy-making, the acceptable range adopted in the 1990s is that global warming should not go above 2-degrees Celsius higher than pre-industrial temperatures. Managing global carbon emissions is a crucial part of maintaining global temperatures below this threshold.
This discourse between risk and opportunity is one that both businesses and governments need to address in their policy conversations. It would not be realistically possible for businesses to embrace policies that did not benefit overall productivity and profitability. National governments and international institutions like the United Nations (UN) must, however, pay attention to climate change as a risk and, therefore, the need for carbon pricing. This is why they are more concerned with the question of whether current initiatives are enough to ensure achievement of the 2-degrees Celsius goal. The Lima Call for Climate Action agreed upon in the last round of UN climate talks will be put to the test in the December 2015 conference in Paris where negotiators from around the world are set to strike a global deal to tackle climate change.
All current international efforts to reduce carbon emissions from both global businesses and national governments must therefore consider two things: 1) what mechanisms and policies can be adopted, and 2) how we can ensure that such mechanisms and policies are implemented to such an extent that they make a difference. Charging for carbon emissions is an effective mechanism because, first, it has been shown to drive energy efficiency and innovation, and, second, the cost can be adjusted depending on the effectiveness of the measure. In order for carbon pricing to work, it needs buy-in from a significant number of both businesses and governments.
Carbon Pricing and the Private Sector
The response from the private sector has been positive. Pro-carbon taxing initiatives by global institutions have support from global businesses. For instance, the World Bank’s "Put a Price on Carbon Statement" has elicited support and commitment from over 1,000 businesses and investment companies worldwide.
This comes in part from the recognition that sustainability and profitability are not exclusive propositions and that ignoring sustainability can prove fatal for organizations that have to navigate the long-term implications of climate-related risks. Long-term viability depends on making sure that an organization is prepared for these risks, primarily through process and technology innovations.
Carbon pricing does not merely represent a response to risk; it also represents a compelling business opportunity. A CDP paper released in June 2014 presents the insights of senior executives from top Standard & Poor’s (S&P) 500 companies who see a lot of positive potential in carbon pricing. Many cite internal carbon pricing as a driver of innovation. Rob Bernard, Microsoft’s Chief Environmental Strategist notes, "Our carbon fee model supports a culture of innovation and efficiency at Microsoft. We are promoting the efficient use of resources and purchasing green power, and...fees collected from the carbon fee support important projects."
Another benefit of internal carbon pricing is that its integration in the analysis of all plausible market futures allows a company to develop a more informed and flexible corporate strategy and risk management planning. Exelon’s Chief Sustainability Officer, Christopher Gould, relates: "Exelon continually conducts near and long-term modeling to best determine and inform our daily market positions, near-term portfolio management and decision making around investment and development."
Internal carbon pricing is also useful for companies who intend to take advantage of the reputational benefits of achieving the ambitious goal of net zero greenhouse gas (GHG) emissions. The Walt Disney Company, for instance, has been making strides to reduce emissions across its business units. There are essential processes in their operations that cannot be changed radically enough to lead to significant emissions reduction. For these they offset the emissions. Disney Executive Beth Stevens explains: "The Disney Climate Solutions Fund (DCSF) was created to offset what we can’t reduce. It is made possible because we have a price on carbon; fees from the carbon price flow directly into DCSF. Through DCSF, we purchase high quality forest carbon credits to offset the emissions we haven’t yet found a way to reduce."
National Governments Start Taking Carbon Pricing Seriously
The public sector also shows positive signs of embracing carbon pricing. National governments have been entertaining the idea of implementing a tax on carbon for a number of years now. The reasoning is that there is a growing need to curb the world’s use of carbon in order to limit its overall emissions. While some are still figuring out how to implement an effective and practical tax on carbon, many countries and cities have already started implementing theirs.
The concept of a global carbon price was established when the Kyoto Protocol’s proposed cap-and-trade method was heavily criticized. Many experts argued that global cap-and-trade was bound to fail and that creating a common carbon emissions tax would be more practical. The continued rise of social action towards the greening of the world has influenced business and political leaders in their pursuit of sustainable solutions.
States Implementing a Carbon Tax
The Carbon Tax Center created a list of states that implement carbon tax policies in their territories. The organization is responsible for compiling the latest news and developments in the global attempt to put a price on carbon. Its research has determined which countries have been successful in their implementation of policies and which ones have yet to find the perfect method for achieving their goals.
British Columbia, Canada - While Canada has yet to implement a national policy on carbon pricing, many of its provinces have started applying a carbon tax to their industries. British Columbia’s current carbon tax policy is one of the most effective in the western hemisphere. By pricing carbon emissions at USD $25 per short ton, companies have been encouraged to adopt alternative practices in order to cut back on emissions. Furthermore, by returning the carbon tax revenues to taxpayers, citizens have more incentive to support the policy.
Sweden - Sweden is the European country that has experienced the most success with its carbon tax. Implemented in 1991, the country’s policy has led to economic competitiveness and a more sustainable environment. The conversion rate is currently at USD $150 per ton of CO2 emissions, although fuels used to generate electricity are not taxed.
Future Plans for Carbon Pricing
With climate change on the forefront of policy-makers’ minds, many other national governments have started laying out plans for a carbon tax policy that will work for their markets. While there are countries that have finalized their policies, some have yet to implement them.
Chile - The South American country is the first to enact a carbon tax policy in the area, with USD $5 per metric ton as the rate, which will be implemented in 2018. While the reason for the delay has not been specified, many have speculated that it may be due to the country’s minimal contribution to the global amount of carbon emissions.
How Business Leaders and Political Leaders can Work Together for a Common Carbon Price Policy
The President of the World Bank, Jim Yong Kim, recently urged the world’s leaders to help each other mitigate the world’s carbon emissions, stating that it was part of developed states’ responsibilities to aid developing countries in their sustainability-related efforts.
At the 2014 COP20, UN member states set aside a significant amount of time to discuss the topic of carbon pricing and how it could be applied at the global level. At the final meeting where member states could lay down ground rules for COP21, representatives stated their interest in setting a price for carbon in order to offset the consequences of climate change. With three types of carbon accounting (carbon taxes, cap-and-trade programs and direct regulation) practiced around the world, UN member states included the topic in their agenda in order to discuss which method will work best for the planet.
FirstCarbon Solutions' Carbon Management Solutions
FirstCarbon Solutions (FCS) is a leading sustainability solutions provider with expertise in climate change and carbon management, providing cost-effective solutions to reduce carbon footprints. With FCS’ tools and expertise, companies can achieve affordable and efficient operations that lead to increased savings, reduced carbon emissions and an improved bottom line. FCS helps organizations understand the business drivers for carbon management and manage carbon programs for internal operations and consumers. As industries and governments deal with climate-related challenges, FCS develops solutions that support internal carbon pricing across the entire organization.
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