FEATURE STORY

Why Business Leaders Support a Price on Carbon

August 11, 2014

Industries face several risks from climate change. The Thirsty Energy infographic looks at the energy-water challenge.

STORY HIGHLIGHTS
  • Climate change can put the resources, supply chains, and infrastructure that companies rely on at risk, while also threatening to roll back decades of global development progress.
  • Business leaders recognize the risks. Several have started to use an internal “shadow price” on carbon dioxide emissions, a driver of climate change, to help guide their investment decisions and seize opportunities.
  • A growing number of business leaders are speaking out in support of carbon pricing policies.

The companies we turn to every day for electricity, transportation, consumer goods, and even electronics face risks from climate change. Most need reliable water for production processes and products. Extreme weather and temperatures can hurt their productivity and damage their supply chains and assets.

Business leaders understand that climate change can have real economic impact, and that their current business models may not be profitable in a 4-degree warmer world. They also see opportunity in innovating for a cleaner future.

Several global companies, including Google, Walmart, and Shell, have started using an internal “shadow price” on carbon dioxide emissions, a greenhouse gas that contributes to climate change, in their investment planning to help avoid risks and find opportunities that can increase energy and resource efficiency, reduce CO2 emissions, and give them a competitive edge. A few industries internally pricing emissions won’t move an entire industry to better practices, though; a sector- or economy-wide price on emissions can. 

In about 40 countries and more than 20 cities, states and provinces, these companies and others also work with a formal price on emissions that is set or planned for entire sectors or economies through carbon taxes or carbon markets. That price on carbon, as it frequently referred to, sends a consistent economic signal that investing in cleaner, low-carbon growth can pay off for everyone. 

Business leaders are increasingly speaking out in favor of expanding those carbon pricing policies.

More than 250 companies have already joined a statement that is being organized by the World Bank Group and partners including the World Economic Forum, UN Global Compact, and the Prince of Wales’s Corporate Leaders Group encouraging governments to explore carbon pricing methods and set their own predictable price on carbon.

Flexibility, innovation & efficiency

The energy giant GDF Suez, sees carbon pricing as a cost-effective way of addressing climate change while letting businesses choose how they lower their emissions. The France-based multinational operates on five continents in about 70 countries – some of which have carbon pricing systems in place. In positioning itself for the future, the company is aggressively developing renewable energy resources to reduce its carbon footprint, a move that has put it at the cutting edge of the energy sector.

“We at GDF Suez support carbon pricing because we believe there is a need to address risks linked to climate change, and we support action to address emissions reductions cost effectively. We are in favor of market-based approaches and emissions trading which allow business the flexibility to reduce when and where it makes the most business sense,” the company wrote in adding its name to the public statement encouraging governments worldwide to put a price on carbon.

KDF Energy of Romania, another supporter of the carbon pricing statement, writes that “carbon pricing improves the efficiency of the economy, and it is a signal for investment in low-carbon and resilient economic growth.”

Software company Microsoft, which uses shadow carbon pricing, describes similar benefits from its internal carbon fee model. It says the internal pricing mechanism provides justification to prioritize efficiency at every level of the organization. “We’ve found over time that the more we can integrate sustainability goals across the business, the better position we are in to respond to changing economic, social and environmental conditions. Our carbon fee model supports a culture of innovation and efficiency,” Microsoft told CDP for a recent report on internal carbon pricing.

Open Quotes

We need to engage governments to create an environment that is supportive to meeting the big sustainability challenges the world faces. Close Quotes

Unilever

Investors

For investors, transparency and sustainability are important. A price on carbon helps bring to light the risk of stranded assets and connects the damages caused by burning fossil fuels to their sources, costs that are rarely reflected in stock prices today.

“In addition to encouraging investment in low-carbon generation, a carbon price also provides investors an incentive to pursue other low-carbon activities, such as tilting portfolios away from high-carbon investments, as they have a clearer view of the economic cost of holding high-carbon assets,” four investor groups from Europe, Asia, Australia and North America wrote in a recent online article. “The continued improvement and expansion of carbon pricing is crucial to a low-carbon energy future.” 

The French public service pension fund ERAFP proposes that companies report their carbon footprint as a proxy to assess how businesses are preparing to deal with climate change.

“Assuming that, as a result, it would be in the interest of any company to gross the highest revenue possible for the least carbon footprint, pressure would increase for a subsequent overhaul in corporate business models,” ERAFP writes in supporting the price on carbon statement. “We will never stress enough the importance of being transparent.”

Small businesses

Small businesses are also concerned about climate change; they have fewer resources to endure extreme weather events, recover or adapt. The American Sustainable Business Council works with small businesses and sees value in properly pricing the burning of fossil fuels and using the proceeds to reduce taxes elsewhere.

“By returning some of the revenues to the lowest income earners, a price on carbon actually benefits small businesses that serve this segment of consumers,” the ASBC writes. “Addressing the climate crisis will not just avert economic catastrophe, it can serve as a wellspring of innovation, job creation, and produce economic and international competitive benefits.”

A similar model has been used in British Columbia since 2008. The Canadian province set a tax on emissions from fossil fuels – paid at the pump and in an energy bills – but then cut business taxes and personal taxes and added a low-income tax credit to protect the poor. The revenue-neutral approach led to one of the lowest income tax rates in Canada and lowered the province’s emissions.   

Private sector involvement matters

The World Bank Group has been working with business leaders to increase investment in clean energy and low-carbon development, and it recognizes the value of a price on carbon in encouraging that shift.

The private sector’s involvement is critical. Climate change threatens to roll back decades of development progress in countries around the world and puts the poorest and most vulnerable at greatest risk. Public money alone will not be enough to shift the world to low-carbon growth than can reduce missions to safer levels. Nearly two-thirds of finance for projects today that help mitigate climate change, such as renewable energy development and expansion of energy efficiency, comes from the private sector, and the combined total is far short of the investment needed.

Solving the challenges of climate change will take both public sector and private sector leadership. 

Global consumer products company Unilever described the connection and the impact on consumer goods companies in joining the carbon pricing statement: “Many of the impacts of our operations fall outside our direct control, so we need to engage governments to create an environment that is supportive to meeting the big sustainability challenges the world faces.”