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Is There A Right Price For Carbon?

Gloria Gonzalez

Corporations all around the globe are adopting a price on carbon for business planning purposes amid expectations that national emissions trading systems or carbon taxes will be implemented from China to South Africa, according to a new report from the CDP. But one critical and often controversial question remains unanswered: what is the right price to instigate changes in behavior that actually reduce carbon emissions?

15 September 2014 | Eight corporations operating in China and South Korea are upping the ante in their preparations for national emissions trading systems (ETS) by incorporating a price on carbon in their business planning and risk management strategies, according to a new CDP report. The same is true in South Africa where five corporations in different sectors reported using an internal price on carbon ahead of government plans to implement a carbon tax in 2016. But the prices disclosed to the CDP varied significantly, which raises the question: is there an ideal price on carbon?

For many companies, mere expectations for carbon pricing can have a positive impact in encouraging them to put a price on carbon that actually affects the decisions they are making, Mark Trexler, Chief Executive Officer of the climate strategy and risk group Climatographers, told attendees of the Society of Environmental Journalists conference in New Orleans on September 6.

“It’s not as if we have to impose a high carbon tax today to have a big impact tomorrow, Trexler said. “You can actually put in a very modest carbon price as long as you have some sort of certainty as to the price tomorrow. It’s the expectation of carbon pricing that drives the decision making rather than todays carbon price.

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While many companies reporting to the CDP assume a carbon price is coming in some format, the more difficult question to answer often revolves around what that price needs to be to actually change behavior in a way that lowers carbon emissions.

“No one is talking about what carbon price we need because that’s a much more controversial number, he said. “If it’s a carbon price just for the sake of a carbon price, who cares? What would it actually take to change (corporate) behavior? Those numbers vary, but within the electric utility sector, you’ll start to see behavioral change around $30/tCO2e (per tonne of carbon dioxide equivalent). In the transportation sector, you won’t start to see behavioral change until over $100/tCO2e. When we have carbon prices in the international market of $4/tCO2e, when you have prices in the California market of $10/tCO2e, $11/tCO2e, $12/tCO2e, there’s a very real question of is that carbon pricing changing decision making? And if it’s not changing decision making, is it a big issue?

California’s cap-and-trade system for carbon emissions currently has the highest average price of the existing ETS programs, with allowances clearing at $11.50/tCO2e in the August 2014 auction, and the state has also implemented a floor price, which is $11.34/tCO2e in 2014.

“That’s a fairly unique measure, but that ensures there’s at least some price signal, said Gary Gero, President of the Climate Action Reserve. “Now we can have arguments about whether that’s an adequate price signal, but that ensures there is some price signal.

“We’ll get to the point where emission reductions cost $50/tCO2e, I suspect, over time, he added.

Current carbon pricing programs often “nibble at the margins of doing something about climate change in part because there is a focus, especially in California, on looking for cost-effective emissions reductions, Trexler said. “That’s fine, but the reality is that we’re not building a price of carbon into the larger thinking in the economy, he said.

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The Socially Acceptable Cost of Carbon

In May, the United States White House revised the social cost of carbon (SCC) the eventual expense incurred by society from climate change in today’s dollars for each tCO2e of emissions upwards from $21/tCO2e to $35/tCO2e, a decision that the nonpartisan experts believe that the SCC should be set as high as $200/tCO2e because of the risk of catastrophic climate change and current carbon pricing programs such as the one in California are nowhere near that threshold.

“The (California) program is designed to have the least disruptive economic impact possible on the consumers in California ultimately all these costs get transferred to consumers  while getting the most emissions reductions,Gero said. “If the social cost of that emission is $35/tCO2e or $200/tCO2e and you can buy that emissions reduction for $10/tCO2e or $12/tCO2e, then that’s economically efficient and that’s the point. If you imposed a price of $50/tCO2e on the economy today across the board, that would be an economic shock and it wouldn’t be necessary because you can get those emissions reductions [at a lower cost].

Carbon taxes in this upper range do exist, mostly in European countries such as Sweden, although the province of British Columbia in Canada also has a $30/tCO2e carbon tax. However, the carbon tax route is politically much more difficult when certain factions refuse to acknowledge that there is even a climate problem, Trexler said.

To talk about the price of carbon as a solution is fundamentally problematic if you don’t have any kind of a political coalition to actually say we need to solve the problem, he said. “We don’t have that now and to hide that fact, we’re focusing a lot of time and effort on talking about pricing carbon. You’re never going to get a carbon price that does the trick as long as you don’t have the underlying political consensus.

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Carbon Pricing Circles the Globe

Globally, 150 companies reported using an internal carbon price to the CDP, formerly known as the Carbon Disclosure Project. Sixty-seven companies reported using an internal carbon price for planning purposes in Europe, home of the world’s largest carbon market to date, the European Union Emissions Trading System (EU ETS), while 44 corporations in North America reported using an internal carbon price.

Despite the price collapse in the EU ETS, the carbon pricing assumptions by European companies were often higher than their North American counterparts. The lowest reported price by a European company was $30/tCO2e reported by Cairn Energy while the highest was an $84.24-324/tCO2e range disclosed by utility Pennon Group. In North America, companies reported a carbon price in the range of $6/tCO2e for technology giant Microsoft to $60-$80/tCO2e price reported by energy major Exxon Mobil.

In Australia, where the legislature voted in July to repeal the country’s carbon pricing program, 21 companies disclosed use of an internal carbon price. Only two companies disclosed the actual price: Westpac Banking uses a $10/tCO2e price and utility APA Group uses a $65.9/tCO2e price.

The decision to repeal the carbon price has created a great deal of market uncertainty, said Australian financial firm Stockland. “It is unclear how/when the Direct Action Plan proposed by the new government will come into force, and whether or not the carbon price will be re-instated at a later stage due to international pressures, the company reported to the CDP.

Carbon pricing is not restricted to the developed world, as companies with operations in developing countries are using an internal carbon price for planning purposes, according to the CDP. Eight companies in Asia reported using an internal carbon price, citing expectations that China and South Korea will launch national ETS programs in the next few years.

China-based information technology firm Taiwan Semiconductor Manufacturing estimated it will pay about $3 million per year to purchase carbon permits based on the current market price and its annual carbon emissions. China-based Compal Electronics, also in the information technology category, noted the impact of the seven ETS pilots already in operation in the country, with an average carbon price estimated at RMB 32/tCO2e in 2014 (US $5.22), increasing to RMB 41/tCO2e in 2016 and RMB 53/tCO2e in 2018. The company estimated its increase in operating costs related to carbon pricing in the first year at RMB 5.12 million.

Utility Korea District Heating Corp is looking at the planned implementation of Korea’s ETS in 2015 as a business opportunity, predicting additional revenues via the sale of unused emissions permits due to technologies to reduce greenhouse gas emissions and enhance energy efficiency. If the company is able to reduce 100,000/tCO2e, it estimates that it could obtain additional revenues of KRW 2.1 billon (roughly $2 million US dollars), assuming a carbon price of KRW 21,000/tCO2e.

And the efforts to price carbon in China and South Korea could spread to other countries in the region. Philippines-based clean energy company First Gen described the possibility of pricing carbon in that country as small, but noted that the Philippines may have to introduce carbon pricing mechanisms in the medium term as South Korea moves forward with its cap-and-trade system and the international community works toward a global climate agreement.

Out of South Africa

Companies in South Africa are also using an internal carbon price in anticipation of the government’s plan to implement a carbon tax set at 120 rand (US $10.92) in 2016 in an effort to slash its carbon dioxide emissions 34% from business as usual or projected emissions if no efforts were made to curb them by 2020, and 42% by 2025. But South Africa-based steel producer Arcelor Mittal South Africa discussed the limited capacity for steel producers to reduce carbon emissions: “Existing technologies simply do not allow for more carbon efficient alternatives and there are no new technologies available either, the company reported to the CDP.

South Africa-based cement company PPC expressed concern that its competitiveness might be jeopardized by increased competition from limestone producers that do not have to pay the carbon tax because they fall under the minimum emissions threshold and that the likelihood that carbon pricing would not be implemented uniformly across the globe would have a negative impact on the company.

But South Africa-based precious metals company Gold Fields sees a business opportunity to be seized in the upcoming carbon tax. The company has been active in the renewable energy and carbon sequestration fields, which will enable it to quickly add carbon offset projects that will create additional income when sold to other companies and mitigate emissions while generating co-benefits such as job creation and energy independence, it said. Sectors covered by the tax emit about 387 million tonnes of carbon dioxide annually, and compliance entities could demand up to 30 million tonnes of offsets per year, according to a 2012 analysis by carbon project developer Camco Clean Energy.

Companies in developing countries were generally less likely to report the internal carbon price factored into their decision making than their counterparts in Europe and North America, but Brazil-based consumer staples company BRF S.A. reported using a $6.56/t price. Four Brazilian companies in three different sectors disclosed use of an internal carbon price to the CDP.

“The potential adoption of emission reduction targets by the Brazilian government can have direct financial impact on the company if these targets are to be transferred to the industrial sector, BRF reported to the CDP. “A carbon price could result in additional operational costs and impact future expansion plans Most likely, fuel and energy regulations will materialize as a carbon price.

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Gloria Gonzalez is a Senior Associate in Ecosystem Marketplace’s Carbon Program. She can be reached at ggonzalez@ecosystemmarketplace.com.
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