American businesses are already pricing carbon—could they show Washington the way?
By Mary Gable
The beauty of a carbon fee and dividend policy is that it operates on one of the simplest principles of economics: make something more expensive, and people will buy less of it. While a world powered by fossil fuels might seem like a good idea today from a purely financial standpoint, it’s not a world in which humans can continue to thrive. A carbon price creates transparency about this reality.
That’s an unsettling notion for institutions that depend on large amounts of coal, oil, and gas for energy, not to mention those in the business of selling them. But for companies that are required to make investments that pay off over decades, what’s worse is the uncertainty about if, when, and how they might be forced to change their ways.
A carbon price clears up these questions, guiding buying decisions away from high-emitting energy sources and toward ones that will be viable for generations to come. It provides a predictable signal to businesses that gives them the information they need to change the way they operate and plan for the future.
So what happens when the major participants in an economy are ready for this nudge, but the people making the rules are not? In a way, that’s what’s happening in the United States, which is alone among the world’s largest economies in its lack of a carbon price or emissions trading scheme. American businesses, many of which compete internationally, are at risk of being left behind as their peers decarbonize. Rather than waiting on Washington, however, many of them are taking matters into their own hands, setting internal carbon prices to guide their investments and reduce their emissions.
As of 2017, more than 1,300 companies worldwide were either using an internal carbon price or planned to start using one within the next two years, according to CDP, a UK-based nonprofit that helps organizations manage their environmental impact. That’s a huge change from 2014, when only 150 companies were using one. The latest totals include more than 100 companies that are part of the Fortune Global 500, who have collective yearly revenues of roughly $7 trillion. A significant number of new names on the list are companies based in the United States.
How internal carbon pricing works
While corporate carbon prices have some of the same goals as national carbon prices—encouraging a shift away from fossil fuels without hindering economic growth—they also have some important differences. Companies may use carbon prices to meet emissions-reduction targets that they set for themselves or that are legally required in the countries where they operate. Among public companies, pricing carbon shows shareholders that a business is aware of and responding to climate change risks. For other companies, a carbon price is also good PR—a way for them to show their customers that they support climate solutions.
Not all prices are created equal. The majority of companies pricing carbon internally use what is known as a “shadow price” as a planning tool. When evaluating a potential investment, a company may calculate their expected return using a variety of carbon pricing scenarios. It’s not surprising that the companies most likely to use a shadow price are those that would be most affected by a national carbon fee. While only about a quarter of consumer products companies assess risk this way, 63 percent of utility companies and 52 percent of all energy companies do.
For example, Exxon judges projects by assuming a carbon price of $60 per ton of emissions by 2030, and $80 by 2040. AkzoNobel, a chemicals company based in the Netherlands, assumes a €50 per ton price when considering short-term investments. For projects with lifetimes of 30 years or more, the company accepts that the price of carbon will be up to twice as high, and makes decisions accordingly.
Using carbon fees to shape behavior
Other companies are acting more decisively. The other major type of internal carbon price is one that assigns an actual fee to high-emitting activities and uses those funds to pay for energy-efficiency or renewable energy projects.
Microsoft is the best-known practitioner of this approach. After pledging to make its operations carbon-neutral in 2012, the company has used a carbon fee of $8 per ton of CO2 emissions to help it make progress. Each business unit tallies its emissions from uses like electricity and employee air travel, and then pays a fee into a central fund. That fund is used for renewable energy investments, community projects that offset carbon, and new technologies related to energy and climate.
By making environmental impact a line item for managers across the company, Microsoft says that its carbon fee has increased awareness of climate and sustainability issues and changed the way the business operates. And it works: the first year after implementing its carbon fee, Microsoft reduced its net emissions by 81.9 percent. Since 2012, it has decreased emissions by over 9 million metric tons of CO2 equivalent and invested in more than 14 million megawatt-hours of clean energy.
Measuring emissions this way isn’t easy and requires real commitment, which may be part of the reason more companies haven’t embraced this model. Other major corporations using a carbon fee include the Walt Disney Company, which uses funds collected to purchase carbon offsets. Ben & Jerry’s uses a $10 per ton internal fee to reduce emissions throughout the entire supply chain involved in producing a pint of ice cream, investing in everything from more efficient freezers to technology farmers can use to reduce methane production on dairy farms.
Where businesses can begin
Most companies are just getting started. But several years’ worth of data indicates that those that have implemented internal pricing programs—whether shadow prices, carbon fees or some variation of the two—are seeing a difference. A small number of companies have shared with CDP the specific changes they are making as a direct result of carbon pricing, ranging from shifting investments to lower-carbon energy sources to developing new, more efficient products.
For businesses ready to begin using an internal carbon price, there are plenty of resources to help. CDP is the global standard for carbon pricing disclosure and shares insights that allow companies to benchmark themselves against their peers. To become an official CDP signatory, corporations must commit to the UN Global Compact’s Business Leadership Criteria on Carbon Pricing:
- Set an internal carbon price high enough to significantly affect investment decisions to drive down greenhouse gas emissions
- Publicly advocate the importance of carbon pricing through policy mechanisms
- Communicate on progress over time through public corporate reports
Another popular resource is Trucost’s Corporate Carbon Pricing Tool, which a company can use to calculate how various national carbon fees would affect their business and set a proactive internal carbon price. Microsoft has also published several white papers about its own journey toward an effective carbon price, sharing a basic five-step formula that any organization can apply.
From the boardroom to Capitol Hill
Corporate carbon prices are helping move the needle in the right direction and will surely remain an important element of a low-carbon economy. But the private sector can’t address climate change on its own. The most effective solution would be a high and steadily rising national carbon price that requires every organization to do its part. If they are serious about their environmental commitments, business leaders could adopt the UN Global Compact criteria and advocate for such a policy.
There’s some evidence that this is beginning to happen. Microsoft has met with representatives from King County, Seattle to discuss its carbon pricing program, which has helped inform the city’s investments in renewable energy. Microsoft’s president and chief legal officer, Brad Smith, recently tweeted his support of Washington State’s proposed carbon tax. In 2017, 11 major companies, including Exxon, Shell, and General Motors, became founding members of the Climate Leadership Council, showing their support for the national carbon tax proposed by Republican elder statesmen James Baker and George Shultz.
Citizens’ Climate Lobby is also playing a role. The Business Climate Leaders (BCL) action team engages businesses across industries and recently convened a meeting of leaders from large technology companies, including Microsoft. BCL’s main goal is to guide leaders toward support of a national carbon fee and dividend, but internal carbon pricing has also been a topic of discussion. A follow-up gathering with this group in April will include a deep-dive on corporate carbon prices, led by CO2 Logic.
A chance for businesses to lead
Successful carbon fees outside of the United States have put necessary pressure on businesses to slow the burning of fossil fuels and shift toward sustainable sources of energy. Will U.S. companies flip this script and set an example for Congress?
“Business leaders can be especially influential with members of Congress,” says Steve Hams, BCL Engagement Director. “And corporate carbon prices are great proof of how carbon pricing can be good for the economy and good for business. If a company could share specific lessons they’ve learned regarding carbon pricing, that would go a long way.”
It’s too soon to tell whether businesses will use their power to tip the scales in Washington. Indeed, they may not even change from within: internal carbon prices are not legally binding, and companies are free to act without regard for the future their models predict. But the growing use of all types of carbon pricing by corporations is an encouraging sign to those of us working to make a national carbon fee and dividend a reality. Companies have considered carbon pricing legislation a foregone conclusion for years. They are planning accordingly. It’s only a question of when it happens.