Firms are increasingly using internal carbon pricing. But evidence of these prices having an impact on projects is hard to find, reports Alex Marshall
One of the more surprising trends in green business is the continued growth of internal carbon pricing – surprising since you would think any business worth its salt would have long used a carbon price to shape investment decisions.
Over the past year, the CDP (formerly the Carbon Disclosure Project), the UN Global Compact and the International Emissions Trading Association (IETA) have all issued reports praising the growth of carbon pricing and encouraging others to follow – in the UN’s case even publishing an executive guide explaining how to calculate it (bit.ly/1N0Nnuv).
Some 435 companies set internal carbon prices last year, up from 150 in 2014, according to the CDP, and range from food retailer J Sainsbury to internet giant Google. The pricing goes from the very high (£251 a tonne in the case of Japanese spark plug manufacturer NGK) to the very low (67p a tonne for Brazilian power company CEMIG) (see panel, below).
A growing phenomenon
The number of firms using internal carbon pricing is expected to be more than 1,000 by 2017, the CDP adds.
Much of the growth is in China, South Korea and South Africa – countries that are only now implementing carbon markets. In those cases, setting an internal price makes sense since businesses are looking for ways to prepare themselves for regulation. But there is also growth in Europe where the EU emissions trading system (ETS) has been operating for more than ten years.
Some 60 UK companies told the CDP in 2015 that they used internal carbon prices, up from 23 the previous year. A further 21 said they expected to adopt a price soon. Unilever said it was ‘considering the introduction of an explicit cost of carbon…to evaluate the business case for new investments and drive our [climate] performance even harder’. Meanwhile SUEZ Environnement, the French conglomerate that owns waste firm Sita, reported that it was in the middle of evaluating two pricing pilots.
Innovative schemes may also be on the way. ‘Some companies have raised the idea of embedding carbon prices in revenue targets or taxing marketing budgets to incentivise low-carbon research and development,’ says the UN Global Compact’s executive guide. ‘Companies in the food and beverage and service sectors are [also]…considering options for pricing carbon in partnership with their suppliers or customers and clients.’
Making a difference?
Despite the surge in firms using internal carbon pricing, a question hangs over all these schemes, and it is a large one: what do they actually achieve? The reports on internal carbon pricing tend to say that the schemes are influential in deterring businesses from involvement carbon-intensive projects. But they all lack examples. The CDP, for example, quotes 170 companies explaining how they use internal carbon pricing, but only one, National Grid, explicitly states it has influenced decisions. In its case, an internal price helped spur replacement of assets that use sulphur hexafluoride (SF6), an extremely efficient electrical insulator but also a greenhouse gas 23,000 times more potent than CO2.
‘If you are looking for someone who’s put a price on carbon and then changed x, y and z, they are honestly hard to find,’ says Zoe Tcholak-Antitch, spokesperson at the CDP. ‘A lot of the prices are too low to cause change right now. But this is a long-term game and these schemes will change how businesses think and plan, and that’s incredibly important.’
The most celebrated internal carbon pricing schemes do not involve setting a price to evaluate new investments. Instead, they are more like a carbon tax applied to every unit in a company. Making carbon part of a unit’s bottom line is intended to encourage them to consider energy-efficiency improvements, while creating a fund to spend on projects. Disney pioneered this approach in 2009; Microsoft followed in 2012. Both have used the funds generated to pay for carbon offsetting and renewable electricity purchases. Microsoft reports that it has used $2m of the fund on internal carbon reduction projects in the past three years.
The latest adopter is US ice cream manufacturer Ben & Jerry’s, a subsidiary of Unilever. In 2014, the firm re-evaluated its approach to climate change when, according to activism manager Christopher Miller, it realised it needed a long-term strategy to cut emissions – and that would require investment to tackle the supply chain. A lifecycle assessment revealed that 52% of the company’s emissions came from its suppliers, largely dairy farms. It was a statistic that could not be ignored.
The firm decided to try to lower them by encouraging farmers to deploy better cropping techniques and help them to buy biodigesters and manure separators. These split manure into liquid and solid parts, to be reused as a fertiliser and animal bedding respectively. An internal carbon fee was seen as a ‘slick and sensible’ approach to raise the required funding, while also potentially lowering the company’s direct emissions, Miller says. Each year, Ben & Jerry’s decides how much it intends to invest in its supply chain and works out a carbon levy based on that. For 2015-16, the first year of its use, it stands at $10 a tonne.
Miller insists the internal price was the only way forward. The firm cannot simply order farmers to cut emissions themselves because some are ‘teetering on the edge’ financially, he says. ‘We felt that their footprint is our footprint so we should make investments together.’
Ben & Jerry’s would prefer the US adopted a nationwide carbon price rather than having to use the company’s own scheme, but Miller says the two should not be incompatible.
The common approach
These schemes remain few, however, despite the publicity they attract. The more common approach involves simply adopting an internal price, or range, and using it as part of the process to evaluate potential investments. Some UK companies, including BT and Sky, base their price on the cost of allowances under the soon-to-be-abolished carbon reduction commitment scheme, so a maximum £17.20/t. Others use the far lower ETS price, which is about £4/t. However, from looking at the range of prices, many have seemingly plucked a figure out of the air.
It is this type of scheme that is hardest to evaluate since most companies appear unwilling to talk about them outside generalities. However, the environmentalist found one business that was willing to admit it had had little impact on its work. South West Water adopted its scheme in 2009 after sector regulator Ofwat ordered firms to take account of carbon in their business plans.
South West Water decided to use the government’s shadow price of carbon (now known as the non-traded price) to assess all projects over a 40-year lifetime. Carbon pricing would, therefore, play a part in how projects are ranked and deciding which ones go forward. The non-traded price is expected to have an impact because it is relatively high: £63/t this year, rising to £224/t in 2050 and increasing thereafter.
‘Internal carbon pricing was exciting and new and we thought it was something important to do,’ says David Rose, the firm’s energy and carbon manager. ‘But it’s a bit fraudulent really [to say we still push it]. It was created to meet the requirement of the regulator and it is still part of all our cost benefit analyses, but it hasn’t [ever] been sufficient to re-order our projects.’
This is partly because the water company’s projects are so expensive. ‘If we consider a pumping station for a water treatment works you’re looking at, say, 10,000 tonnes of CO2 for a project costing several million,’ says Rose. ‘Our price won’t make a difference. We did some sensitivity analysis and, when we increased the price by ten it had quite a big impact, but below that you didn’t see it.’ The internal carbon price is not even likely to drive the company’s engineers to focus more on cutting energy, Rose adds. ‘Energy is our second highest cost after salaries, so it’s always got a lot of attention.’ The company has its own carbon and energy reduction targets that provide significant drivers too.
South West Water’s experience does not appear unique. Last year, building materials firm Cemex told the UN Global Compact that, although it supported carbon pricing, ‘in view of the high abatement costs in our CO2-intensive sector and competitiveness issues, the company has concluded that an internal carbon price that would materially reduce its greenhouse-gas emissions is currently unfeasible’.
National Grid’s experience is similar to South West Water’s. Stuart Bailey, its head of sustainability and climate change, admits that for ‘99 out of 100 projects, decisions are the same if you use the social cost of carbon [in cost benefit analyses] or if you don’t’. However, in its case, an internal carbon price at National Grid has led to a few changes and that makes Bailey feel it is something all firms should consider worthwhile. National Grid’s internal price was set up to help it cut SF6 leakage in its electricity transmission business as well as methane escapes in its gas distribution arm and was part of a regulatory agreement with regulator Ofgem. The non-traded price of carbon has been applied to all projects in these areas and affects the order in which they are funded.
‘It might not have changed the fundamental design [of projects], but it certainly justifies them being brought forward,’ says Bailey. This included replacing SF6 components at substations earlier than expected, and replacing gas compressors too, the latter now often powered by electricity instead of gas. These moves would not have happened had the firm used a lower price like that under the EU ETS, Bailey says.
Because of those successes, National Grid is ‘exploring other situations where it might be applied’, although, like South West Water, it is more likely that it comes to rely on other ways of ensuring emission cuts. These might include telling suppliers and contractors that carbon emissions will be assessed when evaluating tender submissions.
The price is right
Jonathan Grant, director of climate change at PwC, insists National Grid is not the only company to have changed decisions on the back of its internal carbon price. But the others do not want to talk about them either for commercial sensitivity reasons or because the impact occurs in a project’s design phase and so is difficult to tease out. Grant says: ‘One of the advantages of an internal price if you are not regulated is that it raises awareness of the issue among project teams as you have senior executives suddenly asking about exposure to carbon price risk. So it drives work to mitigate that and try things teams wouldn’t have previously done, like waste heat recovery.’
Since the Paris climate summit, PwC has had inquiries from firms looking to adopt a price. Grant primarily says these have been big industrial companies from emerging economies that are facing carbon regulations for the first time. He recommends these firms choose a price quickly rather than obsess over the right level because the main purpose of one is simply to acquaint staff with regulation and force them to think differently. ‘You could pick a number from £20–£50/t. It doesn’t really matter,’ he says.
Any scheme should also be simple rather than include a variety of prices to reflect local regulations or abatement costs. Others have learned this from experience. Shell uses a $40/t (£28.11) carbon price globally to evaluate projects. The oil giant previously tried different prices in each region, but this proved complicated, according to a report it wrote for IETA.
However, as much as Grant and others advocate setting internal carbon prices, it seems ultimately that their effectiveness comes down to the motivations of the organisation using them. If a company wants to drive change – as Ben & Jerry’s does on its suppliers’ farms or National Grid did with its SF6 leakage rate – internal carbon prices can be set in a way that will achieve it. But, if used simply to assess the impact of existing or future regulation, carbon prices are likely to be ineffective. That applies in the case of PwC. ‘We have a such low carbon footprint, an internal price wouldn’t affect our decisions,’ Grant says. ‘Our investments in new buildings are about wanting a great building or doing the right thing and a carbon price wouldn’t change that.’
The wide variety of internal carbon prices
(£/t CO2e)
Food and drink
J Sainsbury
£17.20 *
Nestlé
£10.87
Ben & Jerry’s
£7.03
Oil and gas
Exxon Mobil
£56.21
Royal Dutch Shell
£28.10
Total
£20.02 (€25)
Energy
E.on
£16.02–£32.04 (€20-40)
Iberdrola (Spain)
£24.02 (€30)
Centrica
£13 (2014, based on cost of all carbon levies)
Abengoa (Spain)
£7.21 (€9)
CEMIG (Brazil)
£0.67
Utilities
Pennon Group
£63–£224 **
National Grid
£63–£224 **
Finance and advertising
WPP Group
£29.20
Société Générale
£8.01 (€10)
Telecommunications
BT
£17.20 *
Sky UK
£17.20 *
IT
£9.84
Microsoft
£3.09
Materials and chemicals
AkzoNobel
£40.04–£87.29 (€50–€109)
Anglo American Platinum (South Africa)
£2.29
Manufacturing
NGK Spark Plug (Japan)
£251.08
Stanley Black & Decker
Varies depending on location, but from £16.79 (France) to £105.43 (Sweden)
Balfour Beatty
£17.20 *
Jaguar Land Rover
£17.20*, but around £4 for other parts of business ***
BMW
Around £4 ***
* Carbon reduction commitment scheme compliance price for 2016
** UK’s non-traded price of carbon, 2015 prices
*** EU emissions trading system price, April 2016
Source: Putting a Price on Risk, Carbon Pricing in the Corporate World (bit.ly/1j1bZex), CDP, September 2015.Carbon pricing at Capgemini
Matthew Bradley, global head of environmental sustainability, explains the multinational management consultancy’s strategy: ‘Capgemini originally looked into the use of carbon pricing in 2009. In the UK we decided to create a sustainability fund based on calculations of our own CO2 footprint. This fund was used to invest in sustainability-related projects across our activities that impact on the environment, such as office energy and business travel.‘After a while the fund was absorbed into our cultural practices and every project was then agreed on the basis of the return on investment in terms of sustainability and economic benefits. We are now looking at ways to build on this success.
‘This year we will continue to impose carbon budgets on the business but we are also then looking at ways to re-invest the money externally. This could be through environmental projects in the community or through our people creating a positive environmental impact outside the workplace.’
