Set and Use Carbon Pricing Effectively
Carbon pricing is an idea that’s tossed around as the “saviour” to your internal engagement issues. However, with no standardisation or clarity, it’s the question mark in a sustainability professionals' toolkit.
At Altruistiq, we’ve designed a step by step guide for setting and using a carbon price that is actually pragmatic (vs just part of a consultant’s power point deck).
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Set and Use Carbon Pricing Effectively
Before we start… What is a carbon price?
Carbon pricing is an instrument that represents the value of the externality for your business. It is an internal assumption informed by the company’s own analysis/ experience.
Myth busting: there shouldn’t be a single carbon price across companies. While it might be influenced by carbon taxation, it’s not the same thing.
Carbon prices should vary - we have seen numbers anywhere from <$1 to >$1000 per ton of CO2E.
Who is using carbon pricing?
Nearly 50% of the world’s biggest 500 companies are using an internal carbon price (CDP).
Carbon price vs carbon cost:
Saif, our founder, thinks it should be called a “carbon cost” as it represents the cost of decarbonisation rather than the price you're paying to acquire it.
Get Internal Buy In
Let’s be honest…people will be resistant to carbon pricing if it is seen as disruptive. Early engagement with the Board and impacted departments is key to overcoming this resistance. Proactive communication helps build understanding and shared ownership.
Here's how to pitch carbon pricing to the key functions:
Exec Team:
The Exec Team focus on risk management.
Frame your carbon pricing logic around:
Risk management: No Board will want to make a big public commitment without being certain on the cost to get there. Carbon pricing helps price and cost your sustainability strategy.
Practically:
Time: Identify the executive team's meeting schedule and frequency. Aim to present carbon pricing on the agenda early in the discussion, not as a “bolt on”. If the impact of carbon pricing needs to influence or be influenced by financial reporting, seek opportunities to present the topic during discussions related to budgeting, forecasting, or performance reviews.
Format: Use clear visuals like charts and graphs to communicate the potential benefits of carbon pricing. Consider using infographics to highlight key trends and relationships.
Finance
Finance focus on ROI.
Frame your carbon pricing logic around:
Budget management: The CFO wants to budget and fund sustainability appropriately. Carbon pricing can be used to to predict and manage sustainability budgets vs costs accurately, quarter-on-quarter and year-on-year.
Practically:
Time: Avoid pitching carbon pricing during busy periods like quarter-ends.
Format: Aim for mid-month presentations with clear visuals (e.g., Excel models, summary slides) that show your current carbon footprint and associated costs.
Procurement:
Procurement focus on price, quality and on time delivery.
Frame your carbon pricing logic around:
Budget management: A CPO wants to compare trade off’s between suppliers, judge different initiatives and understand how to best leverage suppliers to meet targets e.g., purchase more volume from X supplier vs Y. Carbon pricing can identify hidden costs associated with carbon-intensive materials and suppliers.
Practically:
Time: Keep in mind contract renewal and budget planning periods. Procurement will be involved in gathering data on past spending and negotiating supplier contracts to ensure alignment with upcoming budget. Try and schedule meetings around these peak times.
Format: Procurement think they are the busiest team (in most cases they probably are). Make sure you highlight clear, concise and actionable takeaways alongside defined timelines (what’s urgent and what isn’t).
Setting your Carbon Price
The different approaches to setting a carbon price
Let’s get one thing straight, there is no standardised approach to setting a carbon price. Companies can set carbon prices in a few different ways.
Good
Carbon tax proxy: an explicit tax rate (government imposed fee) on GHG emissions e.g., the EU Emissions Trading Scheme charges €74.1 per ton of CO2e (January 2024).
Pros: It’s easier to justify as it’s a mandatory cash expense.
Cons: The application is complicated. Different activities, industries, and locations may have varying tax rates e.g., a higher carbon tax on air travel and a lower carbon tax on sugar. This can create complexity when consolidating costs across diverse operations.
Better
Carbon offset proxy: Your historical average spend on offsets per ton of CO2e.
Pros: Straightforward to establish.
Cons: Doesn’t reflect the true cost of reducing carbon internally. Offset costs fluctuate depending on offset project type/ market conditions.
Great
⭐ Marginal abatement cost logic ⭐: Aggregate the cost to decarbonise each ton of CO2e from your business activities (e.g., transportation, purchases) to create an overall cost.
Pros: A more accurate representation of the cost to decarbonise that is tailored to your company for more strategic decision making.
Cons: Requires the most time investment in terms of analysis and maintenance.
So… how do you set an Internal Carbon Price?
1.
Identify major emissions driving activities and sub-activities in the business (e.g., logistics can be long-haul short haul). It is helpful to categorise these alongside your Scopes;
2.
Map emissions to each sub-activity;
3.
Estimate the cost to decarbonise each sub-activity;
4.
Calculate a weighted average.
The weighted average might change over time as the cost of decarbonising the activity shifts, and the number of emissions associated with that activity shifts as well.
For some decarbonisation initiatives, you will have higher certainty on emissions and cost than others e.g.,renewable energy shifts vs regenerative agriculture practices.
Don’t let perfection be the enemy of progress.
A carbon price is, at its heart, a number for financial modelling. This means it is directional, rather than precise. Whether your number is $50 or $500 is material, whether it is $50 but should be $40 is not relevant right now.
How we approach Carbon Pricing at Altruistiq
Apply a cost to each corporate initiative
Model and cost different scenarios
How many carbon prices should you have?
Choosing your carbon price structure is key.
Start with a single, “uniform price” per ton of CO2e for your entire company. You can establish this price by averaging the various carbon prices across the company. This simplifies implementation and aligns everyone around a clear goal.
As data availability improves, consider a “differentiated price” that varies by factors like business function or location. This allows for more targeted reductions.
Bell Group Example
Bell Group uses a uniform carbon price. Having one price has helped to motivate employees and align everyone behind one, memorable number.
Use your Carbon Price
Why you need to engage your supply chain (the abridged version)
Now this is where it get’s really interesting….Companies use carbon pricing in different ways depending on their goals and resources. This evolves from a strong to weak application:
Strong
Internal carbon tax: Charge a fee for every ton of carbon each department emits. This money can then be used to fund green projects within the company, like switching to renewable energy.
Example: Microsoft uses an internal fee mechanism, ensuring every department pays a fee based on its C02e emissions. This money is redistributed in the company and used to pay for climate related innovations.
Moderate
Cost integration: Bake your carbon price into existing financial models and investments to drive decision making. Embedding the cost of carbon into the price will encourage lower-carbon investments.
Example: A delivery company uses an internal carbon price of $75 per ton of CO2e. They need to decide between replacing a traditional delivery van with an electric van. They integrate the carbon price into the overall cost of ownership to get the full picture.
Traditional Van: 50 tonnes * $75/tonne = $3,750 carbon cost
Electric Van: 5 tonnes * $75/tonne = $375 carbon cost
Mild
Shadow pricing: Attach a hypothetical cost to each ton of CO2e. Once you have established your carbon price and attached a hypothetical cost to each ton of CO2e, use it as a proxy measure for new initiatives. For initiatives that are more expensive than your carbon price, highlight the additional qualitative measures (e.g., brand value, reduced regulatory risk, supply chain resilience, unlocking new markets) to get your initiative across the line.
As it’s a theoretical price, it tends to be easier to implement as there is no need to make changes to budgets and financial allocations.
Example: A company is considering two potential cotton suppliers. Supplier A’s (regenerative farm) cotton is more expensive than Supplier B’s (traditional farm) but when they factor in the shadow price of carbon, Supplier A is more attractive.
Monitor and Track
Your carbon numbers will change month by month as your GHG inventory moves around and the cost of solutions evolves (in both directions). So it’s best to look at:
1.
Frequency. Refresh your carbon price:
Max: Quarterly
Medium: Annually
Minimum: Every 2 years
2.
Inputs. Revisit the numbers going into your carbon price, including:
Activity based emissions
Cost to decarbonise these activities
Activity based emissions
Cost to decarbonise these activities
E.g., you have an intervention up and running to use plant based milk instead of dairy. Revisit your emission numbers to ensure they are up to date (plant based vs dairy) and to ensure that you are accounting for the latest plant based milk prices.
Carbon pricing, whilst it frustrating to set up and even more frustrating to use, it is one of the most powerful tools in your sustainability toolbox.
Have some questions? Tune into our upcoming webinar and Q&A on Carbon Pricing.
Watch our Carbon Pricing Webinar
Set and Use Carbon Pricing Effectively