It’s like they say: “Money talks.” Sometimes, putting some financial accountability behind initiatives like company sustainability pays off. Carbon pricing puts a cost on the emissions companies produce so that the company and its business units will account for these costs in their capital expenditures and other relevant evaluations. Accountability for carbon dioxide emissions encourages investment in more environmentally friendly technologies, systems, and equipment while slowing the global warming caused by the excess of carbon dioxide in the atmosphere.
Global standards have not yet been established for carbon pricing, but as of early 2021, 28% of companies in Europe use internal carbon pricing.
How does carbon pricing work?
Nothing creates efficient change like a solid financial incentive. When carbon pricing is done well it generates funds for the company, encourages investments and innovations in green technology, and protects the air and natural resources.
There are several carbon pricing methods:
- Internal Carbon Pricing (ICP): Organizations assign their own internal cost for carbon. To do this, the company can calculate a shadow price (The High-Level Commission on Carbon Prices estimates that one ton of carbon priced between $50-100 per ton by 2030 should keep global average temperatures from rising more than two degrees Celsius.) Alternatively, a company can establish an internal carbon fee (priced by the ton), which creates revenue for cleaner practices and technology.
- Carbon Credits (also known as Carbon Offsets): An organization is given an emissions allowance: one credit for each ton of carbon dioxide emitted. Polluting companies can buy more, and low-carbon institutions can sell theirs. Independent corroborators are needed to verify that emissions are reduced.
- Cap and Trade (also known as Emission Trading System, or ETS): Sets a cap for carbon emissions within a sector, but the credits that allow emissions can be saved and resold among entities in that sector. This method allows for the most flexibility.
- Carbon Tax: This is the most direct way of pricing carbon emissions. Carbon is taxed by the ton, which motivates companies to either lower emissions or switch to alternative energy sources. Carbon taxing provides a steady price, but this method does not guarantee that worldwide emissions will be reduced.
- Results-Based Climate Finance (RBCF): With RBCF, organizations receive funds for their emissions reductions. This encourages private sector participation in completing international climate goals. Independent parties are needed to corroborate that emissions are reduced.
Carbon accounting software such as SustainBase helps to track, measure, and report carbon emissions over time. To successfully incorporate carbon pricing into your business model, make sure your pricing plan aligns with other company policies. Also, be transparent and fair in your public expectations and communications.
If you’re looking for sustainability inspiration, see how SustainaBase became the go-to platform for other companies looking to improve their environmental impact and sustainability reporting.
How does carbon pricing affect business?
Your business stands to benefit by incorporating carbon pricing for several reasons:
- Carbon pricing is likely to become more commonplace soon. Getting ahead of the curve now will save you the effort later, and get you familiar with the ways to apply this financial tool.
- Investors and consumers are increasingly favoring ESG-centric companies to support. Giving them what they want, and demonstrating measurable progress on climate will ensure their interest and loyalty.
- Last but not least, most carbon pricing methods will guide you to invest in cleaner, more efficient technology and help to mitigate climate-related risk.
Since 2016, the United Nations Global Compact has asked for companies to work toward an internal carbon price of $100 per metric ton at a minimum. Other organizations recommend different rates based on country and industry.
The silver lining of carbon pricing
Carbon pricing is another opportunity to attract investors, and customers. Successful carbon pricing requires top-notch software to track and report your carbon emissions. Anticipating the shift toward carbon pricing will set your company up for sustainable growth and an easy transition into the ESG economy.
