How carbon pricing effectively can lead to more informed climate action
How much is one tonne of carbon?
We are still waiting on the elusive international price of one tonne of carbon. One bitcoin is worth £6,900, a barrel of oil stands at a low $31, and an ounce of gold is $1,670. The price of a tonne of carbon? Well, depending on the market and definition, it can range from as low as $0.25 to upwards of €30. Furthermore, the value of carbon is either in the form of ‘a right to emit one tonne’, or a certificate for the ‘removal of one tonne of carbon’. The definition is dependent on the mechanism: whether a cap-and-trade model is used (like the EU Emissions Trading Scheme) or an offsetting approach. The offsetting approach is what will be discussed in this article, namely because it is in my opinion more accessible, easier to conceptualise, and has the properties of a consumable good.
Where did it begin?
Way back in the early 2000s, the Kyoto Protocol’s attempt to create a global market for carbon credits finally came to fruition via the Clean Development Mechanism. A controversial, albeit pioneering concept, the CDM has gone on to help fund thousands of projects worldwide working towards a more sustainable future. The CDM, via the approval of the United Nations Framework Convention on Climate Change, has created markets for nation states, businesses, and even individuals to purchase carbon offsets. At the same time, even more stringent and rigorous carbon offset schemes came about. The most popular and respected of these standards are VCS and Gold Standard, paving the way for trusted, verifiable, and genuine carbon offset projects.
How do they work?
Through rigorous planning and validation, projects calculate how much carbon will be offset, sequestered, or reduced by using emission factors and other accounting methodologies. This then determine the overall quantity of carbon credits they can issue. By selling these credits, they are essentially selling the tonnes of carbon they have saved from entering the atmosphere from otherwise unabated fossil fuels. Through something called a certified emission reduction (CER), which is equal to one tonne of CO2, private and public institutions have a way to reduce their impact that otherwise wouldn’t exist. Billions of dollars have been invested in carbon offset projects over the years via the purchasing of carbon credits, ultimately saving billions of tonnes of carbon from being emitted.
So, why are they criticised?
Carbon offsets have often been criticised in the past for being a way for large corporations to claim to be carbon neutral while continuing to pollute in their local context. Climate change is a global problem, and there is nothing inherently controversial with supporting a project abroad to the same end goal of reducing carbon emissions. The problem lies in the price. If the CER price is as low as $0.25 it is not truly reflecting the real cost of the future environmental damage of that tonne of carbon or the economic cost to cut it out. The IMF, in a recent study, suggests $75 per tonne of carbon is the true social cost and is ultimately needed to spur innovation and move away from fossil fuels.
Why don’t companies set their own price?
To encourage sustainable purchasing practices within their own business divisions, Microsoft introduced (almost a decade ago now) an internal carbon price ($15 a tonne). It became an innovative way to reduce climate risk from procurement practices while also providing a pot of income to invest in either offset projects abroad or local projects such as rooftop solar. The future looks bleak for a lot of industries and assets that will no longer be legally operational beyond 2050. The cost of stranded assets due to climate change will be in the region of $250bn dollars (low estimate). Companies still investing in those assets directly or indirectly are set to lose out, and by adhering to an internal carbon price, they can encourage a greener supply chain and climate positive procurement that will ultimately cut this risk out.
What does the future hold for carbon offsets?
COP 26 in Glasgow later this year is set to make important changes to the clean development mechanism. The mechanism was set up to enable developing economies to access sustainable development funding. This connection between global communities is exactly what is needed to make significant enough changes to reduce the risk of the climate emergency.
Organisations in the UK are now focusing their efforts on achieving the government’s net zero by 2050 target. This is the perfect opportunity for businesses to identify, measure, and curb carbon emissions both internally and across supply chains. By setting an internal carbon price that incentivizes productive switching to greener alternatives, businesses will be able to cost in the real benefits of sustainability and reduce considerable costs associated with suppliers that are not.
Becoming carbon neutral, once a way for businesses to differentiate, is now becoming an integral way for businesses to ensure their competitiveness moving forward. By setting an internal price, and investing in carbon offsets, businesses can ensure they are making a difference, and preparing for the sustainable future we all hope to inherit.