As global companies increasingly rally behind putting a price on carbon, new analysis from the World Resources Institute finds a carbon price — either a carbon tax or cap-and-trade program — would reduce emissions even more than the US Energy Information Administration has predicted.
In WRI’s new issue brief, Putting a Price on Carbon: Reducing Emissions, researchers explain the ways in which carbon pricing would encourage emissions reductions by changing the behavior of producers, consumers and investors.
WRI compares incentives for emissions reductions to EIA’s model, which found that if the US had set a carbon tax of $25 per ton in 2015 and increased it by 5 percent each year, CO2 emissions would have fallen to 32 percent below 2005 levels by 2030. It concludes that EIA’s model likely underestimates the emissions reductions potential of a carbon price.
In the transportation sector for example: EIA’s forecast does not take into account a carbon price’s effect on vehicle fuel economy. “Under a carbon price, businesses responsible for such emissions will have a financial incentive to seek out lower-carbon production processes, and consumers will have a financial incentive to purchase fewer carbon-intensive products or to seek out lower-carbon substitute products.”
US Firms Lag in Supporting Carbon Pricing
When asked about WRI’s issue brief, Tom Kerr, principal climate policy officer, IFC/World Bank Group, says the analysis will raise support for a US carbon pricing policy.
“Currently, US businesses are far behind their counterparts in Europe, Asia, and Latin America in embracing carbon pricing as a preferred climate policy strategy,” Kerr says. He cites recent business support including a letter from six major European oil and gas companies including BP and Shell urging carbon pricing ahead of COP 21, a letter from major investors to G7 finance ministers affirming support for carbon regulation, and the World Economic Forum’s CEO Climate Leadership effort.
“US companies — with a few exceptions — are not speaking out,” Kerr says. “This is due in part to misconceptions about the effectiveness of carbon pricing in delivering a strong environmental and cost-effective outcome. This Issue Note will help them to better understand the rationales for a carbon pricing policy.”
An EY survey released in December echoes Kerr’s evaluation. The study on business attitudes toward carbon pricing found consensus is building around the idea of carbon pricing and companies expect it may actually improve overall performance. But US companies lag behind their global counterparts.
This global survey of more than 100 executives found that 48 percent of respondents say their company is in favor of carbon pricing; just 7 percent say that they are against it. Regionally, 64 percent in Europe and 59 percent in emerging markets are in favor of carbon pricing, compared to the US where just 18 percent of companies were in favor.
Additionally, 78 percent of respondents say that that carbon pricing would have a strong positive impact on fostering innovation, triggering initiatives that are beneficial to performance and not just compliance, and 50 percent believe that carbon pricing will have a positive impact on their overall competitiveness.
Encouraging Competitiveness, Emissions Reductions
The Carbon Pricing Leadership Coalition, a public-private partnership with some 75 private-sector partners, launched at COP21 in Paris. Its goal is to expand carbon-pricing policies globally. Effective carbon pricing policies, it says will “maintain competitiveness, create jobs, encourage innovation, and deliver meaningful emissions reductions.”
Kerr says the CPLC is currently convening leadership dialogues with governments and business around the world to advance carbon-pricing policies as a part of a larger climate strategy.
“Companies that join the CPLC will work in three important ways to advance climate action,” Kerr says. “First, the CPLC will form a working group of companies that are using an internal carbon price to help them move to a cleaner business model.”
In 2015, CDP saw a tripling in the number of companies reporting that they use carbon pricing over the prior year (437 up from 150 in 2014). More than 1,000 companies disclose to their key stakeholders that they currently price their carbon emissions — or intend to in the next two years — to try to meet their climate change risks.
“Second, the CPLC will help companies to provide input government carbon pricing policy,” Kerr says. “There are good examples of this. For example, before the launch of the California cap-and-trade program, electric utility Pacific Gas & Electric (PG&E) and seven other companies ran emissions trading simulations that tested key policy design features — such as allowance holding limits and allowance price containment reserves.”
Kerr says the results gave the utility important information on how these design features could affect the program; the results were shared with the California Air Resources Board to help CARB understand how the policy design could impact the market.
“Third, CPLC businesses will join Leadership Dialogues to help countries like Mexico, Chile, South Africa and India to put in place effective, well-designed carbon pricing policies—ones that they can support,” Kerr says. “Without this sort of corporate/government engagement, we may get sub-optimal policies that do not address the climate problem. That is why corporate leadership is critical to the Coalition’s success.”
Photo Credit: industrial plant emissions via Shutterstock