Q&A | Implementing Internal Carbon Pricing

May 24, 2022 | Insights, News,

ICP definition: A mechanism by which companies can put a value on their greenhouse gas (GHG) emissions in a way that drives positive change in their business.

Explore the ICP Guide

Charlotte Challis, Principal Consultant at Anthesis, was invited to speak at the UN Global Compact Network Climate Action Q&A Surgery, which covered the topic of Internal Carbon Pricing (ICP). Find highlights from the discussion, with answers to some of ICP’s most poignant questions below.

Why is ICP becoming such a trending business practice?

There has been a high uptake and enthusiasm for Science-Based Targets (SBTs) and Net Zero targets over the last few years. Achievement of those targets requires a non-marginal change – i.e., business decisions must change. ICP is a simple but powerful mechanism to achieve these targets by embedding them into business practice. Also, practically speaking, there is a growing awareness of ICP through CDP questions, TCFD requirements, and how the external cost of carbon and the rising price of the EU Emissions Trading System (EU ETS) has been more in the news, which makes the issue of external carbon pricing risk more front of mind.  

What are the different types of ICP mechanisms?

There are two main ICP models – carbon fee and shadow price. Implicit price is a metric to measure the cost of reducing carbon in an organisation and can be used for both models. 

Carbon fee models are where the prices of carbon are levied e.g., an additional charge for booking business travel which goes into a central fund. Shadow pricing applies a cost of carbon to the decision-making process, but the cost is not levied e.g., in a project assessment the carbon impact of that project is quantified and then monetised using a $/tonneCO2e. The resulting financial figure is taken into account in the decision but that carbon related value is not charged. 

The main aim when designing the ICP is to meet the right needs and drivers and to understand the human factors.  

What factors are considered when setting an internally applied carbon price?

When setting the price there is a range of factors to consider. If external tax risk is a driver, a regulatory price such as the EU ETS should be included in the analysis. However, when reviewing external risks, your organisation should consider carbon tax risks in all operating countries, as variations can occur. Another external factor is the price of Renewable Energy Certifications and offsets. Bloomberg recently published an analysis suggesting that offset prices could reach $200/tonne by 2030.  As companies race to Net Zero and achievement of interim SBT targets, the demand-supply dynamics are likely to affect the prices of certificates significantly. 

Internal factors must be considered including the implicit cost of carbon for the organisation and the cost of changing behaviour. The human factor is important to get the balance right, as ultimately ICP is about driving behaviour. The choice of the carbon price is about achieving the best outcome at the best price. 

What are the resources needed to implement the ICP mechanism?

The key resource that is required is data. Organisations will need to quantify the carbon impact of the ICP mechanism. At one end there are simple, already calculated annual corporate footprints which are used to apply a charge to departments. ICP could be focused on business travel, where the data is relatively easy to collect and improve. Alternatively, your organisation could quantify the impact of individual business cases that requires access to data that supports the carbon quantification of the project.  

How can investors help implement ICP?

ICP is used by investors to make divestment decisions. When a carbon price is applied to particularly carbon-intensive sectors, it can certainly make investments look less attractive. 

The trick is how to apply this sensitively to take account of the opportunity to improve carbon emissions, not just penalise those that are currently underperforming. To model this effectively, and make those informed decisions, requires significant engagement with companies to understand their potential to change and the plans currently in place. Accessing CDP data can be one way of approaching this, or more direct engagement to request specific data returns.  

ICP can be useful as a flag, particularly where shadow carbon pricing is used –i.e., highlighting risks and identifying priority companies to work with. How that information is then used in decision-making must be thought through more specifically in relation to the aims of the organisation putting it in place. 

How can carbon rationing policies within organisations drive individual accountability?

Carbon rationing can be used with great effect when well thought-through. Whether to impose those rations on all, or just some, individuals is an important question to work through and will be related to the level of individual autonomy there is within roles. It is a different thing to apply a limit to the director of a department who is deciding on strategy, than it is to apply it to a factory floor worker. Carbon rations can still inspire the required behaviour, even when not applied individually. We are social animals, so where we have a strong group culture and an issue is communicated and incentivised in the right way, individuals will get behind the cause.

It is worth stress testing the use of this method in a pilot phase and thinking through the implications of what choices individuals have when the limits are reached. Working through the guidance, training, governance of the system, how limits are set, how limits and effects of the system can be reviewed, and range of options open to individuals is important.

What is the guidance to implement ICP?

I would recommend thinking about the three letters of the acronym separately: 

  • I – Internal is important for understanding what your drivers are, the stakeholders involved, and who is affected? What are the internal and external issues? This takes a systems approach.  
  • C – Carbon is all about the data practicalities of what data do you need? What is the quality of the data? What are the supporting processes and tools that help quantification?  
  • P – Price is where you want to take account of the external carbon tax risks, implicit price, the price needed to change behaviour, cost of late action, and cost of growth in the carbon footprint 

How can Anthesis support your ICP mechanism?

Anthesis can support businesses with the creation of internal carbon pricing mechanisms through stakeholder engagement, our in-house tools, and our network of experts. We can work with you to identify the mechanism that suits your business needs and then design a process that fits into and works with, your existing data, business processes, and management structures. 

For more information on how to identify if your organisation would benefit from internal carbon pricing and how to get started, contact us. 

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