What is carbon pricing?
Carbon pricing is an instrument which puts a price on carbon emissions. A price on carbon helps transfer the burden for the impairment from carbon emissions back to individuals, businesses, and governments, who are responsible for it and who can avoid it. Carbon pricing pushes reduction of carbon emissions through placing a fee on emitting and/or offering an incentive for emitting less.
There are two primary approaches when it comes to carbon pricing:
Government sets a fixed price per ton of carbon dioxide emissions or an equivalent greenhouse gas and entities must pay this tax based on the amount of emissions they produce. Since taxes increase with emissions, companies and individuals are encouraged to cut back on emissions to save costs.
Cap and Trade (Emissions Trading System)
In a cap and trade system or emissions trading, the government sets a limit on the total permissible greenhouse gas emissions within a certain jurisdiction or industry sector. Following distribution or auction, emission allowances are sold to companies and entities. Companies who emit less than their allotted allowances may sell their extra allowances to companies that emit more than their allotted allowances. This gives businesses a market-based incentive to reduce emissions since they can make money by selling extra allowances or have to buy more allowances if they go over their caps.
How does carbon pricing affect your company?
The following are some ways that carbon pricing may impact your company:
- Increased Operating Costs: Carbon pricing can lead to increased operating costs, especially companies that are in the brown industries i.e., steel, aluminium, and cement. These companies may be required to pay a carbon tax or buy extra emission allowances in a cap and trade system. This can impact a company’s bottom line, particularly if the company depends a lot on fossil fuels or energy-intensive processes.
- Innovation and Technological Development: Carbon pricing can stimulate innovative green technologies and practices. Companies could discover new opportunities in research and development to reduce emissions, resulting in new products and services development that attracts eco-conscious customers and increases your bottom line.
- Regulatory Compliance: Carbon pricing is frequently introduced as a component of broader climate policies and regulations. To prevent fines or other legal repercussions, companies must make sure that these regulations are followed. An example is the European Union (EU) Carbon Border Adjustment Mechanism (CBAM) which will take effective on 1 October, 2023 under a three-year transition phase, during which EU importers of carbon-intensive goods i.e., cement, iron & steel, aluminium, fertilizer, electricity, and hydrogen must submit quarterly reports on their product carbon emissions to the European Commission.
How can your company get ready for carbon pricing?
Strategic approach is a must for companies to manage carbon emissions, reduce costs, and maintain competitiveness where all eyes are on sustainability today. Your company can take the following actions to get ready for carbon pricing:
Assess Carbon Footprint
Know your company’s current carbon emissions profile and determine the primary sources of emissions, at the organization level as well as product level. This assessment will decide your reduction targets and carbon pricing strategy.
Implement Energy Efficiency Measures
Invest in improving your company’s energy efficiency through innovative technologies, processes, and tools. Not only that reducing energy consumption can help to lower carbon emissions significantly, but also cut down operational costs.
Strengthen your sustainability reporting initiative. Transparency about your carbon reduction efforts and progress can build confidence with customers, investors, and stakeholders.
Gain insights on how to improve ESG communications and build engagement.
BBC comprises a team of passionate practitioners implementing solutions for sustainability. Our consultants have extensive knowledge and experience in ESG and Sustainability, helping you to solve your problems with sustainable innovative solutions. Download our latest free eBook: The 101 ESG Guide and the Future of ESG, to learn what ESG is, how ESG is impacting businesses, and how to integrate ESG into your business strategy.
eBook: The 101 ESG Guide and the Future of ESG
In our latest eBook, we compiled the latest ESG trends and provided a practical approach to help you navigate your sustainability journey with ESG. Providing you with insights on how to integrate ESG into your business strategy and the impact of the integration on you.