How putting an internal price on carbon can help fund sustainability projects

We recently helped one of our clients with financing options for their sustainability objectives. We showed them the many funding options available for sustainability projects such as leasing and loan options, funding from the budget, but also more innovative solutions like Revolving Energy Funds (REF), or Energy Performance Contracts (EPC).

Another innovative funding option is carbon pricing. Increasingly organisations are implementing an internal carbon price as a method of managing climate risk and achieving sustainability goals. According to the CDP, 600 organisations around the world in 2017 are using an internal carbon price with almost 800 planning to implement it soon.

Free Download: Financing Options for Sustainability Projects

Microsoft, for example, uses the revenue from its internal carbon fee to fund renewable energy, energy efficiency, research into emissions reduction technology, and to raise employee awareness of climate risks and opportunities.

Update April 2019:  Microsoft doubled its internal carbon fee to $15 per metric ton on all carbon emissions.

Others, such as Shell, BHP, and BP, embed a shadow price in their business strategy to help evaluate business opportunities such as investing in low-carbon assets.

What is an internal carbon price and how does it differ from an external price?

An internal carbon price is a fee an organisation places on the greenhouse gas emissions it emits, which can be used to influence investment and business operations decisions.

An external carbon price, on the other hand, is a locally, or nationally regulated price on carbon emissions from organisations in that region. Around 45 countries now put a price on carbon, including for example the European Union, Chile, Korea and Finland. These countries as well as several sub-national jurisdictions all use carbon pricing to curb greenhouse gas emissions.

How does an internal carbon price help with getting sustainability projects over the line?

Implementing a carbon price not only prepares organisations for future government regulation, it also gives them a competitive edge over other organisations. The implementation of an internal carbon price places an obligation on the entire organisation to manage their emissions. This obligation assists in making the business case for sustainability projects stronger. An internal carbon price can:

  • Shorten the payback period and justify investments with lower margins that would otherwise not have met internal approval criteria
  • Improve long-term resilience through low-carbon decisions in operations and in the supply chain
  • Make a company’s sustainability strategy more effective and meaningful
  • Make it easier to get buy-in from organisational stakeholders

Types of internal carbon pricing

There are three types of internal carbon pricing that organisations typically choose from:

Type of Internal Carbon PriceDescriptionBenefitsRevenue GenerationAustralian Case Examples
Internal Carbon FeeA fixed fee on each ton of carbon emissions emitted by the organisationGenerates a revenue stream to fund an organisations emissions reduction targetYesMicrosoft (Global)
Shadow PriceA hypothetical price on carbon emissions emitted by an organisation to use when making long-term business planning and investment strategiesThis allows organisations to prepare for future regulation and prioritise low carbon investmentNo Wesfarmers, AGL, Stockland,BHP,Westpac, Shell (Global), and BP (Global)
Implicit PriceAverage cost per tonne of emissions borne by the organisation to meet its emissions reduction targetsGenerates the revenue required to meet the organisation's emissions reduction targets such as being carbon neutral through purchasing offsets or renewable energyYesNational Australia Bank (NAB)

Quite often organisations use a hybrid approach to create what works for them and their goals.

How you can implement an internal carbon price

100% Renewables has developed a 5-step method for the implementation of an internal carbon price. These steps are illustrated in figure 1 below. You first need to calculate your carbon impact and determine what your carbon, energy or sustainability targets will be.

After discussing the business case for an internal carbon price with key organisational stakeholders, you need to agree on an appropriate price level. After that, it’s a matter of making sure that carbon pricing permeates the whole organisation and that it is integrated into the long-term strategy, planning and operations. And finally, you will have to monitor whether the carbon pricing is performing as expected and make any necessary adjustments.

How to set an internal carbon price
How to set an internal price on carbon

Figure 1 – How to set an internal carbon price

How we can help you with determining appropriate financing options for your sustainability projects

We use a tried and tested methodology to help organisations meet their sustainability goals. Some of the ways we help organisations include the following:

  • Organise discovery sessions or workshops where we present relevant financing options to key organisational stakeholders and get their input to develop a funding strategy
  • Evaluate your current projects and help with selecting the most suitable financing method
  • Present and explain the pros and cons of each funding method
  • Provide case examples of how other organisations have funded their sustainability initiatives
  • Integrate a funding strategy into your environmental/sustainability strategy
  • Calculate the business case for your sustainability initiatives (NPV, IRR, payback – depending on the needs of your stakeholders)

We have developed a Financing Guide for Sustainability Projects for Local Governments that describes 11 funding options.

Download Free Financing Options for Sustainability Projects

If you want to discuss financing and funding options for your sustainability strategy, please contact Barbara or Patrick.

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