Internal carbon costs: the dark arts of pricing emissions

Only three things seem certain today: death, taxes and rising carbon output. The second can, however, reduce the inevitability of the third. That theory backed the development of the EU’s emissions trading scheme (ETS). Though not strictly a levy on carbon pollution, it does provide a reference price. But the EU’s system is unusual.

Most countries have neither an emission pricing system nor carbon taxes. That has prompted some companies to set their own carbon prices for internal purposes.

These vary widely. They can be as high as $1,600 per equivalent tonne of carbon dioxide (USD/tCO2e). That is far above the most actively traded contracts in the EU scheme, currently setting a price of about $73/tCO2e.

Some 1,000 companies report their internal carbon pricing to the CDP, a non-profit. Unsurprisingly, most prefer prices well below those set by the EU scheme. A price of about $50 suits most of them. BP, the oil and gas company, projects a figure of $100 by 2030.

Higher internal carbon prices should not deter companies from investing, says Tom Smout at Aurora Energy, though very high prices would. Other factors — such as shareholder demands for profit growth — weigh heavily. Oil companies, like BP, will maintain capex on fossil fuel projects despite internal carbon prices. At least half of BP’s spending will go to fossil fuel-related businesses by 2030.

Internal carbon prices help companies get a handle on the pollution burden of proposed projects. Most are shying away from marrying those prices with the carbon emissions they report. No wonder. Lex’s calculations have shown that if the European steel and cement sector had to pay to pollute at rates set by the ETS, it could wipe out half their annual ebitda.

According to an old joke, when a chief executive asks what profits will be, the CFO replies “what would you like them to be?” That is the problem with internal carbon prices, too. Robust external carbon pricing would support transition better. The ministers that gather to waffle at COP summits would do better to create a cross-border trading scheme to provide those magic numbers.

The Lex team is interested in hearing more from readers. Please tell us what you think of internal carbon prices in the comments section below