Add to the steady drumbeat of corporate leadership on climate change a new paper on pricing carbon, released today by CDP (download PDF). It’s not exactly a new story — a handful of companies have been putting a price on carbon in their internal accounting for the past couple of years — but the CDP report provides a little more depth to the conversation.
Late last year, CDP released a white paper detailing how S&P 500 companies are using internal carbon pricing as a strategic tool in their business planning.
While some stories previously had been told — for example, we’d previously reported on Microsoft’s carbon-pricing scheme as well as Disney’s similar program — the December paper garnered high interest.
Today’s CDP report aims to build on that, bringing additional depth about those and other programs to light. As the authors write:
This strong interest led to many questions, asked both in the media and directly to CDP, about what carbon prices mean and how they function. Common questions included:
• Why are these companies using a carbon price?
• How are these prices calculated, and how to do they function as internal costs?
• Do carbon prices drive strategy and investment?
• What are the implications of the use of these prices for investors, companies and policymakers?
This paper was conceived to provide insight on these and other questions through direct commentary from companies using carbon prices, investors, policy makers, and academics. These various perspectives demonstrate that corporate use of carbon pricing can spur innovation, curtail risk and provide investors with an economic valuation of climate-related risks and opportunities.
The report includes the voices of senior corporate leaders from AEP, Disney, Microsoft, TD Bank, and Xcel Energy; investors such as Generation Asset Management and Pax, as well as former Goldman Sachs Chairman for Investment Strategies Bob Litterman; and voices from the World Bank, US EPA and others.
Following are excerpts:
Nick Akins, chairman, president & chief executive officer, American Electric Power
AEP uses a carbon price within its Integrated Resource Planning (IRP) process to appropriately capture the potential future policy and regulatory risk associated with carbon emissions. The IRP process is the fundamental pathway through which we assess and plan for providing reliable electric supply to our customers over a longer-term time horizon. The IRP is a formal process within many of our states, which involves publically disclosing a plan for future operations that is subject to review by regulators and stakeholders. In most cases, it includes a robust stakeholder process to inform the plan’s development. AEP’s IRP process considers all available resource and market options to achieve the least-cost plan.
The carbon price used within the IRP process is a fundamental input that places a relative value on carbon dioxide emissions from AEP’s electric generating facilities and future facilities that may be considered within the planning process. The effects of carbon pricing are further integrated into AEP’s forecasts for commodity pricing, including wholesale electricity, natural gas and coal. The use of a carbon price favors investment in new zero- or low-carbon generation technologies, as well as gradual divestment (i.e. retirement) of older carbon-intensive generating sources.
Christopher D. Gould, senior vice president, corporation strategy and chief sustainability officer, Exelon Corp.
One way Exelon has used a price on carbon to develop a supply curve that ranked GHG abatement measures based on the price of carbon needed to support the economic viability of the options. This approach included both demand side and supply-side alternatives (energy efficiency, increasing nuclear capacity and renewables), and helped inform the Exelon 2020 strategy and goal to abate 17.5 million tonnes of GHG emissions annually by 2020. This approach supported prioritization of investments that ultimately led Exelon to achieve its goal in 2013.
Investors should value market forecasting expertise that focuses on ensuring short-term market performance while also being forward-thinking and seeking to ensure valid strategic direction under emerging market forces like climate change This balance of short- and long-term considerations is essential for ensuring corporate success, but also for meaningful integration of these issues into how corporations operate. As a result of our careful consideration of existing and potential market drivers across the energy value chain, Exelon has positioned itself as the leading U.S. competitive energy provider, with one of the cleanest and lowest-cost power generation fleets and one of the largest retail customer bases in the United States.
Rob Bernard, chief environmental strategist, Microsoft
Our carbon fee model supports a culture of innovation and efficiency at Microsoft. We are promoting the efficient use of resources and purchasing green power, and we hope to set an example by driving accountability through our internal carbon pricing and carbon fee model. The fees collected from the carbon fee support important projects — from internal efficiency measures to renewable energy projects such as the 110 megawatt Keechi wind project in Texas. In addition, we invest in carbon offset projects such as biodiversity in Madagascar and Indonesia and efficient cook stove projects in Mongolia. These projects are not only offsetting GHG emissions, but they also are advancing global citizenship by improving health, protecting ecosystems and providing income and employment to local communities. Realistically, it would not be possible for us to adopt this model if it did not benefit the overall productivity and profitability of our company.
Karen Clarke-Whistler, chief environment officer, TD Bank
Being carbon neutral and having an internal price on carbon quite literally has transformed the bank. Take our facilities: for every tonne of emissions we can’t eliminate through energy reduction, we have to invest real dollars to buy and develop offsets and RECs or purchase greener — and generally more expensive — energy. The potential for avoided costs and increased environmental benefi s is a business driver. We now approach the design and operation of all our facilities through a “green” lens. This has led to development of net zero energy branches; design standards for new stores that are 45 percent more energy efficient; solar installations on 100 facilities; a LEED platinum energy-efficient data center; and retrofitting of existing facilities. Our total GHG emissions from energy have decreased 11 percent from 2008, despite having a 23 percent growth in the space we occupy and almost doubling our revenue.
Beth Stevens, Ph.D., senior vice president, corporate citizenship, environment and conservation, Walt Disney
Disney has found that by attaching a financial value to carbon, our businesses have an incentive to reduce their greenhouse gas emissions and to think creatively about new approaches and technology that will help reduce their carbon footprint. We have proven that putting a price on carbon isn’t bad for business by making positive strides toward ambitious environmental goals, while simultaneously delivering three consecutive years of record financial performance.
Pricing carbon has engaged our businesses to assess the impact of their operations and evaluate where they can make improvements to reduce their emissions. Since our program requires each business segment to contribute an allocated fee based on their annual greenhouse gas emissions, their emissions directly impact their bottom line. We have also built this into our capital planning process, so that our businesses have to take the carbon fee into account when planning new capital projects.
Frank P. Prager, vice president, policy & strategy, Xcel Energy
In the states where Xcel Energy operates, public utility commissions (PUCs) oversee our major generation and other investment planning activities. Many of these PUCs have directed us to use carbon proxy pricing for planning purposes. Under the regulatory planning process, utilities and other stakeholders propose price levels, timing and escalation of carbon proxy prices.
Xcel Energy bases our proposed carbon proxy prices on a periodic survey of third-party market forecasting consultants. The PUC usually determines the final carbon proxy price forecast, and often requires our planning to include forecasts both with and without assumed carbon proxy prices.