And China, the European Union, and California are among those rolling out cap-and-trade programs that put a ceiling on total emissions to create incentives for reducing them.
- Statistical Design.
- Climate change;
- A Sketch Grammar of the Bafut Language.
- Artifacts from Ancient Rome.
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Thus even with the policy retreat under way in Washington, DC, American corporations must actively manage the potential increased cost of their emissions if carbon prices rise—for several reasons. First, state-level cap-and-trade programs have already led to carbon pricing for about one-quarter of the electricity consumed in the United States.
Second, federal and state policies—such as regulations pertaining to fuel economy, the energy efficiency of appliances, biofuels, and renewable power—can impose an implicit carbon price on the firms that must comply with those rules. Third, the likelihood of expanded carbon pricing under a future administration and Congress must be considered when making investments in long-lived equipment, factories, and power plants.
Finally, many American corporations operate in or sell products to countries that have already implemented cap-and-trade programs or carbon taxes.
Governments have two direct mechanisms for pricing carbon: a tax on CO 2 emissions and a market-based cap-and-trade scheme. Governments can also indirectly affect carbon pricing by enacting energy regulations that result in compliance costs for companies. A carbon tax is straightforward: A government imposes a tax on each ton of carbon dioxide emitted. Therefore, a carbon tax is often applied not to actual emissions but to the carbon content of fossil fuels used, because the complete combustion of a ton of coal, a cubic foot of natural gas, or a barrel of oil produces a known quantity of carbon dioxide.
In the United States, applying a carbon tax could be administratively simple if it piggybacked on existing excise taxes for oil and coal.
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Refineries and importers of refined petroleum products already pay a tax of nine cents a barrel to finance the Oil Spill Liability Trust Fund, and coal mine operators pay a per-ton tax to support the Black Lung Disability Trust Fund. Imposing a carbon tax on natural-gas processors and importers would cover the balance of fossil fuel companies.
And judging from the experiences under similar upstream carbon taxes in British Columbia and Northern Europe, a tax would pass through to energy prices, creating incentives for energy efficiency, conservation, and lower-carbon sources of energy. A cap-and-trade program starts with the objective of limiting the aggregate quantity of emissions, which is represented by the cap.
These are typically either sold to bidders at an auction or provided free to firms covered by the program, with allocations based on their historical emissions. The covered firms must report their emissions to the government and surrender allowances equal to those emissions. In these programs, firms may buy and sell allowances in a secondary market, and the price that emerges from this trading reflects the cost of reducing a ton of pollution.
Government energy policies do not always put an explicit price on carbon; sometimes they merely create implicit prices by imposing compliance costs on companies. The government might, for instance, require that a share of electricity generation come from renewable sources or that an appliance meet a minimum energy-efficiency standard.
And consider how heterogeneous and volatile the policies are. Carbon policies may be all over the map, but one thing is virtually certain: In time, every jurisdiction will have some pricing scheme in place. Internal carbon pricing allows companies to place a monetary value on emitting a ton of carbon, even when few or none of their operations are currently subject to external carbon-pricing policies and related regulations. Companies use internal pricing in three key ways: to inform decisions about capital investments especially when projects directly affect emissions, energy efficiency, or changes in the portfolio of energy sources ; to measure, model, and manage the financial and regulatory risks associated with existing and potential government pricing regimes; and to help identify risks and opportunities and adjust strategy accordingly.
Although an ICP may be levied as an actual fee on business units within a company as we discuss later , it is more typically a theoretical price used in economic and strategic analyses. For some companies, the price adopted internally is just a reflection of the existing carbon tax or price imposed where they do business. Some firms may not have operations in jurisdictions with explicit carbon-pricing policies, but they may still face carbon risk if their supply chains extend into those areas, especially if they are large consumers of electricity, fuels, and energy-intensive manufactured goods.
Setting ICPs requires understanding both carbon economics and company operations. At the outset, companies must get a clear picture of their emissions. Since different countries and different states in the same country are adopting different environmental regulations and carbon prices, companies should determine the quantity and geographic location of both their direct and their indirect CO 2 emissions. Energy firms and energy-intensive manufacturers in the United States already report their direct emissions to the U.
The global reinsurer Swiss Re, for instance, has very low direct CO 2 emissions, but in its indirect emissions from business travel were 15 times as high as its direct emissions per employee. A framework for mapping emissions is beyond the scope of this article, but many resources are publicly available. For example, Greenhouse Gas Protocol has created a standardized approach for measuring and managing corporate emissions, and it provides accounting and reporting standards, guidance by sector, and calculation tools. After mapping their emissions, companies should examine their exposure to current and estimated future carbon prices, beginning with an assessment of existing climate policies in the countries where they operate or plan to expand.
In jurisdictions with cap-and-trade policies, the price placed on a ton of carbon is made explicit in the marketplace for emissions allowances—for example, on the European Energy Exchange platform. In other jurisdictions, carbon tax rates can be easily determined by looking at national tax laws. Additionally, several international organizations have compiled explicit and implicit carbon prices under existing government policies. The World Bank provides updated data from each national regulatory system in its annual State and Trends of Carbon Pricing. Current carbon prices are useful data points, but to build a long-term strategy, companies also need to make predictions about future carbon prices.
This is a daunting exercise, given the lack of clear and consistent signals from governments and the uncertainty about technological and economic developments that could affect carbon pricing policies. But a collaborative approach can help.
Adapt or else
In CDP formerly the Carbon Disclosure Project and the We Mean Business coalition created the Carbon Pricing Corridors initiative, which engages large companies in identifying industry-specific carbon price levels necessary to achieve the Paris Agreement goals. These numbers reveal three important insights about the implications of public policy for business. First, companies need to think beyond current regulations; the range is much higher than the price of carbon currently imposed by climate policies in most countries.
Second, the average price is expected to increase over time as more-aggressive climate policies are enacted.
Third, the range of prices will widen; the longer the time horizon, the greater the uncertainty about the possible impact of policy and technology innovations. Predicting carbon prices requires navigating and critically reviewing data and analyses from climate experts, research institutions, peer companies, and environmental agencies. Forecasts produced by academics and government analysts are based on assumptions that are difficult for nonexperts to fully gauge.
And relying solely on the estimates disclosed by peer companies may lead to groupthink effects and biased forecasts. Companies need to develop in-house expertise or rely on external professionals to identify the likely evolution of public policies and associated carbon prices.
Ideally, they should project not only the level of prices but also the timeline of their changes, the extreme values that could be reached, and the probabilities attached to each possible scenario.
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An essential part of setting an internal carbon price is anticipating not only the most likely level of external prices but also the consequences of possible extreme prices. When evaluating carbon risk, managers and investors should consider enhancing their valuation approaches by using models based on scenarios and simulations. The standard valuation approach is to estimate future cash flows that reflect the cost impact of the most likely future price of carbon.
Scenarios allow more-effective valuations than this standard method does. Scenario-based valuation requires at least two but often three scenarios: a best case, a most likely one, and a worst case. Consider this example: A company evaluates three scenarios. But we can better judge the upside potential and the downside risk of the investment by weighting each scenario with the probability that it will occur.
This scenario-based valuation is clearly more informative than one based on a single ICP. Expanding on this approach, simulation-based valuations focus on the full probability distributions of key variables affecting future cash flows, in lieu of a small set of possible scenarios. Representing the uncertainty over future carbon prices with a probability distribution, company analysts can deliver project valuations that reflect all possible states of the world. This approach is mathematically complex, but it can be easily handled by common software packages such as Oracle Crystal Ball.
With a sense of the likely trajectory of external carbon prices, companies can set their ICPs. This requires a deep understanding of both carbon economics and company operations and strategy. One consideration is the time period that an internal carbon price is expected to cover. It is not uncommon for a company to adopt different prices for decisions with different time horizons. Department of Energy, and the U. Department of Transportation in many of their regulatory impact analyses over the past decade.
Some companies have established specific emissions or carbon-intensity targets. Carefully considered ICPs can help them meet those targets. That environmental pollution inevitably coincides with the spread of moral, mental, physical, social, and spiritual poisons. Besides, are we really benefiting from all that plastic? Are we happier than our grandparents for having plastic bags rather than cloth, plastic bottles rather than refillable glass, plastic drinking straws rather than paper?
The Earth system
For that matter, is it so bad to walk barefoot? Is it so bad to be without cars, cheap air travel, broadband, air conditioning, abundant consumer goods, convenience foods, and cheap throwaway stuff? In the context of the current society built around these things, it is hard to be without them. If we take cars for granted, it is progress to have a nicer one. If we take roads for granted, it is progress to have a wider one. If we rely on digital communication devices, it is progress to have a faster one. The houses are built for air conditioning. The towns are built for cars.
The pressures of life demand conveniences and time-saving technology. Exercising different choices as an individual consumer is not the whole answer.