What’s the value of carbon? It depends on how you price it

"CO2" written in cloud across blue sky: Carbon pricing should be standardized.

Carbon pricing should be standardized. Image: Unsplash/Matthias Heyde

Pedro Ahlers
Innovation Architect for Sustainability, SAP
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Sustainable Finance and Investment

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  • To understand and maximize the value of carbon economically, it must be priced correctly, and be subject to global and universal standards.
  • Effective carbon pricing can enable new business models and manage investment risk more effectively.
  • Ecosystems thinking, rather than ego-systems thinking (business-only mindset) is critical in valuing carbon correctly.

Carbon dioxide (CO2) is the key to maintaining the earth’s natural balance. But today, carbon dioxide levels are higher than they have been for the past 800,000 years. Experts acknowledge the excess we now produce of the transparent and fundamental compound but governments, companies and the public often compare outdated figures with a very different context.

Now is the time to challenge what we think we know about carbon dioxide and technology can help us achieve that goal. Governments can then build on this through robust, globally aligned frameworks that help transform businesses to become more sustainable, so together, we can stop the earth from hurtling into disaster.

Through 2021, the World Economic Forum hosted a multi-stakeholder dialogue to advance a collective understanding of the net economic, social and environmental value delivered by multiple forms of carbon. This blog is part of a series illustrating key elements of a possible model for value assessment, an improved narrative about carbon, and opportunities for potential collective action.

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Global carbon pricing

For decades, politics and experts have been calling for a “carbon price” (the cost of an emitted ton of carbon dioxide, often lost in the sustainability discussion). Currently, this price tag varies from less than $1/tCO2e to more than $140/tCO2e. Fines remain modest, however, and some of the largest emitting countries don’t even place a price on carbon.

One form of carbon pricing occurs via emmission trading systems.

In order to manage CO2 emissions, the European Union introduced the cap-and-trade system in 2005, whichsets a limit to the total amount of CO2 industries can emit. Companies need to hold an emission allowance for every ton of CO2 they emit within one calendar year.

Currently, there are more than 40 emission trading schemes worldwide, with numerous national and subnational jurisdictions. For an international business, such complexity is both challenging and frustrating to manage.

Without a universal standard, the decarbonization challenge will continue to be treated as a regional issue, even though the implications are global. Standardization is, therefore, key to effective reporting and trading emissions beyond borders.

Emission trading was already a hot topic at the 2018 United Nations Climate Change Conference (COP24) and came up again this year at COP26. While the parties reached a last-minute agreement on trading emissions in bilateral deals, supervised in a United Nations marketplace, the question of when collective engagement in pricing carbon emissions will happen remains.

Disruptive carbon business models

Carbon pricing shows great promise in the fight against climate change and could redirect investments to clean technologies. Assembling data on the CO2 inputs through production and operations at all levels of an enterprise is the foundation of carbon pricing. Many companies have joined the sustainability efforts and are finding innovative ways to understand, track and reduce their carbon footprint.

Results have included a transition to electric vehicles and the development of carbon-neutral combustion engines that run on carbon-based fuel either emitted or extracted from the atmosphere.

Carbon-enabled technology could accelerate net-zero emission vehicles in a relatively short time. Instead of emitting new carbon dioxide and paying for it, either by buying allowances or investing in offsetting measures, carbon can be sourced from the atmosphere, converted to net-zero fuel and sold to industries and customers. The automotive industry could use this bridge to improve its research on net-zero production of electric vehicles, which current estimates suggest will be possible by 2050.

Many companies have realized that they can better achieve their sustainability goals in a value network than on their own.

Pedro Ahlers, Sustainability Innovation Architect, SAP

Climate risk is investment risk

Today’s investors struggle to make a case for sustainable investments as current reporting on it is not yet insightful. While standards are in progress to offer better transparency into a fragmented market, a cross-industry and globally aligned framework could drive the transformation. Plenty of money is available to fund this sea change, so the only question is, what is the most promising investment to address carbon emissions.

While businesses have traditionally been opaque, reluctant to disclose their efficiency parameters, regarding such information as a competitive advantage, a shift is occurring from solely focusing on financial KPIs in planning, steering, and reporting to including sustainability metrics in performance assessments. In addition, many companies have realized that they can better achieve their sustainability goals in a value network than on their own.

That’s why we are seeing multiple alliances being formed in industries and markets around the world, exchanging sustainability and particularly carbon reduction and trading. Industry leaders are joining forces, taking on the challenge and revising the operational conditions they have been working under for decades.

Further efforts are needed, however. Governments must create certain conditions so that companies move towards sustainable development and no longer work in silos. Lacking standards only leave companies to market their value, while some take advantage of unregulated areas and sell at low prices.


From ego-systems to ecosystems

Since sustainability does not stop at national borders, efforts must be globalized but interpreting ever-changing rules hinders a global approach. The International Organization for Standardization adopted protocols and international agreements that can help selectively but don’t provide the globalized market for sustainable development companies are looking for.

Despite what we know about climate change and the impact of carbon emissions, many companies have not yet updated their business models or "ego-system" mentality. Technology can speed up the sustainable business challenge but it is not the sole answer when 40% of emissions are caused by how we live and produce.

While we can point fingers at businesses and others for not taking responsibility for climate change, a quicker response and impact is likely when governments, businesses and the public work as an ecosystem, each contributing in terms of standards and demand, in order to get carbon pricing right.

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