Businesses Using Carbon Pricing to Manage Climate Risks

By Jessica Lyons Hardcastle
As published by Environmental Leader – January 13, 2016

Carbon markets are booming, according to two new reports, and business is playing a key role.

Global carbon markets’ total value increased 9 percent to €48.4 billion ($52.6 billion) in 2015, boosted by North American markets, which grew 121 percent in terms of volume and 220 percent in terms of value, according to Thomson Reuters’ annual Carbon Market Monitor.

Thomas Reuters forecasts global carbon markets will continue to grow in 2016, with the overall value of carbon markets to growing by a quarter this year.

In its annual carbon market forecast, The Climate Trust predicts carbon pricing will play a major part in helping countries meet their emissions reductions targets in the Paris climate deal. Private corporations’ efforts to reduce their carbon footprint will affect the success of the COP21 agreement and 2016 will be the year that “climate risk gets real for private industry,” The Climate Trust predicts.

“How corporations are monitoring, managing, and planning for the associated risks and opportunities posed by a changing climate are becoming widely recognized. CFOs across the globe are heeding the call to better manage what tomorrow’s world looks like,” The Climate Trust executive director Sean Penrith tells Environmental Leader. He cites Tata Consultancy research that finds “CFOs are redrafting their approach to risk, moving from a stance of risk-averse to risk-ready instead.”

Carbon Pricing to Offset Risks

For a growing number of companies, this involves using carbon pricing to offset the costs and risks of their greenhouse gas emissions production.

Putting a price on carbon emissions is going mainstream, according to disclosures provided to CDP, which finds major multinationals including Allergan, Campbell’s Soup, Colgate-Palmolive, Stanley Black & Decker, Exxon Mobil, General Electric, Nestle, Microsoft and Nissan are among the 437 companies using carbon pricing.

In 2015, CDP saw a tripling in the number of companies reporting that they use carbon pricing over the prior year (437 up from 150 in 2014), which the report says highlights the rise of big name brands across all industries putting a price on their climate risk.

An additional 583 companies say they plan to use an internal carbon price within the next two years, including Yahoo! and China’s power giant, CLP Holdings.

Together, more than 1,000 companies disclose to their key stakeholders that they currently price their carbon emissions — or intend to in the next two years — to try to meet their climate change risks.

Climate Disclosure the ‘New Norm’

“Corporations are now aware of the risks climate change poses and disclosure of such is the new norm,” Penrith says.

Johnson Controls, for example, in filings with the US Securities and Exchange Commission, says climate change poses a financial risk to its business. It says extreme weather conditions could affect demand for residential air conditioning equipment and car replacement batteries. “Climate changes could also disrupt our operations by impacting the availability and cost of materials needed for manufacturing and could increase insurance and other operations costs,” the filing says. Additional, supply chain disruptions, caused by climate-change related weather events, could result in product price modifications and affect resources needed to produce them.

“Johnson Controls is not an isolated incident of such reporting,” Penrith says. “This level of disclosure will become more commonplace.”

Penrith points to the COP21 climate talks in Paris, where private companies responsible for annual revenues of more than $38 trillion made climate pledges to support a low carbon economy.

“Many of these firms see opportunity; some are driven by triple bottom line goals, while others want some degree of certainty on how to account for the price of carbon,” Penrith says. “Companies are well advised to follow in the footsteps of Disney and Microsoft who have realized internal efficiency gains of implementing and internal price on carbon.”