Lighting the Way to Carbon Pricing

PAULA-DIPERNA2

By Paula DiPerna

There is only one purpose to hitchhiking—getting a free ride. Put out your thumb, smile, look innocent, hope, wait. But, zoom! The car does not stop. Most drivers fear strangers, but also most dislike the idea of providing free rides. We leave those hitch-hikers on the road without a second thought.

But in the economy, we tolerate much free riding—the most parasitic of which free rides on all our economic activities—“carbon pollution.” This simple term actually refers to a complicated situation–the emission of greenhouse gases (ghgs). These are nasty byproducts of the combustion of fossil fuels such as coal, oil and gas to produce energy. Carbon dioxide (CO2) is the most commonly known of these gases; the five key others are methane (CH4); nitrous oxide (N20); hydroflourocarbons (HFCs); perfluorocarbons (pfcs); and sulphur hexafluoride (SF6).

When we burn fossil fuels, these gases, formerly trapped safely underground in the fuel, are liberated to rise up into earth’s very thin atmosphere. There, they stay, trapping the sun’s heat producing the infamous “greenhouse effect.” This clogging of the atmosphere with ghgs is causing climate change, which we experience on earth as extreme and unpredictable weather – typhoons, droughts, floods, wild winds.

To express the impact of all six ghgs, chemical science uses a single measure–carbon dioxide equivalent or CO2e. One ton of CO2e reflects the global warming potential of a ton of one or all of these gases.

Today, CO2e is the world’s most nefarious hitchhiker. And, since the dawn of the burning of fossil fuels, we have been giving CO2e a free ride. The reasons were partly because we did not understand the problem, ignored CO2e as it was convenient to achieving economic growth; and CO2e is invisible. It is the hitch-hiker we cannot see.

Now the World knows it must reduce ghgs emissions to reckon with climate change. The time has come to end the free riding and render the invisible visible.

Enter, Carbon Pricing” and what I have come to call the green cursor.”

This is the warning light that tells us where hitchhikers lurk. And, once we spot them we can decide either to give them a ride or leave them behind.

“Carbon fees hold our business groups financially responsible for the cost of reducing and compensating for their carbon emissions.”

Microsoft has been a pioneer in carbon pricing. Seeking to ferret out all the extra CO2e tons being generated by its operations directly and indirectly, the company established an internal carbon fee. According to Microsoft’s recently released report by Tamara DiCaprio, the Director of Environmental Sustainability who spearheaded the effort, the carbon fee model “holds our business groups financially responsible for the cost of reducing and compensating for their carbon emissions.”

In practical terms, the carbon fee works like an internal tax—a dreaded, but necessary word. In the carbon model, each business group must tally up its CO2e tonnage, apply the carbon price per ton and pay up that total cost to the carbon fund. Microsoft then invests the money in their carbon fund which funds various projects that reduce emissions. These include energy efficient investments. This generates a see-saw balance of rising and falling emissions to achieve carbon neutrality.” Free riders on one side are eliminated on the other.

The carbon fee is a tracking system that illuminates the hidden costs and free riding. Following this cursor, Microsoft says that it has reduced its emissions by 7.5 million metric tons of CO2e and cut energy costs about US$ 10 million per year, among other benefits.

Microsoft has not confirmed its exact surrogate carbon price, but it is generally assumed to be roughly US$6 to US$ 7 per ton.

Increasingly, other companies are internally pricing carbon, using shadow prices as planning tools or to incentivize reductions. According to a 2014 report by CDP, global internal carbon prices can be as high as US$ 60 per ton, which is not unrealistic. After all, CO2e was trading at ¤ 30 a ton in the heyday of the mandatory carbon market operating in Europe (EUETS), before poor design and monitoring caused prices to plummet.

Ultimately, a carbon price represents the hidden cost of emissions to society in environmental destruction and the potential value of avoiding that destruction.

The trick is to how discover the “true price,” as climate change worsens and the world wrestles with keeping economic growth alive while simultaneously trying to hold down emissions. To decouple emissions growth from economic growth is perhaps the most ambitious challenge facing our financial, operational and social systems. In order to meet this challenge we first need to see, count and eliminate free riding pollutants. Welcome, green cursor. BM