Driving down carbon emissions with internal pricing

Acciona, Swiss Re, and Mahindra & Mahindra look inward to reduce their carbon footprint and fund greener investments.
Driving down carbon emissions with internal pricing
Image by Nick Lowndes / Ikon Images

Corporations are key players in the global race to slash greenhouse gas emissions. Companies finding a strong business case for decarbonisation are increasingly using internal carbon prices to channel investment towards low-carbon technologies and energy reduction.

More than 2,000 corporations reported using an internal price to cut emissions from their operations or are planning to do so within two years, according to 2020 disclosures to the climate not-for-profit CDP. These companies, with a combined market capitalisation of $27 trillion, include 226 of the largest 500 global companies as measured by the FTSE Global All Cap Index.

"A large fraction of resource allocation occurs within firms, and they need prices to guide them," said Nobel Prize-winning economist Joseph Stiglitz in an interview with FM magazine. "Recognising the cost of carbon effectively draws the attention of decision-makers to try to minimise those costs."

Creating an expense line in financial statements has helped to steer manufacturers such as Mahindra Group of India away from fossil fuels in its operations and towards capital investments in renewable energy. Consumer and tech giants such as Unilever and Microsoft use carbon costs to nudge their operations away from carbon-intensive business practices as they shift to net-zero emissions.

Investors are paying attention to climate risks — operational, reputational, credit, and market — which hit the value of assets such as coastal real estate, petroleum reserves, water-starved farms, and factories without power during floods and hurricanes. Cutting those risks can also ease access to capital, whether a company finds its stock included in low-carbon index funds or, on the debt side, is offered a lower interest rate.

"Within financial services, there is a growing attention to risk — climate, fiscal, regulatory," Angela Churie Kallhauge, who leads the secretariat of the World Bank's Carbon Pricing Leadership Coalition, told FM magazine. "Investors are starting to divest from fossil fuel, and they do not want to lock their investment in assets that may not be viable in a few years."

Management accountants play a vital role in this process, starting with helping to calculate the emissions of each unit. Determining an effective price for each tonne of carbon dioxide equivalent depends on a company's goals, whether it is to judge the value of future capital investments, prepare for a future of carbon taxes, pool money for energy upgrades, or set up transfer-pricing mechanisms to reward lower-emitting units. "Accounting has a lot more procedures and policies to manage risk, not just the bottom line," Stiglitz said.

Internal carbon prices fall into three main categories:

  • Carbon fee: Business units or company divisions are charged a fee per tonne of carbon output. The added expense drives change within divisions focused on maximising profit. These fees can be pooled to finance investments in energy reduction.
  • Implicit pricing: Companies set an emissions reduction goal and estimate the amount of investment needed to reach that goal. The pricing level is set to produce enough "income" to fund investments to reduce energy usage. They calculate the carbon price by dividing that number by the tonnes of carbon produced.
  • Shadow pricing: Companies use a range of possible carbon prices — as if emissions were taxed or limited — in scenario planning to test the long-term profitability of large-scale capital investments.

Three diverse companies — Acciona of Spain, Swiss Re, and Mahindra & Mahindra of India — shared their carbon-pricing experience with FM magazine.

Acciona (carbon fee, shadow pricing)

Acciona, the Spanish company that builds and operates wind, solar, biomass, and other renewable energy plants, positioned itself to benefit from the shift to sustainability. In 2020, the company posted revenues of €6.47 billion from energy and infrastructure projects and employed 38,355 people.

In line with the new disclosure requirements for climate risk, European accountants are working hard to ensure their companies' assets have enduring value — whether a vineyard where water is scarce, a hotel subject to flooding, or a factory whose emissions may be taxed, rendering it unprofitable.

Alcobendas-based Acciona believes all of this will push companies towards its technologies.

"In Europe, our competitive advantage is to be low-carbon," said José Luis Blasco, Acciona's global head of sustainability, and KPMG's former global head of sustainability services. "We need to figure out how to sell things to people without using carbon, and pricing is a tool to achieve that."

The company has been carbon-neutral since 2016 and is more than halfway to its 2030 goal of cutting 2017 emissions by 60%, Blasco said.

Acciona has raised its internal carbon fee six times to €7 per tonne to increase the pool of funds for projects to lower the amount of carbon dioxide equivalent produced for each million euros of revenue, Blasco told FM magazine.

While its energy division was never dependent on fossil fuels, much of the construction equipment to instal its equipment is, and water desalination is its most carbon-intensive operation. Acciona has used its carbon fees to fund projects proposed by each division — for example, mobile solar generators for construction sites in Chile and AI platforms to optimise energy consumption in desalination plants.

Acciona has so far involved its white-collar staff in devising energy-saving ideas but is now enlisting the help of its blue-collar workers on construction sites. "We have an incubator of projects that can reduce energy usage, which captures the attention and uses the talents of so many smart people within the company," Blasco said. "It's not just exhorting people to cut emissions; it's a question of figuring out how to reduce variable costs."

Blasco also thinks the EU's coordinated approach, which may include carbon border taxes, is necessary to prevent "leakage", or companies shifting production to avoid carbon taxes.

This year, Acciona integrated its sustainability department into its finance department — the company's way of linking and giving equal weight to financial and sustainability targets and performance.

In addition to renewable energy plants, Acciona markets sustainable infrastructure in transportation, water, housing, and waste treatment to promote the UN's Sustainable Development Goals. To do so, it has classified all its economic activities according to the EU taxonomy framework to see how much each helps lead to a low-carbon future.

Just under half of Acciona's sales come from activities that fall within the taxonomy, but 84% of EBITDA and 85% of all capital expenditures are directed towards such activities. Acciona is aligning its future with sustainable development.

Swiss Re (carbon fee, shadow pricing)

Global reinsurer Swiss Re levies a carbon fee of $100 per tonne on its own emissions — the steepest of any multinational — giving each division a powerful incentive to help the company's operations achieve net-zero emissions by 2030. Swiss Re Group CEO Christian Mumenthaler, who co-chairs the World Economic Forum's Alliance of CEO Climate Leaders, decided to make his company the first with a three-digit carbon price as an example for other companies.

The Zurich-based multinational charges each division for its emissions, and the collected fees are pooled to kick-start technologies that can pull carbon from the air to offset the company's residual emissions. "Do Our Best, Remove the Rest" is the company's campaign to reduce emissions as much and as fast as possible and to use its carbon fee to move from conventional carbon offsetting to supporting carbon-removal projects such as direct air capture technology and biochar, a charcoal-like material that converts the carbon in biomass into a stable form.

"The decision is meant to guide the company to low-carbon behaviour — in the buildings it leases, the energy it uses, and the air travel it undertakes," Mischa Repmann, senior environmental management specialist who heads the CO2NetZero Programme at Swiss Re, told FM magazine.

Swiss Re plans to raise its carbon fee steadily to $200 per tonne by 2030, a level the company believes will support high-quality, high-durability carbon-removal projects.

Two-thirds of Swiss Re's carbon footprint comes from air travel, the emissions from which are relatively easy to calculate based on the number of miles flown. Implementing a carbon price was more difficult, especially figuring out how to collect fees from offices spread across 20 countries, without triggering concerns about cross-border money flows. "At first when we said what we wanted, the accounting team said, 'This is impossible,'" Repmann recalled.

They found it convenient to charge for flight emissions at the business-unit level but listed each employee's travel emissions in a dashboard to encourage individuals to alter their consumption behaviour. During the pandemic, the ban on nonessential air travel helped to cut the carbon emissions of Swiss Re's operations by more than half per employee. The company has decided to capitalise on this flight-ban experience and impose stringent flight emission targets going forward.

Swiss Re has also committed to managing its assets from its core insurance and reinsurance business to achieve net-zero emissions in its investment portfolio by 2050. In March, for example, Swiss Re announced that it would exit coal-based assets for the portfolio by 2030. "As a global reinsurer, we can play a vital role in championing action on climate change far beyond our own industry," Mumenthaler said in 2019, when co-founding the UN-convened Net-Zero Asset Owner Alliance.

The company plans to increase to $4 billion its green, social, and sustainability bond exposure and raise its social and renewable infrastructure investments by $750 million.

As the insurance industry bears much of the risk of severe weather events, Swiss Re has instituted environmental, social, and governance benchmarks for the projects it reinsures. In this vein, it is planning to stop underwriting coal and other carbon-heavy power projects. Many investors are concerned that carbon taxes would leave such assets "stranded", or unable to be used.

Swiss Re also actively underwrites renewable energy initiatives, especially in wind and solar, and has created insurance policies to help mitigate climate risk — for example, for Mexican farmers whose crop yields are damaged by weather extremes.

Mahindra & Mahindra (implicit pricing, plans for shadow pricing)

The Mahindra Group of vehicle, agricultural equipment, steel, IT, financial, resort, and other companies is believed to be the first Indian multinational to set an internal carbon price. The company, with $19 billion in revenue and 250,000 employees in more than 100 countries, uses implicit pricing to pool resources to fund energy-efficiency and renewables projects. Between 2016 and 2019, the company cut by 25% emissions from its operations, called Scope I, and those of its energy suppliers, known as Scope II.

The Mahindra Group committed to carbon pricing with the 2016 Paris Agreement, at which nations and companies pledged actions to try to cap global warming to well below 2 degrees Celsius. Mahindra is leveraging the latest technological advances and its carbon price to work towards being carbon-neutral by 2040. "We are doing our part in the global fight against climate change with this ambitious new target," said Chairman Anand Mahindra, who regularly guides other Indian companies in using internal carbon pricing.

Mahindra & Mahindra, a vehicle and agricultural machinery maker, comprises half of the Mahindra Group's sales and emissions. It became the group's test case for carbon pricing.

Mahindra & Mahindra sets its carbon price by estimating the cost of energy-efficiency projects, divided by the number of tonnes of emissions. That produced a levy of $7 per tonne of emitted carbon dioxide equivalent, which the company rounded up to $10 per tonne to push staff to innovate and find more ways to shrink its carbon footprint, while also raising business output and return on investment. "I would say that everything we have done has a very clear financial justification," Pawan Goenka, the company's then managing director, said on a Yale School of Management panel in 2017. "None of it has been done just to be nice."

The carbon levy funded a $4 million investment in LED lighting, which saved more than $4 million in electricity costs within a year, and high-efficiency motors at its vehicle plants, which paid for themselves within 16 months. Before emissions became an expense, logic dictated replacing the motors only at the end of their 15-year lifespan, according to Vijay Kalra, then chief of manufacturing operations, who also spoke on the Yale panel. Other initiatives include wind power and waste heat recovery systems at its plants.

Mahindra & Mahindra found renewable energy to be a game-changer. A solar project produced an internal rate of return (IRR) of 23% in the first year — twice the rate of its business investments. Executives are considering raising the internal price to help increase the amount of electricity from renewable sources from 5% to 50%.

Ideas to drive energy efficiency came not from the top but from middle managers and the shop floor, which helped to build sustainability into the organisation's culture. Factory managers identified which processes used the most energy — costs that had not previously been broken down, Kalra said. And manufacturing sites vied to become the first to use LED lighting or to become a model of water conservation, solar power, etc., by submitting project proposals. The projects with the highest IRR are funded first.

The company is considering a shadow carbon price for procurement decisions to help the company reduce emissions from suppliers and promote future sustainable investments. It is making sustainability a business opportunity.

Sara Silver is a freelance writer based in the US. To comment on this article or to suggest an idea for another article, contact Alexis See Tho, anFM magazine associate editor, at