Carbon pricing gains traction, but not enough to hit climate goal

More than a fifth of the world’s carbon emissions are priced, but the current costs of emitting carbon dioxide are still too low for what’s needed to rein in rising global temperatures, the World Bank said in a recent report.

Carbon pricing is an approach that imposes a cost to greenhouse emissions in the form of a tax or by using an emissions trading system (ETS) in which companies trade carbon “allowances” or “credits” that allow them to pollute. Governments have been using such carbon policies to encourage companies to shift to greener energy options and move away from polluting industries.

There are currently 64 carbon pricing schemes globally; last year, they generated $53 billion in revenue, a 17% increase from the year before. Carbon allowance prices in the EU hit an all-time high last year as it pursues more ambitious goals outlined in the EU Green Deal announced last year. A highlight this year was China’s announcement of its national ETS, which is currently the world’s largest carbon market, set to begin trading by the end of June.

Despite the progress in the number of carbon emission initiatives worldwide, current carbon prices are far too low, the report said. Only 3.76% of emissions with a carbon price is above $40 per tonne of carbon dioxide equivalent, the bottom range of the recommended price to comply with the Paris Agreement.

Within companies, the use of internal carbon pricing is gaining popularity. Last year, 853 companies disclosed that they use an internal carbon price, and an additional 1,159 companies report that they intend to adopt one in the next two years. Internal carbon pricing is increasingly used as a tool to integrate climate risks and opportunities into long-term strategies and to help guide investment decision-making.

But the growing use of carbon pricing should not indicate that it’s the best solution to tackle climate change, the report said. Rather, corporates should prioritise emission reduction in their climate strategies.

Role of finance and accounting professionals

Carbon trading will continue to be a short- to medium-term solution to climate change as industries transition to greener operating alternatives. Finance and accounting professionals will have to learn new language related to these initiatives to support climate issues affecting their companies.

Accountants may be involved in determining how to account for the buying and selling of emissions allowances and credits. Emissions trading may also mean that accountants have to reassess a company’s profitability. There could be new business opportunities, such as selling carbon allowances, and cost reduction measures may be needed to reduce carbon emissions costs.

To comply with a company’s emissions trading targets, finance teams may have to impose internal charges for energy through transfer pricing. CIMA research on emissions trading in the UK found that a company reduced its overall energy usage when it changed its energy division from a cost centre to a profit centre. The division raised internal invoices to charge the company’s energy users.

Other areas may include strategy and decision-making, capital investment appraisal, incorporating environmental metrics in a company’s balanced scorecard, and providing investors with information on the company’s carbon emission reduction activities.

— Alexis See Tho (Alexis.SeeTho@aicpa-cima.com) is an FM magazine associate editor.