How Carbon Pricing is Driving Sustainability Innovation

By STAR Index

Carbon Pricing and Sustainability

Sustainability measures have to directly correlate with a profitable business model, if corporations are to meet their net-zero carbon targets.  We can all appreciate that.

The challenge is for corporations to identify what specific steps can be taken to reach this goal.

One highly effective move we have seen in over 2,000 corporations worldwide, is to assign a price to carbon within their internal accounting structure. The application of an internal cost to manufacturing, travel and all carbon intensive operations, provides an effective incentive to move business away from fossil fuels.

Sounds great, but how do these internal charges actually work? The accounting strategy essentially falls into three main categories.

  1. Carbon Fees: these work by applying a charge per tonne of carbon, in order to encourage a reduction in emissions as a means of reducing overall costs, so that the accumulated funds can be used to finance carbon reducing innovations that will be embraced in the future.
  2. Implicit Pricing: this uses emission reduction goals that are set with a forecasted investment budget value of how much it will cost to reach this goal. The carbon is priced by taking that number, then dividing it by the tonnes of carbon produced.
  3. Shadow Pricing: takes a range of shared carbon price examples to test how effective the profitability will be. Certain large multinationals have already begun to lead the way by sharing their carbon price data.

The challenge for corporations will be to identify what specific steps can be taken to reach this goal.

Practical Benefits

The Mahindra Group, that spans a broad range of sectors, such as vehicle manufacture, agricultural technology, IT and steel (to name just a few), is already seeing the practical benefits of these accounting strategies…

Firstly, Mahindra used used Implicit Pricing. They calculated their carbon price by estimating the cost of carbon-saving projects. Secondly, they divided this value by the amount of carbon tonnes they produce, resulting in a total levy figure of $10 per tonne encouraged their internal divisions to find ways to reduce their carbon emissions. 

Ultimately, this $10 carbon charge snowballed into a 4 million dollar investment pot that was then used to fund an innovative LED lighting project, resulting in a saving of  over $4 million in electricity costs within that year.

The positive financial impact on the corporation’s bottom line was their key motivation, and this would be no different for many other businesses. But, these accounting techniques have also been effective because they complement business models, instead of counteracting their profitability and efficiency.

How Carbon Pricing is Driving Sustainability Innovation

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