Published on July 16th, 2014 | by Sandy Dechert1
Business Uses Carbon Prices For Long-Term Planning: CDP Report
CDP (formerly the Carbon Disclosure Project) finds it encouraging that after years of denial, business uses carbon prices to plan ahead these days. The response of business and industry leaders to the problem of climate change is undergoing a major transformation, says the Center for Climate and Energy Solutions:
“Just over a decade ago, the corporate sector was almost uniformly opposed to serious government action on the issue. But increasing certainty about the science of climate change—and an ever greater understanding of the risks and opportunities it presents for businesses and society—have contributed to a willingness among corporate leaders to help shape solutions. In addition to acting on their own to reduce greenhouse gas emissions and explore new, low-carbon market opportunities, a growing number of businesses are calling on the government to provide investment certainty through clear climate policy.”
CDP views disclosure as a catalyst for change. The group has just released a report that follows up its previous study on how companies are using carbon prices to determine mid- and long-term business strategies. The new report aims to answer some questions generated earlier:
- Why are companies using a carbon price?
- How are prices calculated?
- Do carbon prices drive strategy and investment?
- What are the implications for investors, companies, and policymakers?
Detailed analysis of the responses indicates important trends and developments in the way business uses carbon prices.
The need for concerted effort from business and industry has become particularly acute since June 2, 2014. Then, the Environmental Protection Agency, following on its emissions rules proposed last year for new power plants, proposed a plan to cut carbon pollution from existing fossil fuel-fired electric generators. (Note that before last month, US power plants had limits on mercury, sulfur, arsenic, cyanide, soot, and lead emissions. However, there were no federal brakes on carbon pollution, which is almost universally acknowledged as causing unprecedented anthropogenic climate change.)
EPA’s plan provides emission guidelines that states can use to address greenhouse effects from plants under their jurisdiction. The comment period on these rules ends in about three months (10/16/2014).
Many states, cities, and businesses across the country have already started to address the risks of climate change. EPA notes that individual entities have different priorities based on the mix of sources and opportunities available to them. Overall, the agency says it aims to maintain an affordable, reliable energy system nationwide, while cutting pollution and protecting our health and environment.
Though many prescient treehuggers had an idea what was coming, EPA’s Clean Power Plan announcement left some confusion among those who have to make critical business plans, especially leaders who denied or underestimated the force of climate change—as Rupert Murdoch and his like appear to do even now. It’s evident from CDP’s report that business uses carbon prices in more and more planning activities.
“Understanding today’s policy context on carbon emissions and the upsides and downsides facing American corporations and communities has become a critical aspect of business planning,” says Tom Carnac of CDP. An international, not-for-profit organization, CDP provides a global system—reportedly the only one—that offers companies and governments the ability to measure and share vital environmental information.
The group lays claim to the world’s largest collection of self-reported climate change, water, and forest risk data. CDP is probably right about its impact: its analysts work to steer 767 institutional investors (with $92 trillion in assets), thousands of companies, and many municipalities through investments that may be climate-dependent.
Carnac continues: “Pricing that risk with a cost for carbon pollution is one way of addressing the significant financial impacts that face companies as a result of global warming.” The organization takes a long view:
“We see a world where capital is efficiently allocated to create long-term prosperity rather than short-term gain at the expense of our environment…. We use the power of measurement and information disclosure to improve the management of environmental risk. By leveraging market forces, including shareholders, customers and governments, CDP has incentivized thousands of companies and cities across the world’s largest economies to measure and disclose their environmental information. We put this information at the heart of business, investment and policy decision making.”
As of this year, investors—including huge conglomerates like JP Morgan and Chase, representing over a third of the world’s invested capital—have asked more than 5,000 public companies to report carbon emissions and climate change strategies through CDP.
View CDP’s 2014-2026 strategic plan here. Business uses carbon prices in many ways, CDP has found:
- Some 50 purchasing organizations (among them Dell, PepsiCo, and Walmart) are using CDP’s global system to mitigate environmental risk in their supply chains.
- CDP is driving more sustainable water use by industry.
- CDP’s forest program works with companies to address deforestation.
- The company assists local and national governments across the world.
CDP’s report about corporate use of carbon includes these important insights from corporations, investors, and thought leaders:
- Xcel Energy’s VP for Policy & Strategy, Frank Prager, says the company has already scheduled certain coal plant retirements that it considered economic with or without carbon policy assumptions, but continues to utilize an internal price on carbon for proxy planning purposes to reduce future carbon risk faced by the company and its customers.
- AEP‘s chairman Nick Akins describes how the company uses an internal price on carbon in resource planning to assess future policy and regulatory risk, and to ensure that as a high emitter of carbon pollution they are making prudent capital investments that are not at risk of being stranded in a low-carbon future.
- Bob Litterman, former chairman for investment strategy at Goldman Sachs, describes how without proper pricing of carbon risk, investors also face the potential of stranded assets—portfolios full of companies that cannot burn the fossil fuels in their reserves.
Further perspectives in the paper are provided by the following business, community, and academic leaders:
Columbia University Jason Bordoff, Professor of Professional Practice in International and Public Affairs, Founding Director, Center on Global Energy Policy;
Exelon Corporation Christopher D. Gould, Senior Vice President, Corporation Strategy and Chief Sustainability Officer;
Generation Investment Management Tammie Arnold, Global Head of Client Relations;
Governor Christine Todd Whitman, Former Governor of New Jersey and former administrator of the US Environmental Protection Agency;
Microsoft Corporation Rob Bernard, Chief Environmental Strategist;
Pax World Funds Julie Fox Gorte, PH.D, Senior Vice President for Sustainable Investing;
Stanford University Internal Carbon Pricing at Royal Dutch Shell;
Stephen Comello and Stefan Reichelstein, Graduate School of Business and the Steyer-Taylor Center for Energy Policy and Finance;
TD Bank Group Karen Clarke-Whistler, Chief Environment Officer;
The Walt Disney Company Beth Stevens, Ph.D., Senior Vice President, Corporate Affairs;
and World Bank Rachel Kyte, Vice President, Climate Change.