Internal carbon pricing key indicator for investors of investee companies’ commitment to emissions reductions.
A third of companies reporting to CDP already use or will introduce internal carbon pricing, but the climate disclosure platform says investors need to press investee firms on detailed use of such mechanisms to assess their future exposure to climate risks.
Representing more than US$27 trillion in market capitalisation, more than 2,000 companies of the 6,000 surveyed disclosed that they currently use an internal carbon price or plan to implement one in the next two years, according to a new CDP study. This is an 80% increase since 2015.
Internal carbon pricing has been introduced to drive low-carbon investment, energy efficiency and changing internal behaviour, corporates cited in the survey.
CDP data demonstrated a correlation between companies setting an internal carbon price and actively reducing carbon emissions, “with a higher percentage of the companies currently implementing an internal carbon price also setting comprehensive emissions reduction targets or using more renewable energy”, the report noted.
Prices set by firms’ internal mechanisms are lower than those implemented through the EU’s emissions trading scheme (US$44.80 per m/t in March 2021) or the recommended £75 per m/t (by 2030) for the UK. US corporates averaged US$25 per m/t of CO2, even as US Treasury Secretary Janet Yellen has recommended a minimum price of US$40 per m/t. Companies in Asia and Europe disclosed a higher average of US$28.
“The data does indicate that the majority of companies use evolutionary prices which adjust over time, suggesting that corporates worldwide may be preparing for greater risks from their carbon emissions in the years to come,” CDP said.
However, despite 1,830 companies disclosing that they currently face or expect carbon pricing regulation, 60% of them said they don’t identify this regulation as a substantive risk to their stakeholders.
This is “a potential gap in information that investors should explore”, said Nicolette Bartlett, Global Director of Climate Change at CDP.
“Investors shouldn’t just focus on the price level on its own. They should scrutinise more how companies are using the price [and] whether the price only incorporates market explicit prices or takes other carbon-related risks into account,” she told ESG Investor.
“Investors should expect companies to disclose pricing levels and assumptions on carbon pricing. There are only a few exceptions where not disclosing may make sense, such as if it is applied to an R&D budget, but in most cases, there is no reason for companies not to be transparent here.”