By Houda Maimouni (with Cassandra Ferreira and Jules Landreau), Urbanomy
The aim of carbon pricing is to help achieve ambitions in reducing greenhouse gas emissions. To do so, investments with a lower carbon impact are made more profitable.
Several pricing tools are currently in use. Two main market instruments exist: carbon tax and the greenhouse gas emission quota system. These two complementary levers allow for a direct price on CO2 to be put in place and to integrate a pricing signal by all economic players into their investment and consumption choices.
Another approach, called cost-effectiveness carbon pricing, defines a "benchmark value" for a tonne of CO2. Companies can use all these tools to define their internal carbon pricing, which is itself an essential lever for making investment decisions.
Two types of regulations
A double objective: reduce emissions and anticipate poor investments
Internal carbon pricing: a flexible tool
- Shadow price: an economic value is assigned internally to investment decisions. It is a theoretical value that does not lead to financial flows. The aim is to understand the impact that a carbon price would have on strategy and on the calculation of the internal rate of return on a company's investments
- Internal carbon tax: this consists of adding a bill for the emissions generated by operations to the cost of operations. By increasing the operational costs of carbon-intensive investments, the internal carbon tax leads to short-term emissions reductions while stimulating innovation in the long term
- Implicit pricing or real cost of decarbonisation: this price is calculated in retrospect, based on an analysis of decarbonisation investments. It enables companies to measure the effectiveness of their decarbonisation projects
Picture of piles of coins
The shadow price of carbon: from €54 per tonne of CO2, in 2018, to €775 per tonne of CO2 in 2030
Definition of the decarbonisation objective: net zero by 2050
Calculation of the resources needed to achieve this objective, using forward-looking models such as TIMES, IMACLIM, ThreeME, etc
Establishment of a trajectory for the evolution of the reference value: from €54/tCO2 in 2018 to €775/tCO2 in 2030
A 3-dimensional implementation of internal carbon pricing
- "Height" corresponds to the monetary value of one tonne of carbon. This price depends on the company and the country in which it is located
- "Width" is the perimeter of emissions covered by the internal price of carbon. This perimeter varies according to whether scopes 2&3 (indirect emissions) and scope 1 (direct emissions) are taken into account
- "Depth" corresponds to the integration of internal carbon pricing within the company. At what levels does it apply? The more it is taken into account at different levels of a company, the more it becomes a pillar of decision-making
3 recommendations for efficient internal carbon pricing
- Maximise the effectiveness of internal carbon pricing by initially using the market price to set its trajectory and anticipate changes in market prices and carbon abatement costs
- Integrate scope 3 emissions into internal carbon pricing by aligning the decisions of the company's customers and suppliers
- Raise awareness of the concept of internal carbon pricing among financial players
A civil engineering graduate, she holds a master's degree in material science for sustainable construction from the École des Ponts ParisTech and a PhD in civil engineering from the École Centrale de Nantes. She has several years of experience in innovation consulting.
Today, she helps organisations on projects with energy systems simulation projects, defining decarbonisation strategies, carrying out technical and economic studies as well as developing and deploying detailed action plans.