Episode 10: Tax Ourselves? Why Companies and Institutions Are Pricing Their Own Emissions [Full Transcript]
Internal Carbon Pricing Part I
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Casey: Welcome to Pricing Nature, a podcast from the Yale Center for Business and the Environment, the Yale Carbon Charge, the Yale Tobin Center for Economic Policy, and the Carbon Pricing Leadership Coalition.
I’m Casey Pickett, Planetary Solutions Project Director and Director of the Carbon Charge at Yale.
Jacob: I’m Jacob Miller, a recent graduate from Yale College. Back in 2017, I was the first intern with the Yale Carbon Charge. Recently, I’ve been working as an audio producer and journalist, focused on market-based climate policy. Ahem.
Casey: [laughs] Ahem!… And you’ve been absolutely…what’s the ubiquitous, jocular term we use these days…crushing it?
Jacob: Oh, is that what they say at your end of the Millennial generation? Here at my end, by the Gen-Z’ers, we actually say “stepping on it.”
Casey: OK, you’ve been STEPPING ON IT, dude! Nice, oh I like the way that rolls off the tongue.
Jacob: If I just tell you it’s a Gen-Z thing can I get away with pretty much anything?
Casey: Oh yeah, carte blanche.
Today we’re here to continue the conversation we started in our mini episode about the Panama Canal. Private actors are beginning to price carbon voluntarily. We said this was going to be a big episode, and it is. So big, in fact, we’ve split it into two. In today’s show, we’ll explore why companies are pricing carbon, and how they’re doing it. Then, next episode, we’ll discover what happens when they do.
[Music]
Jacob: Casey, what the heck is that all about? We’re used to thinking about carbon pricing as something people enact on companies and, to an extent, upon themselves, through government action.
Casey: Right Jacob, but some entities are putting prices on their own emissions, without any traditional government involvement. Weird, right? Like “Hey everyone likes taxes! Let’s tax ourselves!” And yet… not that weird. People and companies do stuff like this all the time to save money; think of piggy banks and savings accounts. Or to modify behavior, think of a swear jar.
What we’ll find today is, there are even more reasons why a company might tax its own operations, beyond saving money and improving behavior.
Jacob: We’ll talk to experts at massive corporations, small liberal arts colleges, and research universities. Let’s get to it.
ACT I: Why and how do companies and institutions price their carbon emissions?
Casey: To start, let’s explore why organizations put prices on their own emissions. Are they just tying their shoelaces together?
Jacob: There are many reasons an organization might price their own emissions.
Casey: They might be preparing for a future price on carbon they expect through government action.
Jacob: Or they might be using the price to find opportunities to save energy and reduce costs.
Casey: Or they might be raising money to fund new projects in energy efficiency and decarbonization.
Jacob: And in a few cases, they’re adding to the body of research on carbon pricing, to help policy makers and other institutions use the tool more effectively.
Casey: That’s a big motivator for the Yale Carbon Charge.
Jacob: Casey, can you tell us how it got started at Yale?
Casey: The story starts in 2014 with Professor Bill Nordhaus sitting on an Earth Day panel at Yale. He was asked, what else can Yale do to reduce its contributions to the climate crisis. He said, “Well, we could charge ourselves for our carbon emissions.” One person in the audience took this idea quite seriously. Jennifer Milikowsky was a joint degree student in the school of management and the school of the environment. Like I was before Jennifer, and like our very own Maria Jiang is now.
Jacob: Oh I know Maria!
Casey: *laughs* So Jen Milikowsky got together with a few other students and wrote a paper on the idea of an internal carbon price at Yale. The paper landed on the desks of President Peter Salovey and then Provost Benjamin Polak, who became interested in how a carbon price could send a signal from the university administration to all the energy users on campus. Then President Salovey appointed Bill Nordhaus to chair a Presidential Carbon Charge Task Force to study the idea. After six months of deliberation, the task force recommended moving forward with an internal carbon price, phasing in with a pilot study.
Jacob: Ah yes, a pilot study. Airplanes are a notoriously difficult sector of the economy to decarbonize.
Casey: Wah-wahhhhhhh. Pilots. Hilarious. The pilot study took a representative sample of buildings across Yale, and applied different carbon pricing approaches to those buildings. I joined shortly after that pilot study was completed, to take the project from pilot to actual implementation. I spent my first year finalizing tricky policy questions, getting the charge into organizational unit budgets, and meeting with groups all around campus to help them understand what this new internal carbon price would mean for them and how it would work. And on July 1st, 2017, Yale’s budget office started charging schools and operational departments for their carbon emissions.
Jacob: I think I actually remember that day, when those first charges started going out. That was the summer I started working.
Alright Casey, can you tell us a bit about what the Yale Carbon Charge looks like?
Casey: Sure. And as we do, we can talk about how Yale’s approach is just one of many ways to implement internal carbon pricing. We can contrast it with approaches several other companies and institutions are taking. And then next episode I can share what we learned and how we’re redesigning our whole carbon pricing system to achieve new goals.
Jacob: Alright Casey, well, where do we start?
Casey: There are lots of ways to put a price on carbon inside an organization. You could set up an internal carbon trading system; you could require business units to offset their emissions; you could just implement emissions reduction projects, calculate the costs after the fact, and call that an implicit carbon price. But we’re going to focus on the types of internal carbon pricing I hear companies and institutions exploring most often.
Jacob: Sounds good. What are the main options?
Casey: We can see the outlines with just three questions. A brief choose-your-own-carbon-pricing-adventure. The first question is easy: do you want to use internal carbon pricing to help decarbonize your organization?
Jacob: If I say no, am I fired?
Casey: Well no, but… It’ll make the episode kind of lame. What do you want to do; just go eat a sandwich?
Jacob: I feel like I shouldn’t answer that question honestly…. Let’s say yes! I do want to decarbonize my organization using an internal carbon price.
Casey: Your enthusiasm for this work is just staggering Jacob. I’m bowled over.
Jacob: Let me be clear, if I had an organization, I would absolutely use internal carbon pricing. But I am a mere pleb.
Casey: Great! OK, that was supposed to be a quick one. Second question is longer: The question is, do you want to use your price to guide central decision making, or do you want to affect behavior and policy in a more distributed way across the organization?
Jacob: Well, let’s explore one and then the other. What’s the version geared more for central decision making?
Casey: That’s called a proxy price. Proxy prices are imaginary prices used to guide purchase and investment decisions. In the UK, they call this a shadow price, but that sounds inaccurately nefarious to an American ear, so I prefer proxy price.
Jacob: And when would an organization use a proxy price?
Casey: Say, before investing in a new building, boiler, or bus. If people in my organization wanted to see and feel the cost of the harm their emissions were causing other people, or if they just wanted to know what they were likely to be on the hook for in the future with a state or national carbon price. We’d take that cost and put it into our calculations.
Jacob: What would that look like?
Casey: For example: you’re planning to install a new heating system in one of your buildings. One proposal is for a new boiler powered by fossil gas (AKA natural gas). Another proposal is for an electric heat-pump system that can provide both heating and cooling for the building, but costs more up front.
Jacob: Okay so you’ve got one less expensive, less efficient, more carbon intensive option, and then a more expensive option that is very efficient and produces fewer carbon emissions.
Casey: And let’s say when you use your proxy price to factor in the cost of carbon, the gas-fired boiler goes from being the less expensive, to the more expensive option than the electric heat pump.
The proxy price helps you figure out “how much would this cost if there were an external carbon price in my country/state,” or “how much would this cost if I wanted to internalize the social cost of my carbon emissions.”
Jacob: So a proxy price allows you to insert different climate-related concerns into a financial decision in the language of the financial decision.
Casey: Well said. To help us understand how and why proxy prices are used, we spoke to Alex Barron, a climate policy expert and professor of Environmental Science and Policy at Smith College. He’s worked on climate policy in both the Obama and Biden Administrations. At Smith he led the implementation of a proxy carbon price.
Alex Barron: “It's basically a way to build the carbon price into decision-making in dollar terms… In practice, a lot of our use of it happens in the context of life cycle cost analysis… This is a way of looking, not just at the purchase cost of an item, but also what is it going to cost you over time in terms of costs to maintain it, cost for the energy to run it.”
Casey: We asked Alex for what kinds of decisions do proxy prices provide the best guidance:
“...many of those decisions are not these sort of decentralized decisions about where to set a thermostat or which appliances you'll turn off at night or those kinds of things…. It's things like what fuel does our campus heating plant run on? Where are we purchasing our electricity and those kinds of big structural decisions are better served at an institution like ours with the proxy price, which is really a good tool for forward facing purchasing decisions.”
Jacob: So the proxy price is used to make decisions about the future. Big capital investments with long lifespans.
Casey: Yep.
Jacob: I think we’ve done a pretty thorough job defining proxy price. What about the other major type of internal carbon price that’s often used, that you said “affects behavior and policy in a more distributed way”?
Casey: Ah yes, that would be the carbon fee, also known as a carbon charge.
Jacob: Sounds like the… Yale Carbon Charge, no?
Casey: Yes, in fact, that’s the system we used at Yale for quite a while. But you know that.
Jacob: Heh yeah, I’m just trying out that leading questions thing you usually get to do.
Casey: Nice. Sittin’ in the big chair. Callin’ the shots… Here: let’s listen to Alex Barron’s explanation of carbon charges or fees:
Alex Barron: “Carbon charges or carbon fees are the internal carbon pricing tools that most closely resemble the carbon prices that you would see at the policy level, like at a national carbon price or a state level carbon price…. It's really good in many cases at what economists would call marginal changes, encouraging someone to make a decision about where they're setting their thermostat or switching from one appliance to another or something like that.”
Casey: A carbon charge is a fee. For each ton of emissions you are responsible for, you pay some amount. At Yale, we chose $40/ton because it matched the US Federal estimate of the Social Cost of Carbon at the time we started the program. We applied this price to emissions coming from powering, heating and cooling buildings at Yale.
Jacob: And why did you choose to only apply the price to buildings?
Casey: There were two reasons. First, buildings are responsible for the vast majority of our on-campus emissions. It was easier to focus on one sector of emissions, so we chose the largest one. And second, buildings are where we have the best data. Our utilities team meters natural gas—I mean fossil gas—chilled water, electricity and steam use in each building on a monthly basis.
Jacob: If you want to put a price on the emissions from within your organization, you need to know how much the different parts of your org are emitting.
Casey: Precisely. You take energy consumption data, convert it to emissions data, multiply the emissions by the price you’ve selected, and then send out your carbon fee bills.
Jacob: Who do you send the bills to, Casey?
Casey: Well, Yale is composed of schools, like the School of Medicine and the School of the Environment, and operational departments, like Athletics, IT, facilities, the President’s Office. We have about 50 of these, what we call, “planning units” at the University, they’re like business units at a company, and 29 of them participate in the carbon charge. Each of these 29 units is financially responsible for at least one building… that’s big enough to justify receiving a charge, and has metered energy consumption, and where Yale staff have operational control. All in all, that’s about 270 buildings, which covers about 75% of building-related emissions.
Jacob: Nice, so buildings are a majority of the on-campus emissions at Yale, and of those buildings, you’re covering about 75% of those emissions. It’s a big chunk of a big chunk.
Casey: *Acknowledge*
Jacob: Okay Casey we’ve been through the first two questions on your how-to-design-an internal-carbon-price choose-your-own-adventure thing. First, do I want to price carbon at my organization? And if I do, the two options I should consider first are a proxy price and a carbon fee. What’s the third and final question in that choose-your-own-adventure you mentioned?
Casey: The last question only applies if we decide to do a carbon fee model. And that question is this: What do you do with the money you’ve generated from the fee?
Jacob: Hm, yeah…
Casey: With a proxy price, you’re not charging anybody. Nobody pays it, it’s a decision making tool. You might end up investing more up front in equipment and buildings, but you’re not collecting revenue. With a fee, though, you’re actually collecting money from parts of your organization.
Jacob: Yeah, thinking about what you described at Yale… $40/ton may not sound like much, but it would add up fast. Yale emits a couple hundred thousand tons of CO2 equivalent annually, so even if the charge doesn’t apply to every part of the university, it’s generating millions of dollars.
Casey: Yeah, about eight million dollars actually. *EIGHT MILLION DOLLARS*
Jacob: So the question becomes… What do we do with all that money? Sharks with frickin’ laser beams? Surely there’s a better use for these funds.
Casey: Oh, Jacob! Look at you! Getting ‘90’s movie references!
Jacob: What can I say, I am a 90s child at heart.
Casey: Well, hard to do better than sharks with laser beams. But as a next best option… We decided to make our carbon charge “revenue-neutral.” You might remember the phrase revenue-neutral from Season 1…
Jacob: Yeah, we talked about state and federal carbon pricing proposals where all of the revenue generated by the fee or tax is returned to taxpayers in the form of a rebate.
Casey: Exactly. And the main reason for Yale’s revenue neutrality approach was the same as in the most well-known proposals for national carbon fees in the US—reduce concerns among the people taxed that the “government,” in Yale’s case, the central administration, is taking people’s money and deciding how to spend it. The dynamics are similar. Who likes giving their money to someone else to spend?
Jacob: So the original Yale carbon charge design was similar to like, the Baker-Shultz and Citizens Climate Lobby proposals for a fee-and-dividend carbon pricing system?
Casey: Yeah, our system was similar, except there was no need for a border carbon adjustment, Yale not being a country, and instead of giving everyone at Yale a fixed, equal rebate, each part of the university subject to the carbon charge received a rebate depending on their emissions performance. Units that reduced their emissions more than the university average received a rebate that was greater than their charge, and units that reduced their emissions less than the average got a rebate that was smaller than their charge.
Jacob: So a planning unit that underperforms compared to the university experiences a net loss, and one that overperforms sees a net gain?
Casey: Yeah! Well I would argue that we ALL experience a net gain from a system in which our externalities are priced.
Jacob: I mean, tell that to the planning unit budget managers…
Casey: What do you think I’ve been doing? No, actually, the budget managers, the deans, the staff and faculty—they’ve been great.
Jacob: Yeah, how did people respond?
Casey: A few people grumbled. A bunch of people got really excited—it’s something tangible they can help with on climate. And the vast majority said, “OK. It’s going to be a bit of a pain, but it makes sense. I’m on board. Now, how do we reduce our emissions?”
Jacob: Which is basically the question you hope for, right?
Casey: Exactly.
[music]
Casey: Now, I should note that dividing up the collected funds and returning them to the participating organizations is just one way to use the revenue from a carbon charge or fee. Alternatively, you could put all the money in a general fund to support your organization. I haven’t seen anyone do that, but you could. Or you could earmark the funds to support projects that help reduce or eliminate your organization’s carbon emissions. By the way, we call that kind of work, “decarbonization:” wringing the carbon emissions out of an organization.
Jacob: So the final question, how should we spend the money we generate with an internal carbon price, has a number of possible answers.
Casey: Yes it does. Although we ran across this last spending option more often. Most internal carbon pricing schemes we looked at direct funds towards decarbonization projects across the organization.
We spoke to representatives from three major companies -- H&M, the Swedish clothing company; the Mahindra group, an Indian conglomerate involved in everything from aerospace engineering to agribusiness to automotive manufacturing… it’s actually the world’s largest tractor manufacturer; and an up-and-coming tech startup based in the Pacific Northwest: I think the name is Mee-cro-suft.
Jacob: Yeah, Meecro-soft. French founders?
Casey: It’s the Pacific Northwest pronunciation so…
[Music]
Interestingly, while their reasons for using carbon pricing differ, the companies we spoke to all landed on a similar design.
Jacob: From H&M, we heard from Kim Hellstrom, a strategy lead for H&M’s global sustainability department who led the design of their carbon pricing system. Like many other companies, H&M has made a commitment to fully decarbonize, aiming to be what they call “climate positive” by 2040.
Casey: This means they want to remove more carbon from the atmosphere than they emit. It’s a step beyond Net-Zero, which is a commitment to remove as much carbon from the atmosphere as you emit.
Jacob: Right. And it’s basically the same thing as carbon negative, but with a slightly more positive tone. And “climate positive” also acknowledges the many co-benefits that come from decarbonization and carbon removal… For example, carbon removal projects can improve water quality, strengthen local economies, and increase biodiversity.
Casey: So where does carbon pricing fit into their climate commitments?
Jacob: Well, Kim Hellstrom says that carbon pricing seemed to be the most efficient way of reducing emissions at H&M:
Kim Hellstrom: “We looked at trying to educate tens of thousands of employees in climate-related questions to make them understand how their decisions impact the climate. We soon realized that that is very inefficient. We don't want to push that kind of information out to people who might be, or might not be interested in it…. So internal carbon pricing for us is really the tool that instead of having to do all of this training, we just translated the carbon impact or the climate impact to the decisions. And we translated into money because everybody understands how to minimize a cost.”
Casey: So at H&M, they wanted to make sure employees were feeling the climate impacts of their purchase and design decisions, in the language of the bottom line. Theory being, that way, you don’t need a deep understanding of climate and carbon to make a positive impact.
Jacob: Yeah, this kinda reminds me of what Hank Green said in our conversation with him -- Specialization has value. We can’t all worry about everything. There are benefits to some of us worrying mainly about climate and some of us worrying mainly about equal rights, and some of us worrying mainly about producing clothing.
Casey: Right. A carbon price can allow people focused on things other than climate change to make good business decisions… that also protect the climate… without needing to think much about it.
Jacob: Yep. We spoke with Elizabeth Willmott, Lead of Microsoft’s Carbon Program, and she echoed this sentiment:
Elizabeth Willmott: “We see the fee as an important power tool in helping establish the business case internally for our internal stakeholders to invest in de-carbonization strategies. We all have busy jobs, busy days, and many priorities and it's easy to lose the signal in all the noise of the work that we all do every day.”
Casey: So, let’s get into how these prices work.
Jacob: I’ll start with H&M. At H&M, the sustainability team applies a carbon price to suppliers and materials based on their associated emissions, so H&M’s designers can see the prices… All the designers have to do is weigh the costs and benefits of each material they choose, as they would without a carbon price.
Casey: Slick. And what do they do with the funds generated by the carbon price?
Jacob: It’s invested in emissions reductions at the companies that make the materials H&M uses.
Casey: Hmm, so technically their decarbonization projects are external to H&M?
Jacob: Right. As you know, not all emissions associated with your company or product are immediately within your control. At H&M, they’re not producing their own materials. They’re buying them from outside suppliers. Sometimes you have to work with your suppliers and even your consumers to fully reduce the carbon impact of your organization.
Casey: Okay, can you tie a little audio string around my finger so we can remember to come back to these external emissions later? *foghorn* Ha. Sounds more like a four-inch-thick barnacle-encrusted rope…but, perfect, thank you.
[Music]
Now, what about at Microsoft? How did they design their internal carbon price?
Jacob: Well similar to H&M, Microsoft has a goal to be what they call “carbon negative.” They’re pushing to get this done by 2030, and they treat this pledge more like an emissions cap than a reduction goal. Here’s Elizabeth Willmott:
Elizabeth Willmott: “We realized that not only is it crucial to establish the goal publicly, but also put in place operational controls to drive execution.”
Jacob: And that’s where their carbon price design comes in. They use it to raise revenue for a variety of decarbonization projects:
Elizabeth Willmott: “A couple of different examples include pilot projects that we've done on sustainable aviation fuel with KLM Royal Dutch airlines, several years ago, then subsequently with Alaska airlines to cover the most frequently traveled routes that Microsoft has with Alaska airlines. And then most recently we've successfully contracted two and a half million tons of carbon removal over the past two years. And that includes a range of projects from reforestation and soil carbon sequestration to carbon mineralization and direct air capture as well as bio char.”
Jacob: Microsoft started their program by creating a fund from their carbon fees and invited business units to apply with decarbonization project proposals. It proved wildly popular.
Casey: Elizabeth once told me people at Microsoft were so excited by the decarbonization projects they were able to invest in using the fund, they asked the carbon team to raise the fee to expand the size of the fund so they could do more projects.
Jacob: Whoa.
Casey: We’ll link to more information about Microsoft’s carbon removal projects on our website, pricingnature.substack.com.
Alright Jacob, what about the final company, the Mahindra group? How are they thinking about their internal carbon price?
Jacob: Mahindra has a goal of being “carbon neutral” by 2040. That means no emissions after factoring in offsetting investments in carbon reduction and removal elsewhere. We’ll get into that in our offsets episode coming soon. We spoke to Anirban Ghosh, the Chief Sustainability Officer of the Mahindra Group, who said their carbon price is helping them toward their goal of carbon neutrality, while also making it easier to invest in cost-saving projects within the company:
Anirban: “One of the things any business wants to do is to reduce cost of operations and what the carbon pricing did is to give businesses a new lens to look at ways in which businesses can drive costs down or become more productive. That's all, right? So we would have been looking for ways in which we could drive costs down. It so happens that there are many projects which drive costs down as well as drive emissions down at the same time.”
Jacob: In theory, any project that saves money should be an easy investment decision for a company to make. But theory is of course different from practice. In practice, it can be difficult to find funding for cost saving projects because those projects require up-front capital, and that means competing for funds that might be needed in other parts of the organization
Casey: That IS often a challenge. What is Mahindra doing to move decarbonization up in its list of priorities?
Jacob: Mahindra takes the pool of money generated by the carbon fee and dedicates it solely to decarbonization projects. That enables sustainability managers to shift their time from seeking approval for projects, to identifying good projects, with the highest carbon reductions and shortest payback periods. And they fund all the projects they can each year till the money from the carbon fee runs out. With their carbon fee revenue, Mahindra replaced more than a thousand motors in their factories, and switched to higher efficiency air conditioners.
Casey: And these investments save money?
Jacob: Yep; by saving energy. Which also reduces emissions.
[Music]
Alright, let’s pause here for a second. We’ve established the two main categories of internal carbon prices… the proxy price, which tells you how much a new investment will cost if you consider the cost of carbon emissions;
Casey: And then the carbon fee model, where you tax parts of your organization and collect revenue, and then do something with that revenue.
Jacob: Then there are a few ways you can spend the revenue: For example, you can redistribute it to participants, like we did at Yale;
Casey: Or you can use the revenue to fund emissions reduction projects, like at H&M, Microsoft, and Mahindra;
Jacob: There are other options too. So now I’m thinking about implementing an internal carbon price… I’ve got the broad outlines. Let’s get into the finer points. How do I design the pricing system to fit with how my organization is structured and what it does?
Casey: Let’s take these questions over to Act II, where we’ll hear from an expert on how to approach designing an internal carbon price for your organization.
ACT II: The Four Dimensional Box
Jacob: Four?!
Casey: Four, we’ll get into it later man. Don’t spoil it!
We talked to Long Lam. He was lead author on the How-to Guide to Corporate Internal Carbon Pricing from Ecofys, the Generation Foundation, and CDP, formerly the Carbon Disclosure Project. The guide outlines the best practices for designing an internal carbon pricing system.
Jacob: And Casey, you helped with the report, right?
Casey: It’s Shake and Bake, and I helped!
Jacob: Casey, once again, you’re going right over my head.
Casey: Anyway, in this report, Long Lam and colleagues developed a visual aid for building a carbon pricing system. Picture a box…
Long Lam: “We tried to break down internal carbon pricing into four dimensions. When you talk to people about internal carbon pricing, the first thing they think of is the price. And that's what we say is the height. The height dimension. So how high is the price that is being applied in the internal carbon pricing system?”
Casey: The price is the height of the box. At Yale, we set a price of $40/ton. The prices we looked at for this episode ranged from $10 to $100, but they can vary even more widely. Alex Barron, from Smith College, had some advice for people about choosing the price:
Alex Barron: “they should not get hung up on
isthe carbon price that they pick because you can always change it later. If you are not including the carbon price in your decisions right now, you may effectively be using a carbon price of zero. And that's the one number that we know is not right.”
Casey: There are many ways to choose a price that’s right for your organization. At Yale, we chose $40 because at the time, it was the federal estimate for the Social Cost of Carbon. We hoped it was high enough to shift behavior, but not so high that it would seriously hinder operations of the university. Smith College, on the other hand, uses a higher price than most, at $70/ton, rising 2.5% annually. But because they’re using it for a proxy price, there’s little pushback. No individuals are affected; it’s only used to make more informed decisions about future investments.
Jacob: And then you’ve got Microsoft, which uses different prices for different sources of emissions.
Casey: How does that work?
Jacob: Well, originally, they used the carbon price to generate funding for decarbonization projects. They still use it this way, but as time went on, they found the carbon price was an effective way to change decisions and behavior within the corporation. So they chose different price levels for things like air travel and non-renewable electricity consumption, based on “the cost of abatement” in each sector of the economy.
Casey: And “cost of abatement,”... that means how much would it set you back to reduce or remove greenhouse gas emissions from something you’re doing: for example, how much does it cost to switch your electricity source from fossil gas to renewables.
Elizabeth Willmott: “Currently we're charging $15 a ton for electricity, $100 a ton for air travel, and $8 a ton for other emissions. And those prices are set based on the cost of abatement for electricity, travel, and removal, essentially. And what we anticipate in all of these markets is growth and change. And so we'll be watching the respective de-carbonization markets closely to help determine what funding we need for our programs and equally what signals we need to send internally to really drive the right focus and the right business case for these different strategies.”
Casey: So Microsoft’s approach is first to figure out, how high would the price have to be to say, lead one part of the business to start purchasing renewable electricity? And how much would it cost to reduce airplane emissions with sustainable fuel? And the answers they found in those sectors were $15/ton and $100/ton?
Jacob: Exactly. It’s a very practical approach, they’re trying to draw a direct link between the sources of the emissions and the solutions.
Casey: It makes a lot of sense… I think there’s a lot to admire in that approach. And it just shows how much we learn by comparing these different approaches. You know, at Yale, we found our $40/ton carbon price wasn’t having a big effect on decisions. But at Microsoft, their much lower carbon fee did affect decisions. This actually fits what we’ve been learning about internal carbon prices, that other factors of the policy design may matter more than the price itself.
*price is right plays*
Casey: Ahh, no, Jacob, I reject the concept of the “rightness” of a price.
Jacob: Alright well it’s still the first decision you have to make when designing your internal carbon price.
Casey: Yeah, we need a song called, “The price is SOMETHING.”
Jacob: The price “is.” (Casey: Ha) But that’s only one dimension, the height of your carbon pricing “box.” What’s next?
Casey: Back to Long Lam:
Long Lam: Then a second thing that they think about is, where they apply it to. So what is the coverage, the greenhouse gas emissions, that the internal carbon pricing approach applies to. How widely does the internal carbon pricing approach apply?
Casey: Much like a box, the second dimension is the width of the internal carbon price.
A simple way to think about how widely a carbon price should be applied is to think about how or where you want to reduce emissions.
Jacob: What do you mean? What are the options?
Casey: I think it’s time to do Scope 1, 2, and 3. The World Resources Institute (WRI) and the World Business Council for Sustainable Development define three big categories of emissions, naming them Scopes 1, 2 and 3. Scope 1 is direct emissions—your organization burning fossil fuels or using nitrous oxide or other greenhouse gasses.
Jacob: A factory burning coal to make steel for example, or a person driving their own car... Those would be Scope 1 emissions?
Casey: Yep... then Scope 2 is indirect emissions—your organization buying electricity or heating from another organization that’s burning fossil fuels—,
Jacob: You buy electricity from your utility: If they’re burning fossil fuels to make that electricity, those are scope 2 emissions for you. Scope 1 for the utility.
Casey: Exactly... And finally, there’s Scope 3: upstream or downstream emissions—your suppliers, employees, or customers burning fossil fuels or emitting other greenhouse gasses.
Jacob: Employees commuting to work at your organization; factories making paper or printers that you use at work; or customers using your products—if you’re a manufacturing company, it’s scope 3 when someone uses the gas-powered car, stove, or leaf-blower you made.
Casey: Yeah, and as you may imagine, Scope 3 is the trickiest. For example, at Yale, a big source of Scope 3 emissions is air travel by Yale faculty, staff and students, who in non-pandemic times are traveling the world to conduct research and attend conferences. It’s also from the carbon emitted to make the computers we buy and the bricks we use to build.
Jacob: And let’s bring this back to our discussion of “external” emissions, like at H&M *foghorn*
Casey: Ah there’s that “string” around my finger. You said earlier that H&M focuses its decarbonization investments at factories that produce their materials…
Jacob: Exactly, and that’s because at H&M, almost all of the emissions are Scope 3. H&M doesn’t make the fabrics and materials it uses in its clothing -- most of that work is done by clothing manufacturers who work with H&M as well as many other companies. The manufacturing process is more emissions intensive than the design and sales process, so if H&M wants to reduce its emissions, it needs to focus mostly on the processes of the manufacturers it works with.
Casey: And these are Scope 3 emissions.
Jacob: Yep. We’ll come back to Scope 3 emissions next episode.
*foghorn*
Now, let’s return to that box metaphor… The height of the box is the price. The width of the box is how widely we apply that price. What scope, or scopes, are we focusing on? And we can choose Scopes 1, 2, or 3, or some combination of each.
Casey: Right. Although, scopes are just one framework for figuring out where to apply the price. For example, we didn’t follow the scope-framework strictly at Yale. We focused on building energy consumption, which was most of our Scope 1 and 2 emissions. But we didn’t charge our shuttle service or our vehicle fleet because we didn’t have good data for those emissions, which fall under Scope 1. And we didn’t charge every single building. We personalized our system to put a price on the emissions that were the easiest to quantify and change. To implement internal carbon prices, organizations customize them to fit their organizational context.
Jacob: Alright Casey, we’ve reviewed the first two dimensions, but Long Lam said there are four dimensions… Two more to go.
Casey: The third dimension is depth. Here’s Long Lam:
Long Lam: “ So it’s what kind of influence the internal carbon pricing approach will have on business decisions. ”
Casey: The depth dimension essentially says, how do I want to use the information I get from a price? And this may be the most critical element. It’s where the price becomes real. Where the rubber meets the road. Where the spice hits your tongue.
Jacob: Where the paint strikes the canvas.
Casey: Nailed it. So, for example…Remember the proxy price example we used earlier?
Jacob: Yeah, we were deciding between installing a new boiler powered by fossil gas, and an electric heat pump that is more expensive but more efficient and doesn’t need fossil fuels.
Casey: Right, and when we factored in the cost of carbon with our proxy price, the relative expense flipped—the fossil gas boiler became more expensive than the electric heat pump. Now, the depth dimension of your carbon price determines, how will you use this information? Is the purchasing department doing the proxy price calculation? Are they doing it every time and choosing the lower carbon options when those appear cheaper with the proxy price? Or is the Sustainability Office doing the calculations, maybe only on the biggest items? And are the purchasing, design, and construction departments actually using the results of the calculations in their choices?
Jacob: So it's like the depth of a massage. A deep tissue massage is one that you feel really intensely. It can change how you feel for a week. But if you don’t want your price to impact many of your business decisions, it’s just like, a tap on the shoulder, letting you know it’s there.
Casey: Yeah, that’s one way of putting it.
Jacob: Okay… Is there a way to think about the depth of the price in a fee based system?
Casey: Yes, in a fee-based system, you choose who gets the fee. We sent the charge to planning units, but we could have designed a charge that went down deeper into the organization. For example, we could have gone down to the level of academic departments, institutes, and centers. You’ll note that no student gets a carbon fee on their tuition bill… that would be a very different approach, and not recommended, but that would have been a “deeper” price.
Jacob: Students getting a carbon fee on their tuition bill is definitely the deep tissue massage of internal carbon pricing, but not like a good kind…
Casey: No, it’s the deep tissue massage that you then need to go see a specialist to correct.
Jacob: Alright Casey, we are finally at the question I have been waiting to ask for like 10 minutes now. The fourth dimension? Are we dealing with some kind of carbon pricing hypercube? Does Long Lam wield the secrets of the tesseract?
Casey: Oh, how I wish! But no, it’s simpler than that…
Long Lam: “And finally we have the fourth dimension, which is the time dimension, to also recognize that you cannot have an internal carbon pricing approach with the highest price with the widest coverage or the most impact at the beginning. It's a journey that the organization needs to go through, and the time dimension describes how the price, or the coverage, or the impact will develop over time.”
Jacob: Hm… I don’t want to say I’m disappointed, because I appreciate how clear he’s being. But I was kind of hoping we had stumbled into some Marvel nonsense. Anyways this sounds really interesting -- the fourth dimension is time. How does your internal carbon price change over time?
Casey: Yeah… It’s like… picture getting in your three-dimensional box, and then you sled down the hill with it. It’s common for internal carbon prices to start with a pilot program, knowing your system will evolve as you learn the quirks of your organization. We started a pilot carbon charge at Yale back in 2015. It covered 20 buildings, so we could work out kinks in the design before rolling it out to the 270 buildings it covers today. Any of the three dimensions can change over time -- you can raise or lower the price, you can expand the emissions scopes you cover, and you can change how you use the price information, and which parts of the organization it affects.
Jacob: And if you change all three dimensions, and acquire the infinity gauntlet, you can snap and cut the carbon in the atmosphere in half.
Casey: No, I don’t think that’s right. Well, wait a second…
*music*
Casey: This show, we’ve talked through two kinds of internal carbon prices -- proxy prices, and carbon fees. Proxy prices can help guide central decisions and capital investments, while carbon fees can support emissions reduction in a distributed way across an organization.
Jacob: We’ve heard about the four dimensions of a carbon price that you can adjust in your design -- the level of the price, where the price is applied, how you use the pricing information (and who sees it), and how the system evolves over time.
Casey: And the leaders we spoke to at H&M, Mahindra, and Microsoft have found carbon pricing helps guide, motivate, and fund the work of scrubbing carbon emissions out of their organizations.
Jacob: Alright, so now I, future sustainability manager (hire me!), have a good sense of what my options are as I design an internal carbon price for my organization. But, admittedly, I’ve never done this before. I don’t want to be blindsided by problems that are looming right around the corner. What should I be on the lookout for? What challenges are there to operating an internal carbon price?
Casey: That’s a great question, and the answer can differ depending on your organization. Let’s pick up that question in part two of our internal carbon pricing episode. Join us next time to hear more about the challenges companies and institutions face with their internal carbon prices.
Thanks for joining us today.
Jacob: If you like what you’re hearing, don’t forget to rate and review us on Apple Podcasts, follow us on Spotify, and sign up for our newsletter on our website, pricingnature.substack.com.
Casey: This episode was written by Jacob Miller and Casey Pickett, with help from Cami Ramey. Engineering by Jacob Miller. Original music by Katie Sawicki. Thanks to all our guests -- you can find more information about their work on our website, pricingnature.substack.com. Special thanks to the Carbon Pricing Leadership Coalition and the Tobin Center for Economic Policy for their partnership, and to Ryan McEvoy, Stuart DeCew and Heather Fitzgerald for making this episode possible.