Episode 11: What Have We Learned From Internal Carbon Pricing? [Full Transcript]

Internal Carbon Pricing Part II

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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, and originally the carbon charge’s first intern. 

Casey: We’re back for the second part of our two-part episode on Internal Carbon Pricing at companies and institutions. 

Jacob: In part one, we talked about two of the most common types of carbon prices used internally at companies and institutions to reduce energy consumption, save money, and cut carbon emissions. 

Casey: The first kind of carbon price we looked at was a proxy price, which asks, “how much would my investment cost if I had to pay the true social cost of carbon, or if a future government put a price on carbon in my region?” Proxy prices are useful for central decision making and guiding capital investments. 

Jacob: The second kind of carbon price we examined was a carbon fee, which is like a tax on carbon emissions within your organization. 

Casey: That’s the kind of price we use at Yale. Carbon fees can be useful for changing behaviors and policy in a distributed way across an organization, or for generating revenue to invest in decarbonization projects—meaning the work of getting rid of carbon emissions in your organization. 

Jacob: Then we closed part one by talking about the four dimensions of an internal carbon price. First, the price itself… 

Casey: Which types of emissions the price covers…

Jacob: Who receives the bill from your price, or how the price information is used to guide investments…

Casey: And how your internal carbon pricing policy changes over time.

Jacob: And Casey, you ended the last episode by sidestepping my final question.

Casey: Moi?! Would I do that?

Jacob: I was saying, as a prospective future sustainability manager at an organization, I’ve never actually been in charge of an internal carbon price before, and I have questions. Concerns, you might say. I’d guess there are pitfalls to running an internal carbon price, so Casey, as the expert in the room, what challenges should I be on the lookout for?

Casey: Really feels like you’re bigging me up here buddy.

Jacob: That’s what I’m all about.

Casey: Well, it can be difficult to get organizations to talk about what’s hard about internal carbon pricing. I know, I’ve tried. Companies have competitiveness and public relations to think about, so they sometimes avoid sharing the details and problems they run into. 

But I’m speaking for a research university.  We exist to enable people to figure things out and share the results with the world.

Jacob: Phew. That’s a relief. Sounded for a second like this was gonna be a really short episode.

Casey: No, we’re good. With the Yale Carbon Charge, I like to talk about the challenges we faced. I’m glad to show people my innermost spreadsheets. 

Jacob: You sound fun to hang out with.

Casey: Am I ever.

Jacob: “Hey man, you wanna check out my spreadsheets?”

Casey: Let’s get into the trickier parts of this work: In act 1, we’ll focus on Yale: What did we try that didn’t quite work? What did we learn?  And in act 2, we’ll find out what other colleges, and companies like H&M, Microsoft, and Mahindra, are learning themselves about internal carbon pricing.

ACT I: Lessons from the Yale Carbon Charge

Jacob: Casey, you’re talking a big game on transparency. I’m gonna dive right in. What were the challenges you faced?

Casey: We’ve faced several, mostly related to the fact that our price was revenue neutral, redistributing funds back to the participants. 

Jacob: Really? I thought that was the core of Yale’s approach?

Casey: Well, the core of our approach is that we’re experimenting with carbon pricing, trying out different policy designs. It’s hard to predict how a policy idea will land within an organization before you try it. It’s difficult to see around corners.  So, the initial design of our system solves several problems, but there were some surprises.

Jacob: Such as?

Casey: The first is that people and planning units—the major organizations on campus—didn’t respond like we expected. We thought there might be a larger impact on local and personal decisions.  But the charge hit at the level of heads of planning units, like deans of schools, not at the level of small organizations and building occupants.

Jacob: Ah yes, that’s the challenge we were working on in the Carbon Charge Undergraduate Working Group. 

Casey: Oh yeah, tell us about your time working on the carbon charge as a student.

Jacob: Well, our goal was to encourage behavioral change at the undergraduate level… One thing we did was to develop a checklist of ways for students to shut down their dorm rooms before breaks: closing windows, turning down thermostats, unplugging mini fridges, that sort of thing.  We ran it for winter and spring break for several years, and then got Facilities to take it over.

Casey: Yeah, and that was a great initiative. But - it was really hard to spark change at the individual behavioral level. And, to be fair, even at higher levels, planning units have trouble responding to the charge. 

Jacob: What do you mean?

Casey: Well, as on many campuses, it’s become clear that most Yale planning units aren’t set up with the authority, money, or technical capacity to implement changes that would substantially lower their carbon charges. They rely on the central Facilities department to renovate buildings, and to install new systems like for heating, cooling, insulation.  And many planning units have to go through Facilities even to change temperature settings or install lighting occupancy sensors. 

Jacob: And why don’t they just ask Facilities to make the changes needed to cut emissions?

Casey: They can ask. But Facilities has a long list of energy efficiency and conservation projects, and they’re going through them in order, from greatest to least carbon payback. There’s even a whole Energy Management team focused specifically on energy projects, but it’s small and has a fixed budget. And the supply of contractors in the area who can do these kinds of energy projects is limited. 

Jacob: OK. And was the work that Facilities was already doing influenced at all by the carbon charge?

Casey: Well, since Facilities isn’t financially responsible for any buildings themselves, they don’t get carbon charges or returns. So the charge didn’t act as an incentive for Facilities. 

Jacob: So with Facilities working as hard as they could, building by building, and not affected by the carbon charge, is there a way to spread out the work?  Could you empower the planning units themselves to do more of the decarbonization work?

Casey: Well, that’s part of the idea of the carbon charge. Remember how the revenue neutral system works? 

Jacob: Yeah -- every planning unit receives a carbon charge and a carbon return. The charge comes from the amount of carbon dioxide a unit emits today -- buildings are charged $40/ton. The return is based on historical emissions: If a unit was responsible for 1% of emissions of the university historically, it’ll get 1% of the total revenue collected from the charge today. So planning units are trying to emit a smaller percentage of university-wide emissions than they did historically, so that their return is larger than their charge, and they come out ahead.  

Casey: Right.  So we could have gone further within that system, and required that planning units use carbon returns -- the charge money we give back -- for energy efficiency work. But we decided against it.

Jacob: How come?

Casey: Two big reasons: first, because when we set up the policy, we didn’t know what the “right” amount was to invest in decarbonization.  We didn’t know how much it would cost to get to zero emissions.  So we didn’t want to imply an expectation across the institution that the amount of your carbon charge return is the amount you should spend on emissions reduction.

Jacob: Because it could have ended up being more or less than that amount?

Casey: Right. And we didn’t want an expectation like that to stick around.

Jacob: OK. And what was the second reason you didn’t require the returns to be spent on decarbonization?

Casey: We wanted to try maximizing the incentive power of the charge.

Jacob: What does that mean?

Casey: Well, a dollar is worth more without earmarks, right?  A dollar you can use for anything is worth more to you than a dollar you can only spend on certain things. So returning the funds without earmarks should make them more valuable to the planning unit managers. 

Jacob: So you wanted to see if an unfettered dollar motivated more emissions reductions than if the rebate had to be spent on decarbonization?

Casey: Yeah, the idea here was to try a fairly pure financial incentive. How would people respond if we just focused on the money and gave them their returns without earmarking them for special uses.

Jacob: And how did they respond?

Casey: We found something interesting: returning carbon charge funds without requiring that they be spent on emissions reductions was… kind of unsatisfying for people who might otherwise be the greatest carbon pricing supporters. People motivated on climate change tended to want the returned money designated for decarbonization projects, and the fact that it wasn’t left them feeling a little cold. 

Jacob: That’s encouraging, in a way.

Casey: I know, right?

Jacob: Were there a lot of these people?

Casey: I would say there were a couple of important handfuls of people in that category. But yeah, it is encouraging, right?

Jacob: Yeah, definitely. How about the price? How was that received?

Casey: Interestingly, the price people felt seemed too low to affect decisions in a significant way. It seems most people subtracted the return from the charge in their mind, saw the differences were usually small, and kind of shrugged their shoulders. 

Jacob: So even though the price was officially $40/ton, the perceived price, because of the return, and revenue neutrality, was much lower?

Casey: Yes. But we haven’t wanted to raise the price so far, because of how difficult it is for units to respond to the incentive. 

Jacob: Huh. That’s a tricky bind.  

[Music]

Alright Casey, we’re talking about the challenges Yale faced… I mean, I remember, back when I was an intern, there was a lot of talk about the baselines. The buildings were compared to their own past performance, to determine how much money they’ll get back in the carbon return.  I remember that was pretty contentious, right?

Casey: Yeah, it was.  And it’s funny, because the intention of this baseline system was to treat each building as fairly as possible.  

Jacob: How so?

Casey: Well, each building operates differently, and many operate differently today than they did in the past. Renovations, equipment changes, new uses… Part of the elegance of our revenue neutral system was that by focusing on emissions change compared to the university, rather than absolute change in emissions, everyone was on roughly equal footing. 

Jacob: Oh, say more?

Casey: A small, efficient building that improves 2% compared to its own history is treated about the same as a big, inefficient building that improves 2%.  But setting that historical comparison period—that baseline—proved tricky.

Jacob: Why was that?

Casey: Well, if a building got efficiency upgrades just before or during the baseline period, that lowered the building’s baseline emissions number, making for lower carbon charge returns. 

Jacob: So it sounds like highly efficient buildings were slightly disadvantaged in this system?

Casey: Yep. It was as fair as we could figure out to make it, but it still rubbed some people the wrong way. Revenue neutrality can be a little tough psychologically. 

Jacob: What do you mean?

Casey: With the revenue neutral system, in any quarter, some buildings are in the red and some are in the green.  Some are paying into the system and some are getting paid by the system. For some people, showing up as red seems to read as though you’re not pulling your weight, which is a pretty hard feeling at a collegial place like Yale. If the administration asks your planning unit to grow, and that growth results in a higher carbon charge, putting you in the “red,” it can feel like your building is being labeled “bad” for something you were asked to do. 

Jacob: I could see why that wouldn’t feel right.  

Casey: And that feeling may be motivating for some, but there’s evidence it causes some of the people you would most want to be champions for the system to disengage.

[Music]

Jacob: Now, one big question still remains unanswered -- does internal carbon pricing work? 

Casey: This is actually a difficult question to answer. 

Jacob: Really? 

Casey: Yeah, I mean the Yale case provides lots of specific examples of emissions reduction in response to the carbon charge: One of our big institutes consolidated from two buildings to one to conserve space and save energy. The School of the Environment was thrilled to be able to pick a more efficient boiler for one of its buildings because with the carbon charge, it became the cheaper option over the lifecycle of the boiler.  I could go on.

Jacob: …Oh, go on.  This is cool.

Casey: OK. The School of Management turns off its jumbotron screens at 8pm rather than 11pm now. The facilities superintendents reexamined  building schedules to look for opportunities to adjust, and save energy. The Med School turned down the heat one degree Fahrenheit across their 29 energy-intensive buildings and saved a million dollars a year in utility costs.  All as a result of the carbon charge.

Jacob: *low whistle* I mean, to me it sounds like internal carbon pricing does work, based on everything you just said. But you said it’s a difficult question to answer?

Casey: Yeah, I just gave you five or six anecdotes, and I’ve got over a dozen anecdotes like that. But when we look at emissions data across the university, we haven't been able to draw a direct link between our internal carbon pricing system and the emissions reductions we’ve seen since 2017, when the carbon charge went into place. We’ve analyzed several ways, using fancy stats tools, but most don’t detect a statistically significant impact. That’s part of the reason we’re modifying our approach!

Jacob: Alright Casey, lay it on us. How is Yale modifying its carbon charge?

Casey: I’ve been looking forward to this moment for about five years—We’ve learned enough about how carbon pricing works by applying the theory to our own institution.  We now know much more than we used to.  And we’ve designed a new policy in response …that takes effect this July. 

Jacob: Ooh happy birthday to me! What’s the new plan?

Casey: We’ve built it around the university’s commitment to zero carbon emissions from campus operations (that’s scopes 1 & 2) by 2050.  That’s not net zero.  That’s zero.  

Jacob: No emissions on campus.  

Casey: To help achieve that, the carbon charge will no longer be focused on providing incentives for individual units and buildings to reduce emissions (though that may be an additional benefit). Instead, it’s focused on generating funding for major decarbonization projects across campus.  

Jacob: How’s it going to do that?

Casey: By getting rid of the return mechanism

Jacob: Not the return mechanism!

Casey: Yes it shall be the return mechanism, it’s gone and there’s nothing you can do about it!

Jacob: For shame…

Casey: No seriously, no more revenue neutrality. It’s out. Now it’s just a straight charge—with no baselines to worry about and no more returns that can be spent on anything. 

Jacob: So what will the funds you collect go to?

Casey: Starting in July, all the funds collected will be invested in projects like electrifying campus and switching to low- or zero-carbon energy sources.  

Jacob: Woah, it’s really happening.  We’re really getting off of fossil fuels as a campus?

Casey: It’s going to take a while, but yes. We’re really doing it.  And I want to go back to the policy choice about earmarking the carbon returns for decarbonization work.  I’m glad we didn’t.  Now that we’ve developed a solid plan for how we’re going to get off of fossil fuels, we finally have an estimate of what it’s going to cost.

Jacob: How much is it going to cost?

Casey: About $1.6 Billion.

Jacob: Woof.

Casey: And the thing is, if we had earmarked the carbon returns, which were about $8 million dollars a year, and convinced ourselves that that was the right amount to be spending on emissions reduction, we might have come to rely solely on carbon charge revenues and in doing so, dramatically underinvested.  

Jacob: What do you mean?

Casey: You know, if you couple a source of revenue, like a carbon charge, too tightly with a related expense, like decarbonization, it can come to feel like the source and the expense are naturally tied–like we should spend all of that and there’s no more than that available. $8 million dollars a year in 2020, declining as we decarbonize to 2050, only ends up being between $100 and $200 million.  We need to invest about ten times that to be able to power, heat and cool campus without emitting greenhouse gasses.

Jacob: Dare I ask where all that money is going to come from?

Casey: The new carbon charge will generate roughly the same amount: around 10% of what we need. But thankfully, we’ve realized we need much more than that. And we have the flexibility to make good on that realization. The rest is going to come from changes to our capital budget—the funds planned for campus infrastructure and renovations—and from loans. In this new formulation, the carbon charge is a mechanism to enable current Yale leaders and schools to pay for their share of the decarbonization work happening now and in the future.

Casey: And Jacob, there’s one more piece of the policy change that I want to describe, and that is, we’re adopting the proxy price model as well. We’re setting a proxy price for major capital decisions around $125 per ton of carbon dioxide. And the facilities department and the provost’s office are going to use that number to guide decarbonization work. We will invest in projects that have a carbon abatement cost of $125 per ton, or less, going forward. That’s how we’ll deploy the $1.6 billion dollars. 

Jacob: Wow.  So these changes you’re describing to the carbon charge policy seem pretty significant. How do they address the main policy challenges we talked about earlier?  

Casey: We’ve recognized that units have a hard time responding to the charge and that Facilities has a crucial role in major emissions reduction work.  So we’ve centered the new policy around generating funds that Facilities can use for big energy projects.

Jacob: And now there are no returns, so the lack of earmarks for emissions reduction projects is no longer an issue.

Casey: Right.  All the money will now be invested in eliminating campus emissions.

Jacob: And that means no more baselines either.

Casey: You got it. Since we’re not returning any of the funds directly to units, we don’t need to calculate historical emissions for units.  Their carbon charges are just the tons of emissions they are responsible for times the social cost of carbon.

Jacob: Without the return mechanism, does that mean the price units will feel is going to rise?  

Casey: Yes.

Jacob: Substantially?

Casey: Yes.  But let’s distinguish between price and cost here.  They’re different and we’re adjusting both.  First, we’re adjusting the price to keep pace with inflation. The new price will be $50/ton of CO2 equivalents.  That’s also in line with the current US Federal estimate of the social cost of carbon.  That change will affect the cost units bear, but not nearly as much as eliminating the return mechanism will.  

Jacob: Got it, so the price is the dollar amount per ton that Yale is charging the planning units. The cost is the amount that they’ll have to pay, so when you get rid of the return mechanism, the effective cost is going to shoot up.

Casey: Yeah.  It is. But since we’re taking away the return mechanism, we’re going to help ease the transition by phasing in the new higher price over three years, starting at $20/ton, then $35, then $50 by 2024.

Jacob: It seems like a good example of the fourth dimension of internal carbon pricing that Long Lam talked about last episode. That was, time. 

Casey: I think that’s right. These policies can change over time, adapting to the organizational context of each institution or company.

Jacob: Have you had any big realizations over the course of this experiment?

Casey: Yeah.  It’s been fascinating to see how the results of our experiment correspond to the direction of climate policy discussions.

Jacob: How do you mean?

Casey: Over the course of last season, we traced an evolution from a focus on carbon pricing in the 1997 Kyoto Protocol to a focus on nationally determined contributions in the 2015 Paris Agreement.  And another evolution, in the US, from a 2009 push for a national cap and trade system in the US to the 2021 movement for a Green New Deal, which focuses on standards, investments and justice instead of carbon pricing.

Jacob: How does that relate to Yale’s carbon charge?

Casey: Like many climate-focused policy makers, we’ve been seeing limits to the impact carbon pricing may have when first implemented.  The energy modeler Hal Harvey, author of Designing Climate Solutions, finds that buildings aren’t ideal for carbon pricing. Some sectors, like buildings and cars, may respond better to direct investments and policy standards—like building codes and fuel efficiency standards—than they do to carbon pricing.  And it’s possible that we’re finding the same thing. 

Jacob: If that turns out to be true, what’s your advice?

Casey: Our advice is to use carbon pricing as one part of a larger strategy that includes building standards and investments. 

Jacob: It’s really encouraging to see how far the policy has come and how much you’ve learned from the experiment over time.

Casey: Speaking of learning, let’s see what we can pick up from other organizations applying internal carbon prices.

ACT II: How is this going for everyone else?

Jacob: Casey, you said earlier that it can be hard to get organizations to talk about the inner workings of their internal carbon prices. But I know we’ve got some guests for today’s show, so… At least one person spilled the beans!

Casey: Yes indeed -- in fact, several of our guests shared challenges and lessons from their experiences with internal carbon pricing. And while every organization faces different challenges, there are a few that seem to be pretty universal. 

Jacob: Like what? 

Casey: For direct emissions (scope 1) and purchased energy (scope 2) we covered it pretty well last episode: Which emissions do you price? Who is affected by the price? What price do you use? And is the organization able to respond to the signals the price is sending?

But there’s a reason we keep returning to upstream and downstream emissions (scope 3):  They’re important and hard to deal with.

*foghorn* Oh god it’s back from last episode.

Jacob: And why are upstream and downstream emissions so hard to deal with?

Casey: First of all, they’re hard to measure. Think of commuting -- most people are driving in their own cars, or even if they’re on the bus, what mechanism do you have for them to tell you how many miles they drove each year? How are you going to collect that data? 

Jacob: Okay.

Casey: Then there’s the problem of control: you’re dealing with emissions outside your organization, so how do you control those emissions? It often comes down to influence. Can you influence how your employees get to work? How your suppliers make the supplies you need? How your customers use and dispose of your products?

If you’re Walmart, and have huge power in your industry, then it’s easier… but short of substantial market power, it’s a challenge.

Jacob: Let’s go back to H&M for a moment, from last episode. The way H&M is structured, almost all of their emissions are upstream (Scope 3) *foghorn* Oh jeez. H&M’s upstream emissions come from the materials they use, and from transporting those materials and finished products. So they’re trying to change the way their suppliers operate. H&M is offering to help their suppliers purchase renewable electricity or efficient machinery. Kim Hellstrom, a strategy lead for H&M’s global sustainability department, says that they’re running up against trust issues:

Kim Hellstrom: “The difficulty for us right now is to find projects. Today we have more money than projects. That is our big challenge now. We are working with a couple of different initiatives to increase the interest from our suppliers and also we need to explain to them that we're serious because we don't have full trust… They don't really understand why we would give money for their investments, but that's actually what we're trying to do because that's the only way we can achieve this swift reduction as we have promised in our overarching climate goal.”

Casey: H&M is investing in their suppliers to help reduce the overall footprint of their company. This is a particular challenge because of how H&M measures its own emissions. They follow the strict Science Based Targets Initiative, which, to guard against double counting reductions, only credits offsite emissions reductions as they tie to company operations. 

Jacob: Maybe we should give an example, Casey.

Casey: So if, for example, H&M paid for a supplier’s factory to shift from 0% to 100% renewable electricity, but H&M only receives 5% of that factory’s output, then H&M can only credit itself for 5% of the emissions they reduced. And H&M would end up paying for their competitors emissions reductions:

Jacob: And this makes sense, right? Without this rule, multiple customers could claim credit for a supplier’s reductions.

Casey: Right, it’s a good rule, it just makes it more complicated to reduce your scope 3. 

Kim Hellstrom: “If we pay for a 100% of the emission reduction. We take away all the emissions in one factory, but we only buy 5% of their capacity. Then only 5% of our investment will be accounted to us with today's rules… We can do that a couple of times now in the beginning to prove our point, to set up a couple of good cases and pilots, but over time, it's impossible. We will not pay for our competitors’ improvements.”

Casey: Though the approach is better than the alternative, it creates special challenges. The least expensive emissions reduction projects for H&M may not be the least expensive emissions reduction projects for the world. This accounting system makes it so a project with a high cost per ton of emissions reduced might look more appealing than a project with lower costs per ton where H&M can only count a fraction of the reductions. 

Kim: “On the other hand, you could of course say that, well, that's also an opportunity because you can collaborate with competitors and we are reaching out to some competitors that we have a history of collaborating with… but it's also, we have thousands of suppliers and they have thousands of suppliers and let's say 50 where we share,  and then with another competitor we have 50 other suppliers that we share. So it quickly becomes impractical and administrative to keep track of this.”

Casey: So it’s a big coordination problem… They’d have to get all the other companies that are buying from that supplier to work together to make a joint investment. 

At H&M, they’re grappling with whether it's better to reduce the most emissions in the world for the least amount of money, or reduce the most emissions attributed directly to their company for the least amount of money. 

Jacob: Right… And another question around upstream and downstream emissions runs parallel to what H&M is experiencing. If the factories that supply H&M eliminated their direct and purchased power emissions, and if their transportation contractors, advertisers, and clothing consumers did too, H&M wouldn’t have much upstream or downstream emissions to deal with. Upstream and downstream emissions are just somebody else’s direct emissions.

Casey: But where your emissions fall in the scope framework shouldn’t necessarily define your  responsibility for those emissions. 

Jacob: Even though H&M isn’t manufacturing the clothes it advertises and sells, its work as a company is increasing the amount of clothing sold in the world. The global economy is a web we’re all involved in, so sometimes you should be responsible for your scope 3 emissions.  

Casey: It turns into a tough question: do you pay to reduce your own emissions and some of someone else’s? From a climate standpoint, it makes sense to reduce as much as possible, as fast as possible, starting as soon as possible. But doing so requires an element of good will.

Jacob: So much of this climate change work is about fighting the free-riding problem.

Casey: It’s a bit like picking up around the house: You can pick up only the messes you make, hoping your housemates will do the same. But that’s generally not how things go down. If you want to live in a clean house, you usually have to do more than your share, and by doing so create the norm of a clean house in which anything left out… looks out of place.

[Music]

Casey: Some people we spoke to expressed hope for the future of upstream and downstream, or Scope 3 emissions. We talked to Joanna Marshall-Cook, the lead of University College London’s Climate Action programs. Like Microsoft and Mahindra, UCL has a carbon fee that raises money for carbon reduction projects. Despite the challenges Scope 3 emissions pose at University College London, Joanna is optimistic:

Joanna MC: “Our Scope Three, we predict, is somewhere between 60 and 80% of our total carbon emissions. And I think the level of carbon reduction that we can get on our Scope Three is going to be evolving over time…

 Suppliers are really going for this. It's kind of incredible the speed of change.

 If I had to do it today, I might say it was probably around a 30% reduction that we could probably get in terms of demand reduction in terms of different product choices. But that's not going to be the case by 2030. And I think it just needs to be constantly reassessed.”

Casey: As more companies and organizations focus on decarbonization, it should become easier to partner with suppliers, shipping companies, and manufacturers to squeeze carbon emissions from every part of the supply chain. But I expect it will be hard to mobilize an organization on upstream and downstream emissions until you’ve measured them accurately. As much as you know that they’re big, and they’re out there, until you see a number it just doesn’t feel real. 

Jacob: That sounds kinda personal… What do you mean, Casey?

Casey: I’ve had the experience of thinking, “oh that number is probably between 50% and 75% of our total emissions at Yale.” And that just lives out there as an abstract idea. And then I saw a graph comparing scopes 1, 2 and estimated scope 3 based on solid measurements and all of a sudden I was like “OH MY GOSH, we need to deal with this, and we need to deal with it RIGHT NOW. What are we doing?!” And it’s funny -- I’ve been wanting to deal with upstream and downstream emissions for years now, and even for me, it only became real when I saw the numbers. I expect, the sooner we get the data, the sooner companies will get moving on scope 3. 

Jacob: This is a really important area of research. … We’re still in the early stages of identifying, measuring, and dealing with upstream and downstream emissions. If organizations share their best practices on handling them, we can learn from each other.

[Music]

So Casey, beyond upstream and downstream  emissions. What other challenges should we be on the lookout for? 

Casey: Yeah. One experience we had at Yale was that while a lot of the university’s emissions come from buildings, there are many different kinds of buildings. This complicates how building managers might react to an internal carbon price… Joanna Marshall-Cook shared her parallel experience at University College London:

Joanna MC: “The range of different uses of buildings at UCL is quite significant. So we had everything in the scheme from a Georgian townhouse that houses our history department,  to a high tech cancer research laboratory. And so the potential opportunity to make significant carbon savings in those two different types of buildings is quite diverse.”

Casey: There are a few considerations to make when you have diverse building use. For example, some energy use is pretty essential. Yale has research centers and hospitals that have to be using electricity constantly to keep critical experiments running, and even to keep people alive. So if you’re designing a system that compares building performance across the organization, it’s important to make sure participants feel it’s a level playing field:

Joanna MC: “We really wanted to make sure that people felt like the system was fair. That was one of the key things that came out of our kind of academic steering group was, from a behavior change perspective, if people perceive a system like this as being unfair, then they're much less likely to buy into it and they're much less likely to make savings.”

Jacob: Not every building has the same low-hanging fruit to reduce its energy consumption, like we saw in Act I. As an ICP designer, you may need to tailor the ICP to the needs of individual departments and buildings. Having a steering group or a task force dedicated to customizing the internal carbon pricing system to the needs of your organization can help smooth the operation of that system.

Casey: And you can also use the design of your internal carbon price to address fairness. That was the idea behind Yale’s revenue neutral system. It was designed to put everyone on relatively equal footing. 

Jacob: Although as we saw, even that didn’t work out perfectly. Fairness is tricky to get right.

Casey: It is. No reason not to strive for it. But we should keep in mind: every incentive, every game even, is not perfectly fair. In sports, two sides show up for a game, but one side has more resources; or got better sleep the night before. The question should be, is it fair enough that people are willing to play?

Jacob: And was it at Yale?

Casey: At Yale it has been, for the most part, but with some pockets of dissatisfaction. 

Jacob: Right, we saw that efficient buildings were disadvantaged in the revenue neutral system.

Casey: Yeah! And also, some participants said: “But with this revenue neutral system, my carbon charge amount relies on the relative behavior of other people, so now it’s a competitive system. I like collaborating with people at Yale, I don’t like competing; I wish this weren’t a competitive system.” There are trade-offs with any policy choice.

Jacob: How do you build support inside the organization for policies like internal carbon pricing?

Casey: Depends on the organization. At Yale, We established a task force of faculty to study and socialize the idea; we ran a pilot program to test it; I held 42 meetings around campus in the winter of 2016-2017 to help people get comfortable with it. Other institutions have done the same. Here’s Joanna Marshall-Cook again, from University College London:

Joanna MC: “Really good institutional buy-in is absolutely essential. That was why we developed the academic steering group, because then we had some very vocal supporters from across the institution who were gonna sponsor this scheme and to socialize the scheme within their departments, and on a senior level as well. So that really helped get us off to the right start and also helped with the recruitment of departments.”

Casey: We asked Joanna, what motivated you to do a pilot program?

Joanna MC: "I think as a pilot, we felt it would be very hard to kind of enforce people to do this - it was very much a voluntary activity. And people were a little bit reticent to start with, because they weren't sure how much money they might be required to pay out if they didn't meet the target or they weren't really sure what carbon pricing was.

But actually, because we had so many good supporters internally for the scheme, we were eventually we were oversubscribed for the pilots, there were more departments that wanted to take part than we could actually support.”

Casey: As a final piece of advice, Joanna emphasized that it’s important to create support systems so that members of your organization know how to use the carbon price. When individual departments or business groups are feeling the effects of the carbon fee, you can make sure they know how to reduce their charge! 

Jacob: And how can you do that?

Casey: If they’re going to renovate to reduce emissions, they may need technical assistance. Can they get an energy audit to look for areas to improve? Can they access funds for equipment upgrades?  If they’re trying to make purchase decisions, they may need guidance on how to apply a proxy price.

Joanna MC: “It's so essential to have that supporting thing that goes alongside the scheme…They really needed some handholding and some guidance...”

*Hold Your Hand plays*

Jacob: Casey, you found that the first iteration of the Yale carbon charge doesn’t appear to be driving substantial reductions in energy consumption at Yale.

Casey: As far as we can tell, that’s true.

Jacob: But this is not the universal experience.

Casey: No, it’s not.  Many organizations are finding their internal carbon price is driving emissions reductions.

Jacob: Right -- when we spoke to Anirban Ghosh at Mahindra, we heard about how Mahindra’s carbon pricing system has provided them with the funds for carbon reduction projects like motor replacement and LED installations, which have also been cost-saving projects. Internal Carbon Pricing has been a success for Mahindra, because it has freed up their sustainability managers to identify new projects, rather than scrambling around to get funding approved. 

Casey: And then at Microsoft, there were benefits to the internal carbon price that went beyond direct decarbonization. One of the biggest challenges there was getting good data about their upstream and downstream (Scope 3) emissions, which, for Microsoft, stretch all across the world. Elizabeth Willmott, lead of Microsoft’s Carbon Program, highlighted that internal carbon pricing actually helped improve data quality:

Elizabeth Willmott: “It's a tough hill to climb to get better scope three data quality. We actually realized that using the carbon fee, even in this early state, would help to drive that data quality. That sort of flipped the script for us. Initially, walking into that carbon fee redesign in 2020, we thought that we had to have better data quality to have a really strong fee. On the contrary, even the credible specter of monetary impact actually was what opened doors to drive the data quality. And so that was an encouragement to me.”

Casey: We had a similar experience. In response to the carbon charge, people have become concerned about the quality of our energy metering. Carbon pricing gets more brains and more eyes on your energy consumption and energy data—When people get charged for stuff, even when it’s small, it focuses the mind! It creates demand for data quality, granularity, and accountability.

Jacob: Kim Hellstrom at H&M found the same:

Kim Hellstrom: “When we built [the] internal carbon pricing method, that gave us a massive improvement in accuracy when it comes to emission per product. And it also gave us a much better understanding of our actual emissions.”

[Music]

Casey: As we contemplated the effects of starting an internal carbon pricing system, we asked our guests to share bits of advice they have for organizations interested in starting their own. For many of our guests, the advice was the same: just go for it!

Kim Hellstrom: “My clear recommendation is keep it simple and get started. I really wish we did that, instead of spending years trying to find the perfect setup.”

Elizabeth Willmott: “Don't let perfect be the enemy of the good.”

Anirban Ghosh: “Don't get too caught up in the economics and the complex mathematics. Look at internal carbon price implementation from the perspective of, ‘how can it help me drive down the emissions that I need to drive down?’ Everything else will fall into place.”

Alex Barron: “Institutions should not be intimidated by internal carbon pricing, and should just start experimenting and having classes fiddle around with it is a great way to do it or piloting it in some small area. Yale has been great working with Second Nature or to set up an internal carbon pricing toolkit. So there's tons of resources on the website, Smith's tool is there with a ton of documentation, documents and case studies from other schools…”

Casey: Alex Barron is referring to the Internal Carbon Pricing in Higher Education Toolkit we co-wrote and organized with colleagues from Second Nature, Swarthmore, Smith, Arizona State University, University College London, University of British Columbia, UCLA, Cornell and Princeton. See the link in show notes. With these tools, It’s important to remember the fourth dimension of the internal carbon pricing box: time. There is room to grow and evolve as time goes on, even if the first version of your ICP isn’t perfect. Remember, if you’re not pricing your carbon internally right now, in Alex Barron’s words, that means you’re using a price of $0/ton, the only number we know is not correct. It’s probably better to get started and adjust as you go. Here’s Alex Barron again:

Alex Barron: “The first thing I always like to underscore when I'm talking to people about this stuff is to underscore the urgency here. We need to be reducing emissions incredibly rapidly in order to protect current and future generations.

And we're already seeing impacts of climate change all around us in the U S and globally. And things are going to get much, much worse. As temperature increases, natural systems don't react in a nice linear fashion. Things can go along normally and then really unravel. And we want to stay away from those tipping points as much as we can.”

Casey: Internal Carbon Pricing is a concrete action you can take to help people in your organization SEE their emissions, to make clear that they have a cost, and to get more people thinking about solutions.

[Music]

Casey: There are lots of potential benefits an internal carbon price can provide in your organization’s quest to decarbonize. But, like all the policies we explore on Pricing Nature, this particular policy can’t do everything. Internal carbon pricing hasn’t been a panacea for any of the organizations we talked to -- it’s best thought of as another useful tool that accelerates the path to net-zero emissions, or better yet, carbon negativity.

Jacob: Right Casey… That’s why in our next episode, we’ll explore another tool that companies and institutions use to reduce their emissions. In order to achieve their climate goals, organizations often consider buying credit for emissions reductions or CO2 removals that happen outside of their organization.

Casey: As we’ll find next episode, this carbon “crediting” system is a particularly thorny area of climate policy and carbon accounting. 

Jacob: We’ll have to answer questions like, how do you quantify one ton of “reduced” CO2? The issue is, compared to what?

Casey: And is it better to remove carbon directly from the atmosphere in a costly way? Or to pay someone to reduce their emissions in a way that’s less expensive, but also harder to quantify?

Jacob: We’ll tackle these questions, and many more, next time on Pricing Nature. 

Casey: Thanks for joining us. If you like what you’re hearing, we’d be grateful if you’d sign up for our newsletter on our website, pricingnature.substack.com. And if you rate and review us on Apple Podcasts, or follow us on Spotify, it helps introduce the show to other listeners.

We’d like to dedicate this episode to: Bill Nordhaus, Ben Polak, Julie Paquette, Dan Esty, Jen Milikowski, Ryan Laemel, Tim Pavlis and all the members of Yale’s Presidential Carbon Charge Task Force who debated and developed the Carbon charge policy, and who believe in the power and wisdom of real policy experimentation. 

This episode was written by Jacob Miller and Casey Pickett. Sound 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.