PRICE IS RIGHT In(ternal)vesting In Carbon Pricing For Sustainable Growth

By Nancy Cai (Telstra)

Abstract

Every business decision is associated with environmental externalities. With that in mind, internal carbon pricing (ICP) is growing as corporate decision-making tool to incorporate climate change-related risks and opportunities. Embedding environmental considerations is part and parcel of working towards our shared ambition of sustainable growth. To do so, companies can consider ICP to understand the true environmental impacts of business activities. This article examines the recent trends and various designs of ICP based on the available reports and data from the Carbon Disclosure Project (CDP), exploring case studies in the technology and telecommunications sector.

Introduction

As more countries corral together to tackle climate change, carbon pricing measures such as taxes or emissions trading systems are important not only for international politics but also businesses. Increasingly, more companies are adopting ICP to guide their corporate decision-making (such as project or investment decisions and procurement). ICP refers to the method of voluntarily assigning a monetary value to carbon emissions generated from a company’s business operations. By internalising the cost of a company’s greenhouse gas emissions (GHG), ICP induces environmentally conscious behaviours which decreases the company’s direct and indirect GHG. The Task Force on Climate-related Financial Disclosures (TCFD) advocates ICP in scenario analysis as a forward-looking metric to facilitate the climate transition for a low-carbon economy for financial institutions.1 With greater pressure placed on businesses by regulators and stakeholders, ICP is expanding amongst the private sector and telecommunication players to not only respond to such regulations but also demonstrate greater social responsibility through progress in environmental, social and governance (ESG) standards.

1 TCFD. (2017). Final Report: Recommendations of the Task Force on Climaterelated Financial Disclosures.

Financial Stability Board. Basel, Switzerland: Bank for International Settlement.

Why Use Internal Carbon Pricing

Based on the Climate Change reports published by the CDP, which manages a global disclosure system for companies to assess environmental impacts, ICP is cited to be adopted for multiple purposes, including:2

• Navigating GHG regulations

• Stakeholder expectations

• Changing internal behaviour

• Driving energy efficiency

• Driving low-carbon investment

• Identifying and seizing low-carbon opportunities

With companies pledging to reduce GHG emissions, ICP is one of the many climate change strategies in their arsenal, although motivations could vary from pleasing stakeholders to changing behavioural practices inside the company. In 2020, over 50% of submissions reported chang- ing internal behaviour as a reason for implementing ICP.3

Benefits of ICP include being leveraged as a climate-risk management tool, helping to hedge against regulations, meet existing GHG emissions reduction targets, identifying low-carbon opportunities by considering climate change in corporate decision-making, and building internal awareness of sustainability amongst employees. Adopting ICP could not only provide more accurate financial and non-financial evaluations, but also provide intangible yet invaluable reputational advantages by appealing to favourable sentiment from government, NGOs, socially conscious investors, and consumers.

Designing An Effective Internal Carbon Pricing

The design of ICP could be considered with a four-dimensional framework as per Lam et al. (2017):4

Dimension ICP Parameter Best Practice ICP Approach

Height Carbon price level

Width

GHG emissions coverage

Depth Business influence

Time Development Journey

Price level per unit of GHG emitted (e.g., currency/ tCO2e)

Extent that GHG spans the value chain (Scope 1 to 3) and how

How it influences business decisions and value chain partners

Considers the impact over time, and the intervals between ICP being levied time. To do this, companies could build a centrally organised team in the form of a project management office (PMO), comprising of key staff from cross-sections of the business (such as finance, manufacturing, logistics, retail, real estate) to kick-start and monitor the execution the action plan.5 In the long-run however, companies should aspire for ICP to be part of regular business cadence by instilling a general sense of sustainability awareness, with the overall responsibilities lying with employees in everyday decision-making.

HEIGHT – ASSIGNING PRICES

Prices vary between companies, industries, jurisdictions as well as the chosen instrument of ICP. Some main methodologies include:6

• Social cost of carbon (to internalise environmental costs)

• Abatement costs (to reduce emissions)

• Benchmarking (through peer comparisons)

• External guidance (for price recommendations).

SOCIAL COST OF CARBON (SCC)

Set at a level to influence business decisions

Extensive to cover critical emissions areas

Implemented with material impact on business decisions

Revisit the other dimensions in line with business strategy for ICP

The four-dimensional framework serves as a useful guidance in evaluating companies’ ICP approaches. For a successful ICP operations, there should be a clear ownership and responsibilities mapped to accountable persons, with considerations as to the four dimensions of height, width, depth, and

3 CPLC. (2021). Putting a price on carbon. London: Carbon Pricing Leadership Coalition. 10. 4 Lam, L., Klein, N., Quant, M., Neelis, M., Eddy, G., Saltzman, D., . . . Bartlett, N. (2017). Howto guide to corporate internal carbon pricing - Four dimensions to best practice approaches Ecofys, The Generation Foundation and CDP. London: The Generation Foundation.

SCC internalise the costs from climate damages by including costs of not avoiding damage to environment and costs associated with minimise climate-related damage.

Abatement Costs

Abatement costs are costs associated with reducing emissions considered in parallel with an existing technology.

Benchmarking

Companies could watermark their ICP based on comparable peers in a similar sector or jurisdiction. However, CDP data shows a wide range, with a median of USD$28 per tCO2e for shadow prices, and USD$18 per tCO2e for internal carbon taxes.

External Guidance

This includes regulatory frameworks and scientific studies, from the EU Emissions Trading System (ETS), UN Global Compact to research publications. Companies can align with the governments’ climate policy, with local and regional regulatory frameworks being critical in considering an implementation of an ICP approach. Most companies, operating internationally, closely mointor the EU-ETS, anticipating other countries to follow their stance, as Europe has been at the forefront of advanced regulations and policies for environmental preservation.

An eminent research initiative includes Report of the High-level Commission on Carbon Prices, suggesting carbon price to be within USD$40-80 per tCO2e by 2020 and USD$50-100 per tCO2e by 2030 to be consistent with the Paris Agreement. As of 2022, less than 4% of global emissions are above the price needed by 2030.7

WIDTH – EXTENT OF ADOPTION IN CORPORATE DECISION-MAKING

The width factors the means and extent of how GHG emissions are accounted for within a company’s value chain. This includes the ICP instrument itself as well as the business activities and scope that ICP applies to.

Types Of Icp

There are 3 main ICP types:8

• internal fee/tax

• shadow price; and

• implicit price.

An internal fee/tax places a monetary value on emissions and charges those costs to the company’s expenses. On the other hand, a shadow price and an implicit price do not involve actual financial transactions.

A shadow price is a hypothetical value allocated to carbon measures to manage the potential climate-related risks and opportunities, and an implicit price is a company’s estimated cost of reducing emissions and adhering to regulations.

Due to the hypothetical nature of a shadow price, companies may choose to implement shadow pricing over internal carbon fee. In 2020, the most widely adopted type is the shadow price, adopted by 50.8% of companies with ICP. Implicit prices and internal fees were used by 19.3% and 15.0% of companies, respectively.9

The Coverage Of Icp Across Value Chain

The applications of ICP could be carefully defined within certain parameters. The article provides further de - tails in some case studies, but generally companies could apply ICP to Scope 1, 2 emissions, with some including business travel only or car fleet only for Scope 3. For many companies, Scope 3 is the most arduous and vague when it comes to carbon emissions’ calculations, yet account for the vast majority of a company’s carbon footprint. Nonetheless, a company could design the ICP by keeping in mind the organisational resources and capacity in implementing and monitoring the outcomes of ICP.

7 High-Level Commission on Carbon Prices. (2017). Report of High-Level Commission on Carbon Prices. World Bank. Washington DC: World Bank.

8 Won, K., Broadstock, D., Bradley, H. (2022). Corporate Internal Carbon Pricing: Global Trends and Challenges. Singapore: Energy Studies Institute. 3.

9 Won, K., Broadstock, D., Bradley, H. (2022). Corporate Internal Carbon Pricing: Global Trends and Challenges. Singapore: Energy Studies Institute. 3.

Applications Of Icp

Similarly, the coverage of ICP could apply to certain functions, this could include the capital investment portfolio for large business cases. For capex, this too could be unconditional (applying to all projects, or alternatively be restricted to certain types of projects). For other organisations with a more aggressive ICP policy, it could apply to a wider group, such as procurement, research & development, or in some cases, across the entire company for all operations. For companies with an untested approach to ICP, it could start with certain local offices or products, before discerning whether to continue with a more comprehensive application. 10

DEPTH – AMOUNT OF INFLUENCE IN CORPORATE DECISION-MAKING

The depth dimension of an ICP design is seen by not only the permeation of ICP responsibilities within the organisation, but also the sharing of sustainability considerations with companies’ value chain partners.11

Within an organisation, many ICP roll-out are governed by a central team with direct reporting to a C-suite or board member. Executives’ involvements are critical in driving the ICP roll-out and development. Furthermore, the role-modelling by senior members of an organisation simultaneously drives greater sustainability awareness (beyond ICP), whilst galvanising organisations to factor ICP within their everyday responsibilities.

Some companies go as far as re-evaluating their value chain and approach their up-stream and down-stream partners with the aim of exchanging information (particularly for companies in the provisions of physical goods). The focus is educating and empowering their partners to align on carbon reporting methodology and reporting. The extent of which partners are integrated could showcase how embedded the sustainability agenda is within an organisation whilst pro-actively addressing climate change issues.

TIME – WHEN IS THE REVIEW CYCLE

As most ICP approaches are relatively new and experimental in companies, companies can revisit their ICP design to make appropriate revisions. Companies could flag to monitor market dynamics or alternatively movements in prices set by regulatory trends.

Companies Using Internal Carbon Pricing

The below provides some details of ICP adoption as per the Climate Change reports published with the CDP.

Adoption Companies

Uses ICP

BT

China Telecom

Digi Telecommunications

NTT Data

COLT Technology Services

Singtel

Telefonica

Microsoft Alphabet

Vodafone

Singtel pilots ICP for Singapore using shadow pricing (Scope 1 to 3)

Singtel’s ICP objectives includes changing internal behaviour and driving energy efficiency. To do this, Singtel applied a hypothetical price of SGD$50 per tCO2e for energy-intensive business cases such as large capital expenditure projects.

COLT implements new travelling policy from 2021, effective 2022 (GHG Scope 3)

To achieve COLT’s objective of changing internal behaviour, COLT established a business travel policy applicable to all functions, setting an internal cost of carbon at €13 per tCO2e to be reinvested for carbon reduction initiatives in line with their goals. Employees can see the carbon associated with the travel when they book using their specially developed travel booking platform, with encouragement to choose the least carbon intensive form of travel as per the booking platform. The travel management company then provides a quarterly report to COLT to both assess the carbon costs and ringfence the funding.

Does not use ICP, but plan to in the next 2 years

Does not use ICP and do not anticipate doing so in the next 2 years

Table

Lumen Technologies

Tata Communications

Telstra

Orange

Meta

AT&T

Tele2

Deutsche Telecom

Ciena

Cisco

Telefonica considers costs of equipment, cost of energy consumed, and cost associated with carbon emissions of procured equipment (Scope 1 to 2)

Telefonica cites objectives of driving energy efficiency, driving low carbon investment, and seizing low-carbon opportunities. Telefonica uses an implicit carbon price based on the price of carbon credits purchased in each region and considers the shadow price of carbon in procurement. As such, Telefonica assessed based on “Total Cost of Ownership (TCO)” which “includes the cost of purchasing the equipment, the cost of the energy consumed (electricity or fuels) and the cost associated with the carbon emissions of the equipment (either through energy consumption and/or leakage of refrigerant gases)”.\

Microsoft’s early mover leadership in environmental and climate leadership (Scope 1 to 3)

Microsoft has multiple objectives, including changing internal behaviour, driving energy efficiency, driving low-carbon investment, identifying, and seizing low-carbon opportunities, as well as supplier engagement. Microsoft established a carbon fee starting in July 2012, which is applied to all Scope 1, 2, and 3 emissions, with the same price company-wide in more than 100 countries. The fee is paid by each division based on its carbon emissions and is used to fund sustainability improvements. The carbon fee is intended to drive efficiency, innovation, and culture change within the company. The fee is revaluated annually and reflects the company’s investment strategy to reduce emissions and achieve carbon neutrality and negative targets. Starting in July 2020, the fee was also applied to Scope 3 emissions and continues to be increased to incentivize more aggressive measures to reduce emissions and better match the underlying cost of carbon abatement. In March 2022, the company announced an increased fee across all scopes to meet their FY30 goals and promote energy efficiency and design changes.

Alphabet (Scope 2)

Alphabet cites an alternative objective, which is to assist their risk assessment. Alphabet uses shadow pricing as part of their risk assessment model, to support strategic decision-making related to future capital investment, such as individual data centre facilities to consider future energy costs. Data centres represent most of the electricity use, with Alphabet operating some of the most efficient data centres. Before building a data centre, Alphabet includes a shadow pricing, which enables them to achieve carbon neutrality via energy efficiency, sourcing renewable alternatives or purchasing high-quality carbon credits for remaining emissions. Alphabet usings the social cost of carbon recommended by the US Federal Government’s Interagency Working Group on the Social Cost of Greenhouse gases, placing the value of USD$51 per tCO2e in 2020.

Vodafone forecasts energy costs across the business (Scope 2)

Vodafone aims to drive energy efficiency and low carbon-investment. Vodafone assesses how energy and carbon costs may evolve for each of the business divisions, by calculating the cost of carbon offsetting or potential carbon pricing and carbon taxes to assess costs and risks in the business. By modelling potential additional energy costs with an implicit price, Vodafone drives business cases towards renewable energy and more energy efficiency as part of its Net Zero strategy.

Internal Carbon Pricing To Suit Responsible Business Goals

ICP are a way for companies to evaluate and control the carbon emissions produced by their operations. Overall, the ICP design should be distinctively tailored to each companies’ business model and goals, considering the four-dimensional framework. The case studies show a growing number of companies within the telecommunications and technology industry are considering ICP, with a wide variety of approaches to accomplish their unique business objectives and sustainability agendas. Considering the importance of addressing sustainability challenges, companies can consider ICP within their operations and with their value chain partners to achieve sustainable growth. STF

References

[1] CPLC. (2021). Putting a price on carbon. London: Carbon Pricing Leadership Coalition.

[2] High-Level Commission on Carbon Prices. (2017). Report of High-Level Commission on Carbon Prices. World Bank. Washington DC: World Bank.

[3] Lam, L., Klein, N., Quant, M., Neelis, M., Eddy, G., Saltzman, D., Cushing, H., Bartlett, N., (2017). How-to guide to corporate internal carbon pricing - Four dimensions to best practice approaches. Ecofys, The Generation Foundation and CDP. London: The Generation Foundation.

[4] Moller, K., Schatzmann, J., Schmid, J. (2022). Internal Carbon Pricing. How to Operationalize, Measure and Control Carbon Emissions. Switzerland: University of St Gallen.

[5] TCFD. (2017). Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures.

Financial Stability Board. Basel, Switzerland: Bank for International Settlement.

[6] Won, K., Broadstock, D., Bradley, H. (2022). Corporate Internal Carbon Pricing: Global Trends and Challenges. Singapore: Energy Studies Institute.

NANCY CAI is responsible for program management at Telstra International, where she drives corporate social responsibility initiatives. She started her career at Telstra as a graduate, after rotating through the infrastructure and M&A teams.

play for offshore wind.

Climate Change

While the telecom industry has been operating for quite some time and has made significant advances in our knowledge of benthic marine environments, climate change is one issue that we will have to face in conjunction with all offshore maritime industries and the wider world. The push for projects concerning environmental monitoring and communications is spreading throughout the industry, with a current focus on issues relating to marine megafauna and fisheries targets. Initiatives such as SMART cables and similar monitoring systems in offshore wind will go a long way towards narrowing existing knowledge gaps and ensuring that we have lengthy and reliable data records as our seas undergo this period of immense change.

As mentioned previously, interdisciplinary initiatives such as ROSA will be integral in encouraging data sharing and data tracking as some common fisheries and conservation target species exhibit spatial and temporal distribution shifts. By working together, industry and local stakeholders can broaden our collective knowledge of how the oceans around us will be impacted by climate change related phenomena. As such, we can hope to mitigate issues to the best of our abilities and focus on nurturing sustainable growth of both telecom and offshore wind industries, keeping the world connected and providing reliable sources of clean, renewable wind energy. Similarly, collective knowledge on natural system faults, both for subsea cables and offshore wind infrastructure, will contribute to our understanding of how best to shift future engineering and operation innovations to cope with an increase in strength and frequency of inclement weather events and other climatic factors.

Summary

Throughout both industries, a common theme is the importance of early and continued stakeholder engagement. “We stand by the idea that stakeholder engagement and outreach with other maritime users and operators is incredibly important,” Ryan Wopschall, ICPC GM states, “Raising awareness of subsea cables within the offshore renewable energy sector and encouraging developers and stakeholders to contact us in regard to new and ongoing projects will further facilitate safe and efficient use of marine resources and long-term protection of seabed infrastructure.” All marine users must be considered throughout project development, and these considerations, alongside those of public perceptions, will help to pave the way for community buy-in and long term success of these installations.

In the past century and a half, humans have come to understand a significant amount about our oceans and how they function. Through the course of hundreds of subsea cable installations, the telecom industry has been at the forefront of uncovering benthic knowledge. Our understanding of seafloor hydrology, shifting sediments, ecological interactions, and even earthquakes and tsunamis has greatly increased. By taking what we have learned and applying it to the burgeoning offshore wind industry, we can best position ourselves to reap the rewards of an extensive renewables network while mitigating social, environmental, and ecological impacts. We have extensive local fisheries and communities networks, professional guard vessels and crews, broad knowledge of the marine environmental and applicable requirements and legislation, and, above all, we have a vision for long-term, sustainable success in harnessing our renewable natural resources for clean energy. To our partners in the offshore wind industry— we are ready and willing to help you reach your goals.

Emma Martin is the Marine Systems

Associate at Seagard. She has her BA in Biology from Boston University, USA and her MSc in Marine Systems and Policies from the University of Edinburgh, Scotland. She has performed marine field work around the world and looks forward to continuing to support maritime infrastructure developments.