Understanding carbon pricing

Climate change - we have a limited amount of time to resolve it and it concerns everyone. Some experts say we are throwing money and technology at the symptoms of climate change by financing climate adaptation and mitigation. These processes notably come after the disease has already taken hold. So, are we injecting good money into a leaky system?

Many economists agree carbon pricing is the largest solution to the cause of climate change as it is one of the quickest ways to accelerate the global economy to eradicate carbon-based resources.

 The tricky part

Carbon dioxide is globally dispersed and invisible to the human eye. Some of the consequences of climate change such as extreme weather are already visible today and tax payers are already paying the costs through their health, food and water shortages. These costs will only intensify in the years and decades to come.

Carbon pricing is a tool that we can use to reflect the true costs of carbon emissions on society. For example, pricing the impact of climate change onto fossil fuels provides an incentive for society and businesses to choose cleaner fuels such as renewables at a faster rate.

However, a carbon price could negatively affect poorer households that need to spend a greater portion of their income on energy and energy-intensive goods. That would mean a carbon price could have a much more negative effect on poorer households compared with wealthy households – making the policy notably regressive.

What does that mean for UK businesses?

Carbon pricing methods already exist in the UK through the climate change levy and the UK Emissions Trading Scheme (ETS) where the cap is expected to be aligned with the UK’s 2050 Net Zero target.

To achieve this, it has been proposed to reduce the number of allowances in the scheme significantly from 2024, which will mean higher carbon prices and value chain implications. Additionally, following COP26’s Methane Pledge, there are proposals for the UK ETS to broaden its coverage in recognition of the impact of methane and other harmful gases to the climate.

UK businesses should start to examine where they are exposed to greenhouse gases (not solely CO2), deepen their understanding of their value chain emissions, and consider how they can be incorporated into decarbonisation and nature-related plans. Of course, one solution is to institute an internal carbon price, to help shift thinking and business models towards lower carbon products and services, ahead of any regulatory requirement.

To further explore your thinking around climate strategy, messaging, and disclosures, please reach out to our team at Luminous.

To get in touch, please contact sarah.roper@luminous.co.uk.