With its taxes, tariffs and trading schemes, the world of carbon pricing is complicated. It’s aim, however, is clear: to encourage organisations to clean up their act or pay for the pollution they cause.
Carbon pricing falls into three broad areas, starting with the carbon tax, which has traditionally proved unpopular with both businesses and governments that have levied it.
More common nowadays are emissions trading schemes, when governments cap the total level of emissions allowed over a given period, with companies required to buy permits to cover the greenhouse gases they emit. As a market-based system, the faster emissions drop, the cheaper permits become, while companies that surpass the cap are taxed and those cutting emissions are allowed to sell unused credits.
However, according to Dr Matt Goodwin, sales director at sustainable fuel company Waste Knot Energy: “Carbon pricing is having an effect, but not at the speed we need it to. Ultimately, using the price of carbon to mitigate climate change is asking the market to sort the problem. That works to an extent, but the market is such a complicated system with so many competing factors that, although we might get there in the end, it’s not going to happen at the pace we need it to. We need CO2 emissions to go into reverse.”
Offsetting Mark II
A third way of pricing carbon is through the voluntary carbon market, where companies offset their emissions by supporting schemes that fight climate change. Ten years ago, carbon offsetting dropped off the sustainability radar, amid criticism it lacked transparency, led to broken promises and double-counting of credits and, in some cases, actually did more environmental harm than good.
Now back in the mainstream, its champions believe it has a vital role to play in reversing global warming. ClimateCare helps companies to find projects in which they can buy offsets, ranging from major renewable infrastructure, to smaller projects such as supplying remote villages with smokeless fuel.
According to company chief executive Vaughan Lindsay, businesses should follow a hierarchy of action. They need to measure and understand their footprint, before setting about reducing and avoiding what emissions they can by, for instance, switching to a green energy tariff. The final step is to deal with hard-to-get-rid-of residual emissions and this is where offsetting comes in.
“It’s about neutralising emissions,” he says. “If you can’t reduce or avoid them, take responsibility for them by offsetting.” This ensures a company’s impact on the environment remains zero regardless of residual emissions, because for every tonne of carbon that isn’t avoided, they compensate by funding a project that takes a tonne out.
And while longer term change is crucial, he adds: “Offsetting is the most cost-effective way to take action today.”
The cost of electricity generation makes up about 40 per cent of an energy bill, with the rest covering charges for network transmission and balancing, and programmes like the climate change levy, which is a tax on non-domestic gas and electricity bills.
“Although not visible on the bill, carbon costs will be factored into the wholesale electricity price,” explains Tim Dixon, an energy market analyst at consultants Cornwall Insight.
One way to avoid these taxes is to go off grid and install solar panels or other forms of micro-generation, he explains, although an easier way to make an impact is to move to green energy. “A lot of businesses are looking at ways in which they can be more sustainable, but the options aren’t amazingly clear and transparent at the moment,” says Dixon.
Take green energy. In the UK, for a supplier to claim a tariff is 100 per cent renewable, they have to back it with renewable energy guarantees of origin, or REGO, certificates. But these certificates were initially sold too cheaply, devaluing the scheme and leaving question marks hanging over the true provenance of some green tariffs, says Dixon. There have since been calls for the scheme to be reformed.
“More businesses are looking at contracting directly with renewable generators, so they know where their electricity is coming from,” he says.
A way to do this is through a power purchase agreement (PPA), which gives businesses greater control over the energy prices they pay. PPAs involve directly contributing to a new renewable energy project by agreeing to pay the developer a fixed price for energy when the project comes online. It’s a way of eliminating the carbon impact of purchased energy, while also adding green energy to the grid.
A drawback of this type of agreement, however, is it favours large corporations with deep pockets and credit ratings that enable them to commit to long-term projects.
“It’s difficult for small companies to get involved because they’re so resource intensive,” says Dixon. What’s needed are more innovative ways to bring companies and suppliers together, he says, such as aggregated PPAs, which involve a coalition of companies sourcing electricity from a single renewables generator.
“Everybody needs to participate in this industry to reach the goals of the Paris Climate Agreement,” says Zach Starsia, director of accounts at Seattle-based renewable energy platform LevelTen Energy. “We need to mobilise smaller buyers.”
LevelTen connects smaller businesses with large clean energy projects that are willing to sell them a small amount of energy. “By pooling their demand, they can act as a single large purchaser, which opens up opportunities that would not have been available had they acted alone,” says Starsia.
But whatever direction carbon pricing takes, ClimateCare’s Lindsay is adamant that polluters must continue to be made to pay. “The purpose of pricing carbon is to change behaviours,” he concludes. “If you pollute something, but you don’t have to pay for it and somebody else picks up the bill, you’re never going to change.”