Leadership & innovation: why build a carbon pricing strategy

Gérald Maradan

The Paris Agreement set a foundation for the future of climate action. Now the key is implementation, where business will play a vital role in the success or failure of carbon pricing programs around the world. We ask a group of executives: how should business show true leadership on carbon pricing? And where are the opportunities for pricing to spur innovation to meet the 2 degree challenge? 

” I would like first to answer the first question:  how should business show true leadership on carbon pricing? The question is interesting. The answer is simple, which is that today, business has no other choice. At EcoAct, we think today, climate is the center of everything: climate change involves biodiversity issues, lack of resources, water scarcity and impacts on business. Most companies have understood that the risk brought by climate change is huge; the risk being, at the end the potential destruction of the planet, or at least serious environmental issues. And without the planet, there is no business. It would be crazy that the business world does not take the lead and does not act.

The Paris Agreement is a starting point, but it was quite disappointing in terms of the lack of ambition. It provides general guidelines and a framework for what could voluntarily be done. Business has a key role to play. We cannot just “wait and see” with the Paris Agreement.

Carbon pricing in the Agreement is very indicative of this situation. 

Every economist in the world agrees that carbon pricing is central in tackling climate change and carbon pricing was at the center of the discussion during COP21. However, at the end, it was not included in the final agreement and only present in the preliminary remarks. Nevertheless, in article 6 there is a clear reference to the carbon market and new offset mechanisms. But it’s not enough because it does not require anyone take part in the new offset mechanisms.

We know that fixing a carbon price can be accomplished in 2 ways: tax or cap & trade markets. In these two solutions, there is a direct impact on business even if today only 12% of worldwide emissions are implicated by tax or markets. Definitely, this will increase significantly in the future.

Putting a tax has an inconvenient: it’s like a cheese with holes. There are always exceptions and it’s difficult to collect. There will be a winner, which is not good for climate. Carbon market is the most efficient and easiest to harmonize in a worldwide perspective.

We also know that the price needs to be sufficiently high. According to studies, the price shall be at a minimum of 30 euros to clearly push toward significant low carbon investments, fostering innovation and new technology. There is a clear link between carbon price and innovation. 

Business has understood the situation and cannot just wait and see. Furthermore, it has to take the lead to solve the problem. Increasingly, businesses have decided to fix their own carbon price because they want to act, and they also want to anticipate future regulations and laws.

Many business groups called for carbon pricing last year (the most symbolic one is the announcement in that sense from the oil and gas industry). Now they are acting. According to CDP, in 2015, more than 435 companies in the world defined a carbon price compared to about 150 in 2014. And they are quite inventive since it’s not simple to fix a price unilaterally without a global regulation. Many methods exists and EcoAct has accompanied several companies to build the tools:

  • ICPP for investment, Internal carbon fund
  • Development of Offsets
  • Definition of new methodologies
  • Science based targets 

We created a Climate Club in which business gathers to foster innovation and be ready for the climate challenges. The movement is on-going which is positive. Innovation is flourishing now compared to a year ago. This is the positive impact of Paris Agreement.

The second question is: Where are the opportunities for pricing to spur innovation to meet the 2 degree challenge? Everywhere. Every business has to adapt their business model and build the tools on their sectors. They are the ones who know best what to do.

To conclude, I’d say that business has a new responsibility. It has to take the leadership because the business world is in danger and none will arrive from outside to provide the solution.

Nobody can witness droughts in Africa and floods in Asia without saying something or without acting. Because one day or another, it will be in their own backyards. 

Not acting for one business would be to adopt the position of the “free rider” and it’s risky. You cannot wait anymore for others take the lead and then benefit from the positive effects of the actions took by the others. Because in the theory of the free ride set up by Mancur Olson in 1965, the situation could lead to higher negative impacts for everyone at the end.

 Acting is an opportunity for climate, for innovation, to build new business model. Just business has to think about which place it wants to have in the future low carbon world.”

Gerald Maradan, CEO of EcoAct