3 ways to unlock the full potential of carbon pricing 

The opinions expressed here by Trellis expert contributors are their own, not those of Trellis.​

With financial accountability for net-zero targets in the spotlight, the time has come for carbon pricing to reach its full catalytic potential. Done well, carbon pricing has the potential to rewrite incentives and motivate governments, corporations and individuals to be more responsible for their greenhouse gas (GHG) emissions.

The elegance of carbon pricing is that it provides a common denominator for GHG liabilities and investments. Carbon pricing enjoys broad, active promotion from decarbonization advocates across the political spectrum — more than some climate policies such as clean-energy or electric vehicle tax credits — and widespread use in the oil and gas sector. With fairly steady support over the years, carbon pricing has grown steadily since 2005, according to the World Bank’s annual roundup. Almost one-third of all global emissions are covered by a carbon price.

Moreover, the Science Based Targets initiative (SBTi) recently released its next discussion draft for the Corporate Net Zero Standard that included its first carbon pricing mechanism. Optional until 2035 and mandatory thereafter, the carbon price would mobilize more climate finance to address “ongoing” carbon emissions. 

Carbon pricing has had durable appeal, but could create a bigger impact in the years ahead. Here are three ways to unlock that potential and mobilize significant climate transition funding.

Tackle the terminology

Most of the World Bank’s report focuses on government policies for carbon pricing. In contrast, a report from the University of Oxford proposes that companies can use internal carbon pricing as a tool “for managing climate risk, incentivizing low-carbon investment, and preparing for emerging regulatory requirements.”

The difference and overlap between these two spheres are complex. One key to scaling outcomes from carbon pricing will be to resolve persistent confusion in the terminology, to disentangle the policy tools from voluntary measures and distinguish strong initiatives from weaker ones.

In practice, the term “carbon pricing” is used as a catch-all, because all carbon pricing initiatives share the goal of internalizing the external costs of GHG emissions. But a regional emissions trading scheme is vastly different from a corporate carbon price. In the simplest applications, carbon pricing is a symbolic and optional guidepost for budgeting decisions. In the strongest cases, it generates measurable financial flows from GHG emitters into decarbonization projects.

Words do matter and carbon pricing needs labels that distinguish one structure from the others. In the case of corporate carbon pricing, the persistent ambiguity lets companies blur the line between promises and progress. It risks letting businesses sound ambitious — claiming they are climate champions because they use carbon pricing — even if they have yet to invest a single dollar in solutions.

Apply it in value chains

Internal carbon pricing makes companies four times more likely to have climate transition plans in place, according to research from non-profit organization CDP. Big name brands and major buyers can use carbon pricing to underpin transition plans for their direct emissions as well as for their value chain climate initiatives, which are key to cracking the Scope 3 puzzle. 

Carbon pricing can create better understanding and alignment of goals up and down the value chain. Large buyers, for example, can establish a pathway for suppliers to slowly phase in carbon pricing, and offer pooled resources and practical implementation guidance. Retailers can use carbon pricing to create both carrots and sticks to accelerate investment in climate projects well up the value chain.

It’s important to make sure that value chain carbon pricing initiatives don’t simply tax and weaken supplier partners. To do this, buyers can use internal carbon pricing as a means to generate funding that, through procurement decisions and direct investment, flows into value chain partners’ decarbonization projects. Many exciting examples of net zero partnership between buyers and suppliers leave suppliers financially stronger and better positioned to serve all of their customers with low-carbon alternatives. 

Solve the interoperability puzzle

To scale up the adoption and success of both policy and corporate carbon pricing schemes, it will be necessary to get clearer on how they overlap. Frameworks such as the GHG Protocol, SBTi, the EU’s Carbon Border Adjustment Mechanism trade policy, the Corporate Sustainability Reporting Directive disclosure law and others will need a common yardstick to measure and value companies’ commitments to internal carbon pricing.

As University of Oxford professor Robert Eccles argued recently in Forbes, the next evolution of carbon pricing depends on prioritizing consistency and collaboration over competition. This applies equally to both policy carbon pricing and corporate carbon pricing schemes. “[The tool] can only function if built on reliable, comprehensive carbon accounting that assigns accountability appropriately while enabling market mechanisms to operate efficiently.”

Companies and governments have long used carbon pricing to create incentives for credible climate action, albeit inconsistently. Today’s renewed attention to net zero accountability offers an opportunity to make good on the full potential of carbon pricing. 

We should expect financial commitments to take center stage in corporate climate initiatives in coming years. To raise the accountability bar, advocates can coalesce around an expectation that companies disclose not just future net-zero intentions, but present day financial follow through.

That will require clearer alignment around the technical uncertainties of carbon pricing. Initiatives to sort out the terminology around carbon pricing, syndicate it across value chains and improve interoperability across corporate and policy schemes will help mobilize hundreds of billions of dollars in additional climate funding. With the right level of attention, carbon pricing may just be the highly practical—not flashy—tool needed to accelerate climate finance in the crucial years ahead.