25 May, 2017: New insights on carbon prices to transform the power sector were launched today by the world’s first industry-led initiative convened by business leaders from Bank of America, Barclays, PGGM, MN, Engie, Iberdrola, NRG and Hermes Investment Management. The power sector accounts for a quarter of global emissions and defining investment-grade carbon price ranges will help companies better understand risks and how these align with the goals set out in the Paris Agreement.
The report reveals that while policies which place an explicit price on carbon are increasing globally, with a 23% increase between 2015-2016 in companies embedding an internal carbon price1 , they are not incentivizing companies enough to undergo the rapid transformation needed to achieve abelow 2°C scenario. The research also shows there are other carbon-related price signals embedded in the economy which need to be considered, including policy, innovation and shifting market dynamics.
“The power sector is at the heart of the shift to a low-carbon future. Power generation needs a complete overhaul, with 100% decarbonization needed globally by 2050 to have a better chance of keeping to 2 degrees” commented Nicolette Bartlett, CDP’s Director of Carbon Pricing. “By factoring in carbon prices necessary for this transformation, utilities and investors can better assess climate-related risks as well as identify commercially attractive carbon-free alternatives.”
The Carbon Pricing Corridors is part of the work conducted by CDP under the We Mean Business initiative comprising a panel of more than 20 chief executives and senior leaders from across the G20 who provide market insights into the future impact of carbon pricing. Investors, companies and policymakers can use the price ranges to help calculate the risks and opportunities posed by climate risk to investment decisions. The power sector currently uses an average carbon price of $35/tonne. The panel identified that utilities would need a carbon price range between $30 - $100/tonne by 2030 to limit global warming to 2°C.
The price ranges could be particularly useful for those companies and investors who plan to align their business models with the goals outlined in the Paris Agreement using an internal carbon price. Findings suggest that carbon prices emerging by 2030 will impact capital expenditure decisions being made by power companies today.
This report comes at a critical moment as Mark Carney’s Taskforce on Climate-related Financial Disclosure (TCFD) highlights a clear need for investors to be able to stress test their portfolios against a range of scenarios. The Carbon Pricing Corridors initiative provides organizations with a ready-made tool to stress test their investment decisions in light of the Paris Agreement.
There is increasing momentum for carbon pricing in both public and private spheres, as renowned economists Joseph Stiglitz and Lord Nicholas Stern have established a high-level commission on carbon pricing for policymakers2.
Lance Pierce, President of CDP North America commented: “Industry-led endorsement of this initiative underscores the spread of carbon pricing as a tool for both business and policy. The price ranges identified by the Corridors initiative can help investors and companies with the increasingly important task of calculating the transitional risks brought on by climate change. TCFD recommendations point to the clear need for investors to be able to stress test their portfolios against a below 2°C scenario, and many are seeing robust carbon pricing as an important way to operationalize the TCFD recommendations. Preparing for a price on carbon today will help transform the wider economy tomorrow, decreasing climate-related risk more broadly and supporting financial stability.”
“Our focus on the Task Force is on how companies can and should integrate climate-related risks and opportunities into their core financial planning and reporting. We recommend companies sense check their business strategy against a range of scenarios, including taking into account that over 200 countries agreed to the ambitious goal of stabilizing the climate below 2-degrees. There is a very real transition underway, in particular across the energy sector. The private sector needs to take this into account if we are allocate capital to the right places and ensure financial stability.” commentedMark Lewis, Managing Director, Head of European Utilities Equity Research, Barclays; Member of the Task Force on Climate-related Financial Disclosure
Other findings include:
- Public policy: Policymakers can use these findings in their cost-benefit analyses of policy proposals and in public procurement decisions.
- User friendly: The initiative has developed a ‘user matrix’ detailing how different sectors can use the price ranges over different time periods, to benchmark their investment decisions against these price signals.
- Price ranges: Price ranges for the period to 2030 do not differ significantly from those created by institutions such as the IEA and Carbon Tracker. However, there are variations nearing 2030, when some panel members believe a lower price than other models will be needed due to technology break-throughs and favorable renewable cost curves.
The initiative is due to report on its initial carbon price ranges in other energy-intensive sectors over the next two years, including steel, cement, paper & pulp and aluminum. The corridors will inform work underway in the World Bank Group managed by the Carbon Pricing Leadership Coalition, which has over 200 global Partners aiming to accelerate the uptake of carbon pricing around the world.
For the full report please click here.
NOTES TO EDITORS
Scope and process of the Carbon Pricing Corridor initiative
The Carbon Pricing Corridor will develop an iterative scenario building process that relies on the opinion of a panel of experts. Influential economic actors and experts will apply their knowledge in the areas of energy investments (and in time high emitting and industrial sectors) and consider relevant research and developments to arrive at a view on what range of carbon prices is necessary to shift to a decarbonized global economy well-before the end of the century.
Expert opinions will be obtained via a process of inquiry, asking panel members to respond to a small set of quantitative and qualitative questions. Results will be collected and analyzed to determine an aggregated projection for the range (corridor) of carbon prices, over time, that will likely enable us to meet the emissions reduction goals outlined by the Paris Agreement. The process will result in a biannual publication, the first of which was published in January 2017.
The focus of the first inquiry process and subsequent publication will be on the power sector in order to determine a carbon pricing corridor that enables a transformation in energy supply.
Initially, the project will focus on G20 or a sub-set of G20 countries and will look at the price signals needed for 2020; 2025 and 2030 timeframes.
Current panel members include:
Abyd Karmali, Managing Director of Climate Finance, Bank of America Merrill Lynch
Andre Dorf, CEO, CPFL
Bob Inglis, former Republican Member of the US House of Representatives, and Executive Director, rebublicEN
Brian Marrs, Group Director, Policy and Strategy, NRG Energy
Else Bos, CEO, PGGM
Feike Sijbesma, CEO, Royal DSM
Gerald Cartigny, Member of the Managing Board, CIO, MN
Gérard Mestrallet, Chairman, Engie
Ian Yadigaroglu, Managing Principal, Capricorn Investment Group
Jeroen De Haas, CEO, Eneco
Ignacio S. Galán, Chairman and CEO, Iberdrola
Jose Manuel Entrecanales Domecq, CEO, Acciona
Mark Lewis, Managing Director, Head of European Utilities Equity Research, Barclays; Member of the Task Force on Climate-related Financial Disclosure
Mats Andersson, Former CEO, AP4
Michael Grubb, Professor of International Energy and Climate Change Policy, University College London
Nancy Pfund, Managing Partner, DBL Partners
Pekka Lundmark, CEO, Fortum Oyj
Philippe Joubert, Chair, The Global Electricity Initiative
Rana Kapoor, Managing Director & CEO, YES BANK
Ross Rolfe, CEO, Infigen Energy
Saker Nusseibeh, CEO, Hermes Investment Management
Sherard Cowper-Coles, Group Head of Government Affairs, HSBC Holdings Group
CDP is an international non-profit that drives companies and governments to reduce their greenhouse gas emissions, safeguard water resources and protect forests. Voted number one climate research provider by investors and working with institutional investors with assets of US$100 trillion, we leverage investor and buyer power to motivate companies to disclose and manage their environmental impacts. Over 5,800 companies with some 60% of global market capitalization disclosed environmental data through CDP in 2016. This is in addition to the over 500 cities and 100 states and regions who disclosed, making CDP’s platform one of the richest sources of information globally on how companies and governments are driving environmental change. CDP, formerly Carbon Disclosure Project, is a founding member of the We Mean Business Coalition. Please visit www.cdp.net or follow us @CDP to find out more.