What price carbon?

By Alan Porter, Fund Manager, Sanlam Investments

Carbon pricing is widely accepted as a key policy tool to achieve the big cuts in emissions needed to meet the goals of the Paris Agreement. However, it’s estimated that only one fifth of carbon emissions are covered by any kind of carbon pricing and there is little joined-up thinking amongst policy makers. Never mind what the price of carbon should be, the price of not having a global carbon pricing mechanism seems high indeed.
By making the more polluting energy sources more expensive than cleaner ones, carbon pricing could provide the right incentives to direct future investments and reduce carbon emissions. In practice, countries are moving at different paces and action is slow and uncoordinated. Many observers believe the carbon price needs to be over $75 per ton but the global average is way below that.
In mid-2021, the International Monetary Fund published a paper that proposed the creation of an international carbon price floor to sit alongside the Paris Agreement. The paper suggested three factors were key. First, any arrangement needs to be launched by the highest emitters. China, India, the US, and the EU are likely to account for around two-thirds of projected global CO2 emissions. Second, the arrangement should be anchored on a minimum carbon price, a bit like the broader discussion on a minimum tax rate in international corporate taxation to provide a level playing field. Third, any arrangement needs to be pragmatic and reflect, for example, the historical emissions and development levels of different countries.
Some of the companies we invest in are ahead of the curve here. DSM, the Dutch nutrition company, is part of the Carbon Pricing Leadership Coalition (CPLC). The CPLC’s long-term aim is for effective carbon pricing to be applied throughout the global economy. Importantly, the CPLC is mobilizing business support to put an internal price on carbon. DSM, in 2020, applied an internal carbon price of €50 per ton of CO2 when reviewing large investments and acquisitions. In August 2021 DSM doubled this to €100 per ton to further guide its investments and operational decisions.
We can only hope that policy makers start making longer-term decisions on carbon pricing as some businesses have done.

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