The Business Case for Carbon Pricing

Royal DSM executives highlighted internal carbon pricing as an important financial tool for driving business growth in the first of a new webinar series organized by the Carbon Pricing Leadership Coalition in partnership with the World Economic Forum and Yale University.

The series aims to spotlight leading examples of internal carbon pricing by initiating an open dialogue with corporate executives and sustainability practitioners on best practices and the business case.

Setting the stage for the series, Dominic Waughray of the World Economic Forum emphasized that “systemic issues such as carbon pricing” are needed “to advance the agenda for climate action.” Collective action from the private and public sectors on carbon pricing must be one of the world’s levers for decarbonization in the wake of the Paris Agreement, according to Waughray.

The kick-off webinar featured Royal DSM CEO Feike Sijbesma, CFO Geraldine Matchett, and executives Frank van den Boomen and Maaike Lambrichts, who shared the company’s experience with internal carbon pricing as a means to supporting internal decision-making and driving the company’s sustainability goals.  Watch the full webinar here:

THE BUSINESS CASE FOR CARBON PRICING AT DSM

Royal DSM is a renowned leader in corporate sustainability, climate action, and technological innovation. CEO Feike Sijbesma, a longtime advocate of carbon pricing and co-chair of the CPLC High-Level Assembly, highlighted the role and value of DSM’s internal carbon price.

“We want to future-proof our business,” Sijbesma said. DSM aspires to be prepared for the day when a carbon price impacts all of its operations—and that day may be right around the corner for many companies after the turning point of Paris, according to Sijbesma.

Introducing a carbon price, like removing fossil fuel subsidies or offering tax credits for renewable energy, changes the accounting. By including the true cost, or at least a portion of it, in financial calculations, more carbon-intensive assets may be screened out, tilting the balance in favor of low-carbon alternatives.

"You put addressing climate change into the economic system,” said Sijbesma. The carbon price allows DSM to determine which investments make financial and environmental sense, according to CFO Geraldine Matchett. It also helps to create a “common language” across the company and its operations by “quantifying the impact of sustainability-related aspects” of investments.

The World Bank’s research demonstrates increasing national and subnational adoption, with over 40 national and 20 sub-national jurisdictions—representing 13% of global emissions—putting a price on carbon. Moreover, 90 NDCs referenced carbon pricing initiatives or related market-based mechanisms. With global operations, the Dutch-headquartered company has exposure to carbon pricing in multiple national and subnational jurisdictions, rendering the internal practice advantageous from corporate de-risking and long-term planning perspectives.

DSM’S CARBON PRICING DESIGN

Determined on an empirical basis, Royal DSM’s carbon price is €50/tCO₂e and takes the form of a shadow price applied to Scope 1 and 2 emissions for capital expenditures.

“For all projects that require corporate approval, business teams are asked to put forward a standard model—which includes [a] carbon price […] where it exists in jurisdictions—as well as the same model but with the €50 price,” explained Matchett.

The company opted to take a straightforward approach by not inflation-adjusting the price, making it equal across all geographies, and using normal discounting rates.

Sijbesma cautioned that the level of the price needs to be “realistic—not too low, otherwise it doesn't have impact; and not too free-trade, otherwise it becomes a toy for the financial industry.”

A 2015 report from the Carbon Disclosure Project indicates over 430 companies are using variations of carbon pricing as part of their business operations, nearly three times the number from a year earlier. With hundreds of others slated to join in the next few years, becoming acquainted with the “learning by doing” approach will be critical to turning private sector commitment into action.

So will stakeholder engagement and clear communication, according to Frank van den Boomen, Director of Operational Excellence and Responsible Care. As he pointed out, employees across the company have to be just as aware of and empowered by the carbon price as the executive team, ensuring that low-carbon investment opportunities percolate up to the financial arm of the business.

As other companies consider putting a price on carbon, VP of Finance & Business Support Maaike Lambrichts advised not to “go for perfection” and to “keep it simple” by integrating the carbon price into existing business processes. DSM executives collectively underscored the value of the learning process.

HOW DOES DSM’S CARBON PRICE SUPPORT ITS SUSTAINABILITY GOALS?

Royal DSM furthers its ambitious climate and energy agenda within and beyond the company. Its internal targets for 2025 include a 45% reduction in GHG emissions per unit of product; an intermediate goal of sourcing 50% of its procured energy from renewable sources, with a long-term goal of becoming 100% renewable through the Renewable Energy 100; and ensuring over 50% of its sales come from “ECO+” products.

Carbon pricing aligns with the company’s broader sustainability goals of reducing the carbon footprint of operations and new products, as well as publicly supporting a carbon price. Recognized for its leadership, DSM is a member of the Carbon Pricing Champions Group, the Carbon Disclosure Project, the World Economic Forum CEO Climate Leaders, and We Mean Business Coalition.

Within the company, carbon pricing has prompted creative thinking among employees about the investments and technologies that reduce energy consumption.

“The mindset of the engineers and operations employees was changed,” said Van den Boomen. “They started thinking about the best technologies to be used that reduce energy consumption.”

Ultimately for DSM, carbon pricing helps make the “upfront business case” for capital projects, according to Van den Boomen, by embedding sustainability principles into investment planning.

FUTURE OUTLOOK

Moderator Dan Esty, Hillhouse Professor of Environmental Law and Policy at Yale, wrapped up the session by thanking DSM for its leadership and stressing the importance of starting a conversation at this point in time.

“The next few years may prove to be a watershed moment for carbon pricing,” said Esty. “But we have to keep in mind that the adoption of carbon pricing is going to be a journey—much like the road to Paris—and learning, collaboration and persistence will be the keys to success.”

Considering the momentum of carbon pricing coming out of Paris, now is an opportune time to initiate a focused conversation on the subject. The CPLC, World Economic Forum, and Yale University look forward to continuing and expanding the conversation with the next webinar, which is scheduled for September and will feature Yale’s own internal carbon charge.

If your company is putting a price on carbon and is interested in sharing its experience, please contact us at cbey@yale.edu