First, the cost of emitting greenhouse gases – in other words, the carbon price set by governments – is still too low. At around USD 5–10/tonne, the price of carbon does not accurately reflect the true cost of the damage of emissions from polluters. One tonne of carbon needs to be priced at more than USD 100 to correctly reflect its true cost.
Companies adopting a higher internal carbon price would mean putting in motion a number of other important actions:
- Companies who set net zero targets would realise that the cost of GHG emissions (to their operations) is substantial.
- This would trigger an effort to reduce emissions, both to reach their sustainability milestones and to lower operational costs, and to prepare these companies for potential compliance costs in the future should governments introduce stronger carbon regulation.
- The higher the carbon credit price, the more incentive the firm has to reduce its own emissions rather than pay the cost to compensate its residual emissions. Firms that are serious about achieving net zero should thus pay a fair price for carbon credits to drive decarbonisation efforts within and beyond their value chains.
Second, the flip side to a low price on carbon (which allows companies to emit at a low penalty), is that it does not provide sufficient incentives for companies to reduce their own emissions significantly, nor drive financing into green projects because the rate of return is too low. Why is that? If the carbon credits these projects generate cannot be sold at more than USD 10/credit, then investors are not interested in financing these projects.
Third, private companies do not see a clear path for action. In the media, using carbon credits to compensate for their emissions is criticised by actors who claim that it is 'greenwashing'. They insist that the only credible path for companies is to fully avoid all emissions throughout their operations and value chains. They insist that they should not be allowed to use carbon credits to 'atone for their sins'.
However, we do not have the technologies at hand at an affordable price to allow all companies to reach zero emissions within their own operations and value chains today. And critics do not offer an alternative solution for companies: they insist on full decarbonisation now. Would this mean stopping operations, to not emit at all? This is not an action companies could afford to take.