Carbon pricing and regulations on externalities, human rights, and community impacts help level the playing field for private sector investment and action. - Unsplash
HOW do we accurately price the value of a sustainable future?
Global annual greenhouse gas emissions (GHG) are far beyond the 1.5°C path laid out in the Paris Climate Agreement. While recent discussions at the 29th Conference of Parties (COP29) in Azerbaijan have attempted to readjust our path, on the current trajectory we’re on track for a catastrophic 4°C warming above pre-industrial levels.
Global emissions must be drastically reduced to limit global warming, and carbon pricing will be a vital piece of that puzzle. These mechanisms work by placing a price on the volume of carbon produced by heavy emitters – an important intervention in a market where power and industry account for over half of annual GHG emissions.
Dave SivaprasadManaging Director and Partner; Southeast Asia Lead, Climate and Sustainability, Boston Consulting GroupIn a world with no carbon pricing, the private sector would almost always choose energy projects that yield higher returns – as opposed to those with higher reductions in carbon emissions, but lower financial returns. This reflects the current market system where profitability outweighs environmental considerations, making carbon pricing an essential policy measure to advance our agenda on climate.
To shift market behaviour, laws and incentives must account for the broader value of ecosystems and societal impacts. However, responsibility doesn’t rest solely on the public sector, the private sector must collaborate with governments, advocating for impactful climate policies and providing technical expertise.
Carbon pricing and regulations on externalities, human rights, and community impacts help level the playing field for private sector investment and action.
This is slowly being implemented or under consideration for implementation in South-East Asia, with Singapore launching a modest carbon pricing mechanism in 2019 and Malaysia announcing intentions to bring in carbon taxes on high-emitting industries by 2026. Thailand and Indonesia are also exploring carbon mechanisms, with the latter having already implemented an emissions trading scheme (ETS).
Levelling the playing fieldClimate financing has reached US$1.4 trillion for energy transition investments in 2023. However, an estimated US$150 trillion is required to reach net zero globally by 2050, highlighting that a substantial gap needs to be bridged.
Without a level-playing field that incorporates carbon pricing, private sector funds will not flow into low-carbon investments—unless there are regulatory mandates in place, such as a ban on the sale of internal combustion vehicles.
Carbon pricing can take the form of carbon taxes, ETS or a blend of both. The EU Emissions Trading System is the most prominent and mature of these mechanisms, although there are various markets globally which together cover over five gigatonnes of CO2 equivalent (GtCO2e).
Countries like Sweden, Denmark, Canada, South Korea, and Japan have implemented a combination of carbon taxes and ETS. In some cases, they have applied ETS to high emitting sectors while imposing a carbon tax on the rest of the economy.
Carbon pricing provides the financial incentive for emission reductions, in turn enabling an effective carbon financing ecosystem. Both carbon taxes and ETS play key roles in this, giving businesses the cost of emissions, which can then inform internal carbon pricing and decarbonisation strategies.
Preparing your business for carbon pricingCompanies should set a science-based pathway with interim targets, supported by a separate removal plan to address residual emissions, such as using carbon-removal certificates. They should also fund solutions beyond their value chain that benefit climate, people, and nature to create meaningful ESG impact beyond net-zero commitments.
The number of carbon pricing initiatives globally is growing, with 39 national and 33 subnational initiatives in place as of 2023, covering around a quarter of total global emissions.
Carbon pricing ranges widely across jurisdictions, from around US$1 tonne of carbon dioxide (tCO2) to US$150 tCO2e. Less than 1% of emissions covered are currently mandated at pricing in the range recommended as being required by 2030 – US$61 to US$122 tCO2e – to meet the goals of the Paris Agreement.
Global carbon pricing revenues topped US$100bil in 2023, but there are still major gaps in global coverage. What’s critical for companies in Malaysia and South-East Asia, however, is how they respond to a changing ecosystem.
Malaysia has pledged to achieve net zero by 2050, and is considering the role that carbon pricing can play in a sustainable circular economy of the future.
Carbon pricing is an important policy lever for Malaysia. Revenue generated from carbon pricing can be reinvested in carbon finance projects, creating demand for carbon finance instruments and a maturing carbon market. This will support a low-carbon reduction in emissions in line with the country’s 2050 goals.
Singapore has introduced a carbon tax of S$25 per tonne for emitters that produce over 25,000 tCO2e until 2024, with a view to reach S$50 to S$80 per tonne by 2030. That’s an important step, but falls short of the ambitions required to achieve our shared climate goals.
Malaysian corporates can go further. This matters for businesses not only because they face significant financial costs from the escalating impacts of climate change, but also compliance risks through exposure to global carbon taxation systems.
The EU’s Carbon Border Adjustment Mechanism (CBAM) – expected to be in place by 2026 – is the most significant of these mechanisms, imposing a substantial fee for imports of goods from countries which don’t comply with EU climate standards. Malaysian exporters face escalating costs if they can’t manage their carbon footprint.
Companies can prepare for this by implementing internal carbon pricing in operational and capital allocation decisions. Low-carbon operations are a competitive advantage, especially for businesses targeting markets with stringent carbon standards like the EU. By adopting internal carbon pricing, companies not only safeguard their long-term viability but also position themselves more competitively in their industry.
Carbon-abatement pathways will vary by industry, but the imperative remains constant. As exposure to carbon pricing continues to grow both domestically and globally, it’s not enough for companies to ensure their carbon numbers add up. They must also be able to explain the process and rationale behind them.
What’s the carbon price for a sustainable business? That’s the new question for corporate ESG.
