Power sector urged to adopt world’s first investment-grade carbon pricing mechanism

Financial heavyweights including Bank of America, Barclays and Hermes Investment Management have teamed-up to introduce the world's first investment-grade carbon pricing system for the power sector, aimed at aligning company operations with a 2°C pathway.

A new Carbon Pricing Corridors report released today (25 May) by CDP on behalf of the We Mean Business coalition identified that utility firms would need to adopt a carbon price range between $30 – $100 per tonne by 2030 to limit global warming to 2°C.

The Carbon Pricing Corridor allows investors, companies and policymakers to use price ranges to calculate risks and opportunities posed by climate change on sector investment decisions.

“The power sector is at the heart of the shift to a low-carbon future,” CDP’s director of Carbon Pricing Nicolette Bartlett said. “Power generation needs a complete overhaul, with 100% decarbonisation needed globally by 2050 to have a better chance of keeping to 2 degrees.

“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.”

With the power sector accounting for around a quarter of global emissions, We Mean Business comprised a panel of more than 20 chief executives and senior leaders from organisations across the G20 to provide market insights into the impacts that carbon pricing would have on the sector.

The report found that policies are increasing the adoption of carbon prices globally. There has been a 23% increase in the last 12 months in the number of companies embedding an internal carbon price. However, the report states that the policies aren’t incentivising companies to reach for the 2°C pathway established under the Paris Agreement.

A “user matrix” has been added to the initiative, allowing different sectors to adopt different prices ranges during different time periods. Investors and businesses can then benchmark funding decisions against price signals.

The price ranges do not differ significantly from ones created by the Carbon Tracker and the IEA. However, as the prices near 2030, variations appear due to the belief that a lower price will be needed due to technological breakthroughs and cheaper renewable costs.

Similar reports will be published over the next two years to cover the steel, cement, paper & pulp and aluminium industries.

Task Force consideration

The power sector currently operates with an average carbon price of around $35 per tonne. The initiative hopes to scale this price in line with how likely the sector is to align with the Paris Agreement. Currently, Europe’s major utilities companies are “locked” into high emission projects, placing €14bn of earnings at risk.

CDP’s ‘Charged or static report, released in April, analysed the €256bn market grouping of 14 of the largest European publicly-listed energy firms and found that they look set to collectively overshoot the required “carbon budget” to keep temperature rises below 2C by 14% – equating to 1.3bn tonnes of greenhouse gas emissions.

The report echoes Mark Carney’s Taskforce on Climate-related Financial Disclosure (TCFD) findings, which highlight the need for investors to be able to stress test portfolios against a range of climate scenarios.

Commenting on the Carbon Pricing Corridors, Barclay’s head of European utilities equity research and Task Force member Mark Lewis said: “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 more than 200 countries agreed to the ambitious goal of stabilising 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.”

Matt Mace

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