With the ongoing climate summit, COP28, attention has swiveled back to carbon pricing. Over 40 national jurisdictions already have carbon-pricing systems in place, and another 35 are considering implementing such systems. Notably, the EU’s implementation of the world’s first carbon-centric tariff system, the Carbon Border Adjustment Mechanism (CBAM), was initiated last month. The UN is also in the process of establishing a centralized international carbon market under Article 6 of the Paris Agreement with widespread international support.
According to calculations drawn from World Bank data, carbon emissions are priced higher than ever, rising from $26 per metric ton of carbon dioxide equivalent (CO2e) in 2010 to an expected $36 in 2023. These costs often are invisibly amalgamated into the price of goods and services, thus forming the “hidden costs” of carbon emissions.
However, the calculation of these hidden costs can be complex due to the variety in how carbon pricing systems charge for emissions. Emissions trading plans, which are based on specific business metrics, make these carbon costs relatively easy to measure. These costs are paid directly to government authorities. In contrast, carbon taxes are usually absorbed into the prices of goods, making them less visible and often harder to account for in project economics.
Industrial companies in certain countries are aware of their costs of carbon emissions, as they pay directly to comply with cap-and-trade regulations. However, where carbon taxes are in place, companies with fuel-intensive operations and transportation networks pay indirectly for their emissions as the cost of carbon taxes are built into their input prices.
A unique model has been developed to understand how the hidden cost of carbon builds up across supply chains. This model collates data on national and subnational carbon prices with data on supply-chain emissions for 65 sectors across 141 countries and regions. According to the model, the hidden cost of carbon can amount to more than 1.5% of the production value of goods like steel, cement, and chemicals in the 19 individual countries of the G20. For electricity, this figure can go up to 10%.
With upcoming price increments and the introduction of new pricing systems like the CBAM, the cost of carbon is likely to increase further. Companies must strategize to reduce their carbon costs and emissions to remain competitive in the long run. Initiatives like the green incentives offered by several governments may help offset the costs of clean-energy investments, providing a clear path towards sustainability.