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There is growing momentum globally to place a price on carbon, with increasing use of carbon instruments to achieve compliance with cap-and-trade regimes and to achieve voluntary greenhouse gas (GHG) emission reductions.  A significant number of national jurisdictions, as well as cities, states and regions are placing a price on carbon and establishing emission trading schemes (ETS).  Additionally, many companies are more aggressively managing their environmental footprint, including energy use and GHG emissions, and are evaluating the impact of carbon pricing on their business and investment strategy.

This article examines carbon finance and the various ways in which it can be leveraged to establish and manage an entity's carbon strategy and program.

Carbon Finance

Carbon finance has its roots in environmental finance, which examines the use of use of market-based instruments to achieve environmental objectives.  One example of environmental finance is a land trust, where an agency or entity may designate the use of property for a specified time for a type of activity (e.g., agriculture, public access, wildlife habitat, timber production).  Title IV of the U.S. Clean Air Act Amendments of 1990 launched the market-based SO2 allowance trading program.  Additionally, Australia has implemented a regulatory framework enabling water to become a traded commodity that values water access entitlements and water allocations.

Carbon finance explores the financial implications of a carbon constrained world, where GHG emissions carry a price.  Organizations like the World Bank, International Finance Corporation, United Nations and others are stepping up their activities to finance projects that can reduce GHG emissions.  These organizations' evaluations of projects for funding typically include an assessment of environment, health and safety, and social aspects and impacts, including climate change related considerations.

To lay the groundwork for discussion of carbon markets, carbon registries and carbon pricing, several key definitions are highlighted in the text box.

Carbon Tax/Levy - A charge on use of fossil fuels (coal, oil, natural gas) based on their carbon content.

Cap & Trade System – A legal limit on the amount of pollution with control achieved, in part, through economic incentives.

Carbon "Allowances"– Regulatory instrument that authorizes an industrial source to emit one metric ton of carbon dioxide equivalent (CO2e) during a given compliance period.

Carbon "Offsets" – The voluntary use of carbon credits to compensate for emissions, meet carbon reduction goals, and support the move to a low carbon economy, with one offset equivalent to one metric ton of CO2e.

For the purpose of this article and because there are many terms used to describe carbon instruments, the term "allowances" is used in the context of a mandatory regulation or carbon trading scheme, and the term "offsets" is used to designate carbon instruments from voluntary GHG reductions that are outside the coverage of a mandatory emissions reduction system.  The terms used to characterize program-specific carbon allowances and offsets are listed in Table 1.

Table 1. GHG Allowance/Offset Terminology

Program/Scheme/RegistryCarbon Instrument TerminologyUnits
European Union (EU) Emissions Trading Scheme (ETS)EU Allowance (EUA)1 metric ton (MT) CO2e
California AB-32California GHG Allowance1 MT CO2e
US Regional GHG Initiative (RGGI)CO2 Allowance1 short ton CO2
UNFCCC Clean Development Mechanism (CDM)Certified Emission Reduction (CER)1 MT CO2e
UNFCCC Joint Implementation (JI)Emission Reduction Unit (ERU)1 MT CO2e
Climate Action Reserve (CAR)Climate Reserve Tonne (CRT)1 MT CO2e
Gold Standard (GS)CO2 Certificates1 MT CO2e
Verified Carbon Standard (VCS)Verified Emissions Reduction Unit (VRU)1 MT CO2e
Carbon Markets and Registries

In 2016, about 40 national jurisdictions and over 20 cities, states, and regions are putting a price on carbon.1  Carbon pricing instruments cover about half of the emissions in these jurisdictions, which translates to about seven gigatons of CO2e (GTCO2e) or about 12 percent of global emissions. Examples of ETSs include the following:

  • The EU ETS covers about two GTCO2e of emissions and represents the largest international carbon pricing instrument.
  • The US has two ETSs, under California AB-32 and RGGI.
  • Since 2015, British Columbia, Ontario, and the Republic of Korea have established an ETS and Australia has introduced a safeguard mechanism to limit and price emissions.
  • Since 2013, China has implemented pilot ETSs in two provinces and five cities, with an announcement in 2015 to establish a national ETS in 2017.

And on the eve of the COP-21 signing ceremony in April 2016, The World Bank, International Monetary Fund, OECD, six heads of state and government, and two city and state leaders agreed on a global target to placing a price on carbon.

Characteristics of selected mandatory cap-and-trade regimes and voluntary carbon offset programs are briefly summarized in Tables 2 and 3, respectively.2

Table 2. Mandatory Cap-and-Trade Schemes

CharacteristicCalifornia AB-32EU ETSRGGIQuebec
GHGs CoveredAll GHGsCO2; N2O & PFC in Stage IIICO2All GHGs
Industry SectorsElectricity, ground transportation, industryElectricity, heat & steam, industry, aviation Fossil fuel fired power plantsElectricity, industry, heating fuels, ground transportation
JurisdictionsCaliforniaMandatory for all EU members, plus Iceland, Norway, LichtensteinCT, DE, MD, ME, NH, NY, RI, VTQuebec
Annual Emissions Thresholds25,000 MT CO2e>20 MW for combustion, plus sector thresholds25 MW or more in RGGI states25,000 MT CO2e
Allowance AllocationsMixed – allocation + auctionsMixed – allocation + auction (50%+ auctioned from 2013)90% auctioned, 10% state determinedMixed – allocation + auctions, sector specific
Price Floor10 USD/MT (2012/ 2013), +5%/yr. over inflationNo price floor1.93 USD in 2012, increase with CPI10 USD/MT (2012), +5% per year over inflation
Linkage StatusLinked with Quebec from 2014Australia in 2018, helping to design China marketNo linkageLinked with California from 2014
Carbon Offset Limits8% of compliance obligationNo limits, potential post 2020; Least Developed Countries only3.3% of compliance obligation8% of compliance obligation
Carbon Offset Project CategoriesForestry, Urban Forestry, Dairy Digesters, ODS DestructionCDM/JI protocols except land use, land use change, forestry; and HFC and adipic acid creditsLandfill Methane, Power Sector SF6, Afforestation, Fossil Fuel Combustion in Buildings, Ag Manure ManagementManure Storage/ Methane Destruction, Landfill Methane, ODS from insulating foam & appliances

Several key points to supplement the information in Table 2 include:

  • Greenhouse Gases – The GHGs covered in these mandatory regimes vary, ranging from CO2 only in RGGI to all GHGs (i.e., CO2, CH4, N2O, SF6, PFC, CFC/HCFC, NF3 and other fluorinated GHGs).  The EU ETS focuses on CO2, except for PFC for the aluminum industry and N2O for nitrogen-based acids manufacturing.
  • Linkage – In general, mandatory schemes operate separately but in a linked fashion.  The EU ETS links EU countries into a common scheme, and a future linkage with Australia is planned.  California’s and Quebec’s cap-and-trade regimes have been linked since 2014, with other Canadian provinces (e.g., Ontario3, British Columbia) considering linkage with California and Quebec.
  • Allowance Allocation – All regimes allow a mixture of allocated and auctioned allowances, with varying proportions between schemes.
  • Carbon Offset Limits - The proportion of voluntary offsets that can be used to fulfill a mandatory GHG reduction varies between the selected programs.  While there presently are no such limits for use of CERs within the EU ETS, limits are being considered for the scheme post 2020.
  • Offset Projects – Acceptable GHG reduction project categories vary between the selected programs, with the EU ETS accepting CERs from a wide range of CDM-approved protocols.

For companies whose operations span North America and Europe, maintaining compliance and making carbon mitigation strategy and operational decisions will continue to be challenging.

Table 3. Voluntary Carbon Offset Programs

CharacteristicKyoto/CDMClimate Action ReserveAmerican Carbon RegistryVerified Carbon Standard
Accounting & ReportingProject Development Documents (PDD)Project-specific GHG reductionsProject-specific GHG reductionsProject-specific GHG reductions
Assurance RequirementsValidation, Verification, CertificationVerificationValidation, VerificationValidation, Verification
GHG Reduction ProtocolsVoluntary reductions can be used to offset compliance obligationsAccepts CAR protocols onlyEE & RE projects not otherwise regulatedAccepts VCS, CAR and CDM protocols
Carbon TradingCERs (CDM) & ERU's (JI) accepted by EU ETSOffset credits accepted by AB-32Offset credits accepted by AB-32VCUs tradable only between VCS members

Several key points to supplement the information in Table 3 include:

  • Assurance Requirements – The CDM under Kyoto provides the most stringent requirements, including validation of the PDD (e.g., baseline, additionality, leakage, projected GHG reductions), ongoing verification of achieved GHG reductions, and final certification of GHG reductions delivered by the project.  In all cases, the project baseline, all aspects of additionality, and program-specific requirements must be clearly demonstrated for a project to qualify.
  • GHG Reduction Protocols – Use of specific protocols to generate GHG reductions vary between carbon offset programs.
  • Carbon Trading – For all programs except VCS, carbon offsets may be utilized to fulfill compliance obligations (see Table 2).  Under the EU ETS, only CERs generated from projects in least developed countries qualify.

For companies operating under a regulatory ETS, the decision to pursue voluntary carbon reductions should consider the utility of the associated carbon offsets for partially addressing compliance requirements.

Carbon Taxes

In addition to the establishment of ETS, certain countries or government jurisdictions have developed and implemented carbon taxes or levies to achieve reductions in GHG emissions.  A summary of several carbon levy/tax programs is provided in Table 4.

Table 4. Countries/Jurisdictions Implementing Carbon Taxes/Levies4

Finland1990, first country to enact a carbon tax, now is a combined energy/carbon tax€18.05 per tonne of CO2 (€66.2 per tonne of carbon, USD 24.39 per tonne CO2); €35 per tonne of CO2 (2013)
Sweden1991, no tax for electricity generation fuels, tax on industry is 50% of general tax, non-industrial consumers pay a separate tax on electricity, fuels from renewable sources exemptUSD 168/tonne CO2 (2014)
Norway1991, emissions not covered by the EU ETS, with about 55% of CO2 emissions covered by the taxUSD 4-69/tonne CO2e (2014)
Denmark1992, carbon tax covering consumption of fossil fuels, with exemptions for EU ETS sectors, refinery fuels, energy intensive processes, and othersUSD 31/tonne CO2e (2014)
Great Britain2001, based on the use of energy in the industry, commerce, and public sectors, exemptions for electricity generation from renewables and CHP

2013, carbon price floor tax on fossil fuels used to generate electricity
Based on fuels carbon content, 0.07 – 0.44 pence/kWhr    

USD 15.75/tonne CO2e
Switzerland2008, covers all fossil fuels unless used for energy, Swiss companies exempt if participate in EU ETSUSD 68/tonne CO2e (2014)
Iceland2010, applies to all importers of fossil fuels for retail or personal useUSD 10/tonne CO2e (2014)
Ireland2010, fossil fuels used by homes, offices, vehicles, and farms, based on each fuel’s CO2 emissions€15 per tonne of CO2 (2010), €20 per tonne of CO2 (2012), €10 per tonne of CO2 for solid fuels (2013)
Portugal2014, applies to non-EU ETS sectors€5/tonne CO2e (2015)
France2014, domestic consumption tax on fossil fuel consumption not covered by the EU ETS€7 per tonne of CO2 (2014), €22 per tonne of CO2 (2016)
North America
Quebec2007, applies to energy producers, distributors, and refiners based on sale of hydrocarbon productsTotal revenue of CAD 200 million annually
British Columbia2008, applies to purchase or use of fossil fuels within the provinceCAD 30/tonne CO2e (2012)
Boulder, CO2007-2012, applies to carbon emissions from electricityUSD 7/ton carbon
Latin America
Costa Rica1997, tax on carbon pollution set at 3.5% of the market value of fossil fuels3.5% tax on hydrocarbon fossil fuels
Chile2014, taking effect in 2018, applies to CO2 emissions from power sectorUSD 5/tonne CO2 and applies to 55% of emissions (2018)
Mexico2012, applies to fossil fuel sales and imports, based on the additional emissions generated for use in lieu of natural gasMex$ 10-50/tonne CO2e (2014)

From this selection of examples, the following observations can be made:

  • Carbon taxes in EU countries date back to the early 1990s and their use continues today even with the existence of the EU ETS.  However, countries regulated under the EU ETS can be exempt from these taxes (e.g., Denmark, Norway, Switzerland, Portugal, France).
  • The basis for affixing a carbon tax varies by country and can be based on the purchase, sale, or use of hydrocarbon products/fossil fuels, as well as the level of CO2 emissions including that from electric power generation and use.
  • There is a wide range of pricing on the carbon taxes/levies, ranging from less than 5 USD/MTCO2e to over 150 USD/MTCO2e.  The widest range and highest carbon taxes are for countries in the EU.
Carbon Pricing

The price of carbon offsets and allowances has varied widely within and between carbon markets. Historical pricing trends are summarized as follows:

  • EU ETS – During Phases I (2005-2007) and II (2008-2012), prices fluctuated largely between about €10-€30/MTCO2e, with prices at the end of Phase I at <€1/MTCO2e, and <€5/MTCO2e at the end of Phase II, in part due to the over-allocation of allowances.  Phase III (2013-2020) carbon prices started at <€10/MTCO2e.
  • US RGGI – Since 2008, prices have fluctuated between about 2 to 3.50 USD/short ton CO2, with a price floor of 1.93 USD/short ton CO2.
  • AB32/Quebec – Pricing for these linked ETSs in 2014 has been about 11-12 USD/MTCO2e, with a 10/MTCO2e USD price floor established initially in 2012.
  • CDM CER – Offset prices between 2008 and 2012 trended from about €20 to €4/MTCO2e, respectively, with forecasts through 2020 in the range of about €5 to €12/MTCO2e.

It is instructive to examine the extent to which global companies identify and value carbon related costs and benefits, as well.  Companies are looking for clear price signals and certainty in regulations to inform their development of business strategy and to manage risk.  Data compiled by CDP reveals the following:5

  • There are 150 companies who report to CDP and utilize an internal price on carbon to evaluate investments in GHG reductions; 29 of these companies are domiciled in the U.S.
  • More than 200 of the CDP responders support carbon pricing legislation.
  • While climate change represents risk to many businesses, many CDP reporters acknowledge that carbon regulation presents business opportunities, including reduction of environmental footprint and improvement of operational efficiency (e.g., energy use).

For those companies that chose to disclose an internal carbon price, it should be noted that the carbon prices vary widely, from 6 USD to over 300 USD, with all but one under 90 USD/MTCO2e, as follows:

  • The majority of reported carbon prices are in the range of 6 USD to 40 USD per MTCO2e.
  • More than 60 percent of the companies disclosed a fixed carbon price; the remainder disclosed price ranges that varied from 16 percent to eight times the low end of the respective range.

What is most interesting is the use of carbon pricing that is well above the current and projected prices of carbon allowances and offsets, potentially reflecting the long-term nature of the capital investments being evaluated and the social cost of carbon.


Such analysis is not limited to multinational corporations; governments already are incorporating the social cost of carbon (SCC) into regulatory policy and rulemaking decisions. In accordance with Executive Order 12866, US Federal agencies incorporate the social benefits of reducing CO2 emissions into cost-benefit analyses of regulatory actions that may affect cumulative global emissions. Based on the most recent update to the Technical Support Document 6, the average SCC for the period 2020 to 2030 ranges from 12 USD to 73 USD/MTCO2 (in 2007 dollars), depending on the assumed discount rates.

Implications for Multinational Companies

As GHG accounting and reporting regimes and ETSs gradually develop to realize the commitments from COP-21, multi-national companies should consider the following:

  • Requirements for GHG emission accounting and reporting will become more widespread and complex and, until such time that ETSs are comprehensively linked, companies will be challenged to comply with multiple regulatory regimes.  An effective GHG compliance and risk management strategy and program will be essential.
  • Investments in voluntary GHG reduction projects provide options for leveraging these offsets for use in mandatory regulatory schemes.  Projects/protocols should be selected to take full advantage of business opportunities and the flexibility to use the acquired offsets for compliance purposes.  The potential for establishing a post-CDM voluntary reduction mechanism should be considered.
  • Certain companies are developing considerable experience in the use of carbon shadow pricing to evaluate business opportunities and risks.  More companies should consider incorporating this type of analysis into their strategy and operational management so as to reduce business risk, to take full advantage of opportunities to enhance operational effectiveness, and to enhance environmental stewardship and social responsibility.  In the US and elsewhere, government agencies already integrate the SCC into policy and rulemaking decisions.
  • The wide variation in carbon pricing, whether related to carbon allowances or offsets, or country-specific carbon taxes, should be carefully considered as companies develop and refine mechanisms to utilize shadow pricing as one means to assess the implications of their business decisions.

For further information, please contact John Fillo, Principal Consultant, at (724) 996-1946 or


1State and Trends of Carbon Pricing 2015, by World Bank, Washington, DC, September 2015.

2California Cap-and-Trade Program Summary, Center for Climate and Energy Solutions (2014).

3 Ontario’s cap and trade regulation took effect on July 1, 2016 and includes provisions for GHG emission caps, compliance requirements, and distribution, auction and sale of allowances.

5Global Corporate Use of Carbon Pricing: Disclosures to Investors, CDP (2014).

 6 Technical Support Document: Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866, Interagency Working Group on Social Cost of Carbon, United States Government (2015).