internal carbon pricing - cbey.yale.edu carbon... · carbon-pricing literature. our policy...

Ethan Addicott, Yale MESc ‘17

Alhasan Badahdah, Yale MEM ‘17

Luke Elder, Yale MEM & MBA ‘19

Weiliang Tan, Yale-NUS College ‘18

POLICY FRAMEWORK AND CASE STUDIES

Internal Carbon Pricing

TA B LE O F CO NTE NT S

Acknowledgments | 03

Copyright | 03

Executive Summary | 04

Introduction | 05

Research Questions and Methodology | 06

Policy Framework | 06 SHOULD ORGANIZATIONS PRICE CARBON INTERNALLY? | 07

HOW WILL CARBON BE PRICED? | 09

HOW MUCH WILL BE CHARGED? | 09

HOW OFTEN IS THE CHARGE ASSESSED? | 10

IS THE MONEY RETURNED? | 11

WHAT IS THE RETURN MECHANISM? | 11

IS THE MONEY EARMARKED OR UNRESTRICTED? | 12

Case Studies | 12 CASE STUDY 1: YALE UNIVERSITY | 13

CASE STUDY 2: MICROSOFT | 15

CASE STUDY 3: SOCIÉTÉ GÉNÉRALE | 17

CASE STUDY 4: DELTA AND QANTAS AIRLINES | 19

Lessons Learned from These Case Studies | 21

Conclusion | 22

Appendix: Theoretical Framework and Models | 23

Figures FIGURE 1 | 07 InternalCarbon-PricingPolicyFramework

FIGURE 2 | 24 UsingCarbonTaxRevenuestoAddresstheAppropriabilityMarketFailure

INTERNAL CARBON PRICINGPolicy Framework and Case Studies

ACKNOWLEDGMENTSThisworkwassupportedbyYaleCenterforBusinessandtheEnvironment.

TheauthorsareEthanAddicott,YaleMESc2017,AlhasanBadahdah,YaleMEM2017,LukeElder,YaleMEM/MBACandidate2019,andWeiliangTan,YaleNUSCollege2018.

CaseyR.Pickett,DirectoroftheCarbonChargeatYaleUniversity,developedtheideaforthisinstitutional-carbon-charge-policyframework.TheauthorsaregratefulfortheadviceandcommentsfromCaseyR.Pickett;KennethGillingham,AssociateProfessorofEconomicsatYaleUniversity;andthemembersoftheSpring2017EnergyEconomicsandPolicyAnalysiscourse.

TheauthorswereadvisedbyStuartDeCew,ProgramDirectoratYaleCenterforBusinessandtheEnvironment.ThereportwaseditedbyKatFriedrich,NewsEditoratCleanEnergyFinanceForumatYaleCenterforBusinessandtheEnvironment.ThegraphicdesignwascreatedbyHenkvanAssen,SeniorCriticatYaleUniversitySchoolofArt,togetherwithIgorKorenfeldandMeghanLynch,DesignersatHvADESIGN.

Theauthorsthanktheseindividualsfortheirvaluableinsights,support,andassistance

COPYRIGHTForpermissiontoreprint,reproduce,orredistributeanyofthecontentsofthisreportinawaythatgoesbeyondfairuse,pleaseemailYaleCenterforBusinessandtheEnvironment(cbey@yale.edu).

Executive SummaryThisreportseekstoaddressthequestionofhowanorganizationshoulddesignandimplementaninternalcarboncharge.Internalcarbonpricingisapowerfultooltheprivatesectorcanemploytoreducecarbonemissions.

Whilepolicytoolsandguidanceexistforcarbonpricingatthenationallevel,itisnotclearhowimplementationmightdifferinabusinessenvironmentoranothersetting.Ourprojectseekstosupplementthegrowingcarbon-pricingliterature,giventhepromiseofinternalcarbon-chargeprogramsinaddressingclimatechange.

Carbonpricingworkstoshiftthecostofcarbonfromincreasedhealthcarecostsandexacerbatedenvironmentaldamagetopaymentatthesourceofpollution.Bydoingso,itincentivizescarbon-emissionsreductionsandcarbon-efficientdevelopment.

Corporations’internalcarbonpricingattemptstocorrecttheincentivestructurethatunderpinsconsumptionchoicesrelatedtogreenhousegasemissions.

Internalcarbonpricingallowscompaniestoassessthefinancialimplicationsoftheircarbonemissionsandencourageincreasedenergyefficiency.Todate,around1,400companieshavereportedimplementingorplanningcarbonpricestoregulatetheircarbonemissions.

Corporationscanactcollectivelywithgovernmentstoreachthegoalofdecarbonization.

Toprovideguidanceondesigninginternalcarbon-chargeprograms,weprovidetwocorecontributions:1. apolicyframeworkofkeydecisions2. lessonslearnedfromanexaminationofcasestudiesonYaleUniversity,Microsoft,Société

Générale,Delta,andQANTASAirlinesinthecontextofourpolicyframework

Thesecontributionssupporttheuseofthispolicyframeworkforcompanies,organizations,andpolicymakers.Wealsoprovideasupplementarytheoreticalframeworkandmodelforevaluatingacarbon-chargeprogramintheappendix.

Additionally,westatethatthesecondaryeffectsofpairedtaxesandinvestmentsubsidies,whenconsideredasasingleinstrument,couldprovecost-effectiveforinternalizingthetwomarketfailuresassociatedwithclimatechange:accountingforboththecarbonemissionsandthecleantechrevenues.

Furtherworkandthought,however,isnecessarytoproperlyframethisinsightinthecontextofcontemporaryeconomicliteratureonthissubject.

IntroductionInternalcarbonpricingallowscompaniestoassessthefinancialimplicationsoftheircarbonemissionsandencourageincreasedenergyefficiency.

CDP,formerlytheCarbonDisclosureProject,runsaglobalself-reporteddisclosuresystemforcompanies,cities,states,andregionstomeasuretheirenvironmentalimpacts.Partofthisdisclosureincludesquestionsregardingcarbonpricing.1

ArecentCDPreportoutlinesthreemajorbenefitsofinternalcorporatecarbonpricing:navigatingregulation,sourcingrequirements,andcarbonefficiency.2

1. Companiesthattracktheirgreenhousegasemissionsandimplementaninternalpriceoncarbonarebetterpreparedforaregulatoryfutureinwhichcarbonispriced.

2. Companiesthatsell,source,oroperateinternationallyareinevitablyexposedtocarbon-pricingstandards,giventheglobalpatchworkofexistingcarbon-emissionsregulations.Foranycompanythatintendstooperateglobally,itisadvantageoustostartcalculating,tracking,andpricingemissionstoeaseoperationacrossinternationalpricingpolicies.

3. Carbonpricingmotivatesinnovationandefficiencyimprovements,providesanewlensforcapital-investmentdecisions,andspurscarbon-efficienttechnologies.Carbonpricingmakesemissions-intensivebusinesspracticesmorecostly,nudgingcompaniestoavoidthem.Inadditiontothedirectbenefitsfromcarbonpricing,investorsarestartingtoprioritizecompaniesthatareleadersincorporatesustainability,includingcarbonpricing,andareincreasinglyinvestinginthem.3

MostofthecurrentactivityaroundinternalcarbonpricingoccursinEurope,Japan,Korea,Australia,andtheUnitedStates.Thisfigureindicatesthatresearchintothedesignofinternalcarbon-pricingprogramsiscurrentlyverygloballyrelevant.Itwillcontinuetobecomemorerelevantinthenearfuture.

Notallcarbon-pricingschemesarealike.Theimplementationofacarbon-pricingpolicyrequiresdecisionsaboutrevenueneutrality,informationprovision,incentiveandpricingstructures,andcarbonemissions.

Asoneofthefirstuniversitiestoimplementacarboncharge,Yalepilotedfourcarbon-pricingschemes,eachwiththeirownadvantagesanddisadvantages.Yale’sexperimentationwithcarbonpricingmotivatedthisresearchintothepolicytradeoffsassociatedwiththedesignofaninternalcarboncharge.

1 CDP(2018.)CDP: Disclosure, Insight, Action.RetrievedOctober31,2018fromhttps://www.cdp.net/en

2 CDP(n.d.)The Business Case for Carbon Pricing.RetrievedOctober31,2018fromhttps://b8f65cb373b1b7b15feb-

c70d8ead6ced550b4d987d7c03fcdd1d.ssl.cf3.rackcdn.com/comfy/cms/files/files/000/000/284/original/business-case-for-

carbon-pricing.pdf

3 “Socially-responsibleinvesting:Earnbetterreturnsfromgoodcompanies.”(2017).Forbes.Retrievedfromhttps://

www.forbes.com/sites/moneyshow/2017/08/16/socially-responsible-investing-earn-better-returns-from-good-

companies/#7f7f92df623d

Research Questions and MethodologyOurresearchquestionfortheprojectis:“How should organizations design and implement an internal carbon charge?”

WhileexistingtoolsfromOrganisationforEconomicCo-operationandDevelopment,WorldBankGroup,andothersgivepolicyguidanceforcarbonpricingatthenationallevel,fewresourcesaddresshowimplementationmightdifferforanorganization.4Ourprojectseekstosupplementthegrowingcarbon-pricingliterature.

Ourpolicyframeworkcaptureskeydecisionsandtradeoffsthatorganizationsmustmakeinthedesignandimplementationofaninternalcarbon-pricingprogram.WedevelopeddecisionpointsandanaccompanyingtradeoffframeworkforthemwiththeYaleCarbonCharge.Ourframeworkhighlightstheleversavailabletocompaniestodesigninternalcarbon-chargeprogramsrelevanttotheirspecificneeds.

Weexaminefourcasestudies–YaleUniversity,Microsoft,SociétéGénérale,andDeltaandQANTASAirlines–inthecontextofourpolicyframework.Weprovidesomelessonslearnedthatcanbeusefulasthispolicyframeworkisoperationalizedforcompanies,organizations,andpolicymakers.

Wealsoaimtotouchonancillaryquestionsthatmayariseinthedesignofaninstitutionalcarboncharge–includingwhatthegoalsoftheprogramshouldbe,whatscopeofemissionsshouldbeincluded,andwhatpriceshouldbecharged.

Policy FrameworkOurworkprovidesareliableplanningframeworkforactorsseekingtoinstituteaninternalcarboncharge.Forinternalcarbon-pricingprograms,apolicyframeworkpresentstheavailablequestionsandoptionsapolicymakerhastoconsiderbeforemakingcriticaldecisionsaboutthedesignandimplementationoftheprogram.

Wedesignedtheinternalcarbon-pricingpolicyframeworkasasetofquestionsorderedchronologically(asshowninFigure1).Thequestionshighlightvariousdecisionsorganizationshavetomake.Theyemphasizetradeoffsassociatedwitheachdecision.

4 OrganisationforEconomicCo-operationandDevelopment(OECD)andWorldBankGroup(WBG).(2015.) The FASTER

Principles for Successful Carbon Pricing: An Approach Based on Initial Experience.September2015.RetrievedOct.31,2018from

http://documents.worldbank.org/curated/en/2015/09/25060584/faster-principles-successful-carbon-pricing-approach-

based-initial-experience

SHOULD ORGANIZATIONS PRICE CARBON INTERNALLY? Climatechangeposesgreatchallengestobusinesses’activitiesandvalue.5Astheworldbecomesincreasinglyconcernedaboutimpactsfromclimatechange,companiesfacephysicalandregulatoryriskswhich,inturn,posefinancialrisks.

Physicalrisksarethemostevidentasweexperienceincreasesinfloodsanddroughts,changesinecosystems,andchangesintemperature.Organizationscanbedirectlyaffectedbydamagestobusinessassets,supplychains,andresourceandmaterialscarcity,allofwhichhaveadirectimpactontheireconomicandfinancialvalue.

5 “Internalcarbonpricing:Agrowingcorporatepractice.”(2016).I4CE&EPE.RetrievedOct.31,2018from

https://www.i4ce.org/download/internal-carbon-pricing-an-increasingly-widespread-corporate-practice/

Figure 1: Internal Carbon-Pricing Policy Framework

Monthly

Adoptcountry-specificSocialCostofCarbon

Earmarkedfor:energyefficiencyinvestment,offsetprograms,

stewardshipinitiatives,carbon-neutralspending

Fund Check Competition

Annually

Developfirm-specificcarbonpricereflecting:abatementtarget,revenue

target,&benchmarkingtarget

Unrestricted

HOW WILL CARBON BE PRICED?

Onlyusedtoevaluateinvestmentopportunities

(shadowprice)

Appliedtoemissions(carboncharge)

Usedtoevaluateinvestmentopportunities

(shadowprices)andappliedtoemissions

(carboncharge)

HOW MUCH WILL BE CHARGED?

HOW OFTEN IS THE CHARGE ASSESED?

IS THE MONEY RETURNED?

WHAT IS THE RETURN MECHANISM?

IS THE MONEY EARMARKED OR UNRESTRICTED?

AllReturned NotReturned

Forexample,manyfinancialinstitutionssuchasHSBC,MorganStanley,DeutscheBank,andBankofAmericahavereceivedpressuretoreleaseinformationrelatedtotheirclimate-relatedrisksandexposuresforfearofhavingstrandedassetsduetoclimatechange.6

Regulatoryrisks,however,arehighlyuncertain.Althoughsomecountrieshavetakenmeasurestoreduceorlimitgreenhousegasemissions,othercountriesarestilldebatingtheissue.Lawsandregulationsarealsosusceptibletochangewithnewelectioncycles,aswehavewitnessedrecentlyintheUnitedStates.

Risksandopportunities,inabroadsense,arekeyinputsfororganizationaldecision-making.

Thedecisiontoimposeaninternalcarbonpriceitselfpresentscompaniesandorganizationswithasetofexplicitcosts,includingthoserelatedtotheadministrationofaninternalcarboncharge.Italsopresentsasetofopportunities,includingcompetitiveadvantagesinalow-carbonfutureeconomy.

Aninternalpriceoncarbonwilldriveanorganization’splansandstrategiestowardslow-carbonpractices.Inordertobeeffective,theobjectivesofthepolicymustbeclearlydefinedandthepricemustbeproperlyset.Ideally,theobjectivewouldincludegreenhousegas-emissionmitigationandgreen-developmentpromotion.Itwouldalsoincluderevenuegenerationand/orincreasedefficiency.

Mitigatingpotentialimpactsfromclimatechangebyinstitutinginternalcarbon-pricingprogramsreducesorlimitsthoserisks.Inaddition,itcanpresentnewopportunitiesfororganizationstopotentiallyincreasetheireconomicvalue.

Majorbenefitsofinstitutinganinternalcarbonchargecaninclude:• Preparingorganizationsforfutureregulatorycarbontaxesandnewenvironmentallaws• Providingcompetitiveadvantagesinafuturelow-carboneconomy• Reducinggreenhousegasemissionswhenthepriceofcarbonissetproperly• Directinginvestmenttowardsefficientpracticesandtechnologies• Incentivizinglong-termresearchanddevelopmentopportunitiesfornewcost-effective

andgreeninnovations• Attractingenvironmentallyawareinvestorsandstakeholders7• Positioningorganizationsassociallyresponsible• Contributingtolong-termprofitsandreturnsbyleadinginenvironmentalandsocialissues8

6 “Biginvestorstakeaimatbanksoverclimatechangerisk.”(2017).Financial Times.RetrievedOct.31,2018from

https://www.ft.com/content/a2616a52-988b-11e7-a652-cde3f882dd7b

7 Eccles,R.G.,Serafeim,G.,&M.P.Krzus.(2011).“Marketinterestinnonfinancialinformation.” Journal of Applied Corporate

Finance.23.4,113-127.

8 Khan,M.,Serafeim,G.,&A.Yoon.(2016).“Corporatesustainability:Firstevidenceonmateriality.”The Accounting Review,

91.6,1697-1724

HOW WILL CARBON BE PRICED?Thetwoconventionalmethodsofinternalcarbonpricingarecarbonchargesandshadowprices.Bothoptionssetanexplicitpricepertonofcarbonemissions.However,theydifferintheimplementationofthisprice.

Aninternalcarbonchargeisataxappliedinternallyandvoluntarilypertonofcarbonemitted.Thechargereducesemissionsintheshorttermwhilealsoencouraginginnovationforlow-carbonandlow-energytechnologiesinthelongtermbyredesigningincentivestructures.Thecharge,inthiscase,iscollectedbytheresponsibleentityfromallparticipantswithinanorganization.

Ontheotherhand,ashadowpriceinternalizesthecostofcarbonwhenmakingchoicesaboutcapitalinvestmentandestimatingcoststhroughouttheinvestment’slifecycle.

Investmentsincludebutarenotlimitedtoresearchanddevelopment,infrastructure,equipment,andassets.

Ashadowpriceisatheoreticalvaluethatisassignedtoatargetedinvestmentbutisnotactuallycharged.Itusuallycorrespondstothelifecycleenvironmentalandfinancialcostsoftheprojectorequipment.

Thegoalofashadowpriceistoincorporatetheimpactofthecostofcarbonontheorganization’sstrategyandROI.Theshadowpriceaddresseslong-termstrategiesforfutureemissionsandinfluencesdecision-makerstoinvestinenergy-efficientinfrastructureandpractices.However,itdoesnotchangeoraddresscurrentemissions.

HOW MUCH WILL BE CHARGED?Anotherkeyconsiderationforanyinternalcarbon-pricingprogramisthepriceatwhichthecostofcarbonisset.Anextremelyhighchargecreateseconomicburdensforinternalbusinessunitswithinanorganizationandmakesitdifficultfortheprogramtobeapproved.

Ontheotherhand,averylowchargewillnothaveasgreatanimpactsinceitwouldbecheaperforbusinessunitstopaysuchachargethantochangetheiroperationsorreducetheirconsumption.

Thus,thechargeneedstobelowenoughtobeadoptedbythedecisionmakerwhilebeinghighenoughtomotivateemployeesandbusinessunitstochangetheirpractices.Ifthechargeisnotsethighenoughtomotivatematerialchanges,itsimplementationisneverthelessimportant:policydesignandimplementationarelargerhurdlesthanincreasingthepriceinthefuture.

Oneanswertothequestionof“Howmuchwillbecharged?”reliesonusingacountry-specificestimateofthesocialcostofcarbon(SCC).TheSCCiscalculatedusingvariousdiscountratesthatdependongovernmenteconomicpolicies.Itisconsideredtobethesocialcostatwhichorganizationsarepayingfortheenvironmentalimpactstheycause.

10 INTERNAL CARBON PRICINGPolicy Framework and Case Studies

Ifanorganizationinsteadelectstocalculateitsownprice,thecompanyshouldfirstdeterminecurrentand/orhistoricalemissionsandbuildagreenhousegasinventory.Next,itshoulddefineemissions-reductiontargets.Itshouldspecifyanimplementationforthetimelineforthecarbonchargeandassociatedemissionsreductions.Thecarbonpriceinagivenyearshouldreflectthegreenhousegasinventoryandincentivizebehavioralchangetoachievetheprogramtargetsandpolicygoals.

TheSCCisusuallyrevisitedandadjustedastheintegratedassessmentmodels(IAMs)usedareupdated.ThismoreaccuratelyestimatesfuturedamagesbasedonincreasedCO2concentrationsandresultingtrendchanges.

Thisiswhychargesprivatelysetbyorganizationsshouldberevisitedovertimetoaccountforrevisedtargets.Thiscanpreventtherealvalueofcarbonemissionsfromdeclining.Thiswillencouragetheorganizationtoreduceemissionsintheshorttermandincentivizeenergyefficiencyinvestmentsandinnovationsforthelongterm.

Shadowpricesandcarbonchargescanbeemployedsimultaneously.And,insomecases,thepriceusedforeachmethodmaydiffer.Anexampleofemployingbothacarbonchargeandshadowpriceforcarbonemissionsmightinvolveagraduatedcarbonchargeforfutureinvestments.Thischargewouldrepresentadifferentdiscountingschemeorriskanalysisthantheshadowpriceusedforcurrentinvestmentdecisions.

Theassumptionisthattheseinvestmentswillbecompletedwithinatimeframeinthefuturewherethecarbonpricesareexpectedtobehigher.

HOW OFTEN IS THE CHARGE ASSESSED?Oncethepriceoftheinternalcarbonchargeisset,thefrequencywithwhichthechargewillbeassessedandcollectedmustbedetermined.Thefrequencyofassessmentandcollectionwilldependoneachorganization’sstructure,activity,andindustry.

Theultimategoalistomaintainafrequencyatwhichtheincentivesforbehavioralchangestillapply.Ideally,organizationsshouldbeginwithapilotprogramtotestandassesstheresponsesandresultsofdifferentschemes.

Forexample,aninstitutioncouldcomparemonthlyandannualassessmentsofthechargeviaapilotprogram.

Pilotprogramsallowtoolsandguidelinesforfuturestrategiestobeevaluatedonasmallscale.Theinitialresultsfromsuchapilotwouldindicatethebestpracticesintermsofemissionsreductionandbehavioralchange.

IS THE MONEY RETURNED?Eachorganizationwillhavetodecidewhattodowiththefeeonceitiscollected.Thetwobasicoptionsintheframeworkaretoreturntherevenueorkeepit.

Organizationsmayalsochoosetoreturnonlyaportionoftherevenueandkeeptheremainingportion.Ultimately,thedecisionshouldalwaysincentivizecontinuedabatement.

Fromtheorganization’sperspective,theeasiestoptionintheshorttermistokeeptherevenue.Thiswillcuttheadministrativecostofdesigningamechanismforreturns.Itmaynot,however,achievethegoalofcontinuedabatementiftherevenueisusedincarbon-intensiveways.

Ontheotherhand,stockdividendsarefractionsofprofitspaidbacktoshareholders.Theyexistaspartofanincentivestructureforinvestments.Similarly,returndividendsfromcarbontaxesshouldbesetupasanincentiveforcarbonemissionabatement.

Therefore,thedecisionregardinghowrevenuewillbereturnedshouldbeevaluatedintermsofitspowertoincentivizeemissionsabatement.Dividendschemesaffordinstitutionsanadditionalleverbywhichtheycanreduceemissions.Mechanismsfordividendreturncanbeoptimizedwithineachinstitutiontorealizethehighestlevelsofabatement.

WHAT IS THE RETURN MECHANISM?Anylevelofreturn,whetherinfullorinpart,shouldbedesignedinawaythatbestinfluencesbehavioralchangeandencouragesemissionsreduction.Therearenumberofcontext-specificmechanismsthatanorganizationcanimplementtoachievethis.

Forexample,returnscouldbeawardedtothemostefficientbusinessunitswithintheorganizationasanincentive,introducingcompetitionbetweenbusinessunitsordepartments.

Duetofundamentaldifferencesbetweenbusinessunits,baselinesareoftenusedascomponentsofreturnmechanisms.Differentbaselinesmayprovidedifferentmarginalincentivesacrossbusinessunits.

Thedegreeofmemorylossbuiltintothebaseline–howmanyprioremissionsyearsareconsideredinitsdetermination–candeterminethismargin.

Butahypotheticalbaselinewithperfectmemory,whileitmaybemoreforgivingofpastemissionsspikes,makesthefee/dividendstructuremorevaried.Itincreasestheriskofahighfeebeingleviedafteraparticularlylow-emissionyear.

Indecidinghowtoconstructabaseline,organizationscanconsiderhowmanyyearsofpreviousemissionsshouldbeusedingeneratingthebaseline.Thebaselinecanbeanimportantmechanismtoleveltheplayingfieldforcarbon-intensivebusinessunitssothatincentivescorrespondtothemarginalcostsofabatement.

IS THE MONEY EARMARKED OR UNRESTRICTED?Thecollectedchargehastwomaineffectsonemissions:thebehavioraleffectandtheinvestmenteffect.Thebehavioraleffectistheshort-termimpactofthechargethatwouldencourageemployees,units,andthefirmtoreduceenergyconsumptionandabateemissions.

Incontrast,theinvestmenteffectisthelong-termimpact.Itispartiallydependentonthereturns.Whethertherevenuesarereturnedornot,theoptionsforthefirmanditsunitsineachcasearetohaveeitheranunrestrictedaccountoranearmarkedaccount.

Anunrestricted accountessentiallygrantsthedecisionmakerthefreedomtohandlerevenuefromthecarbon-pricingprogram.

TheGreenhouseGasProtocoldefinesScope1emissionsasdirectemissionsfromownedorcontrolledsources,Scope2emissionsasindirectemissionsfromthegenerationofpurchasedenergy,andScope3emissionsasallotherindirectemissionsnotincludedinScope2.SinceoftenonlyScope1andScope2emissionsareincludedinacarbon-chargeprogram,returningrevenueasunrestrictedcashmaybeanavenueforleakage,whichcausesissues.Whenthereisacashleakage,therevenuecollectedfromcarbon-emissionsreductionsisusedtopurchasetravelormaterialsthataremorecarbon-intensiveandareoutsideofthecarboncharge.

However,becauseunrestrictedfundsaremorevaluabletobusinessunitsthanrestrictedfunds,restrictioncanlowerthedollar-for-dollarincentivepowerofthereturn.

Earmarkedaccountsarededicatedtowardsfundsorefficiencyprojectsthatwouldguaranteeadditionalabatementandhelpbusinessunitsorfirmsadapt.Theseprojectsshouldbepre-evaluatedtoshowexpectedperformance.Thiswilldemonstratedemonstratehowsignificantlytheywouldhelpachievethedefinedtarget.

Case StudiesFourcasestudiesdemonstratethereal-worldapplicationpossibilitiesofourproject.Theyalsoallowustodrawsomelessonslearnedfromexistinginternalcarbon-chargeprograms.Theseinsightsmayofferusefulguidancetoothercompanieslookingatdesigningtheirownplans.

CASE STUDY 1: YALE UNIVERSITYIn2014,YaleUniversityPresidentPeterSaloveycreatedataskforcechairedbyProfessorWilliamNordhaustoexaminehowinternalcarbonpricingcouldbeappliedwithintheYalecontext.Thetaskforcerecommendedapilotstudy.9Itwasconductedinthe2015-2016academicyear,makingYaleUniversitythefirstuniversitytoexperimentwithinternalcarbonpricing.Withthepilotstudycomplete

9 YaleUniversity.(2015).ExecutiveSummary:Report to the President and Provost of Yale University: Findings and

Recommendations on a Carbon-Charge Program at Yale.RetrievedOct.31,2018,fromhttp://carbon.yale.edu/sites/default/

files/files/Carbon-charge-report-041015.pdf

CASE STUDY: YALE UNIVERSITY

Monthly

Fund Check Competition Other

Annually

Unrestricted

(shadowprice)

(carboncharge)

andareportofpreliminaryresultsreleased,ProvostBenPolakisexpandingtheinitiativeacrosscampussoYalecanserveasalivinglaboratoryforcarbonpricing.10

Thepilotaimedtodeterminetheadministrativefeasibility,effectiveness,andpromiseofacarbonchargeappliedtoenergyconsumptioninYalebuildings.

CarbonChargemanagersassignedeachoftwentybuildingsrepresentingthediversityofYale’sbuildingstocktooneoffourtreatmentgroups,with280remainingcampusbuildingsservingasacontrolgroup.

Allfourtreatmentgroupsreceivedanewcustomreportsummarizingbuildingenergyconsumptionandcomparingittopastperformance.Onetreatmentgroupreceivedonlytheenergyreport.Threetreatmentgroupsweregivenadditionalincentive-basedcarbon-pricingschemes.

Thefourtreatment-pricingschemesarecharacterizedasfollows.Eachofthemwasusedforfivebusinessunits,respectively.• Information only:Buildingsreceivedamonthlyreportwithinformationonenergyuseand

indicativecarboncharges,butwithoutanyfinancialconsequences.• Target:Buildingsweregivenareductiontarget1percentbelowtheirbaseline.Theypaidfor

emissionsabovethisvalueandreceivedfundsforemissionslevelsbelowit.• Redistributive:Companiesusedarevenue-neutralschemeinwhichbuildingswerecomparedto

thegroup’soverallpercentchangeinemissionsfromabaseline.Thebuildingsincurredchargesorreceivedrebatesbasedonperformanceaboveorbelowthebaseline.

• Investment:Buildingsweregivenfundsearmarkedonlyforenergy-conservationinvestments.

YaleusesaSCCof$40/MTCDEforitscarboncharge.ThisisbasedonUnitedStatesfederalgovernmentestimatescompletedundertheObamaadministration.11

Whencompletingthepilot,theYaleCarbonChargediscoveredfivekeytakeawaysfordesigninganinternalcarbon-pricingprograminauniversitysetting.Theselessonslearnedare:1. Internalcarbonpricinghaspotentialforuniversitycampuses.2. Carbonpricingschemedesignisimportant,butmanyvariationscanworkwithinsimilarcontexts.3. Aneffectivecarbon-pricing-schemeconveysclearinformationandincentives.4. Resultingemissionsreductionscanbecost-effective.5. Carbonpricingcanbenefitgreatlyfromexperimentationandcollaboration.

10 YaleUniversity.(2016).YaleUniversity’sCarbon Charge: Preliminary Results from Learning by Doing.RetrievedOct.31,2018,

from:http://carbon.yale.edu/sites/default/files/files/Carbon_Charge_Pilot_Report_20161010.pdf

11 UnitedStatesEnvironmentalProtectionAgency.(n.d.).Retrievedfrom

https://www3.epa.gov/climatechange/Downloads/EPAactivities/social-cost-carbon.pdf

Usingthelessonslearnedfromthepilot,Yaleisincorporatingthecarbonchargeintoorganizationalbudgetsfor264outoftheover400campusbuildingsstartinginfiscalyear2018.Thesebuildings,combined,accountforover70percentofYale’scarbonemissions.

Administratorsandoperationsstaffwillreceiveamonthlybuilding-energyreportandwillberesponsiblefornetcarbon-chargepaymentsandreturnsattheendofthefiscalyear.Inadditiontoimplementation,theYaleCarbonChargewillcontinuetoprioritizeresearch.Italsowillusecampusassetsforexperientiallearning.

Monthly

Annually

Unrestricted

HOW OFTEN

IS THE CHARGE

ASSESED?

(shadowprice)

(carboncharge)

CASE STUDY: MICROSOFT

CASE STUDY 2: MICROSOFTImplementedin2013,theinternalcarbon-pricingschemeusedbyMicrosoftisaninnovativequantity-basedapproach.InsteadofpricingcarbonattheSCC,Microsoftdeterminesitscurrentlevelofemissionsandthencalculatestherequiredinternalcarbonpricetomakeitsoperationscarbon-neutral.However,structuralproblemsareholdingbacktheprogram.

Microsoftreliesontwocoreformulaeinitsapproach:

Cost of environmental initiatives portfolio ($) = Cost of internal initiatives ($) + Cost of green power purchases ($) + Cost of carbon offsets ($)

Internal carbon price (per mtCO2e) = Cost of environmental initiatives portfolio ($; from above)/Total emissions (mtCO2e)

TheemphasisofMicrosoft’sprogramisonhowtaxrevenuesarespentratherthanhowmuchthecarbonpriceisorhowrevenueiscollectedinternally.

Intermsofourtheoreticalframework,thismeansMicrosoftfocusesonthesecondarybenefitsofacarbontax.Ittakesthisapproachratherthanevaluatingtheemissionsreductionsofindividualbusinesssubunits.

Thisprogramisinnovative.Itwouldstillreapthedoubleeffectofemissionsreductionsifthecarbonpriceissufficientlyhigh.Becausethepriceofcarbonisdeterminedbythetotalcostofthecarbon-feefundinvestmentstrategy,itcanchangefromyeartoyear,althoughMicrosofthasthusfarkeptitsinternalcarbonpricerelativelyconstant.

Unfortunately,Microsoft’scurrentinternalcarbonprice,whilenotreleasedinofficialreports,hasbeenmentionedtobebetween$4-5USD.12

Hence,weexpectminimalreductionsinenergyconsumptionandcarbonemissionsinternally.Microsoft’sapproachtocarbonneutralityistosimplybuyupcarboncreditsandreducecarbonemissionselsewherewhereitischeapertodoso.

Thus,whileMicrosofthasoftenbeenlaudedasaleadingexampleofinternalcarbonpricing,thecompanymaynotbethebestexampletofollow.

12Pickett,C.Personalcommunication.

CASE STUDY 3: SOCIÉTÉ GÉNÉRALESociétéGénéraleBankGrouphasbeenproactiveandcommittedtoreducingitscarbonemissionsformanyyears.Since2005,SociétéGénéralehasperformedagreenhousegasinventoryfollowingtheGHGProtocol.13Thedatacollectedforthisinventoryisusedasthebasisforcalculatingthebank’sinternalcarbontax,whichispricedat€10/tCO2($10.8/tCO2).SociétéGénéralewasoneofthefirstbanksintheworldtointroduceaninternalcarbontaxin2011.

13GHGProtocolisaninternationalstandardthatcovershowtomeasure,manage,andreportgreenhousegasemissions.Itwas

developedbytheWorldBank.

TEXT WRAP

CASE STUDY: SOCIÉTÉ GÉNÉRALE

Monthly

Annually

Unrestricted

(shadowprice)

(carboncharge)

ThebankdevelopedaCarbonReductionProgram(CRP)basedonthistaxtoachieveitsemissionsreductiontargets.Themechanisminvolveseachentity,definedaseitheracorebusinessorcorporatedivision,payinganinternalcarbontaxaccordingtoitsrespectivecarbonfootprint.ThebusinessentitiesofSociétéGénéraleBankareresponsibleforsettingtheirownactionplanguidedbythebank’semissionstargetandincentivizedbytheinternalcarbontax.

TherevenuefromthetaxisthenallocatedtointernalenvironmentalefficiencyinitiativesviaCRPEnvironmentalEfficiencyAwards.Thecompetitionforawardsprovidesadditionalmotivationandincentiveinternally.Eachawardcancoverupto100%ofimplementationcostswithamaximumlimitof200,000($182,000)perinitiative.

TheprogramisdesignedtoincentivizeeachbusinessentitytoreduceCO2emissionstolessentheamountoftaxleviedandtoimplementenergyefficiencyinitiativeswithanefficiencyaward.

Thisideallycancreateavirtuouscycleofefficiencyupgradesandemissionsreductions.Gradually,thegroupcantransitionfromenergy-intensiveproductsandservicesandbecomeenergyefficientthroughthisprogram.Oneoftheadditionalgoalsofthisprogramistopromoteawarenessinshowcasingenvironmentalefficiencyinitiativesasopportunitiesforinnovation.

Theresultofthe2012-2015CRP,whichusedapriceof$10.8/tCO2,wasan11.4%reductioninGHGemissionsperoccupantcomparedto2012.Thisperformanceexceededtheinitialtargetof11%.Theprogramalsoreducedenergyconsumptionby11.3%comparedto2012.14

In2015alone,56initiativeswonawardsworthatotalof€3.4M($3M).Overthethree-yearperiod,119winninginitiativesyieldedannualsavingsofanaverageof€13M($11.8M)onoverhead.Thiswasanaverageof4,700tCO2/yearinemissionsreduction.Italsoresultedinanaverageof30GWhofenergysavings.15

Theseinitiativesinvolvedprojectstargetingbuiltinfrastructure,informationtechnology,paperuse,andtransportinnovation.

Recently,thebanksetupanewandmoreambitiousCRPwhichaimstoreduceemissionsperoccupantby20%comparedto2014levelsby2020.16

14 SOCIÉTÉGÉNÉRALE.(2016).Corporate and Social Responsibility Report.

15 Ibid.

16 “Internalcarbonpricing:Agrowingcorporatepractice.”(2016).I4CE & EPE.RetrievedOct.31,2018fromhttps://www.i4ce.

org/download/internal-carbon-pricing-an-increasingly-widespread-corporate-practice/

STUDY 4: DELTA AND QANTAS AIRLINESTheairlineindustryisresponsiblefor2%ofglobalannualemissions,emittingalargershareofglobalcarbondioxidethanmanycountries.17

17 Lampert,A.(2016).“U.N.setslimitsonglobalairlineemissionsamiddissent.”Reuters.RetrievedOct.31,2018from

https://www.reuters.com/article/us-climatechange-aviation/u-n-aviation-committee-approves-airline-climate-deal-

idUSKCN1261QR

*Not disclosed or publically available

*Not disclosed or publicly available

Monthly

Annually

Unrestricted

HOW OFTEN IS THE CHARGE ASSESED?*

IS THE MONEY RETURNED?*

WHAT IS THE RETURN MECHANISM?*

IS THE MONEY EARMARKED OR UNRESTRICTED?*

(shadowprice)

(carboncharge)

CASE STUDY: DELTA AND QANTAS AIRLINES

Iftheairlineindustrywasacountry,itwouldbethe21stmosteconomicallyproductivenationandthe6thlargestemittingnationintheworld.18, 19

However,theairlineindustrywasleftoutofthe2015UnitedNationsclimatechangeconferenceinParis,despiteitscarbonintensity.CurbingairlineemissionswasinsteadlefttotheInternationalCivilAviationOrganization(ICAO)andindividualcountries.

In2012,theEuropeanUnionEmissionsTradingSystem(EUETS)requiredallairlinesoperatinginEuropetoreportcarbondioxideemissionsandpurchasecomplianceoffsetsiftheyexceedtheirtradeableallowances.AsimilarprogramwasestablishedundertheAustralianEmissionsTradingSystem(AUETS).

TheInternationalCivilAviationOrganization(ICAO),seekingtoharmonizeregionalpoliciesforemissionsreductionandmitigatetheglobalclimatedamagesattributabletotheaviationindustry,establishedaglobalmarket-basedmeasure(MBM)tocontrolfuturecarbondioxideemissionsfromaviation.

DeltaandQANTASairlineshavereportedtheuseofaninternalcarbon-pricingscheme.Whilebothairlinesarecommittedtousinginternalcarbonpricing,neitheristransparentaboutitsapplicationorlevel.

Instead,aninternalcarbon-pricingmechanismseemstobevoluntarilyappliedeitherasadirectpass-throughofcarbon-pricingregimesestablishediwnvariousjurisdictionstotheairlines’applicablebusinessunitsorinanticipationoffuturecarbonpricingoremissionsregulations.Formanycompaniesintheindustry,theaimofcarbonpricingnowistopreparethemselvesforfutureenvironmentallegislation.

Forthcomingregulationsareanticipatedtobeintroducedtohelptheindustrymeettheambitioustargetsetoutinthe2016ICAOGeneralAssembly:tomakeallaviationgrowthafter2020carbon-neutral.

Implementationofpoliciestomeetthisgoalwillincludeavoluntarypilotphasefrom2021to2026andthenamandatorysecondphasefrom2027to2035forcountrieswitha2018revenuetonne-kilometreofover0.5%.20Policiesemployedinthepilotprogramwilleitherinvolveglobalemissionstrading,globalmandatoryoffsetting,orglobalmandatoryoffsettingwithrevenue.

DeltaandQANTAS,thethirdandthirteenthlargestvoluntarycarbonoffsetbuyersglobally,alongwith

18 AirTransportActionGroup.(2018). Facts and Figures.Retrievedfromhttp://www.atag.org/facts-and-figures.html

19 UnionofConcernedScientists.(2018).EachCountry’sShareofCO2Emissions.RetrievedOct.31,2018from

http://www.ucsusa.org/global_warming/science_and_impacts/science/each-countrys-share-of-co2.html#.WQ4AoOUrKUk

20 Bisset,M.(2017).“Aviationemissions–Theschemeagreedatthe2016ICAOGeneralAssembly.” Clyde & Co.RetrievedOct.31,

2018fromhttp://www.mondaq.com/x/577730/Aviation/Aviation+Emissions+The+Scheme+Agreed+At+The+2016+ICAO

+General+Assembly

nineotherairlines,currentlyoffsetcarbonemissionsinanticipationofindustry-wideregulationfromtheInternationalCivilAviationOrganization(ICAO)andincompliancewiththeEUETSandAUETSrequirements.

Deltaalsousesashadowpriceofcarbontoevaluatefutureroutes,projectschedules,andinvestmentopportunities.Thisisalsobeingdoneinanticipationofcompliancerequirementsforregionalorglobalairlineoperation.

QANTASimposedanAustraliancarbontax-linkedsurchargeonfares–butitremovedthisaheadoftherepealofthecarbontax.AnewsarticlefromAustraliareportedthatastaffersaid,“Ourall-inclusivefareshavenotrisen,thoughwehavekeptasmallcarbonsurchargeondomesticfaressothatwecankeeptrackinternallyofthecostofthetax...Thishasnowbeenremoved,buttherewon’tbeanychangetothepricesthatcustomerspay.”21

Inthatway,thecarbonchargeappliedtoair-travelbyQANTASwasadirectpass-throughofacarbontaxtoconsumers.TheremovalofthesurchargedidnotseeareductioninfaresduetoincreasingmarketcompetitionontheAustraliandomesticaviationmarket.

Lessons Learned from These Case StudiesThesedifferentcasestudiesshedseveralbroadlessonslearnedthatmaybeusefulascompaniesdesignandimplementtheirowninternalcarbon-pricingschemes.

First,theYaleUniversitycasestudyshowsthatcarbon-pricing-scheme design is important, but many different variations can work within similar contexts.

Intestingfourdifferentcarbon-pricingschemes,YaleUniversity’spilotfoundthatallbusinessunitsthatparticipatedinanypricingschemeduringthepilotsignificantlyreducedtheircarbonemissionsrelativetothebusinessunitsthatdidnotparticipateinthepilot.

Specifically,the“investment”pricingscheme,inwhichbuildingsweregivenfundsearmarkedforenergy-conservationinvestments,experiencedthegreatestreductioninemissions.However,duetothesmallsamplesizeofthepilot,theexplanatorypowerofthesefindingsislimited.

Theairline-industrycasestudyclearlydemonstratesthefirstbenefitofaninternalcarbon-pricingschemeoutlinedbyCDP.DeltaandQANTASemploycarbon-pricingstrategiesasa form of regulatory preparedness or advanced/anticipated compliance.

21 News.com.au.(2014).“Quantasscrapscarbontaxsurcharge.”RetrievedOct.31,2018,fromhttp://www.news.com.au/

finance/money/costs/qantas-scraps-carbon-tax-surcharge/news-story/aad2d2b4c7a7256a3b5e6143b7c16ad6

Inasimilarvein,SociétéGénérale’sdecisiontoimplementacarbonchargewasinpreparationfortheupcomingEmissionsTradingSystem(ETU)intheEuropeanUnion.

Microsoft,anothermultinationalcompany,canalsobeconsideredtobereapingthebenefits of moni-toring and evaluation of carbon emissions as a means of navigating various global standards, commit-ments, and challenges.

Thesetwocasestudiesalsoshedotherinsights.SociétéGénéralebenefitedsignificantlyfromitsearlyperformanceofaGHGinventoryin2005tosetaneffectiveinternalcarboncharge.Thissuggeststhatdesign elements from its program could be used effectively for other internal carbon-pricing schemes.

Inadditiontothecharge,competition between unitsencouragedtheemployeestoengageandbecreativetoproposevariousinternalenvironmentalefficiencyinitiatives.TheinitialCRPinthegroupachievedthedefinedemission-reductionandenergy-consumptiontargets.Itresultedinannualsavingsof$11.8million.

TheMicrosoftcasestudyshowsusthatwhilefocusingontheusesofrevenueforaninternalcarbonchargeisaninnovativeapproachincarbonpricing,the carbon price must be sufficiently high to reap the double reduction in emissions,ashighlightedbyourtheoreticalmodel.

Whileoftencitedastheleadingexampleforinternalcarbon-pricingschemes,Microsoft’sprogrammaynotbethebestmodelforcompaniesseekingsignificantreductionincarbonemissions.

ConclusionAswesurpass400ppmatmosphericcarbondioxide,theresponsibilitiesforcarbon-emissionsreductionandmitigationfalltogovernmentsatalllevelsaswellastheprivatesector.Whilethereareresourcesforpriceinstrumentstoaddressdamagesfromcarbonemissionsatthenationallevel,therearelimitedresourcesavailabletocompaniesandotherinstitutions.

Ourpolicyframeworkcaptureskeydecisionsandtradeoffsthatorganizationswillfaceinthedesignandimplementationofaninternalcarbon-pricingprogram,highlightingtheleversavailableforcompaniestodesignaninternalcarbon-chargeprogramthatmeetstheirneeds.

Wefindthatcurrentimplementationofinternalcarbon-pricingschemesbycompaniesgenerallyserveaspreparationforcertainoranticipatedfutureregulations.

Lesscommon,butstillrelevant,arepositivereturnsfromrevenue-neutralinternalcarbon-chargeprogramsliketheYaleCarbonCharge.Newincentivesforinvestingincarbon-efficiencytechnologycanpotentiallyaddressthebehavioralfailuresthatleadtounderinvestment.

Appendix: Theoretical FrameworkWepositthatthesecondarymacroeconomiceffectsofpairedtaxesandinvestmentsubsidies,whenconsideredasasingleinstrument,couldprovecost-effectiveforinternalizingthetwomarketfailuresassociatedwithclimatechange:theclimateemergencyandthetechnologytransition.22

Thepolicyframeworkprovidesdifferentdecisionpointsandtradeoffsthatcompaniesface.Outcomevariables,intandemwiththepolicyframework,wouldhelpcompaniessettargetsfortheirinternalcarbon-pricingschemesandaligntheirtargetswiththepolicydecisionstheymake.

Therehasbeenmuchdebatearoundwhetheranationalcarbontaxprovidessecondarybenefitsapartfromareductionincarbonemissions.

Goulderfirstoutlinedthepossibilityofadoubledividendinwhichreturningcarbontaxrevenuesbyloweringotherdistortionarytaxesintheeconomywouldincreasenon-environmentalwell-being.Thiswouldbeindependentofanyenvironmentalbenefitsofthetax.23

Sincethen,others,includingGoulder,ParryandOates,demonstratethetax-interactioneffect,whereacarbontaxisseenaseffectivelyataxonafactorofproductionandhenceincreasesexistingtaxdistortionsintheeconomy.24, 25

Thesedebateshavesometimesoccurredinthecontextofcomparingdifferentpolicyinstrumentsforclimatechange,suchasthetaxversuscap-and-tradedebate.26Recentworkhassuggestedthatwhetherthedoubledividendortaxinteractiondominatesdependsonthespecificcircumstancesthatunderliethesituationinwhichthecarbontaxisimplemented.27

Littleattentionhasbeenpaidtotheeffectsofusingcarbon-taxrevenuesforpoliciesthataddressotherenvironmentalmarketfailures.Examplesincludesubsidiesforthecleantechrevenuesrelatedtoenergy-efficiencyinvestmentsandtheunderinvestmentinR&Dforgreentechnologiessuchas

22 Jaffe,A.B.,Newell,R.G.,&Stavins,R.N.(2005).Ataleoftwomarketfailures:Technologyandenvironmentalpolicy.

Ecological Economics,54(2),164-174.

23 Goulder,L.H.(1995).Environmentaltaxationandthedoubledividend:areader’sguide.International tax and public finance,

2(2),157-183.

24 Goulder,L.H.(1998).Environmentalpolicymakinginasecond-bestsetting.Journal of Applied Economics,1(2),279-328.

25 Parry,I.W.,&Oates,W.E.(2000).Policyanalysisinthepresenceofdistortingtaxes.Journal of policy Analysis and

Management,603-613.

26 Goulder,L.H.,&Schein,A.R.(2013).Carbontaxesversuscapandtrade:acriticalreview.Climate Change Economics,4(03),

1350010.

27 Goulder,L.H.(2013).Climatechangepoliciesinteractionswiththetaxsystem.Energy Economics,40,S3-S11.

improvedPVcells.28Thereisanintertemporalfeedbackofsuchpoliciesonthequantityofenergyconsumedortheamountofemissionsperenergyconsumedrespectively.

Thus,itmightbeinsightfultoexaminetheinterdependenceofthecarbontaxandthesubsequentpolicyimplemented,ratherthantreatthemastwoseparatepolicyinstruments.Kolstadacknowledgesthelinkbetweenthesetwomarketfailures,butintermsofincentivesforinducedinnovationratherthanthroughpotentialusesofcarbon-taxrevenuestosubsidizeinnovation.28Figure2belowillustratesourcoretheoreticalidea.

Thegraphontheleftistheclassictheoreticaldiagramfornegativeexternalities.Ideally,governmentsorcompaniesshouldsetacarbontaxequaltothemarginalexternalcostsofenergyconsumption.Thiswouldforceconsumersorbusinessunitstointernalizealltheexternalcostsassociatedwithenergyconsumption.

Assumingthisidealscenario,thequantityofenergyconsumedwoulddecreasefromQ0toQ*andthetaxrevenuecollectedwouldbeequaltothebluebox.

28 Kolstad,C.D.(2010).Regulatory choice with pollution and innovation (No.w16303).NationalBureauofEconomicResearch.

Figure 2: Using carbon tax revenues to address the appropriability market failure for cleantech revenues

E2E1P*P*

MSC=MPC+MEC

Dd=MSB=MPB

Price/Cost/Benefit ($) Price/Cost/Benefit ($)

Quantity of energy consumed Quantity of investments in energy efficiency

MSC=MPC

MSB=MPB+MEB

ENVIRONMENTAL EXTERNALITIES APPROPRIABILITY

Giventhatthereisanotherexternality,apositiveexternalityintermsofrevenuesfromenergyefficiencyorcleantechdevelopment,theserevenuesmaybeusedassubsidies.Shouldtheamountcorrespondperfectly,thesubsidieswouldallowconsumersorbusinessunitstointernalizetheexternalbenefitsofenergyefficiencyinvestments.ThiscausesanincreaseinenergyefficiencyinvestmentsfromQ0toQ*.Theseinvestmentslowerthequantityofenergyconsumedinfuturetimeperiods,resultinginfurthercarbon-emissionreductions.

Thus,usingcarbon-taxrevenuestosubsidizeotherexternalitiessuchascleantech-developmentrevenuewouldprovideadditionalenvironmentalandsocialbenefitsthatmayormaynotbegreaterthanthebenefitsofreducingotherdistortionarytaxes.

However,therehasyettobeacomparisonoftheeffectivenessofdifferentusesofcarbontaxrevenuesinthecontextofoptimaltaxtheorythatwouldgobeyondreducingotherdistortionarytaxesorreturningtherevenues’lumpsums.

Goulderexaminedwhethercarbontaxesareamoreefficientrevenue-raisingmechanismforgovernmentsascomparedtootherrevenuesourcesandsimplyconcludedthattheenvironmentalgainfromgreentaxesisessentialforgreentaxestobelesscostlythanotherformsofgeneraltaxes.29

Wethinkthatacomparisonofdifferentusesofcarbontaxrevenuescanprovidenewperspectivestothedebateondouble-dividend-versus-taxinteraction—aswellas,perhaps,acarbon-tax-versus-cap-and-tradeevaluation.

Whencompaniessetinternalcarbon-pricingschemes,theydonotfacethemacroeconomiceffectsofrevenuerecyclingortaxinteractionasdiscussedinthecurrentacademicliterature,sotheuseofcarbontaxrevenuesforotherpoliciesbecomeacentralconsideration.

Inparticular,companiescanchoosetoearmarktheserevenuesforgreeninvestmentswithinthecompanyorexternally.Ortheycanreturnthemtoindividualbusinessunitsordepartmentsearmarkedsuchthattheunitsthemselvesengageinthesegreeninvestments.

29 Goulder,L.H.(2013).Climatechangepoliciesinteractionswiththetaxsystem.Energy Economics,40,S3-S11.

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