CO2 Pricing: Business Reacts to Credible Expectations

Business reacts to credible expectations, not brave declarations. We cannot lose the momentum and credibility of collective will.

Immediately after Paris and COP21, we heard disappointment around the fact that carbon pricing didn't feature as strongly in the text of the agreement as it could have, despite numerous CEOs urging for a decision in this field and business asking for a price signal. A clear, credible and meaningful signal able to trigger a change in behavior of the so-called mainstream business was the desire of the most advanced leaders. Few people understood that the UNFCCC process had very little chance to produce a clear statement on this particular topic. In the end, false expectations were created, which led to a disappointment that could have been easily avoided.

Businesses asked for a price not because they like the idea of increasing costs, but because they know the current price system is not sustainable and they also know this price will come, but they do not know how high, when, and in which form. They want a price above all because they want to reduce uncertainties.

Then came the Carbon Pricing Leadership Coalition under the patronage of the World Bank, re-energised in Paris with the blessing of impressive godfathers; the UN Secretary General, the President of the World Bank, the Managing Director of International Monetary Fund, the Secretary General of OECD, credible leadership in the field of 'big business' from the Chairman and CEO of Royal DSM and all of this being co-chaired by the President of the COP.

Finance Ministers also joined the party, bringing their credibility to the table. Some critics commented they came with the wrong motivations, seeing it as an easy way to increase the potential of their tax base, but even if this was the case, it could be easily corrected or mitigated.

This Coalition comes together with a movement where we are seeing organizations, countries and individuals both creating and reacting to an expectation of a price on carbon, and in a way making it a self-fulfilling prophecy as the market is shifting in line with that.

We are now seeing impressive growth in the area of the so-called "shadow carbon price". At the end of last year CDP reported on 400+ companies that are using a price for carbon now, with almost 600 more planning to do so in the next two years. Impressive numbers considering there were just tens a few years ago.

All of these companies are anticipating that the price and the real cost will come anyway. So they are using a shadow price to start orientating their portfolio of research projects and investments in the right direction. Again, they are anticipating this change instead of waiting for the confirmation, as they want to be the first movers and avoid being stuck with stranded assets. Some are even insisting on a high level of price able to change behaviour internally.

Countries are also moving to organize their local markets, which will be soon interconnected. China with up to one billion people who will be impacted by carbon price is certainly the most obvious example of a potential massive transformative move.

Although not explicitly linked to a price on carbon, we are starting to see a change of thinking from fossil fuel producing countries too. Some are sceptical of the reasons, but Saudi Arabia planning to sell state oil assets marks a huge shift in how oil producing countries are thinking about diversifying and preparing for a world beyond oil and towards net zero emissions. They are also changing their own energy mix, investing in solar at a scale that will cover all their own needs and create room for exports.

These big movements aren't happening because of a new system that is already in place, but because of a change of thinking and the credible expectation of a new system arriving. This lends itself well to the idea of a virtuous circle; expectation feeding reality, which then in turn feeds expectation. This virtuous circle will drive the change we need to make expectations into fact.

This is why the Carbon Pricing Leadership Coalition has such a huge responsibility moving this idea forward, creating an expectation of collaboration across borders, across sectors, sharing information, know-how and capacity, to build the most economically efficient tools for decarbonisation into every nation's climate plan as soon as possible.

The Coalition and other initiatives should feed this movement and maintain the credibility of a coming price on carbon. Business acts when it anticipates a credible vision of a new system, not because of facts already proven, which has often... proven too late.