Carbon Price

Drafting notes and guidance

Overview

A carbon price is a financial cost or penalty imposed on an organisation for the Greenhouse Gas Emissions associated with their activities.

Expressing the environmental cost of those activities as a financial cost helps organisations decide which activities to undertake and how to go about them. It should incentivise organisations to reduce their emissions; otherwise, they face a financial penalty.

Government carbon pricing measures

Some governments have introduced carbon pricing to reduce GHG emissions. Governments usually implement this in one of two ways:

• A carbon tax is the direct fee imposed on emitters for GHGs emitted into the atmosphere as a result of their activities.
• Carbon emission trading (also known as cap and trade ( CAT ) or emission trading schemes ( ETS )) works by allowing participating emitters the right to ‘purchase’ more allowances than their quota from other emitters who are below their quota on a secondary market. The overall cap is reduced over time to ensure emissions decrease.

Carbon pricing between private sector entities

Companies may choose to apply a carbon price to their activities. Essentially, this applies a carbon tax either internally or within their value chain.

If including carbon pricing provision in a contract, issues to consider include:

• Which activities and emissions are covered?
  • It may be easier to only cover particularly high-emitting activities rather than all Scope 1, 2 and 3 Emissions of the relevant party. The carbon price could be linked to an emissions budget so that it is only paid for emissions that exceed that budget.
• When should the carbon price be paid?
  • For example, it might be paid on completion of the relevant contract, on a set date or as interim payments over the contract term.
• Who receives the carbon price payment?
  • Where a carbon price is placed on a supplier, the customer may prefer the carbon price to be paid to a climate change charity or for the supplier to purchase offsets to cover its GHG emissions. Where offsets are used, they should be in addition to GHG reductions to ensure that the organisation's emissions reduction targets are met. Alternatively, the carbon price could be paid into an account that the parties can draw on to fund GHG emissions reduction projects within their value chain.
• How is the price calculated?
  • The periods over which carbon price is calculated should align with the timescales over which [party A] can measure its emissions. For example, if [party A] can calculate its emissions quarterly, then the carbon price can be calculated quarterly.
• What is the effect over time?
  • Will the organisation's emissions budget decrease and the carbon price increase over time to drive GHG emission reductions?

Using a carbon price payment mechanism in funding agreements

If used in a funding context (for example, a lender funds a new manufacturing start up), the carbon price could be added to the outstanding capital.