Execs urged to adopt "shadow carbon pricing" strategy

Growing numbers of businesses are expected to adopt a "shadow price" for carbon when making infrastructure decisions after the UK National Grid announced it is to emulate the government's approach of attaching a financial cost to carbon emissions as part of future cost-benefit analyses.

The new strategy is part of a major emission reduction programme announced this week that commits the grid operator to an 80 per cent reduction in emission levels by 2050.

Under the initiative, the company is to undertake a year long review of its operations in partnership with non-profit group The Climate Registry to measure its carbon footprint and identify the most effective areas to curb emissions.

The National Grid then plans to use the information to set annual and five year carbon reduction targets which will in turn be used to create carbon budgets, against which managers' performance will be measured. Company Spokesman Stuart Larque said that staff would be measured against their carbon budgets in the same way performance is gauged against traditional business metric such financial, operational and safety targets.

The budgets will also include a "shadow spot price" for carbon, which will be used to determine emissions costs for future design, construction and maintenance of its electricity and gas networks, management of its fleet and facilities, and any potential new investments.

The company said the policy would not only help it account for the environmental impact of investment decisions but would also help ensure it is prepared for future legislation that could see the introduction of a carbon tax or mandatory cap-and-trade programme.

The approach mirrors the government policy, detailed last year, of incorporating a shadow price for carbon when making investmen t decisions.

Larque said the company would further emulate the government approach and use the current Defra approved shadow price of £25.50 per metric tonne of carbon. " It's a great model for measuring the environmental impact in a traditional cost benefit analysis and is particularly important in the light of our 80 per cent emission reduction target," he said.

Environment Secretary Hilary Benn welcomed the move and particularly praised its decision to adopt carbon budgets and carbon pricing.

A spokesman for Defra said it was optimistic that more business would adopt shadow carbon pricing policies. "The reason we publicised the [shadow pricing] approach is that we want business to follow suit," he said. "When making project it is always difficult to quantify social and environmental costs against value for money considerations and this gives a relatively simple means of undertaking those calculations. It helps make the financial case for more environmentally sustainable decisions."