Putting a price on carbon is becoming the norm for multinationals. This fall the nonprofit global environmental disclosure platform CDP published a new report revealing the extent of this shift. Over the past four years, the number of global companies that factor or are planning to factor an internal carbon price into their business plans jumped from 150 to 1,400.

CDP’s research showed that these multinationals include more than 100 Fortune Global 500 companies with annual revenues totaling $7 trillion.

“More and more companies are utilizing this tool,” says Nicolette Bartlett, CDP’s director of carbon pricing. Recently we caught up with Bartlett to understand the advantages and challenges that carbon pricing represents as well as how it can spur innovation at multinationals and smaller companies alike.

What trends are you seeing?

CDP has been working on the topic of carbon pricing for four years now. We’ve primarily done that through reporting on what companies disclose to us. There was a trend in 2013 where companies were saying this was one of their strategies for managing climate risk. We started to ask a specific question around it. We also ask if companies are regulated within an emissions trading system. We hadn’t brought the two things together, but in 2017 we did.

We noticed this trend of big multinationals that use an internal carbon price to help manage climate risk and opportunity, driven by policy developments around the world.

For corporate leaders, what are the main takeaways from this report?

Carbon pricing is growing. More and more companies are utilizing this tool. You could say it’s an obvious thing to do, like budgeting. But we’ve seen that this tool is expanding into a company. So, where it might start out being used just in cap-ex decisions, we’re now seeing them used in operations. It’s almost like an internal pricing system to incentivize behavior change. This tool has begun to take on a life of its own that, I would argue, is broader and deeper than just reacting to policy.

One of the most interesting spikes we see is in the United States. More companies disclose to us that they use an internal carbon price. There are a variety of reasons. One is because they’re multinationals operating in places which have carbon pricing systems. Secondly, they can see the direction of travel in terms of low-carbon.

What are the largest challenges companies are facing around carbon pricing?

There are a lot of internal dynamics to overcome. Let’s say you decide this is a valuable tool and say let’s embed it within the company. Internal carbon pricing takes something which is usually the purview of the sustainability team and turns it into a price metric. That means it starts to become the language of other parts of the machine. In particular, you see it becoming embedded within the finance department. That’s one of its major advantages but also one of the reasons why it can be tricky for a company to do.

It’s bad enough having to explain what carbon emissions are to your entire company. Now there’s a price metric. You’ll need to persuade the powers that be that this is a useful tool, that it’s going to be good for the company in the long run, [that it will] help you manage risk and opportunity, help you innovate. You’re going to need buy-in at a very senior level, probably the CFO or the CEO.

The second challenge is around policy uncertainties. You’ve got different systems coming online in different places. It’s hard to gauge the relative importance of this tool. Am I going to see a massive change in the next 10 years where I need to increase the significance of this variable in my decision-making?

Canada is an example where they have more certainty. This is a metric that makes it that much easier to read the impact of climate policy. A counter to that would be companies that have decided we’re moving to a low-carbon world. When they use an internal carbon price, it becomes something they use to enable behavior change across the organization and trigger innovation.

The third challenge: Companies can get stuck in the price level trap. Consultants come in, do heaps of analysis, and spend a lot of time to find the perfect number. And they don’t necessarily focus on the internal political buy-in need, the governance, the working groups, embedding this in the organization. The number is really important, but it shouldn’t be your entire focus.

What would be a smart strategy?

Start out where you have a number you can at least sell internally. I heard the CEO of a company say to me what he did was sit down and run the numbers. If it had a 1% impact on the EBI before taxes, they looked at that. One percent doesn’t have enough of an impact on decision-making, but they couldn’t have 10% because that’s starting to upset shareholders. They found a number that would work and translated that into the euro amount.

Get a number that you can have people buy into, that is meaningful. Then start in one part of the organization, and have this be one variable in decision-making. You iterate, grow, increase its importance relative to other variables, and expand so it becomes dynamic. In time you’ll end up with a stronger carbon price than if you focus on the perfect number.

How is carbon pricing spurring innovation?

A big chemical company is applying it to their supply chain. They’re a massive buyer. They have key suppliers that want to stay key suppliers. They’re starting to say to them, “This is our internal carbon price. We’re going to start applying it to your bids. It’s just an awareness-raising step.” They show what your bid actually costs when it comes to the level of emissions in the products or services. “In future, we are going to start having that be something that matters to us in the decisions with you. We’d like to keep you, but we need you to go on a journey.”

At a different big chemical company, the CFO really got into this. Before, they were applying their internal carbon price to their cap-ex decisions only. Then they looked at it when they started to build factories. The engineers went, “Here’s a new parameter. We’ll completely redesign our factories.” The factory has become low-carbon, high-tech.

One classic example is Microsoft. They set up an internal fee and they actually have money changing hands. They started out with a low number but a high degree of influence. They then got the whole company involved, and they put it into a fund. The staff bid to say what they would like to use the fund for in terms of low-carbon investments. That’s how they funded renewable energy investments. Engineers and folks like that who never really thought about this before start to play with it. Now they’re starting to link that to their R&D and to investing in data platforms, products, and technologies that will help us solve low-carbon issues.

Thinking ahead, what will carbon pricing will be like in the future?

That’s the magic question, isn’t it? I think you’re going to see a lot of momentum in the Americas. For example, California is linked with Ontario and Quebec. You’re seeing Chile, Colombia, and Mexico having a carbon tax. In time, you’re going to see a spine of jurisdictions along the Americas that have linked their carbon markets.

Also, the finance sector is looking at this for the first time properly. When they take it seriously, which they are beginning to, they like carbon pricing. We’ll start to see it being used to drive decisions in the investment sector.

The other big one is China will launch their emissions trading system. That will dwarf the European emissions trading system. And it’s going to focus on the sector and take it stage by stage. It will have a ripple effect.

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