By Stathis Gould
As the impacts of climate change accelerate, treating climate as a systemic risk means that climate policy has to influence change in the system. Carbon pricing mechanisms are therefore a necessity (although not a panacea) as price ultimately changes behaviour and choices.
Carbon pricing directly encourages investment in innovative low-carbon technologies that would more quickly reduce emissions. Economists and business leaders recognise this and are pushing for carbon pricing through the Climate Leadership Council, which proposes a plan for carbon dividends that will cut US CO2 emissions in half. As has been shown by British Columbia, introducing a carbon tax helped cut emissions with no negative impact on the province’s growth rate.
Unfortunately, much of the progress on climate action so far amount to baby steps. As was made abundantly clear at the World Economic Forum this year, “audit geeks” and accountants have an important role to play.
We know that businesses that fail to address the prospect of carbon taxation and higher carbon prices will face great costs to both their bottom-lines—a global carbon tax is estimated to cost businesses US$4 trillion—and their reputations. It’s time that accountants help move the needle more significantly—and more globally.
As the global voice of the accountancy profession, the International Federation of Accountants (IFAC) supports market-based policy and regulatory initiatives that lead organisations toward low-carbon business models as well as more reliable, relevant, and comparable disclosures on climate risk. The chief executives of the Accounting Bodies Network of the Prince of Wales’s Accounting for Sustainability (A4S) initiative also highlight the need for market-based policy incentives as well as better disclosure in their Call to Action in Response to Climate Change.
Carbon pricing regimes and a global carbon market can help countries get closer to the ambitious targets set by the global Paris Agreement in 2015. As climate action becomes a more urgent political priority, governments cannot be satisfied with incremental improvements in reporting and disclosures alone. This is where market-based policy comes in. It ensures that those most responsible for climate change are paying for its impacts.
Carbon pricing, either through a carbon tax or emissions trading schemes (ETS), gives businesses the flexibility to select their own response and adoption strategies while specifically reflecting the social cost of CO2 emissions into a company’s financial statements. Those clear financial consequences are likely to drive action to mitigate emissions and reduce demand for carbon-intensive products and services. Business will treat these costs like any other operating cost and aim to reduce them.
An increasing number of companies are already applying internal carbon pricing to promote change within their operations and investments. For example, amid intense scrutiny aimed at the entire technology sector for failing to reckon with its climate footprint, Microsoft applies internal carbon pricing to drive its investment in renewable energy and increase energy efficiency.
Improving reporting on climate risk and its financial implications—and moving toward new models—is essential. This is a critical time for accountants to not just prepare for inevitable carbon pricing, but to get ahead of it.
In their roles as CFOs and finance professionals, accountants can ensure their organisations are future-fit by helping make choices that factor in potential carbon pricing—and the coming surge in climate-related regulation. This includes utilising internal pricing to inform decisions about capital investments and to better identify risks and opportunities and how strategies and plans might need adjusting.
By identifying climate risk and assessing the strategic, operational and financial implications, accountants are in a good position to contribute to discussions that lead to low-carbon business models that support sustainability and profitability.
If, as a profession, we fail to identify and empower these changes, the question will come: Where were the accountants when these make-or-break decisions were made?
If we want business to respond to the climate emergency, we need to look down the road rather than in the rearview mirror. It’s time for accountants to take the driver’s seat.
This article originally appeared on the IFAC Knowledge Gateway. Copyright © 2020 by the International Federation of Accountants (IFAC). All rights reserved. Used with permission of IFAC. Contact [email protected] for permission to reproduce, store, or transmit this document.
