Shell and Carbon Pricing
There is no single solution to the urgent societal challenge of cutting carbon emissions to help limit global temperature rise. Shell advocates for governments to use carbon pricing as one mechanism to tackle climate change. Find out more about how carbon pricing works and how Shell is supporting the development of carbon markets.
What is carbon pricing and how does it work?
According to the World Bank, a carbon price gives an economic signal and emitters decide whether to discontinue their polluting activity, reduce emissions, or continue emitting and pay for it. In this way, the overall environmental goal is achieved in the most flexible and least-cost way to society. The carbon price also stimulates clean technology and market innovation, fueling new, low-carbon drivers of economic growth.
What are the different types of carbon pricing instruments?
According to the World Bank, there are two main types of explicit carbon pricing: emissions trading systems (ETS) and carbon taxes.
An ETS – sometimes referred to as a cap-and-trade system – caps the total level of greenhouse gas emissions and allows those industries with low emissions to sell their extra allowances to larger emitters. By creating supply and demand for emissions allowances, an ETS establishes a market price for greenhouse gas emissions. The cap helps ensure that the required emission reductions will take place to keep the emitters (in aggregate) within their pre-allocated carbon budget.
A carbon tax directly sets a price on carbon by defining a tax rate on greenhouse gas emissions or – more commonly – on the carbon content of fossil fuels. It is different from an ETS in that the emission reduction outcome of a carbon tax is not pre-defined but the carbon price is.
There are also implicit carbon pricing signals – such as performance standards, flare reductions/penalties, and carbon takeback obligations – which do not have an explicit price on carbon but do encourage carbon reduction through other policy mechanisms.
How does a carbon tax work?
1. Government imposes a tax on emitters for their GHG emissions.
2. This gives emitters a financial incentive to reduce emissions.
3. The carbon tax encourages emitters to pursue energy efficiency improvements.
How does an emissions trading system work?
1. The government places a limit on the amount of GHG emissions for sectors and issues units that emitters can use to meet their compliance obligations.
2. Emission units can be traded between emitters.
3. Emitters are required to obtain enough units to cover their emissions.
4. The carbon price is determined by supply and demand for emission units.
Did you know?
Emissions trading schemes are also called "cap-and-trade“
Our position on carbon pricing
Shell advocates putting a direct price on carbon emissions, as part of a broader policy framework to achieve net-zero emissions. Our view is that the carbon price, whether through cap-and-trade, carbon tax or a hybrid system, should apply to as many sectors of the economy as possible and increase over time.
Policies should be based on robust and transparent modelling of the impacts of carbon pricing on consumers and industry.
Shell also promotes greater international cooperation through systems that transfer carbon credits between countries and advocates to ensure that international carbon credit transactions have environmental integrity by avoiding double counting across national inventories, including in voluntary carbon markets.
To find out more about our global climate and energy transition policy principles and how carbon pricing fits within that, please refer to our advocacy page. For more information, please refer to a podcast on carbon pricing.
Carbon pricing initiatives in which Shell is active
Shell is one of the largest global participants in carbon markets. We have been active since 2003, when the first emissions trading scheme was set up in Europe. Since then, we have expanded significantly to become a global presence in both the regulated and voluntary carbon markets.
Today, we participate in all major emissions trading schemes in the world. We work with many companies across the globe, helping them to comply with environmental regulations and manage their exposure to the carbon markets. Shell has set several milestones in the emissions market history, including being the first company to:
- Execute a trade of European Union Allowances
- Trade US federal CO2 compliance future contract on the Chicago Climate Future Exchange
- Trade a carbon product usable under a mandatory US cap-and-trade program
- Take delivery of Certified Emission Reductions (CERs) under the United Nations Clean Development Mechanism program
For further information, please visit Shell Environmental Products.
FAQ’s
Is there any evidence that carbon pricing works? Will carbon pricing really help tackle climate change and help achieve 1.5 degrees?
Is there any evidence that carbon pricing works? Will carbon pricing really help tackle climate change and help achieve 1.5 degrees?
There is a significant amount of evidence that suggests carbon pricing is one of the tools required to achieve 1.5 degrees. According to the Carbon Pricing Leadership Coalition, which Shell is a member of, it is one of the strongest policy instruments available for tackling climate change as part of a broader policy framework. It has the potential to decarbonize the world’s economic activity by changing the behavior of consumers, businesses, and investors while unleashing technological innovation and generating revenues that can be put to productive use. In short, well-designed carbon prices offer triple benefits: they protect the environment, drive investments in clean technologies, and raise revenue.
However, it is important to highlight that carbon pricing is one of the tools that are required as part of a broader policy framework, including net zero targets, government mandates, policy support, and an integrated policy framework. Further material can be found at the International Chamber of Commerce.
How does Shell use carbon pricing internally?
How does Shell use carbon pricing internally?
We consider the potential costs associated with operational green house gas (GHG) emissions when we assess the resilience of new projects. For each region, we have developed short-, medium- and long term estimates of future costs of carbon. These are reviewed and updated annually. Up to 2030, costs for carbon emissions estimates are largely policy driven through emission trading schemes or taxation levied by governments and which varies significantly on a country-by-country basis. Beyond 2030, where policy predictions are more challenging, the costs for carbon emissions are estimated based on the expected costs of abatement technologies required for 2050. Further information can be found in our Annual Report.
What does the Paris Agreement say about carbon pricing?
What does the Paris Agreement say about carbon pricing?
According to the United Nations, the Paris Agreement of 2015 marked a turning point for international climate action. For the first time, all nations came together in the common cause of combatting climate change. The Agreement aims to keep global temperature rise to well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further, to 1.5 degrees Celsius. To achieve these ambitious goals the Agreement sets in place provisions for enhanced cooperation among nations on climate change mitigation, including through market-based approaches, such as carbon pricing and trading. This includes Article 6, including 6.2 – which helps facilitate government to government trade, and Article 6.4 – which aims to develop a new international mitigation mechanism to help countries reduce emissions and promote sustainable development.
There are different prices for voluntary carbon markets and compliance carbon markets – what are they and how are they different?
There are different prices for voluntary carbon markets and compliance carbon markets – what are they and how are they different?
Compliance and voluntary carbon markets are similar as both look to use market-based mechanisms to help reduce carbon emissions. They differ in the way that they are implemented.
Compliance-based markets are markets that are set by governments that are legally binding and mandatory. They are usually in sync with national emissions reduction targets or equivalent. Examples of this include the EU’s ETS, California-Quebec’s Cap and Trade Program, etc. Given that these are regional specific programs, the prices vary for each jurisdiction.
Voluntary carbon markets, on the other hand, are driven by the action of companies, individuals, or other entities who want to meet their environmental sustainability goals or part of their net zero targets. The voluntary carbon market provides an opportunity to support projects that avoid or reduce carbon emissions or remove carbon dioxide already in the atmosphere. These projects may generate carbon credits from activities such as protecting natural ecosystems, reforestation, improving efficiency in household devices, displacing fossil fuels with renewable energy generation and switching to less carbon intensive waste management processes.
What role can technology play in helping accelerate carbon markets?
What role can technology play in helping accelerate carbon markets?
Shell is already active in leveraging digital solutions to improve efficiencies across the value chain by targeting technical and commercial scopes through accurate, reliable and transparent data. Examples of areas where Shell is currently working on digital solutions include calculation of emissions forecasting to support commercial decision making and providing high quality non-Geographical Information System information to understand risks and aggregation of carbon credits generated in the portfolio. At Shell we believe digital innovations are complementary to each other and, combined, could bring improvements to the market. By making it easier for companies to enter the carbon market, this creates incentive to develop carbon projects.
