Introduction & Background

It was November 2015, and Sue Wells had a lot on her plate. As the Director of Finance and Administration for the Yale School of Forestry & Environmental Studies (F&ES), she was responsible for every aspect of the School’s operations, from overseeing the budget to keeping track of construction projects. And now she had a new challenge. Yale had identified F&ES’ landmark building, Kroon Hall, as a candidate for the University’s new internal carbon charge pilot project and Dean Peter Crane had nominated her to take the lead. This was not a complete surprise. She had been involved in early conversations about the endeavor and fully supported the concept, especially given how well it aligned with the mission of the Forestry school. Yet, in moving from theory to practice, Sue knew she would have a wide range of tasks ahead of her. She was already balancing multiple projects and teams. Kroon was a new, state of the art building without a lot of room for energy use improvement. Would they be penalized for having the best building on campus? Who would she need to involve to ensure real results? How would this impact her financial planning? She had been assured that the pilot program would represent an insignificant burden, and would have administrative support, but would she have time to take on this new responsibility?

As an academic institution, Yale University strives to be a leader in sustainability research and teaching. In addition to the work of the School of Forestry and Environmental Studies, Yale has “over fifteen institutes, centers, and programs directly linked to the study and promotion of the environment across the University”.^[1] Yale also leads by example with its ambitious program to reduce campus greenhouse gas (GHG) emissions through measures such as energy efficiency, renewable energy and improved waste management. In its new 2025 Sustainability Plan, Yale sets a goal of reducing GHG emissions by 43% by 2020 compared to 2005 level and becoming carbon-neutral by 2050. However, the University’s policies on climate change and energy use have mostly concerned central units such as facilities and the sustainability office and were not the primary focus of most departments and schools across the university. At the same time, as a part of broader national movements, student activists have called for the divestment of Yale’s endowments from fossil fuels, urging the University to consider climate change as an investment and overall financial priority.

Within this context, an internal carbon charge was proposed to expand Yale’s sustainability efforts by providing decentralized incentives for emissions reduction and generating knowledge to inform the broader national and global conversation on carbon pricing.

Carbon Pricing Background and Trends

Although not a new concept, carbon pricing has recently gained momentum in both the public and private sectors as an efficient and effective way to promote climate change mitigation. In 2016, almost 40 countries and more than 20 cities, states and provinces are implementing emission trading programs or carbon taxes. The share of global emissions covered by carbon pricing initiatives has increased threefold over the last decade, to about 13% in 2016.^[2] Of the 189 countries who submitted pledges to reduce GHG emissions through their Nationally Determined Contributions (NDCs), more than 100 mentioned the use of carbon pricing and other market-based mechanisms, suggesting broader government action in the future.

There has also been growing adoption of voluntary carbon pricing in the private sector. In 2016, over 1200 companies reported the use of or plans for internal carbon pricing to the Carbon Disclosure Project, a remarkable eightfold increase from 2014. Over 140 of these companies are taking this approach further by embedding a carbon price within business strategies and operations to achieve established climate targets. Within these, 37 are disclosing impact of their internal carbon pricing.^[3] 

One of the main justifications for carbon pricing is that it helps decision makers internalize the costs of current and future damages from their carbon emissions. Putting a price on carbon dioxide and other greenhouse gases is critical to successful emissions reductions, as it provides the necessary financial incentives for individuals and firms to shift consumption to low- or zero-carbon goods and services. Proper carbon pricing also spurs innovation in clean technologies. However, carbon pricing alone is not sufficient and must be part of a larger package of policies to reduce greenhouse gas emissions.^[4]

There are two main approaches to carbon pricing: cap-and-trade and carbon tax. Cap-and-trade establishes a cap on emissions and allows participants to buy and sell allowances for emitting more or less than permitted. This creates a market for emissions allowances and the carbon price (the price of the allowances) is determined by the interaction between demand and supply. The emissions allowances are usually auctioned by governments to raise revenues. Cap-and-trade is a quantity-based approach to carbon pricing.

A carbon tax establishes a fee per ton of carbon dioxide (or equivalent) emitted from an activity and is often defined based on the carbon content of the fossil fuels used. A carbon tax also generates revenues; however, it is different from cap-and-trade in that the quantity of emissions reduction is not pre-defined but the carbon price is. Carbon-tax is a price-based approach to carbon pricing.^[5]

There are also hybrid approaches, such as the use of a price floor and/or ceiling in a cap-and-trade system – once the permit price reaches these levels, the policy switches to a carbon tax. Price floor and ceiling help reduce the volatility of market permit prices under cap-and-trade. While there is much debate on the pros and cons of carbon tax vs. cap-and-trade, it is argued that, if well designed, either policy can be effective in reducing GHG emissions.^[6] See Goulder et al. (2013) for a detailed discussion of the dimensions along which carbon tax and cap-and-trade are equivalent, and others where one is superior to the other.

Unlike government-imposed cap-and-trade systems or carbon taxes, corporate carbon pricing is internal and voluntary. Many companies adopt internal carbon pricing as a compliance strategy—to anticipate and prepare for GHG regulations or respond to investor and customer demands. An increasing number of companies however is moving beyond compliance and using carbon pricing as a tool for innovation and growth. Companies report the use of an internal carbon price to help provide an incentive or added reason to reallocate resources toward low-carbon activities, make the business case for R&D investments, and reveal hidden risks and opportunities in a company’s operations and its supply chains.^[7]

There are generally three types of corporate carbon pricing: implicit price, shadow price, and internal taxes, fees or trading systems.^[8]

• Implicit price: The implicit cost per ton of carbon is calculated based on how much the company spends to reduce GHG emissions, e.g., the amount of money a company allocates to energy efficiency or renewable energy projects to achieve its climate target. This is analogous to marginal abatement cost—the amount of money spent to reduce one ton of CO₂-equivalent (tCO2e).
• Shadow price: A shadow price is a hypothetical or assumed cost applied to carbon emissions to assess the profitability of potential investments under different carbon regulation scenarios. It is often used in carbon-intensive industries like oil and gas; however, a shadow price on carbon has not been found to drive decision-making in oil and gas companies.^[9] There are nevertheless cases where shadow price has made an impact. For example, Suez, an utility company, has used shadow pricing to drive investments in low-carbon technologies such as installation of new water pumps that increase energy performance.^[10]
• Internal taxes, fees or trading systems: These are formal programs to create incentives to reduce emissions by charging a price for the emissions associated with the energy used. The revenues from these carbon charges are used in a variety of ways. For example, Microsoft uses them to fund internal energy efficiency initiatives, green power procurement and carbon offset projects.^[11]

While many corporations have been working through the design and implementation of internal carbon charges, Yale is the first academic institution to join the Carbon Pricing Leadership Coalition, and the first University to institute a formal internal carbon charge. The Yale carbon charge is an internal fee system and was designed to test multiple models of carbon pricing, including both quantity- and price-based approaches. This case study looks at how Yale decided to implement the internal carbon charge, how the University rolled out its initial pilot, and what was learned from the process and results. The case study focuses on two key aspects of the Yale carbon charge: the design and management of the project by the Carbon Charge team, and the implementation of energy conservation measures in response to the carbon charge by the administrative units and building managers. It provides information and lessons learned for other institutions interested in internal carbon pricing, as well as raising unresolved questions and issues for discussion and further research.