Shifting the carbon pricing debate Emerging business attitudes fuel momentum for global climate action Shifting the carbon pricing debate I 1

Welcome from EY Conversations about the role of business in finding solutions to climate change have increased in both their sophistication and specificity in recent years. A growing number of businesses are now actively investing in low-carbon initiatives and technologies. Such moves are proving to be of benefit — not only to the environment, but to a business’s bottom line. In the context of this year’s COP21 gathering in Paris, low-carbon discussions are gaining momentum. Since agreements in Kyoto and Durban, and in anticipation of Paris, the paths to a large-scale reduction in greenhouse gas emissions from businesses are becoming global considerations. As those discussions widen, the interest in harmonized, reliable and transparent methods for carbon pricing is likely to intensify. In an effort to better understand the drivers for business, and in the context of EY’s participation in the World Bank’s Carbon Pricing Leadership Coalition, we commissioned this survey to take a pulse on the issue and practice of carbon pricing. For some time, the thinking was that any carbon pricing protocol would require outside direction for businesses to act. The deployment of carbon pricing mechanisms has met resistance due to concerns regarding their potential effect on business competitiveness. Now, our survey findings — along with growing business support for a number of key initiatives driven by the likes of the United Nations (Business Leadership Criteria), the World Bank and the World Business Council for Sustainable Development (WBCSD) — provide evidence that companies are increasingly open to taking independent carbon pricing action, fully expecting it will actually improve overall performance. Such action will be complicated — and our survey suggests uneven — but it will bring a wealth of opportunity from which proactive businesses may benefit. Companies that intend to lead are already incorporating future expected carbon prices required for innovative and expensive technology into their decision-making. Businesses, generally, need to understand these market-driven solutions. Advancements, such as those expected from COP21, will only serve to further motivate the private sector. We appreciate the participation of the executives in our survey, and we hope this discussion helps spotlight how the adoption of carbon pricing by business may be driving global climate action. Juan Costa Climent Global Leader of Climate Change and Sustainability Services EY +34 915 727 381 [email protected] 2 I Shifting the carbon pricing debate 2 I Shifting the carbon pricing debate

Introduction Surrounding this year’s 21st Conference of the Parties to the United Nations Framework Convention on Climate Change (COP21), increasing numbers of multinational businesses and global institutions have come out in support of carbon pricing. This report, commissioned by EY’s Climate Change and Sustainability Services practice, highlights the findings from a survey exploring the prevailing views of businesses around the world toward carbon pricing, as both a regulatory necessity and strategic corporate priority. It finds not only that carbon pricing is welcomed by the majority of respondents as the best way to cut carbon emissions, but that it is also expected to bring benefits to companies in a number of areas. On 1 June 2015, six major oil companies wrote an open letter saying that they would be able to take faster action on climate change if there was a stronger — eventually global — carbon pricing 1 framework in place. This is a sharp change from a decade ago, when energy sector companies were more commonly raising doubts about the urgency of climate change rather than actively supporting strategies to reduce carbon emissions. What’s driven this? “There is a growing likelihood that we will see some price on carbon established,” explains Mathew Nelson, Deputy Global Leader of EY’s Climate Change and Sustainability Services practice. “The conversation is gradually changing from ‘if and when’ carbon pricing will happen to ‘how’ it will happen.” More than 430 companies around the world have already set internal prices for their carbon emissions. In 2014, the number of companies setting an internal price for carbon stood at just 150. Another 583 companies say they will adopt carbon pricing in the next two years.2 “Carbon pricing is widely accepted today as one of the most effective tools to reduce greenhouse gas emissions,” says Lila Karbassi, Head of Environment and Climate at the UN Global Compact. “We see a lot of signals from businesses across regions and sectors that using a price on carbon is an effective means to reducing emissions. Through our Business Leadership Criteria on Carbon Pricing,3 nearly 60 companies have committed to setting, advocating and reporting a meaningful price on carbon.” This is confirmed by the respondents to our survey, 54% of whom believe carbon pricing is the most effective way to cut carbon emissions. Although carbon-pricing frameworks such as the European Emissions Trading System (EU ETS) and national carbon taxes are already a fact of life for some companies, a growing number are taking voluntary steps to implement an internal price for carbon in anticipation of such regulations in their operating markets. In time for the COP21 meeting in December 2015, EY conducted this new study, surveying more than 100 executives from around the world that have an impact on their company strategies. The following are the key findings that highlight their attitudes to carbon pricing. We see a lot of signals from businesses across regions and sectors that using a price on carbon is an effective means to reducing emissions. 1 ‘Six Oil Majors Say: We Will Act Faster with Stronger Carbon Pricing,’ UNFCCC, June 1, 2015 http://newsroom.unfccc.int/unfccc- newsroom/major-oil-companies-letter-to-un/. 2 ‘Threefold surge in companies disclosing carbon price shows climate change concerns going mainstream,’ CDP, September 21, 2015 https://www.cdp.net/en-US/News/CDP%20News%20Article%20Pages/surge-in-companies-disclosing-carbon-price.aspx . 3 See the Caring for Climate Business Leadership Criteria on Carbon Pricing: http://caringforclimate.org/workstreams/carbon-pricing/ . Shifting the carbon pricing debate I 3

Prevailing business attitudes toward carbon pricing Carbon pricing — a growing business consensus Our survey found that more than half of respondents (54%) believe that carbon pricing is the most effective way to cut carbon emissions. Nearly half (48%) say their company is in favor of carbon pricing, with only 7% of companies opposing (see Figure 1). While in Europe and emerging markets, the majority of companies in our survey consider themselves to be in favor of carbon pricing (at 64% and 59%, respectively), in the US, companies were much more likely to be neutral on the topic, with only 18% overtly in favor of carbon pricing (see Figure 2). Support for the concept of carbon pricing is on the rise. The World Bank Group reports that 39 nations and 23 cities, states or regions are using a carbon price. “This represents the equivalent of about seven billion tons of CO , or 12% of annual global GHG emissions,” says James Close, 2 Director of the World Bank Climate Change Group. “This is a threefold increase over the past decade.” Consensus seems to be building behind the idea of a price on carbon. Our survey found that 73% of respondents based in countries where carbon pricing mechanisms have not yet been implemented believe that they will be put in place in the next five years. However, there is clear demand for the improvement of carbon pricing schemes as they exist today. Nearly two-thirds (63%) of respondents believe that current approaches to carbon pricing need to be rethought. “How can companies compare and quantify energy efficiency standards in India with an emissions trading scheme in China, for example?” asks Karbassi. “What we’ve heard from some companies from our research is that until there’s more clarity on comparable standards for carbon globally, it’s difficult for certain industries to make a fast move in this area.” Karbassi believes there are three key factors holding back companies from adopting carbon pricing today. “From recent consultations with companies, the most commonly cited challenges with carbon pricing were the lack of clarity and long-term certainty in climate policies, lack of a common method to set a carbon price, and the difficulty of arriving at the right price including competitiveness issues,” she explains. “At the same time, these companies also see many benefits such as increased support across business units for renewable investments.” Figure 1. Which of the following statements best describes your company’s position on the introduction of carbon pricing in the country where you’re personally based? 48% We are in favor of carbon pricing 45% We are neutral on the topic of carbon pricing 7% We are against carbon pricing 0 10 20 30 40 50 4 I Shifting the carbon pricing debate

Despite the variables, our survey found support for carbon pricing across many locations, including emerging economies, where 59% of companies in our survey are in favor of carbon pricing (see Figure 2), and in various sectors, including construction and real estate, financial services and consumer goods — areas that have not traditionally been impacted by carbon pricing policies. “Carbon pricing schemes start nationally,” says Jean-Pierre Clamadieu, CEO of Solvay. “They have to be connected internationally to scale up our climate ambition. We have been advocating the positive impact these mechanisms will have for furthering the global mobilization of business in the fight against climate change.” Changing attitudes from businesses globally, and in particular in emerging markets, are providing new impetus to policy discussions on the setting up of carbon pricing schemes. In order to be prepared for regulatory requirements related to a carbon market mechanism, companies are increasingly developing monitoring and verification approaches and identifying mitigation actions. Figure 2. Which of the following statements best describes your company’s position on the introduction of carbon pricing in the country where you’re personally based? Europe Emerging markets US Neutral Neutral Neutral 31% 34% 73% In favor In favor 64% 59% In favor 5% 18% Against 7% 9% Against Against In order to be prepared for regulatory requirements related to a carbon market mechanism, companies are increasingly developing monitoring and verification approaches and identifying mitigation actions. Shifting the carbon pricing debate I 5

Prevailing business attitudes toward carbon pricing The net benefits of carbon pricing When asked about the impact carbon pricing would have on a range of areas across their businesses, respondents answered that in every case it was more likely to be positive than negative. Seventy-eight percent of respondents said carbon pricing would have a strong positive impact on fostering innovation, suggesting that carbon pricing can trigger initiatives beneficial to performance, not just compliance. Eighty-one percent of respondents said it would have a positive impact on their companies’ green growth opportunities. Furthermore, almost half of respondents (49%) believe that carbon pricing would have a positive impact on their overall competitiveness (see Figure 3). One reason for optimism may be the positive reports emerging from companies that have implemented a business-wide carbon price. Pharmaceutical company GSK, for example, reports substantial benefits from being part of the EU ETS, including the sell-off of unneeded European carbon allowances and 4 savings from switching to energy-saving policies. Microsoft, having voluntarily set an internal price for 5 carbon, reports that it saves US$10m per year as a direct result of that action. Over the longer term, other benefits may emerge, not least that it may be more cost effective for companies to act sooner rather than later on carbon pricing. “We know that acting now is cheaper than waiting until tomorrow,” explains Gérard Mestrallet, CEO of Engie. Figure 3. What impact would carbon pricing regulation have on your company? Overall carbon 21% 27% 27% 21% 5% emissions Appetite for 16% 27% 30% 20% 7% investment in the country Fostering innovation 38% 40% 13% 6%3% Investment in green 40% 15% 1% growth opportunities 41% 3% Overall 22% 28% 28% 14% 9% competitiveness Strong positive impact Slight positive impact No impact Slight negative impact Strong negative impact Note: not all percentages total 100 due to rounding 4 ‘10 years of carbon pricing in Europe,’ CISL, p7, 2015 http://www.corporateleadersgroup.com/resources/ publications/10-years-of-carbon-pricing-in-europe-2013-a-business-perspective. 5 ‘Making an impact with Microsoft’s carbon fee,’ Microsoft, March 2015 http://download.microsoft.com/ 6 I Shifting the carbon pricing debate download/0/A/B/0AB2FDD7-BDD9-4E23-AF6B-9417A8691CF5/Microsoft%20Carbon%20Fee%20Impact.pdf.

One reason for optimism may be the positive reports emerging from companies that have implemented a business-wide carbon price. This year’s COP21 gathering in Paris will include a focus on carbon markets and carbon pricing practices. Market practices with the potential to reduce carbon emissions are being watched closely by business leaders today. Shifting the carbon pricing debate I 7 Shifting the carbon pricing debate I 7

Prevailing business attitudes toward carbon pricing Internal carbon pricing — part of a broader move to decarbonization Emissions reduction by big business is growing more common. Three-quarters of survey respondents already benchmark their carbon emissions against industry averages. Beyond target setting and improved measurement, some companies are also investing in low-carbon assets and turning to renewable energy sources. Three-quarters of respondents also say their company is investing in low-carbon technologies, and 60% have made a renewable energy commitment of some kind (see Figure 4). This is more common among large companies (those of over US$10b in revenues). Nine in 10 of this group say they are investing in low-carbon technologies, and more than three-quarters (76%) say they have made a renewable energy commitment. This marks a shift from prevailing attitudes just a few years ago and echoes recent developments in the US. In October 2015, the White House announced that 68 companies had joined the original 13 signatories of the “American Business Act on Climate Pledge,” forming a group with an estimated market capitalization of US$5t.6 Each has made various commitments to reduce their Figure 4. Which actions has your company taken as part of its carbon emission reduction strategy? 75% Benchmarking against average industry emissions 75% Investing in low-carbon technologies 72% Developing corporate emissions reductions targets 60% Making a renewable energy commitment 27% Paying to offset any of your own emissions that are unavoidable, such as flights 15% Setting an internal carbon price 4% Other 3% None 6 ‘Global companies sign White House pledge on climate change action’, FT, October 19, 2015 http://www. 8 I Shifting the carbon pricing debate ft.com/cms/s/0/ed2c2682-763a-11e5-933d-efcdc3c11c89.html#axzz3pfAOieWd.

carbon footprint, with some committing to implementing internal carbon pricing strategies. The White House reportedly hopes to add a third round of companies to the group around the time of COP21. Indeed, there are a number of reasons these companies might consider implementing such a policy. Of the respondents to our survey who have implemented a carbon pricing strategy, 33% say it is primarily to meet regulatory requirements, 29% say it is done voluntarily to align with the company’s strategy and values, 19% say it is part of a global standardization effort and 12% say it is to better understand the impact of future carbon regulation (see Figure 5). The companies that are implementing carbon-pricing strategies are doing so “because they’re convinced that this will be a reality sooner or later, and prefer to anticipate regulatory changes,” says Alexis Gazzo, Partner in EY’s Climate Change and Sustainability Services practice. Figure 5. What was the primary motivation to implement a carbon pricing strategy in the country where you are based? 33% To meet the regulatory requirements of our market 29% Voluntarily, because it aligns with our company strategy and values 19% Voluntarily, as we’ve implemented it in other markets globally and we’re standardizing on this globally 12% Voluntarily, to better understand the impact on our business of potential carbon regulation 7% Other Shifting the carbon pricing debate I 9

Prevailing business attitudes toward carbon pricing The potential for regional carbon markets The World Bank’s Partnership for Market Readiness program is designed to help new countries achieve emissions reduction through instruments such as carbon pricing, and encourages the development of regional carbon markets. The fact that some of the world’s largest economies have already implemented emissions trading systems could be significant in shifting perceptions toward carbon pricing. The EU ETS has been active since 2005, and is now in its third phase. China plans to implement a national system by 2017, having conducted a seven-province pilot program. A price on carbon in British Columbia, introduced in 2008, is lauded as one of most successful carbon pricing schemes to date — by 2012, emissions had dropped 6% below 2007 levels. What will key players like China be able to learn from 10 years of cap and trade in Europe? “At the end of each allocation phase of the EU ETS, there was some uncertainty over how the next phase would be managed,” explains Alexis Gazzo. “There were also a number of questions in the initial phases about how allocations would be managed between sectors, industries and companies. The EU ETS has been a pioneering scheme that has helped develop experience in how these markets function, and which risks to anticipate.” Both China and South Korea have worked closely with EU regulators to understand best practices. “Governments are becoming more adept at designing and running effective carbon pricing systems,” says James Close of the World Bank. “This is evident in the new FASTER Principles for Successful Carbon Pricing report issued in September by the World Bank Group and the OECD. These principles capture the dynamic learning that we have seen over the past decade, and show that governments are building from one another’s success to develop a common set of elements that address key challenges, such as concerns about emissions leakage, impact on the poor and productive use of revenues.” China will not have to deal with the complexities of negotiating with multiple governments, as the EU did when setting up its ETS in 2005, and there are growing expectations that it can become a key player in a regional, or even global, carbon market. However, before China can become a pivot for a global market, EY’s Nelson believes a few questions need to be answered. “China will have a scheme in place. The question is: what kind of market will it be? Will it be a liquid market and will it be a meaningful market? As is true for any region, the levers that are pulled and how hard they are pulled can make a huge difference to the market, and the way the market operates.” Perhaps further aiding efforts for an effective national system in China, the COP21 discussions in Paris seem likely to bring greater clarity to questions of process, targets and effectiveness. 10 I Shifting the carbon pricing debate

Optimism is rising for a global COP solution Among the executives polled for this study, more are confident than pessimistic about COP21 leading to a fair and reliable carbon pricing system. Overall, 55% of respondents are confident, versus 45% that are pessimistic (see Figure 6). The most frequently pessimistic responses in our survey were from US-based participants, where 67% of respondents express pessimism that negotiations at COP21 can lead to a fair and reliable system. Global optimism may have been fueled by the general build-up to COP21, as well as the fact that companies were included in pre-meeting discussions – a dramatic change from the past when COP focused purely on inputs from governments and NGOs. However, 68% of respondents believe it will be primarily up to national governments to lead the fight on climate change. Given the lack of concrete outcomes from previous COP meetings, this is a pragmatic response from our survey respondents. “A communiqué that says we are going to agree to a two-degree world just won’t cut it in terms of giving the global investment community the certainty it needs,” says EY’s Nelson, referring to the often cited maximum target of a +2 degree Celsius change in average global temperature. Countries attending COP this year must submit intended nationally determined contributions (INDCs), which has the potential to drive a bottom- up solution to climate change, and encourage countries to take broader actions to reduce their emissions. “My greatest hope for COP21 is that it will send the signals the major markets need in order to implement policies that will achieve emissions reduction targets,” he says. “That might seem somewhat modest, but if we have the US and China setting ambitious targets for emissions reductions, it will send a significant message to the global investment community.” Figure 6. How confident are you that the COP negotiations can lead to a fair and reliable carbon pricing system? Highly pessimistic Highly confident 14% 12% Somewhat pessimistic 31% 43% Somewhat confident Shifting the carbon pricing debate I 11

CEO perspectives: first-hand views from business leaders Global optimism may have been fueled by … the fact companies were included in pre-meeting discussions — a dramatic change from the past when COP focused purely on inputs from governments and NGOs. 12 I Shifting the carbon pricing debate 12 I Shifting the carbon pricing debate

Some companies feel carbon pricing could threaten their competitiveness. Do you think EY:these are justifiable concerns? “What changes the competitiveness of energy-intensive companies operating on global markets are the distortions that could emerge between countries that put a price on carbon and others that do not, or between countries with very different carbon price levels. The wanted consequence of carbon pricing policies is to reduce emissions; it is not to displace production from countries with ambitious climate policies towards countries with less ambitious climate policies, which have no emissions savings objective. This is why we are calling for a convergence of climate efforts and of carbon pricing mechanisms.” What lessons are to be drawn from the EU ETS experience? Do you think the “cap and EY:trade” mechanism implemented in Europe is the most effective option for putting a price on carbon? Jean-Pierre Clamadieu “Cap and trade is the best system to price carbon for the manufacturing industry. Other pricing systems such as taxes or regulations might be more appropriate for other sectors. The Chairman of the Executive EU ETS has delivered on its environmental objective. The absolute cap of emissions has been Committee and CEO met in 2012 and no one doubts that it will be met in 2020. The trade part of this cap-and-trade Solvay system ensures the cost effectiveness of the instrument. Further improvements are still necessary to ensure that the ETS does not create undue extra costs for installations competing in global markets. The European experience is spreading and similar schemes with stability reserves are now being widely adopted across the world.” China recently announced that its national emissions trading scheme would start in 2017. EY:Do you think this announcement will encourage more countries to adopt a clear carbon pricing strategy? “China’s decision to go for a national emissions trading scheme is a very positive signal and additional evidence for the relevance of the EU ETS. Given China’s economic weight, it is likely that this system choice will have an influence on its major economic partners.” Where do you see the biggest barriers to carbon pricing today? What are your long-term EY:expectations for the creation of a global market for carbon? “The biggest barrier today is the absence of a global framework that would allow existing carbon pricing systems to converge over time. National emission reduction objectives differ in terms of their ambition and hence the carbon price they require to be met. In the countries where they exist, emission trading schemes follow different rules. We, therefore, need rules that allow a progressive linking of existing schemes and the roll-out of carbon pricing to countries without any scheme, with the help of the United Nations Framework Convention on Climate Change’s (UNFCCC) project crediting mechanisms.” With respect to carbon pricing, what are your expectations for this year’s COP21 EY:discussions in Paris? And what is the role of the corporate community in shaping concrete outcomes? “Carbon pricing schemes start nationally. They have to be connected internationally to scale up our climate ambition. Unfortunately, the draft Paris agreement so far only contains scant references enabling interconnections of carbon pricing and emissions trading. We have been advocating the positive impact these mechanisms will have for furthering the global mobilization of business in the fight against climate change. My impression is that negotiators are starting to understand this.” Shifting the carbon pricing debate I 13 Shifting the carbon pricing debate I 13

CEO perspectives: first-hand views from business leaders Do you consider that a consensus is building in the business community around carbon EY:pricing on a global level? If so, what factors are driving this change? “Companies acknowledge the process of ongoing climate change … as an increasingly relevant risk for businesses; and the use of market mechanisms, like carbon price, as one of the most effective measures to … decrease global warming. In the last 18 months we have seen a growing number of associations and all sorts of organizations … supporting a price on carbon. It is the biggest expression of shared interest related to climate change that has ever occurred. The main reasons are the business opportunities that may derive from the new environment post COP21.” Some companies feel carbon pricing could threaten their competitiveness. Do you think EY:these are justifiable concerns? “After reading the latest Intergovernmental Panel on Climate Change report, there is no doubt that taking measures on climate is the most reasonable position from the point of view of Jose Manuel Entrecanales managing business risk. Domecq We could talk for years about the need to act on climate change, but without a price signal, we Chairman and CEO will not be able to change consumer behavior or mobilize investment fast enough to reverse the trend in global emissions. I think it is really important to highlight the opportunities that come with Acciona putting a price on carbon. It will serve as a wellspring of innovation and job creation; and it will act as a catalyst for energy efficiency and greater competitiveness …” What lessons are to be drawn from the EU ETS experience? Do you think the “cap and EY:trade” mechanism implemented in Europe is the most effective option for putting a price on carbon? “We’ve learned what should be corrected, and now we are in the position to improve it. Something essential for business is to have a clear and predictable CO price signal: the recently 2 approved Market Stability Reserve (MSR), aims to achieve it and it is certainly another step in the right direction. MSR is a price stabilization tool, which leaves room for the market to operate but prevents its failure, due to too high or too low prices. There are other market mechanisms that can also be effective and efficient.” China recently announced that its national emissions trading scheme would start in 2017. EY:Do you think this announcement will encourage more countries to adopt a clear carbon pricing strategy? ”It is good news. First, China is the world’s largest emitter of greenhouse gases and its efforts to combat climate change can serve as impulse to other countries to implement clear carbon pricing strategies. Also, in the context of COP21 in Paris, the recent US-China agreement and commitment to combat climate change is a significant step forward in future emissions reduction and may facilitate negotiations between “developed” and “developing” countries. We need to engage governments to introduce efficient market mechanisms to climate-proof our economies, and a carbon price is the most efficient way of going about it.” Where do you see the biggest barriers to carbon pricing today? What are your long-term EY:expectations for the creation of a global market for carbon? “The biggest barrier to reduce emissions is lack of will from business decision makers and, most importantly, from policy makers who can implement the appropriate policies that will promote business action. About the global market for carbon … let’s go step by step. Countries will understand that flexibility is a good choice, so linking markets will come naturally. The private sector is increasingly supporting carbon pricing, particularly the financial sector as a risk mitigation or risk assessment measure. But governments and policymakers in general will need to take the steps to generalize adoption.” 14 I Shifting the carbon pricing debate 14 I Shifting the carbon pricing debate

Do you consider that a consensus is building in the business community around carbon EY:pricing on a global level? If so, what factors are driving this change? “We are experiencing a change of perspective. Since the World Bank launched its “Declaration on generalizing carbon pricing,” in May 2014, the need to put a price on carbon has gained widespread momentum. At the UN Climate Summit in September 2014, businesses again expressed the importance of carbon pricing signals to redirect investments. With the Lima- Paris Action Agenda (COP20, 2014) launch, the “non-State” actors were incentivized to make commitments. I’ve been honored to facilitate a series of related ‘Business Dialogues.’ The goal was to exchange on the issues at stake in the negotiations, to discuss means to make the agreement work efficiently, to identify barriers to low-carbon technology deployment and ways to generalize carbon pricing signals.” Some companies feel carbon pricing could threaten their competitiveness. Do you think EY:these are justifiable concerns? Gérard Mestrallet “We are aware of our responsibilities and know that acting now is cheaper than waiting until tomorrow. Today, we need a stable and coherent regulatory framework allowing us to anticipate Chairman and CEO impacts, given long investment paybacks. Putting a price on carbon could be risky if it is not Engie generalized at a global level. Without this generalization, emissions risk being displaced to areas without a carbon pricing signal, and would reinforce delocalization of operations and jobs without solving the problem of emissions. Generalizing carbon pricing would also create opportunities for businesses. It could help the development of low-carbon solutions, which on a larger scale of development will become more profitable, like renewable energies and resource efficiency initiatives.” In your opinion, what tools should be used to implement a carbon pricing system? EY:“Carbon can be priced directly via a carbon tax or a carbon market. Some countries choose to combine the two. Carbon can also be priced indirectly by setting emissions standards. At this stage, it seems unrealistic that all countries could agree upon one global system and a single carbon pricing system. We can assume that carbon pricing signals will develop in different ways depending on the country. Industry leaders have a preference for market systems that allow them to optimize costs by choosing when and where it makes the most economic sense to invest.” Where do you see the biggest barriers to a global carbon market today? Do you view these EY:as barriers only for the short-term? “Until 2020, an international carbon market exists … the Kyoto credits market. However, this market only involves countries that ratified the Kyoto agreement. The carbon credits generated by this market can be used to partially cover regulatory emissions reduction obligations (in the EU ETS market) or to voluntarily offset emissions. Without a post-2020 international agreement, it will be impossible to go beyond voluntary systems, or bilateral country agreements. Furthermore, a market cannot exist without demand. Today, only the EU accepts the partial use of international credits to reach ETS emission obligations. However, we are confident that experience and feedback from the Clean Development Mechanism initiated by the Kyoto Protocol will inspire future cooperation.” With respect to carbon pricing, what are your expectations for this year’s COP21 discussions EY:in Paris? And what is the role of the corporate community in shaping concrete outcomes? “Mobilization on carbon pricing may have already influenced negotiations. The Bonn draft agreement (23 October) makes references to carbon market tools that seemed, until then, to be beyond the negotiation framework. If the agreement text could not directly rule on carbon pricing, it could still incentivize parties to include these signals within their national contributions. The negotiations must support the implementation of comparable calculation methodologies, transparent and reliable monitoring, reporting and verification systems of emissions and greenhouse gas emission reductions to create a trusting environment for investors.” Shifting the carbon pricing debate I 15 Shifting the carbon pricing debate I 15

Sustaining momentum beyond COP21: consensus into action Although carbon pricing isn’t on the COP21 agenda as a stand-alone item, “The INDC implementation offers an excellent opportunity for countries to roll up their sleeves and learn from others as they use carbon pricing as a cornerstone of a national climate mitigation strategy,” believes James Close of the World Bank. This could have implications for the rate at which businesses adopt carbon pricing strategies, particularly in countries where there is no formal structure for putting a price on carbon emissions. There are other barriers to implementation also. “Undoubtedly, carbon markets will be a controversial and tough topic in the COP negotiation, as they could affect, among other things, international trade agreements, some of which have only recently been reached,” says José Manuel Entrecanales Domecq, Chairman and CEO of Acciona. “However, strong signs encouraging carbon pricing are a must as one of the main COP21 conclusions.” Our survey shows businesses around the world taking action on carbon pricing, and opening up to the benefits it can bring in terms of competitiveness. The next challenge will be maintaining the momentum that has been seen in the run-up to COP21 through 2016 and beyond. As discussions at COP21 in Seventy-eight percent of Seventy-three percent of Paris and elsewhere widen, businesses surveyed believe respondents in countries the interest in harmonized, carbon pricing can foster without carbon pricing reliable and transparent innovation and trigger mechanisms believe such methods for carbon pricing is initiatives beneficial to mechanisms will be in place likely to intensify. performance. in the next five years. My greatest hope for COP21 is that it will send the My greatest hope for COP21 is that it will send the signals signals the major markets need in order to implement the major markets need in order to implement policies policies that will achieve emissions reduction targets...if that will achieve emissions reduction targets...if we have we have the US and China setting ambitious targets for ‘ the US and China setting ambitious targets for emissions emissions reductions, it will send a significant reductions, it will send a significant message to the global message to the global investment community. investment community. ‘ 16 I Shifting the carbon pricing debate

Lessons for business: shifting from analysis to readiness More than 80% of businesses questioned expect to be impacted by new carbon pricing regulations in the next five years. For these companies, the ability to identify risks and opportunities of new carbon market policies and stay ahead of expected change is critical. EY identifies several steps that can be implemented to adapt to this changing environment: 1. Embed carbon risk and opportunity assessment in 3. Commit to reduction targets corporate strategy Once monitoring and assessment processes are in place, Building a comprehensive climate change strategy set targets for the reduction of carbon emissions across is necessary to ensure that climate-related risks and the business. In addition, companies may seek to purchase opportunities are taken into account. Implementing cleaner sources of power, such as renewable energy. a corporate-wide carbon approach is key to reducing the exposure to climate risk, by reconsidering existing 4. Communicate on results and progress investments, prioritizing emission reduction actions, and screening opportunities for greater energy efficiency and Report on business progress against targets and seek innovative low-carbon technologies. verification of performance. Communicating achievements internally and externally will provide company stakeholders 2. Establish a carbon reporting process with the knowledge that risks and opportunities are being appropriately managed. Setting up a monitoring, reporting and verification (MRV) framework across the value chain enables companies 5. Set an internal carbon price to identify baseline carbon emissions and to monitor performance over time. Developing internal reporting Several companies have already implemented an internal processes before regulatory requirements are established carbon price in strategic planning and project finance to help has proved beneficial to companies that were ahead of the guide decision-making on carbon-intensive projects such as market, for instance in adapting to cap-and-trade schemes. power plants. This can be useful to anticipate the carbon cost risk and reflects the impact of expected policy developments, for instance by anticipating an emissions trading scheme. Acknowledgments EY wishes to thank the following individuals Jean-Pierre Clamadieu and organizations for their consideration and Chairman of the Executive Committee and CEO input during the preparation of this report: Solvay James Close Jose Manuel Entrecanales Domecq Climate Group Director of Policy and Finance Chairman and CEO World Bank Group Acciona Lila Karbassi (in association with Jayoung Gérard Mestrallet Park) Chairman and CEO Head of Environment and Climate Engie ‘ UN Global Compact Shifting the carbon pricing debate I 17

Appendix Survey demographics What is your company’s annual revenue in USD? Total respondents: 116 63% Small (up to $5b) 12% Medium ($5b to $10b) What is the primary industry for your company? 26% Energy and natural resources 25% Large ($10b or more) 20% Construction and real estate 17% Chemicals 16% Manufacturing 9% Financial services 4% Consumer goods Survey respondents by region 3% Automotive 2% Agriculture and agribusiness 2% Health care, pharmaceuticals and biotechnology 33% 35% 1% Retailing Europe Emerging markets 1% Telecommunications 1% Other 32% US 18 I Shifting the carbon pricing debate

Our survey shows businesses around the world taking action on carbon pricing and opening up to the benefits it can bring in terms of competitiveness. Shifting the carbon pricing debate I 19 Shifting the carbon pricing debate I 19

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