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Do you know how CO2 will impact your product portfolio and your Pricing strategy ?

The price of CO2 now exceeds 50 € per ton, an increase of more than 50% in just one year. At the same time, public regulations are tightening transparency requirements on companies’ carbon footprint. And State pressure will inevitably increase in order to achieve carbon neutrality by 2050. WhiteHeron Software is committed to helping companies confront these regulatory changes while reducing their carbon footprint. Our flagship product, WhiteHeron Pricing™, allows companies to measure the impact of CO2 on the costs and profitability of their products and services and to define the most appropriate pricing strategy in this context.

Background. “As global warming worsens, companies can expect tougher government measures that will extract a growing price for their carbon emissions.” 1  Since the Kyoto Protocol in 1997 and the Paris Climate Agreement in 2015, the acceleration of global warming and the seriousness of its consequences have led States to strengthen measures aimed at reducing greenhouse gas (GHG) emissions. At a European level, the EU Emissions Trading System (ETS) sets a price on carbon aimed at encouraging economic players to embark on the path to a low carbon economy. The European Union’s ambitious climate policy targeting a 55% reduction in CO2 emissions by 2030 has led to a sharp increase in the price per ton of carbon on the European emissions quota system (EU ETS). In May, it broke a record, passing the symbolic bar of 50 euros and today it exceeds 55 € per ton, thus almost doubling in one year. Prices in this market were established back in 2005 and have long remained below 10-15 euros due to the availability of too many allowances. The European Commission is also developing a carbon tax project for goods entering the EU which are not subject to a carbon tax in their home country. It is to be presented on July 14 with implementation starting gradually in 2023 and coming into full force as of 2026.

On a country level, France implemented in 2015 a regulation requiring companies to publish their carbon footprint, the first step towards a policy of control and reduction of the impact of businesses on climate change. Companies with more than 500 employees must now include in their annual management report the carbon footprint of their activities as well as of the carbon content of the products and services they deliver. In parallel with the implementation of these regulatory measures, voluntary carbon pricing initiatives are being developed within companies themselves, with the setting of internal carbon prices. “… by putting their own price on carbon, companies can better evaluate investments, manage risk, and forge strategy.”2 Furthermore, “By setting an internal carbon price (ICP), companies can prepare for uncertain external pricing in the future, and investors can get a clearer picture of a firm’s ability to compete in a low-carbon world.”3

As well, more and more individual and corporate customers are demanding transparency on the carbon content in the products and services they buy and are starting to factor this into their purchasing decisions. “Our analysis starts from the observation that reducing the product carbon footprint not only has an effect on a firm’s costs, but also on demand. That is, while greener products tend to be more costly to produce, consumers tend to purchase more at a given price when products have a lower carbon footprint”. 4

What WhiteHeron Software brings to the table. Starting this year, WhiteHeron Pricing™ is able to integrate carbon emissions (and other GHGs) into the costing of a company’s activities, products and services. This can be achieved either by calculating the quantity of CO2 linked to a recorded expenditure, such as energy or transport, or by directly integrating the quantities of CO2 measured by the company at the level of each activity along its value chain. In either case, the company will be able to cost the CO2 emitted at market price or at a normative price set internally, provide a carbon footprint by activity/process and by emission source, as well as calculate the carbon share in the total (accounting and extra-accounting) cost of each product or service. As a result, companies will immediately be able to measure the impact of the cost of CO2 on the profitability of their customer and product portfolios. Taking it a step further, companies will be able to define a pricing strategy that takes into account the cost of carbon and its potential fluctuations over time. Lastly, they will have the option to provide their customers with details of the carbon cost included in quotations or customer orders.

“… the rapid adoption of internal carbon pricing shows that companies increasingly recognize its importance to competitive operations and strategy. Only firms that understand and proactively manage carbon risk will sustain long-term advantage as more and more countries move to decarbonize their economies.”5

These new features will allow companies using WhiteHeron Pricing™ to distinguish themselves in several key ways: to deliver a clear communication strategy on the carbon content of their products and services, to adapt their pricing strategy accordingly and to progressively develop products and services with a lower carbon footprint, all while respecting mandatory transparency requirements.

Notes:

1 – 3, 5: “Future-Proof your Climate Strategy”, by Gianfranco Gianfrate (Associate Professor of Finance at EDHEC Business School) and Joseph E. Aldy (Associate Professor of Public Policy at Harvard Kennedy School), Harvard Business Review May-June 2019.

4: “The Role of Marketing in Climate Change: Carbon Footprinting and Pricing”, by Daniel Halbheer (Associate Professor of Marketing HEC Paris) October 14, 2019.

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