Putting a price on carbon

Internal carbon pricing is a globally recognised tool to guide decision-making when assessing climate change impacts, risks and opportunities, by forecasting a future world under various climate-change scenarios. Companies who adopt an internal price on carbon are better able to integrate the impact of climate change into their business strategy and planning.

The United Nations Global Compact called for businesses to adopt an internal carbon price of at least US$100/tCO2e by 2020, which is needed to keep GHG emissions consistent with a 1.5–2°C pathway by 2100. Companies use internal carbon pricing as a risk-management and assessment tool, and to explore cost savings and revenue opportunities through innovation. Reported internal corporate carbon prices currently adopted by companies range from US$0.01 to US$909/tCO2e.

Pricing models

Three types of carbon pricing are commonly used: Shadow price: places a hypothetical cost of carbon to reveal hidden risks and opportunities and to support strategic decision-making related to future capital investments. Internal fee: imposes an internal fee on GHG emissions, results in actual internal financial flows.

Implicit price: calculated based on how much it costs a company to implement emissions reduction projects, such as renewable energy purchases or energy-efficiency upgrades. An implicit price is calculated retroactively, after a company achieves its desired emissions cuts.

The CDP has published data on 1300 companies that use internal carbon pricing (or plan to do so in the next 2 years). While many companies employ multiple types of carbon pricing depending on their needs, shadow pricing is most often used, with more than half of companies implementing this carbon pricing model.

The importance of carbon pricing to Gem Diamonds

Gem Diamonds understands its exposure to the risks of climate change, as indicated in our climate change-related risk and opportunities register. Although we are not currently subject to any direct carbon taxes (there is indirect exposure through our Eskom tariffs and diesel levies), we understand the risk of potential direct carbon taxes being imposed in the jurisdictions in which we operate.

In order to ensure business continuity, effective capitalallocation decisions and to support a just transition to decarbonisation, it is responsible to plan as effectively as possible taking into account the potential risk of climaterelated risks and costs.

Adopting an internal carbon price allows us to effectively estimate the impact on our financial position and performance of climate-related risks and opportunities, and the business-case and trade-off implications for future projects, such as a transition to renewable power to meet demand for future energy requirements.

Our carbon price

Our carbon-pricing model (shadow price) considers our climate-change scenario-planning work, and assigns prices based on current and potential future global responses (including carbon tax, technology development and deployment, coal powered energy divestiture, fossil fuel pricing increases and location specific regulation) associated with various changes in global temperature.

In May 2022, a carbon pricing workshop was held with senior Group management and members of the TCFD Adoption Steering Committee, to workshop the assumptions and outcomes of the carbon pricing model to be utilised by the Group. This informed the internal carbon model and price that was presented to the GDL Board in June 2022. The Directors were presented with the Group carbon pricing model assumptions and recommendations, which included an evolutionary approach to shadow pricing for pre- 2030 and post-2030 business planning and future project considerations.

As the regulatory environment changes around carbon tax and associated energy pricing, the Group will revisit the assumptions within its carbon pricing model to ensure appropriate internal pricing.