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The Securities Exchange Commission’s (SEC) long-anticipated climate-disclosure mandate is the latest evidence of our need for market-based, financially sound solutions to managing climate-related risks within the investor and business communities.

Last month, in a 3-1 vote, the Commission agreed to propose a series of new regulations requiring public companies to disclose not only their greenhouse gas emissions, but also climate-related risks that would “materially” impact their business and management processes for mitigating those risks. In the words of SEC Chairman Gensler, the rules will “…provide investors with consistent, comparable, and decision-useful information for making their investment decisions…”

On one hand, climate-related risks pose a real threat to corporate America, the investment community, and our economy altogether. On the other hand, government mandates can only do so much to meaningfully address climate-related financial risks — let alone solve any broad, complex problem. To resolve this dilemma, we should look to an alternative solution to reducing investors’ exposure to climate-related financial risks, a solution which is both simpler and more effective than any bureaucratic regulation: carbon pricing.  

Carbon pricing is an economic signal that provides maximal market transparency by ensuring the cost of carbon emissions is fully reflected — not hidden — across the economy. Under a carbon pricing scheme, when a purchase is made, the social cost of carbon, a metric representing the estimated cost and damages of carbon emissions, is reflected in the final price. Except in cases where the cost of lowering emissions outweighs the cost of not doing so, a carbon price drives rational economic actors to avoid the costs of polluting by reducing their emissions.

Not only would carbon pricing support broad emission reductions and put our economy on the path towards a low-carbon future, without any bureaucratic madness and rigid rules, but it would achieve the very thing the SEC’s proposed rules set out to do: empower investors and businesses to confidently reduce their exposure to climate-related financial risks.

Carbon pricing would drive companies to incorporate the costs and damages of carbon into their long-term business planning, investments, and day-to-day operations, helping them manage climate-related risks and position themselves for a low-carbon future. 

This concept isn’t new. In fact, in recent years, a growing number of companies have voluntarily assumed a price on carbon because of the strategic and financial advantages it offers. The number of companies using or planning to use an internal carbon price has increased 80% in the last five years. These companies are using a carbon price to inform their risk management processes, emission-reduction strategies, and to get ahead of the curve in capitalizing on the transition to a low-carbon economy.

An economy-wide carbon price would give investors the confidence in knowing that companies have the information they need to adequately consider the cost of emissions on their business, putting them one major step closer towards robustly managing and reducing climate-related risks, in addition to setting themselves on course for a low-carbon world.

A price on carbon would go beyond the proposed SEC mandates, which aims to provide investors with “consistent and comparable” information on public companies, from which they can gauge companies’ exposure to climate-related risks. When a price on carbon is economy-wide, investors can be sure that both public and private companies will factor in the cost of carbon into their most important long-term business and risk management plans. For public and private companies alike, the price of polluting would be reflected in every financial decision they make.

In addition, carbon pricing allows companies the flexibility to decide on their own how best to manage climate risks. With no disclosure requirements of any kind, a carbon price makes the management and mitigation of climate-related risks each businesses’ personal and private responsibility — they’re free to respond in whatever way is best for business. A business need not worry about saying how they are managing climate-related risks, rather than making sound decisions to secure its short and long-term financial viability. Because a carbon price marries a company’s financial sustainability to the sustainability of our climate, we can count on companies making choices that serve both.

Lastly, a carbon price would provide certainty. Unlike rules proposed by a federal agency, policy via congressional action is durable and long-lasting. By removing uncertainties as to the expectations a business will face two or twenty years into the future, investors and businesses can be confident that the decisions they make today will make sense tomorrow. In addition, when designed well, a carbon price could reduce existing regulations, freeing businesses from the pendulum swings of an increasingly volatile and unpredictable regulatory landscape. 

We will limit ourselves if we rely on the SEC’s prescriptive disclosure mandates to solve an issue as complex as climate-related financial risks. To insulate investors and businesses across America from the worst effects of our changing climate, we need a solution that embraces the sophistication and unparalleled efficiency of the market. Carbon pricing is the answer.

Kelsey Grant is the Research and Policy Coordinator for Adamantine Energy, a consulting firm that works to future-proof oil and gas companies against rising social risks. Opinions are the author’s own.

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