A Policy Brief

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A Policy Brief

The issue of global warming is critical. Governments, companies, firms, and organizations throughout the world have hence been called upon to employ strategies designed to mitigate this vice. Global warming is partly accelerated by release of carbon into the atmosphere thus brining carbon related companies under high scrutiny. In particular, my client company ADNOC (Abudhabi national oil company) falls under this category. As such, the company’s management has contemplated various means of reducing carbon emissions into the atmosphere. The shadow carbon price is an excellent policy to oversee this objective. In simple terms, the shadow carbon price places a supposed penalty on carbon. It is applied as an input on decision-making and financial analysis to compensate for no-cost pollution.

Whether or not legislation affects an industry directly, shadow carbon pricing can provide ADNOC with an insight on the return on investment from carbon reduction. Moreover, carbon pricing is an efficient way of creating awareness regarding emerging shifts and carbon mitigation strategies for energy consuming operations. It is also prudent that ADNOC acknowledges the implications of carbon emissions on its supply chain. Dealing with oil implies that most of the carbon emissions come from the supply chain. Therefore, applying this policy implies that carbon reduction efforts should focus on procurement and supplier engagement activities.

The most efficient strategy involves incorporating this policy into investment analysis, scenario involvement, and ongoing business management. Shadow carbon pricing can assist ADNOC’s management with risk mitigation, pricing strategies, renewable energy credits, offsets and mergers and acquisitions. A carbon price can also serve as a proxy incase energy prices increase. It would also prepare the company for future legislation policies such as the cap and trade programme or the carbon tax. Moreover, it is a means of identifying opportunities for enhanced competitiveness and low carbon growth. For example, Shell Company in Canada uses a shadow carbon price of 40 dollars per tonne in evaluating capital expenditure decisions.

Nevertheless, shadow carbon pricing has its limitations. The slow changes in climate change policies and lack of strong price signals discourage using shadow carbon pricing for short-term deals. Moreover, uncertainty in factors such as labor cost and commodity price poses a greater impact on the policy. In addition, using shadow process for evaluating projects includes NPV (net present value) calculations. It is therefore subject to the same drawbacks, where the rate of discount undervalues costs incurred later on compared to current costs.

In case ADNOC intends to employ the shadow carbon pricing, it is imperative that the company undertake a review of its operations with affiliated companies. Conducting this exercise serves to ensure that ADNOC understands the implications of its carbon emissions and thereafter identifies effective methods of curbing emissions. Additionally, such information should be used to set annual carbon reduction targets that in turn should be used to measure the performance of the company’s managers. The management in this case should be scrutinized the same way performance is measured against traditional business metric such as safety and financial targets.

In conclusion, as global authorities become increasingly aware of the detrimental effects of carbon on the environment, numerous organizations and companies are required to implement environmentally friendly policies. For ADNOC, the carbon pricing policy is in particular necessary because it operates in the oil industry. Informed analysis of the policy implies that its beneficial financially and has minimal disadvantages.