Case study | 10 July 2024

Developing an internal carbon price | Port Operator

View our case study on how we helped a major Port Operator develop their internal carbon price, to reach net zero emissions by 2040.

What was the challenge?

The sustainability agenda of large transport businesses can be a complex operation to manage. For one Australian port operator, meeting their commitment to achieve net zero emissions (scope 1 and 2) by 2040 required the development of an internal carbon price — that is, a monetary value assigned to greenhouse gas emissions which business can use to evaluate the potential costs and benefits of different decarbonisation pathways.

Frontier Economics was engaged to provide advice on the design and implementation of an internal carbon price.

How did we complete the economic modelling and analysis?

We analysed a range of carbon internal pricing approaches against the Port’s business model and capital investment program.

These approaches included:

Internal carbon price,
Internal carbon fee,
Implicit carbon price, and
Internal emissions trading schemes.

A key consideration in our analysis was that the largest potential impacts to the Port’s net zero emissions (scope 1 and 2) will come from the replacement of large, long-lived, capital investments. By analysing the implications of these features of the business, we developed options that allow for variances in internal carbon prices across both time and across business units (See the diagram to the left).

After selecting the best internal pricing approach in collaboration with the Port, we developed a method to assign a monetary value to the Port’s Greenhouse Gas Emissions (GHGs). We did this by looking at both market-based and social-cost carbon price benchmarks, as well as the carbon valuation approaches adopted by comparator organisations in the industry, and across Australian multinationals. The choice of valuation methodology was guided by the Port’s business objectives and its tolerance for cost and risk.

In developing our proposed carbon valuation methodology, we referred to Frontier Economics proprietary modelling: the ACCU/Safeguard Mechanism market model which can forecast ACCU prices to 2050. Our model runs different scenarios, providing maximum and minimum carbon prices for sensitivity analysis, and identifying different sources of abatement supporting the market. The model is based on granular, transparent inputs and assumptions.

View diagram (left)

What were the results?

Our final report to the client presented a carbon shadow / internal pricing framework aligned to the Port’s business model and capital investment program, as well as a suite of detailed recommendations to guide the practical implementation of the framework across the Port’s business units.

A key strength of our recommended approach lies in its ability to balance the commitment of scarce capital across both time and decarbonisation initiatives, in order for the Port to cost effectively achieve net zero by 2040.

For more insights on our approach, and non-confidential examples from clients looking to set a carbon price, reach out to our team.

View diagram (right)