Dec 05, 2016

Yale’s Internal Carbon Charge

On November 2, 2016, the webinar series “Internal Carbon Pricing: Practical Experiences from the Private Sector” featured a conversation on Yale University’s carbon charge.

Yale was the first university in the world to voluntarily introduce internal carbon pricing, doing so during the 2015-2016 academic year. The university conducted a pilot project that involved twenty campus buildings and tested the design and implementation of four different carbon-pricing schemes. In the webinar, representatives from Yale shared the rationale, lessons learned, and next steps on the University’s carbon charge.

Watch the full webinar here:

 

The Campus as Laboratory

In discussing the motivation and objectives behind the carbon charge, Provost Ben Polak emphasized the use of the campus as a living laboratory: “As a research and teaching university, Yale views the carbon charge as an experiment and aims to share its experience and lessons learned as openly as possible with the public and private sectors,” said Polak. Yale’s legal structure permits the open sharing of its experiences, thus filling an important knowledge gap in the internal carbon pricing space.

The alignment with Yale’s core educational mission also helped generate support for the carbon charge. “At Yale, even skeptics of the carbon charge want to see our university as a place for learning,” said Polak. Nonetheless, designing and implementing the program proved a complex experiment. “With an annual $65 million energy expenditure, a total of 14,000 square feet of buildings, and different activities by students, faculty and staff, it is challenging to design a carbon charge that accommodates the [campus’s] diverse energy uses,” said Ryan Laemel, former Yale Carbon Charge Coordinator.

The Program Basics

Rather than generate revenue, the Yale carbon charge was designed to purely create financial incentives for energy and emissions reductions. As a result, one of the four schemes tested in the pilot was designed to be revenue neutral, meaning that the sum of charges and rebates to all units was zero. Revenue-neutrality is often seen as a core element of carbon pricing policies in the US and many other countries. Yet, contrary to the expectation that revenue-neutrality would increase the political feasibility of the carbon charge by not penalizing heavy energy users, Yale found the concept to be complex and challenging to communicate.

“People have the tendency to think that it means revenue neutral to each individual unit, or they would interpret it as a contest among themselves, which is not very healthy,” said Polak. In fact, the revenue-neutral scheme meant that units that performed relatively worse than the group’s average paid those that performed relatively better.

“There is a need to find new language to describe revenue-neutrality,” said Polak.

Yale’s carbon price was set at the level of the social cost of carbon, or $40/ton of CO2-equivalent. While there were many questions around the carbon charge itself, there was no push back on the pricing, as the social damage of carbon strongly resonated with Yale students, faculty and staff. The carbon charge was however paired with a rebate mechanism whereby units received rebates at the end of the fiscal year based on their performance relative to a baseline, resulting in a net charge much smaller than the social cost of carbon.

Yale selected 20 buildings representative of the diverse uses and budget types to assess how a carbon charge would impact the university as a whole. The remaining 280 buildings served as control group. Three incentive-based models and one “information only” scheme were tested.

  • In the redistributive scheme, units in the treatment were compared with the average collective performance of all the buildings in the group. The advantages include revenue-neutrality and avoiding exorbitant costs on any individual units in a given year. However, this design allows total university emissions to increase year after year without any penalty. The moving target relative to the group’s average performance also makes it difficult for planning and decision-making.
  • In the target scheme, a specific reduction target of 1 percent was given. Units received a net rebate or charge depending on whether they reduced emissions below or above this target. Units preferred this scheme because of its focus on internal comparison. To ensure fairness, the target would however need to be customized to each unit, which can be overly burdensome.
  • In the energy efficiency earmark scheme, 20 percent of the carbon charge revenues were returned to the units and earmarked for energy efficiency investment. This design guaranteed investment in sustainability, but can lead to over- or under-investment.
  • In the information scheme, units received a report with information on energy use and indicative carbon charges, but without any financial consequences. The other three groups also received this report in addition to the incentives. While observations indicated information to be useful, the most effective design was the combination of information and financial incentives.

Overall, Yale observed energy and emissions reductions from the pilot, but more research is needed to determine whether these were due to financial incentives from the carbon charge, or other factors such as stakeholder engagement, friendly peer-competition, or intrinsic motivation from managers nominated to run the carbon charge at their buildings.

Takeaways from the Carbon Charge

“There is no one-size-fits-all model for internal carbon pricing,” said Jennifer Milikowsky, former Yale Carbon Charge Project Manager. She stressed the importance of starting from one’s company or organization and seeking ways to weave a carbon charge into it. Avoiding the ‘right-price dilemma’ is another lesson, she added, reminding that the price can be always be modified, if needed.

Additionally, engaging relevant stakeholders and aligning the carbon charge with culture is pivotal. Yale found that it was more difficult to engage faculty, students and programmatic staff than those in charge of finance and operations, who worked with energy use and cost on a regular basis.

“Units that successfully reduced emissions were those that bridged the gap between academics and operations,” said Tim Pavlis, Assistant Vice President for Strategic Analysis and Institutional Research. “For example, students in a residential college that became engaged, or a Dean who pondered the carbon impact of a programmatic decision.”.

He further emphasized the value of the carbon charge in bridging faculty, staff and students in new and productive ways. “The carbon charge has created a lot of interest in energy reduction, even to the extent not related to the carbon fee,” he said. “People are more aware and engaged. We have staff in the budget office talk regularly about tons of carbon. These are positive results that Yale is excited to continue.”

It is also important to share and learn from best practices. Yale learned from many companies, NGOs and individuals as it designed and implemented the pilot. And, finally, objectives must be very clear to avoid over-experimentation.

The Path Ahead

Drawing on the success of the pilot, this coming year the carbon charge will be expanded to 60 buildings, with the ultimate aim to include all 300. By the July 2018 fiscal year, Yale also aims to incorporate the carbon charge into its organizational budget.

“It is then that there will be a lasting impact on major investment decisions across the university, which is the utmost priority,” said Casey Pickett, the current Carbon Charge Director.

For more details on the Yale’s carbon charge pilot, the full report is available online. A case study on the carbon charge is being developed by the Yale School of Forestry & Environmental Studies and will be published on the SESYNC Case Study Collection in January 2017.