Cost of Change:
Carbon Budgets vs. Carbon Taxes

As pressure mounts on businesses to reduce their contributions to climate catastrophe, an increasing number are introducing one or both of two accounting mechanisms aimed at dialing down their travel-related emissions: carbon budgets and carbon taxes.

Both strategies are intended to steer employees to lower-carbon travel choices, including potentially not traveling at all. But there are crucial differences.

A carbon budget allocates a specified amount of travel-related emissions which should not be exceeded. A carbon tax, also known as an internal carbon fee, surcharges every trip financially for the emissions it generates at a specified rate per metric ton. There are numerous variations on both these principles, and the two can be combined by applying a tax in the event of a budget being exhausted.

Whichever permutation companies select, TravelPerk head of ESG and sustainability James Dent urged deployment of budgets or taxes in the context of a fully managed carbon-reduction strategy that embraces more than travel. For Dent, this starts with setting science-based targets. This is a rigorous analysis, ideally with external vetting, of how much the company must reduce emissions to meet the Paris target of restricting global warming to 1.5 degrees Celsius.

_{Decision-Making Time}

For those going on to adopt a carbon budget, one of the first important decisions is whether to allocate budgets to departments, individual employees or trips. The second of these options, giving employees personal carbon budgets, is generally regarded as both undesirable and impractical. It is undesirable because “each employee doesn’t necessarily think about where they are at with the departmental financial budget,” said Dent. “It’s someone else’s job to be counting the pennies. It would make more sense to have someone else counting the ‘carbon pennies’ as well.” The idea is also impractical because few, if any, travel tech providers have introduced the ability to show individuals their carbon budgets at the point of sale.

Of the remaining two options, a departmental budget is likely to make travelers and their line managers think harder about whether a proposed trip is justifiable. However, Katharina Riederer, co-founder and CEO of booking tool provider Eco.mio, argued that when travel does have to take place, it is more effective to set a budget to beat for that particular trip, especially if technology allows this information to be presented at the point of sale.

“You have the greatest transparency if you can show them the budget while they book: what the environmental impact is and what their budget is,” said Riederer. Her view is that both carbon impact and the budget are communicated most persuasively by providing behavioral context: displaying comparisons with a designated environmentally acceptable option (such as rail instead of air, a direct flight instead of indirect options), what colleagues typically book for that city pair and so on.

The other crucial question when building a carbon budget or taxation strategy, and perhaps the greatest determinant of the sincerity of ambition, is how much pain to inflict internally. In the case of carbon budgets, more drastic consequences for exceeding the allocation could be limiting or even banning travel for the remainder of that period, or denying financial bonuses to business unit leaders.

With carbon taxation, the challenge of making meaningful change instead of simply looking green is even more formidable.

“The metric by which we should judge the success of any of these schemes is the output of CO2 emissions,” said Scott Gillespie, founder and CEO of travel management consultancy tClara. “The problem with a carbon tax is that in the U.S. the price per ton is less than $14. If you add that cost to a fare, you’re not going to change anybody’s mind about traveling. It has no significant impact unless the carbon tax is made artificially much, much higher.”

Even Microsoft’s recently announced radical internal carbon fee hike from $15 to $100 per metric ton (see below) would only generate a fee of $30 for a Chicago-New York round trip, according to Gillespie’s calculations. “It would have to be a tax of several hundred dollars to become meaningful in terms of reducing demand for business travel,” he said. “But let’s assume you decide to have a $500 tax on every flight. That will definitely reduce demand. However, problem number one: that’s an artificially high price, so that’s going to create contention with the traveler. Second, there is no tangible benefit to the traveler.”

_{Keeping an Eye on Unintended Results}

The other problem with carbon taxes, unless punitively high, is that they could counter-productively normalize rather than discourage polluting behavior. In 2008, cosmetics company Lush launched a carbon tax at a high rate of £50 per metric ton. Lush used the revenue to fund groups opposing aviation, road schemes, fracking and coal.

But, Lush strategy lead for Earth care Ruth Andrade told BTN earlier this year, “we ran it for 10 years and then realized it wasn’t doing what we needed it to do. It wasn’t really disincentivizing people from flying. People were feeling, ‘Oh, we’re funding so much cool stuff through flying.’ The financial barrier wasn’t there for people or even for the business.”

There are many such pitfalls with carbon budgeting and taxation but, as rarely adopted ideas until very recently, best practice inevitably still has some way to evolve. Nevertheless, those who have made a start believe budgets or taxation can make a genuine difference, at the very least by making employees think much harder about the environmental consequences of their travel choices.

“With something like the climate crisis, the ‘softly softly’ approach doesn’t work,” said Emma Eaton, commodity manager for travel, events and fairs at Siemens UK, which is poised to introduce carbon budgeting this autumn (see below). “I think a carbon budget will be our biggest contributor to reducing travel-related emissions.”

Business travel accounts for 10 percent of operational emissions at HSBC. The bank has set carbon budgets for global corporate functions and some geographical markets since the beginning of this year. Monthly reporting from its TMC to these businesses now contains parallel summaries on how much has been spent both financially and in terms of carbon emissions.

“We want travelers to consider carbon in the same way they have always considered cost when thinking about making business trips,” said Claire Turner, the bank’s head of concierge travel and events operations. “Our overall strategy is to travel half as much and make the experience twice as good.”

HSBC has deliberately kept the methodology simple, relying on the emissions calculations supplied by its TMC. Carbon budgets were set at 50 percent of 2019 emissions. “I think people get too tied down in the methodology and miss the big picture, which is that we want to go from a big number to this much smaller number, and we should get started rather than tie ourselves up in knots over every single detail,” Turner said.

The HSBC carbon budget covers emissions from air (responsible for an estimated 72 percent of HSBC’s business travel emissions) and rail, but not yet hotel. “Again, we could spend a year perfecting a way to get to a highly accurate number, but we don’t want to waste time,” said Turner. “It’s about awareness and bringing it to the forefront of decision-making.”

In this first year of operation there are neither penalties for HSBC businesses which exceed their carbon budgets nor rewards for those which don’t. Those ideas are being considered for the next stage of evolution. However, even without formal incentives or disincentives, Turner said there is “healthy competition between the business units,” most of which are hitting their carbon targets as travel continues to be reduced post-pandemic. HSBC has maintained elevated trip-approval processes introduced during Covid, while financial budgets also remain reduced against 2019 benchmarks.

Turner views a carbon budget as a third behavioral lever to reduce emissions alongside policy and financial budget. “This is a tool to make visible the impact of travel at an aggregate level, and then hopefully we’ll get that down to a more individual level,” she said.

Siemens UK is setting a carbon budget per department that has been assessed as necessary to keep the company in line with its science-based target commitments. The budgets are ambitious but, said Emma Eaton, commodity manager for U.K. and Ireland travel, events and fairs, the pandemic has proved very helpful for seeing what reduced travel can look like and setting targets at those levels.

Eaton and her colleagues are still determining what the consequences will be if budgets are exceeded. One idea under consideration is an internal charge that would fund “insetting:” internally managed carbon offset projects. Departments within Siemens UK already pay an internal carbon tax that covers all emissions (not just travel).

Eaton is clear on two points if an internal charge is introduced for carbon budget overspend: The first is it would not be spent on sustainable aviation fuel, which she has concluded produces a poor return. “Right now, there are a number of projects outside travel in which we can invest for better carbon reduction,” she said.

The second is that the charge would be a last resort. “We don’t want anyone paying it,” said Eaton. “Budgets are being set at a level to avoid impacting the Earth.”

To help track the carbon budget, emissions reporting for air travel is being provided by the consultancy Atmosfair. Eaton considers hotel reporting important, believing some properties produce far greater emissions than others. The budgets will, therefore, include hotel emissions data provided by HRS.

Eaton ideally would like her company’s booking tool to provide indications of carbon cost for different trip options, but it is unable to do so. She is less convinced of the need to show progress against carbon budgets at point of sale, something else the booking tool would be unable to provide anyway. “Travelers don’t know the financial budget either,” she said. “They just need to know they contribute to it.”

Microsoft has a strategy to become “carbon negative.” It sets an internal carbon fee “high enough to drive action while optimizing the amount of money collected each year to fund [environmental] projects,” according to carbon program director Elizabeth Willmott.

Business groups within Microsoft are charged for all their contributions to greenhouse gas emissions, not just from business travel. Along with all Scope 1 and 2 emissions, the company is raising the internal fee for business travel (which is a Scope 3, in other words indirect, emission) from $15 up to $100 per metric ton from financial year 2023. Microsoft “will continue to increase the annual fee at an accelerated rate through FY30,” said Willmott. The carbon fee is collected by the finance team.

Microsoft calculated business travel emissions based on commercial air travel only until FY20, when it added hotel, rail and ground transportation. Its air travel emissions calculations are based on GHG Conversion Factors for Company Reporting, published by the U.K.’s Department for Environment, Food and Rural Affairs, which is used by many companies globally.

This company is taking the innovative approach of setting a carbon budget translated into an additional financial budget, which will be used to pay a carbon tax on business travel.

The idea has been developed because the travel manager (who has requested anonymity) and his CFO perceive disadvantages with conventional carbon budgets and taxes. They believe the challenge with the former is that travelers find it difficult to visualize a ton of carbon or how harmful that may be. The problem with carbon taxes, the travel manager said, is that, “say you have $50 on top of your flight and instead of paying $1,000 you are paying $1,050. No one cares about $1,000, so why would they care about $1,050?”

Instead, this company will calculate each of its teams’ carbon emissions from 2019 and convert them to a financial budget at a rate of $50 per metric ton. Each month, emissions on air travel booked by that team will be calculated (by the company’s TMC, using DEFRA methodology), again converted at the same rate into a financial figure and then deducted from the carbon financial budget. The amount deducted from the carbon financial budget will also be invested in carbon reduction projects.

The intention is that each year the carbon price per ton will be increased from its initial level of $50 but, crucially, “teams’ carbon financial budgets will not go up pro rata, so it is going to cause them to travel less,” said the travel manager.

However, he added, punitive measures for exceeding the carbon financial budget will be added gradually. “We will communicate that they have exceeded the budget, but in 2023 no one’s going to be stopped from flying because they don’t have any money left in it. It’s going to be a learning exercise to change people’s mindset. At the end of the day, it’s about ownership.”

The company uses the same booking tool as Siemens UK and is equally frustrated by its inadequacies in supporting sustainability strategies. “When I was talking to our CFO, I said, ‘Don’t ask me to put this on the booking tool, it’s not possible,’ ” he said. “I believe we should tell people how much they have in their carbon budgets but there are very few technology providers which can do that.”