Adopt an internal carbon price to drive decarbonization

There are two main mechanisms through which a company can implement an internal carbon price: 

• Shadow carbon price: This type of internal carbon price is a theoretical cost per tonne of carbon emissions. With this method, a cost of carbon is calculated within business cases, procurement decisions or business strategy development - to demonstrate the implications of the carbon cost on business decisions. The cost is not realized or removed from the business - it is an informational metric of future risk. This type of carbon price supports the selection of projects or products, and can be easier to implement as there are no actual changes to budgets or transactions

• Carbon fee / tax: This type of internal carbon price is an actual cost per tonne of carbon emissions. The tax is levied across business departments, with money being transferred within the business. There are various possible models to implement this carbon price, eg a system of allowance and trading, the creation of a central pot. This type of carbon price can enable fundraising for sustainability initiatives and incentivize change. This can be more complex to implement as it requires careful consideration of sensitivities across businesses

In summary, internal carbon pricing is one of the key methods for companies to drive their decarbonization by setting an internal charge on the amount of carbon emitted from assets and investment projects. This makes it possible to directly link low-carbon transition to the business strategy. 

According to CDP, in 2020, more than 2,000 companies – including nearly half of the world’s largest companies by market cap – disclosed that they are currently using or planning to implement an internal carbon price within two years. This represents an 80% increase in the number of companies planning or using an internal carbon price in just five years. This is expected to continue increasing alongside external pressures from climate regulation and carbon taxes.  

Climate impact

Targeted emissions sources

Scopes 1, 2 and 3 

Decarbonization impact

While the specific benefits of internal carbon pricing differ between companies, generally it can help businesses to: 

• Place carbon and emissions considerations at the center of business operations 

• Diminish risks of future carbon prices 

• Understand carbon risk in your operations 

• Generate financing for sustainability initiatives 

• Raise awareness, both internally and externally 

• Reduce GHG emissions

Key parameters to consider

• Indirect mitigation effect expected: From low to medium indirect impact, depending on how binding is the mechanism – High probability 

• Maturity: Advanced – ICP is used by most of companies advanced in their transition journey 

• Business application scope: ICPs can be implemented for specific decision process or for entire business units and should be embedded in performance management and budgeted to impact operational decisions: portfolio strategy decisions, capital expenditure decisions, operational decisions, remuneration decisions

• Emissions sources addressed: Scope relevance varies by business application, eg Scope 1 and 2 emissions are most relevant to operational decisions, while Scope 3 emissions would be the greatest consideration for purchasing activities

• Cost implication: ICP might require upfront investment and additional FTEs to adjust current companies process and tools

Implementation and operations tips