Set an internal price on carbon

What is this action about?

An internal carbon price refers to the monetary value a company sets voluntarily to internalize the economic cost of its greenhouse gas (GHG) emissions. This value serves as a crucial decision-making tool that companies can use to gauge their exposure to external carbon pricing schemes, guiding their business decisions and investments accordingly.

According to The Center for Climate and Energy Solutions, internal carbon pricing generally takes one of three forms:

• An internal carbon fee – a straightforward monetary value that a company assigns to each ton of carbon emissions, making it easy to understand throughout the organization. This fee creates a dedicated revenue or investment stream companies can use to fund their emissions reduction efforts.

• A shadow price – a theoretical carbon price that helps companies support long-term business planning and investment strategies. By setting a shadow price, companies can prioritize low-carbon investments and prepare for future regulations. The observed price range for companies that use a shadow price varies significantly, ranging from $2-$893 per ton. The UN Global Compact called on companies to set an internal price of at least $100 per metric ton over time.

• An implicit price – a value based on how much a company spends to reduce greenhouse gas emissions or comply with government regulations. This price can be determined by measuring the amount a company spends on renewable energy purchases or compliance with fuel economy standards. By using an implicit price, companies can identify and minimize their costs while understanding their carbon footprint. For some companies, an implicit carbon price can be a benchmark before launching a formal internal carbon pricing program.

In 2021, over 2,000 companies representing over US$27 trillion in market capitalization disclosed they use an internal carbon price or plan to implement one within the next two years. This includes Microsoft, Ørsted, and Mitsubishi Corporation.

Additionally, the rising price of the EU Emissions Trading Scheme (EU ETS) and the Task Force on Climate-Related Financial Disclosures (TCFD) requirements are contributing to increasing awareness of Internal Carbon Pricing (ICP).