Internal carbon pricing scheme
An organisational arrangement that allows an undertaking to apply carbon prices in strategic and operational decision making. There are two types of internal carbon prices commonly used by undertakings. The first type is a shadow price, which is a theoretical cost or notional amount that the undertaking does not charge but that can be used in assessing the economic implications or trade-offs for such things as risk impacts, new investments, net present value of projects, and the cost-benefit of various initiatives. The second type is an internal tax or fee, which is a carbon price charged to a business activity, product line, or other business unit based on its GHG emissions (these internal taxes or fees are similar to intracompany transfer pricing).
An internal carbon pricing system (Internal Carbon Pricing, ICP) is a fundamental strategic measure for companies aimed at assigning a monetary value to their greenhouse gas emissions. The main objectives of such a system are the internalization of the external costs of CO₂ emissions and the alignment of corporate decisions with sustainability goals and regulatory requirements. By integrating a CO₂ price into company-specific key performance indicators (KPIs), it becomes possible to better manage climate-related risks and prepare for the transition to a low-carbon economy.
The implementation of an internal carbon pricing system typically occurs through two main approaches: shadow pricing and internal fees. The shadow price is a hypothetical amount used in economic evaluations to influence investment decisions and scenario analyses, without actual money being transferred. The internal fee, on the other hand, operates based on real charges assigned to individual business units according to their emissions, creating immediate incentives for emission reductions.
Establishing such a system requires a precise greenhouse gas inventory that includes all emissions according to the GHG Protocol, encompassing both direct and indirect emissions. A well-structured internal carbon pricing system has far-reaching applications, such as in investment decisions, product development, and the management of various business units. The strategic advantages include not only early adaptation to external regulations but also strengthening credibility with investors and stakeholders.
Despite the benefits, companies face challenges, particularly regarding the determination of an appropriate price and internal acceptance within the organization. Success also depends on the integration of the system into existing governance mechanisms. Overall, the internal carbon pricing system represents a valuable tool to promote sustainable decisions and secure long-term competitive advantages in the course of decarbonization.
