What is Internal Carbon Pricing?

What is Internal Carbon Pricing?

Internal carbon pricing (ICP) is a self-imposed monetary value that organizations assign to their greenhouse gas emissions to guide decision-making, drive investment toward low-carbon alternatives, and prepare for future regulatory carbon costs. Unlike external carbon prices set by governments through taxes or trading schemes, ICP is established voluntarily by the organization and applied to capital allocation, procurement decisions, and strategic planning processes.

Why It Matters

Over 2,400 companies globally have implemented or plan to implement internal carbon pricing, according to CDP's 2024 survey. This includes more than half of the world's 500 largest companies by revenue. The practice has moved from a novelty employed by climate leaders to a mainstream risk management tool embraced by organizations across sectors.

ICP addresses a fundamental market failure: the externalized cost of carbon emissions. By assigning an internal price—typically $20-100 per tonne for shadow pricing, with some companies using $100-200+ to reflect projected future regulatory prices—organizations make the climate impact of business decisions financially visible. A capital investment that looks attractive at zero carbon cost may become uncompetitive when $80/tonne is factored in.

The forward-looking risk management dimension is particularly compelling. Companies operating across jurisdictions face a patchwork of current and anticipated carbon regulations. An internal carbon price set at or above projected regulatory levels stress-tests investments against future carbon costs, reducing the risk of stranded assets and ensuring capital is deployed toward resilient, low-carbon options.

ICP also generates revenue in some implementations. Companies using an internal carbon fee—where business units pay into a central fund based on their emissions—create dedicated financing for sustainability projects. Microsoft's internal carbon fee, which expanded to include Scope 3 emissions in 2020, has funded its carbon removal portfolio and internal efficiency programs.

How It Works / Key Components

Three primary ICP models exist. Shadow pricing applies a hypothetical carbon cost to investment appraisals without actual financial transfers—used to compare options and identify climate-aligned choices. Internal carbon fees impose real charges on business units based on their emissions, creating both accountability and a funding mechanism. Implicit pricing derives the cost of carbon from existing compliance costs, energy efficiency investments, or renewable energy premiums.

Setting the price level requires balancing ambition with practicality. Prices too low fail to influence decisions; prices too high may be overridden by business units as impractical. Leading practice involves benchmarking against current and projected regulatory prices (EU ETS, national carbon taxes), the social cost of carbon (estimated at $50-190/tonne by the US EPA), and sector-specific abatement cost curves.

Integration into decision-making processes is more important than the price itself. ICP must be embedded in capital expenditure approval workflows, procurement evaluation criteria, product development processes, and strategic planning cycles. A shadow price that exists in a sustainability report but is ignored in the boardroom delivers no value.

Governance structures ensure the price remains relevant and influential. Typically, a cross-functional committee sets the price, reviews its impact annually, and adjusts based on market developments, regulatory changes, and organizational learning. Transparent reporting on how ICP has influenced specific decisions builds credibility and drives cultural change.

Council Fire's Approach

Council Fire designs internal carbon pricing programs that integrate seamlessly into existing financial decision-making frameworks. We help clients set defensible price levels, embed carbon costs into capital allocation and procurement processes, and build governance structures that ensure internal pricing drives real behavioral change rather than remaining a paper exercise.

Frequently Asked Questions

What carbon price should my organization use?

There is no single right answer, but benchmarks help. The EU ETS trades at €60-80/tonne, the High-Level Commission on Carbon Prices recommended $50-100/tonne by 2030, and the US EPA's social cost of carbon estimate exceeds $190/tonne. Many companies use $50-100/tonne as a starting point, with higher prices for long-lived capital decisions.

Does internal carbon pricing actually change behavior?

When properly integrated into decision-making processes, yes. Research by CDP found that companies with ICP are more likely to identify and act on emissions reduction opportunities. The key is embedding the price in formal approval processes rather than treating it as an informational add-on.

How do internal carbon fees differ from carbon taxes?

Internal carbon fees are self-imposed charges within an organization—business units pay into a central fund based on their emissions. Carbon taxes are government-imposed levies on emissions paid to the public treasury. Both create financial incentives to reduce emissions, but internal fees offer more design flexibility and direct the revenue internally.