Applying internal pricing to business operations makes environmental, and financial, consequences tangible
The Financial Times discusses how some companies are adopting internal carbon pricing in the absence of government-imposed carbon taxes to reduce emissions. This strategy helps businesses factor the cost of carbon into their operations, incentivizing emissions reduction and aiding long-term strategic planning.
ICP is a price used to place a value on the amount of a company’s greenhouse gas or carbon dioxide equivalent (CO2e) pollution. Companies that have decarbonization/ energy transition strategies may use ICP to better understand the financial impacts of climate risk.
Internal carbon pricing can incentivise and raise awareness of the need for carbon reduction. It can also assist in strategic planning — by enabling companies to compare the relative profitability of different investments if a national carbon tax were imposed.
It is a tool that has become more popular in recent years. More than 2,000 of almost 6,000 companies surveyed in 2020 by CDP, the environmental disclosure non-profit, said they were either using an internal carbon price or planning to implement one within the next two years.
To survive as a business in the future, you have to engage in global business planning. And one of the methods of doing that is knowing what your risks and opportunities are. This helps you identify them.
Amir Sokolowski, global director of CDP’s climate change team
Laura Draucker, director of corporate climate action at Ceres, the sustainable investor network, cites the example of companies with large real estate assets having to consider what capital investments to make on heating systems — bearing in mind factors such as future regulation, or the cost of energy. “You might apply a proxy price to ensure you’re not making a decision that could be cheaper on paper today, but in a few years would be more expensive,” she explains. “That’s potentially most useful for making larger decisions.”
“They’re easiest to impose on things that for most companies aren’t their biggest emission sources or their biggest climate risks.” She sees internal carbon pricing as useful in helping kick off a climate strategy, in culture change and in strategic planning — but stresses that it needs to be part of a broader carbon reduction strategy. “It’s a tool with some uses,” Draucker says. “But companies that are really serious about thriving in a decarbonised economy are going to need to do much more than impose internal carbon taxes.”
Key points
Internal Carbon Pricing Models
Companies use different models, including:
- Implicit pricing: Retrospective calculations of the costs of emissions reductions.
- Internal trading: Business units trade carbon credits with one another.
- Carbon fees: Charging business units a fee to fund emissions reduction initiatives.
- Shadow pricing: Hypothetical prices per ton of emissions to guide future investment decisions.
Impact on Decision-Making
Companies, such as Microsoft, use carbon pricing to fund initiatives like renewable energy purchases and carbon sequestration projects. More than 60% of companies using internal carbon pricing prefer the shadow pricing model.
Challenges and Limitations
Internal carbon pricing is useful in raising awareness and promoting culture change but has limitations. It is easier to apply to aspects like business travel but harder to manage for larger emissions from supply chains. Therefore, it needs to be part of a broader climate strategy.
While internal carbon pricing is a valuable tool, experts agree that businesses must go beyond this approach to fully thrive in a decarbonized economy.
Source: Financial Times, Sarah Murray, September 22 2023
