Setting an internal cost of carbon, also known as an internal carbon price, is a climate action and risk avoidance strategy in which a price is assigned within a company to every tonne of carbon dioxide equivalent (CO2e) emitted by its operations. This allows companies to better understand the true impact of their activities and to be incentivised to reduce their carbon footprint and invest appropriately in climate solutions.
An internal cost of carbon can be used hypothetically – i.e. as a decision-making tool to understand carbon risk and prepare for it – or as an actual internal levy charged to business units, the proceeds of which are then designated to fund internal or external emissions reduction projects.
Currently, the former approach, also known as setting a ‘shadow price’ on carbon, is the most common among businesses according to non-profit CDP.
Putting an internal price on carbon allows for better financial planning, more accurate cost-benefit and risk analyses in a world where broader stakeholders increasingly need to be accounted for, and future-proofing strategy against future climate legislation. It can also be used as a tool to decide which companies to work with, invest in or procure from. Finally, it can bolster a company’s ESG credentials, which may be a prerequisite for engagement from certain customers or financiers.