Internal carbon pricing,
a growing corporate practice
Towards a society with “zero net emission”
In the Paris Agreement, signed in December 2015, the international community set itself the ambitious goal of achieving zero net emission before the end of the century, in order to comply with the average global warming cap of 2°C or less, if possible. The transition towards this low-carbon world means rapidly reinventing development in every field, including energy, transport, housing, production, farming, finance and consumption.
Most actors agree that assigning a price to greenhouse gas emissions has an influence on their decisions and is an effective means of encouraging economic decision-makers to invest in clean energy, low-carbon technologies and even in different products and services that meet the same requirements. Government authorities in several countries have already taken decisions along these lines and,
in 2016, 13% of global emissions were covered by a regulatory pricing mechanism. This figure is likely to increase.
What is internal carbon pricing?
Companies are conscious of the risks relating to climate change and the need to transition to a low-carbon economy. They are also aware of the effectiveness of carbon pricing mechanisms and the important role that they have to play in decarbonisation. As a result, they pay close attention to this trend and are even making an active contribution to it, which is reflected in the development of voluntary pricing tools.
An internal carbon price is a value that companies voluntarily set for themselves, in order to internalise the economic cost of their greenhouse gas emissions. It can be used both as risk management tool and as part of a company’s decarbonisation strategy. An internal carbon price can help companies enhance their global strategies to become more resilient to regulatory climate policies and more favourable to emission reductions.
Internal carbon pricing primarily takes two forms:
• A shadow price: which represents a carbon value (determined by the company) that is incorporated into investment decisions and applied to the greenhouse gas emissions generated by projects;
• An internal carbon tax: a levy that companies voluntarily apply to their operations and that increases operating costs depending on the resulting greenhouse gas emissions; the company then uses the proceeds of this tax as it sees fit.
What are the benefits for the company?
Introducing an internal carbon pricing system can offer several benefits to companies by enabling them to:
• Effectively reach established emission reduction targets;
• Protect against risks relating to compliance with future carbon pricing systems imposed by government, or future decarbonisation policies more generally;
• Prepare themselves for future climate policies, which could lead to competitive advantage in cases where these policies influence operating conditions (costs, changes in energy supplies or technical systems, etc.);
• Direct investments to low-carbon technologies more effectively;
• Drive R&D and identify new markets.
How to adopt this approach
Many companies, including those that are members of Entreprises pour l’Environnement, have embarked on this approach in order to effectively reduce their emissions, show their commitment to a low-carbon economy and protect themselves against the risks posed by this transition. Based on their experience in this area, this publication proposes a methodological approach to implementing an internal carbon pricing programme.