Why more and more companies are using an internal carbon price

Global warming is a pressing issue. Though the rising temperatures threaten to give way to a climate crisis, comprehensive climate-related legislation such as carbon emission-based taxes remains a long way off. Unsurprisingly, companies have started taking matters into their own hands.

Businesses have begun setting internal carbon prices to limit their greenhouse footprint. But how can companies and the planet benefit from internal carbon prices?

The internal carbon price explained

Internal carbon pricing is just one of the many things companies do to account for the environmental impact of their carbon dioxide emissions. Essentially, this puts a monetary value on the greenhouse gases emitted during the company’s operations, allowing it to incentivise the reduction thereof and helping the firm come up with a sustainable environmental strategy. 

However, the concept of internal carbon price is limited to the company’s in-house operations, like travel and goods production. This notably does not apply to its supply chain, which shoulders the bulk of its greenhouse gas emissions.

Four common approaches to internal carbon price

Different internal carbon prices work for different companies. Here are some commonly used ones so far: 

1. Implicit price
   
   In this model, companies come up with retroactive calculations based on what they’ve spent on previous emissions mitigation efforts. They then use them to assess the amount they need to invest to meet their climate goals.
   
2. Internal trading
   
   Here, companies assign credits representing an allowable amount of carbon emissions to individual business units. If one unit exceeds its carbon dioxide reduction targets, it can sell its extra credits to other units.
   
3. Carbon fee schemes.
   
   This refers to a set monetary value companies charge their business units for their carbon emissions. This simultaneously incentivises the reduction of greenhouse gas emissions and generates funds that the company can use to invest in technologies that can minimise its overall carbon footprint.
   
4. Shadow pricing.
   
   This sets a hypothetical price per ton of carbon emissions. No tangible payments are made in this case, but instead, it generates data and insight that eventually shapes the company’s climate strategy.

How do businesses benefit from internal carbon prices?

An internal carbon price scheme benefits companies in many ways, namely:

• Creation of a comprehensive climate strategy. The data and information gained from its application help the organisation come up with sustainable long-term business policies.
• An environmentally friendly company culture. Internal carbon prices essentially create awareness of the company’s carbon footprint and its impact on its expenses and the environment. 
• Future-proofing. More specifically, it prepares companies for future increases in energy costs as fuel prices rise, as demand increases in the face of dwindling supply. 
• Cost reduction. It encourages business units to reduce their expenses as they cut down on emissions-heavy operations. 

Conclusion

The looming climate crisis requires no less than proactive action, and companies are about to lead the way. Implementing internal carbon prices helps them achieve their reduction goals, although it should not be the end-all-be-all of their climate strategy. Rather, it must be part of an overarching approach that aims to eliminate the company’s carbon footprint altogether.