What is an Internal Price of Carbon?
An internal carbon price is the value a company voluntarily sets to internalize the economic cost of its greenhouse gas (GHG) emissions. It can be used as:
- a decision-making tool that companies use to understand their exposure to external carbon pricing schemes and guide their business decisions and investments.
- a risk management tool aimed at enabling the company’s global strategy to become more resilient to regulatory climate policies and more favorable to emission reductions.
Internal carbon pricing allows companies to assess the financial implications of their carbon emissions and encourage increased energy efficiency. This voluntary carbon pricing tool intrinsically complements governments’ GHG emission reduction policies to which companies are subject.
Internal carbon pricing generally takes one of three forms:
- An internal carbon fee
- A shadow price
- An implicit price
What is Carbon Pricing?
Carbon pricing includes a range of tools that help us legally drive decarbonization, providing financial incentives to transition to low-carbon alternatives. Carbon pricing acknowledges the costs to society that carbon emissions created in climate change, air pollution, and other adverse effects. Governments implement carbon pricing through carbon taxes or cap-and-trade or emissions trading systems.
What is an Internal Carbon Fee?
An internal carbon fee is the market value of each ton of carbon emissions agreed upon by all departments in the organization. The price is set at a range from $5 to $20 per ton, and the collected funds are pooled for investments in internal efficiency projects, green energy, and carbon offset programs in an effort to reduce the company’s emissions.
What is a Shadow Price?
A shadow price is an estimated value on carbon to encourage low-carbon investment or decrease high-emission projections. When dealing with intangible goods, shadow pricing is often calculated guesswork. Most companies use a shadow price higher than the current government levels of $10 per ton, while the average price range for companies using a shadow price is from $2-$893 per ton (Internal Carbon Pricing).
What is an Implicit Price?
An implicit price is based on how much it costs a company to implement emission reduction projects, such as renewable energy purchases or compliance with fuel economy standards. Any company with energy or climate-related goals has an implicit price, and several implicit carbon prices may appear within the same company. They can be used as a standard for determining an internal carbon price and can encourage companies to recognize and reduce these costs.
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