Companies around the world are taking climate action by instituting their own internal price on carbon. An internal price places a monetary value on greenhouse gas emissions, which businesses can then factor into investment decisions and business operations.

Companies use internal carbon pricing as a strategy to manage climate-related business risks and prepare for a transition to a low-carbon economy. Some sectors such as oil and gas, minerals and mining, and electric power have been using internal carbon pricing as part of their risk mitigation strategy since the 1990s. Some companies use internal pricing to help them prepare for future policies restricting carbon emissions.

Companies say that internal carbon pricing gives them an incentive to shift investments to low-carbon alternatives.  It also helps them achieve their greenhouse gas targets, address  shareholder concerns about disclosure, build resilient supply chains, gain a competitive edge, and showcase corporate leadership.

According to 2016 disclosures to CDP (formerly the Carbon Disclosure Project), more than 1,200 companies worldwide are either pursuing internal carbon pricing or preparing to do so. While most of those companies are based in North America and Europe, the sharpest increase is in emerging economies, including India, Brazil, Mexico, and China.

Internal carbon pricing generally takes one of three forms:

• An internal carbon fee is a monetary value on each ton of carbon emissions, which is readily understandable throughout the organization. The fee creates a dedicated revenue or investment stream to fund the company’s emissions reduction efforts. The observed price range for companies using an internal carbon fee is from $5-$20 per metric ton.
• A shadow price is a theoretical price on carbon that can help support long-term business planning and investment strategies. This helps a company prioritize low-carbon investments and prepare for future regulation. While the observed price range for companies using a shadow price is from $2-$893 per ton, most companies use a shadow price higher than the current government levels of $10 per ton.
• An implicit price is based on how much a company spends to reduce greenhouse gas emissions and/or cost of complying with government regulations. For example, it can be the amount a company spends on renewable energy purchases or compliance with fuel economy standards. It helps companies identify and minimize these costs, use the information gained from this to understand their own carbon footprint. For some companies, an implicit carbon price can set a benchmark before formally launching an internal carbon pricing program.

Many companies use a hybrid model of complementary approaches that combine these different attributes.

Corporate pricing is most meaningful if embedded in a company’s business strategy. Some companies, such as Microsoft, use revenue from its internal carbon fee to fund renewable energy, energy-efficiency, and other projects needed to reduce emissions; research into emissions reduction technology; and raise employee awareness of climate risks and opportunities. Others, such as Shell, BHP, and BP, embed a shadow price in their business strategy by shifting investments in low-carbon assets or even stopping projects with high-carbon intensity.

Internal carbon pricing can serve as an important risk-mitigation tool with multiple benefits beyond the company’s operations, customers and communities. As companies are taking leadership on climate action, it can be combined with other approaches to help advance the low-carbon transition.