TL;DR: Internal carbon pricing is a self-imposed cost that companies assign to their greenhouse gas emissions.
Implementing an internal carbon price in your organisation is a strategic way to guide your organisation's sustainable roadmap while also preparing for potential legislative changes.
Establishing a well-defined goal and finding support within the organization are the 2 most important steps in implementing this model.
Introduction to internal carbon pricing
Organizations are increasingly looking for the best methods to become more sustainable. Internal carbon pricing (ICP) has become a popular tool for reducing carbon footprints and fostering responsible decision-making.
But what exactly is internal carbon pricing? And how can it be effectively implemented?
This article delves into the fundamentals of internal carbon pricing and explains how it can be used within your organization.
By adopting this approach, organizations can increase the effectiveness of their sustainable strategies, enhance corporate reputation, and mitigate regulatory risks.
Two different internal carbon pricing (ICP) strategies
Internal carbon pricing is a self-imposed cost that companies assign to their greenhouse gas emissions. This price is integrated into business operations to incentivize emissions reductions and guide sustainable decision-making.
There are two primary models: a carbon fee and a shadow price.
Carbon fee
A carbon fee involves setting a specific price per ton of emitted CO2, which is then charged to internal business units based on their emissions.
This fee creates a financial motivation for teams to innovate and reduce their carbon footprint. It is possible to develop a maximum carbon budget per team, which teams can utilize to ensure sustainable practices.
When a carbon fee is included, the additional budgets that are collected for the carbons emitted can be utilized to support sustainable initiatives within the organization (such as the switch towards a electric fleet) or external (such as reforestation projects).
Shadow price
A shadow price, on the other hand, does not involve actual financial transactions but assigns a hypothetical cost to emissions.
A shadow price is an effective way to factor hidden carbon costs into investment decisions and long-term planning, ensuring that the potential financial impacts of carbon emissions are considered.
Our vision on internal carbon pricing
At Regreener, our consultants gladly advise you on all topics related to sustainable strategy.
It's important to know that the implementation of an internal carbon price is not just reserved for large corporates only. Several Dutch SMEs have already successfully implemented an internal carbon price.
The implementation of an internal carbon pricing offers several strategic advantages.
1. Anticipate future legislation:
Internal carbon pricing helps you to anticipate and manage future regulatory costs associated with carbon emissions, positioning yourself ahead of legislative changes.
2. Illuminate hidden costs:
The implementation of ICP makes hidden costs visible. It creates a clear financial incentive to choose options with the lowest environmental footprint. Therefore, when an organization incorporates the carbon costs of a project or asset, it significantly enhances sustainable decision-making.
3. Generate budget for climate investments:
The implementation of an internal carbon fee can be used to generate a budget for the execution of climate projects within your organization.
4. Come to better decision-making:
The implementation of ICP allows for a critical assessment of which projects align best with the organization's values. Instead of focusing solely on the lowest cost per ton of CO2 offset, companies can include additional factors such as biodiversity and social impact into their ICP, especially if these indicators support their overall mission.
Therefore, at Regreener, we believe that the adoption of internal carbon pricing is a strategic move worth exploring.
In short, a carbon fee creates extra funding opportunities within the organization for sustainable investments. A shadow price helps to incorporate environmental impact into your long-term investment strategy. Therefore, the adoption of ICP signals that your company has a proactive commitment to climate action and it helps to ensure that your organization will become future proof.
6 Steps to implement the right carbon pricing model
Implementing internal carbon pricing requires careful planning and stakeholder engagement. It is wise to consider these steps as part of a broader sustainability strategy to ensure effective implementation:
1. Set clear objectives:
Define the goals of internal carbon pricing, such as reducing emissions, preparing for future regulations, or enhancing corporate sustainability.
2. Choose the pricing model:
Decide whether a carbon fee or a shadow price best aligns with the company's operational and financial structure.
3. Determine the price level:
Set a realistic and impactful price per ton of CO2, considering factors like industry benchmarks, regulatory trends, and internal cost-benefit analyses.
4. Engage stakeholders:
Involve key stakeholders across departments to ensure buy-in and collaborative implementation. Effective communication is crucial to align everyone with the pricing strategy.
5. Integrate into business processes:
Embed the carbon price into relevant business processes, such as budgeting, project evaluation, and supply chain management. Ensure that the carbon price influences decision-making at all levels.
6. Monitor and report:
Establish mechanisms for tracking emissions, evaluating the effectiveness of the pricing model, and transparently reporting progress. Regular reviews help adjust the strategy to maximize impact.
Conclusion
Internal carbon pricing is more than just a financial tool; it's a strategic approach that embeds sustainability into the core of business operations.
By understanding and implementing internal carbon pricing, companies can enhance their sustainable decision-making, drive innovative practices, and prepare for a carbon-constrained future.
This framework ensures that employees within the organization have a clear, financial incentive to meet the set reduction targets, thus fostering a culture of sustainability and accountability.
The implementation of ICP can guide your trajectory to a net-zero company by 2050 (with 55% reduction by 2030, and 90% reduction by 2040 as the steps in between).
Do you need help with internal carbon pricing? Or other stages in your sustainability roadmap? Then get in contact with our team.
