Carbon Finance

A Brief Guide To Internal Carbon Pricing Methodology

July 1, 2021


If your company is about to or is currently exploring how to develop an internal carbon pricing methodology, you aren’t alone. Corporate accounting for the cost of CO2 is rapidly gaining traction, with the number of firms currently using or planning on using an internal carbon price globally increasing 80% over just five years.

In this article, the GHG emissions management experts at SINAI provide a step-by-step guide to developing an internal carbon price. From engaging key players in your firm early on, to developing an internal carbon price approach, we explain how your firm can establish a meaningful internal carbon price that will bolster and support your ambitious climate transition plans.

In addition, we define what precisely internal carbon pricing is and what advantages exist for implementing one.

What is internal carbon pricing?

There is no single price or internal carbon pricing methodology used.

Generally speaking, internal carbon pricing is most frequently used as a shadow price, which can be added to operational costs and future investments to hedge against policy decisions further down the line to implement any carbon pricing mechanisms.

How carbon pricing works

Corporations use internal carbon pricing as a strategy to mitigate climate-related risks to their business and prepare for their transition to a low-carbon economy.

Some industries such as Utilities have been using internal carbon pricing as part of their risk management strategy since the 90s. And many firms have begun using internal pricing to help them prepare for future governmental policies that will restrict carbon emissions.

Is carbon pricing effective?

Several firms report that internal carbon pricing gives them a solid incentive to shift investments to low-carbon alternatives.  It also assists companies in achieving their greenhouse gas emissions reduction targets, addressing shareholder and investor concerns about disclosure, shaping resilient supply chains, gaining an edge over the competition, and showcasing leadership in their niche industry.

Internal carbon pricing methodology

There are five standard methodologies that corporations use to establish their internal carbon price:

  1. shadow pricing
  2. implicit pricing
  3. peer benchmarking
  4. political regulation  
  5. the social cost of carbon.

A step-by-step guide to developing an internal carbon price

Step 1: Engage investors, board, and staff

It’s vital to facilitate collaboration between all relevant parties connected to your company at the very beginning, as you set clear objectives that your firm’s internal carbon price levels should achieve.

Consult every necessary department and value chain partner that the internal carbon price could and will affect. This will help you foster buy-in from the onset with board members, investors, and other key players within your business.

As you engage relevant departments, you should begin developing a sustainability strategy closely aligned with your existing business model to ensure continuity as you embark on your climate transition to a low carbon economy.

Step 2: Develop a best practice approach

The next step in your internal carbon pricing journey is determining the pricing level needed to achieve your set objectives. At this stage, your firm will also want to determine the greenhouse gas (GHG) emissions that the internal carbon price approach will cover.

To continue, work to establish the mechanism for influence and change that the internal carbon price approach will have on business decision-making. And lastly, map out how each of these tasks - setting a pricing level, determining which GHG emissions it will cover, and its impact on decision-making - will develop over time.

Step 3: Trial approach

You will want to develop the rationale that underpins the internal carbon price level and how it will be used, crystal clear. Stress-test the agreed-upon internal carbon pricing approach with various departments that will be affected by it.

Next, your firm will walk to establish how the approach will be rolled out internally and make concrete plans to increase and monitor its uptake and acceptability. Find the appropriate timing and develop an implementation plan to grow and maintain uptake over time.

Step 4: Monitor and evaluate trial approach

The final step in developing an internal carbon price is evaluating if the carbon price level you set at the beginning can still achieve its objectives. Review if the coverage of GHG emissions needs adjustment to ensure the approach can meet its goals.

Assess how to improve the internal carbon pricing approach to become increasingly influential in high-level business decision-making. And lastly, monitor how the internal carbon pricing approach impacts your firm’s business decisions and development over time.

Making sense out of complex data

SINAI’s enterprise-grade software platform can provide your firm with carbon inventory calculations, baseline projections, recommendations on how to reduce your GHG emissions, and how much various mitigation options will cost.

Beyond emissions inventories and reporting, SINAI has built dynamic scenario assessment tools, a Marginal Abatement Cost Curve, and carbon pricing modules for corporations looking to stand out as leaders in deep decarbonization.

To see what our software solution can do for your firm, request a demo today.

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