Internal Carbon Pricing: Strategic Asset Or Administrative Burden?

Internal Carbon Pricing: Strategic Asset Or Administrative Burden?
As decarbonization momentum intensifies, businesses are seeking tools to stay ahead of regulatory changes, manage climate risks and demonstrate sustainability leadership. Among these, internal carbon pricing (ICP) has gained traction as a mechanism to align business practices with a low-carbon future. According to the 2024 Verdantix net zero global survey, 10% of firms have already established an internal carbon price and nearly half (45%) are planning to implement one within the next two years.
But is internal carbon pricing truly the game-changer it’s made out to be?
In our Strategic Focus: Making Internal Carbon Pricing Work for Your Firm report, we weigh the benefits of ICP for a firm’s net zero strategy against the drawbacks associated with its implementation. ICP can drive decarbonization across a firm by creating designated funds to support green initiatives, steering investments towards sustainable projects and preparing business units for future regulatory carbon costs. Microsoft and GPE have both demonstrated just how ICP can create significant value when effectively implemented with robust supporting internal frameworks.
However, ICP is not without its complexities; many firms struggle with the associated administrative burdens, inconsistent applications across business units and supply chains, and difficulties in setting a carbon price that is both impactful and practical. Furthermore, the choice of three different internal carbon pricing methodologies – carbon fee, shadow price and implicit price – can further complicate implementation. Selecting the best approach requires careful consideration of the practical applications against the potential challenges.
Our findings reveal that for ICP to be an effective strategy, it must be implemented under conditions that align with the organization’s broader decarbonization goals. Common pitfalls that need to be considered are:
- Setting an overly high carbon price
- Failing to disclose ICP decision-making and implementation
- Not connecting ICP to a broader decarbonization strategy
- Leaving Scope 3 emissions out of ICP
These problems can turn ICP into an exercise in futility, with the administrative burden of implementing it outweighing the strategic benefits of its application to business operations.
For deeper insights into whether your firm should consider implementing an internal carbon price, and guidance on the different mechanisms available to do so, access the full report: Strategic Focus: Making Internal Carbon Pricing Work for Your Firm.