Decarbonization momentum is intensifying, and organizations are seeking tools to stay ahead of evolving regulations, manage climate risks and demonstrate leadership in sustainability. Among these tools, internal carbon pricing (ICP) has gained traction as a mechanism to align business practices with a low-carbon future. One in ten firms have already established an internal carbon price, according to the 2024 Verdantix net zero global survey, 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 the Strategic Focus: Making Internal Carbon Pricing Work for Your Firm report, Verdantix weighs the benefits of ICP for a firm’s net zero strategy against the drawbacks associated with its implementation. In the 'pros' column, ICP can drive decarbonization across an organization by creating designated funds to support green initiatives, steering investments towards sustainable projects and preparing business units for future regulatory carbon costs. Two prominent examples - Microsoft and GPE - have demonstrated just how ICP can create significant value when effectively implemented with robust supporting internal frameworks.
However, ICP is not without its complexities. In the 'cons' list: many firms struggle with 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. Decision-makers must consider some common pitfalls:
- 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 further reading on whether internal carbon pricing might be right for your firm, see Strategic Focus: Making Internal Carbon Pricing Work for Your Firm.
