Glossary term
Internal Carbon Price
Subject: Sustainability and ESG, Climate Risk
Also known as: Shadow carbon price, Carbon shadow price
An internal carbon price is a cost per tonne of carbon dioxide that a company sets for itself, and applies in its own decisions, to reflect the present or future cost of emissions.
Explanation
Firms use it in two ways. A shadow price is a notional figure added to the numbers for a project during appraisal, so that emissions-heavy options look costlier on paper. A fee, sometimes called an internal levy, is charged to business units for their emissions, and the money goes to a fund for efficiency projects. Companies choose the level by looking at expected regulation, market prices or the cost of cutting emissions. Prices often rise over time to show where policy may head. The practice helps test investments against a world with higher carbon costs without waiting for law to change. It differs from a real tax or permit price, which a firm must pay. Finance teams use it to test a project against higher carbon costs before any regulation arrives.
Example
A chemicals company applies an internal carbon price of 50 per tonne to every investment proposal above a set size. A new furnace that looks cheapest on fuel cost becomes the second choice once its yearly 40,000 tonnes of emissions are priced in. The board approves a heat-pump design with a slightly higher upfront cost.
Not to be confused with
- Carbon Pricing
- Carbon pricing is a public tax or market that the firm must pay. An internal price is the firm's own planning tool.