In the first part of Thrust Carbon's new series spotlighting carbon pricing, we explored the broad societal application of carbon pricing in the form of carbon taxes. Today, we're zooming in and examining how carbon prices can be implemented at a corporate level through internal carbon pricing.
A growing number of companies are also choosing to establish internal carbon pricing to proactively manage risks, preparing for the potential introduction of mandatory external carbon pricing or taxes.
Whether at the government policy or corporate level, the goal is to harness carbon pricing as a decision-making tool to steer policy or business decisions towards achieving net zero emissions. The distinction lies in the scale of application — internally within a corporation as opposed to externally at a national level — and the current voluntary nature of internal carbon pricing in the corporate sphere.
In this instalment, we'll offer a comprehensive overview of internal pricing, exploring its importance and implementation strategies.
What is Internal Carbon Pricing
Internal Carbon Pricing (or ICP for short) is a pivotal tool in the arsenal of companies striving for sustainability. It involves the assignment of a specific monetary value to each metric ton of carbon emissions produced. This innovative approach allows businesses to weave climate considerations into the very fabric of their core decision-making processes and investments. By translating carbon emissions into the traditional metric of business decisions – money – it ensures that a company's environmental impact is considered in critical decision-making processes. It also provides a unique vantage point for businesses to anticipate and adapt to future external carbon pricing mechanisms.
Why is Internal Carbon Pricing Important?
According to CDP, a non-profit setting the gold standard for environmental reporting, in 2021, 1,077 companies globally used an ICP, and a further 1,601 were planning to use an ICP in the next two years. So, why are a growing number of businesses setting an ICP, and why should yours?
Drive emission reductions towards net zero
At its core, ICP is a tool to identify climate risks and emission reductions, moving companies towards achieving net zero by translating abstract carbon emissions into actionable financial data. It helps companies to pinpoint the business areas with the highest carbon emissions, set carbon reduction targets, and actively track progress while providing incentives for reductions. CDP data also highlights a correlation between companies implementing an ICP and those undertaking wider action within their business to further mitigate climate risk, such as by setting a Science-Based target.
Catalyse low carbon innovation
External carbon pricing has been demonstrated to stimulate low-carbon innovation in the public policy sphere, as evidenced by the EU Emissions Trading System, which has been shown to increase low-carbon patents by 10%. Similarly, implementing an ICP could serve as a catalyst for low-carbon innovation within your business. In certain applications of an ICP (where an internal tax mechanism is applied, more on this later), business units may face an actual fee for their carbon emissions, directly funding this innovation.
Future-proof your business against incoming external carbon pricing
As we discussed in the first blog of Thrust Carbon’s carbon pricing series, future external carbon taxes - as well as associated climate regulations - are on the horizon. For example, if hypothetically the government were to implement a carbon tax on all emissions from business travel, having set an ICP, you’d be able to understand how much this is going to cost you and already have all the systems in place to comply. This means that setting an ICP now not only mitigates future risks related to compliance, but also positions your company as a leader in sustainability, ahead of the curve within the carbon pricing space.
Meeting Demands from Stakeholders
Setting an internal carbon price helps address the growing demand from consumers, investors, and society as a whole for businesses to act more sustainably. It demonstrates a concrete step your business is taking to actively reduce its climate risks and minimise its environmental impact.
How to Implement Internal Carbon Pricing
Now that everyone is convinced to set an internal carbon price, how do we actually go about it?
Quantify your emissions.
This will form the foundation of your ICP. You can choose to include all emissions across your value chain, cover identified GHG hotspots, or focus only on emissions you have control and influence over.
Allocate carbon budgets.
Use the accurate emissions data calculated in the previous step to allocate carbon budgets across different departments or units, providing clear, manageable targets for carbon reduction.
Apply a monetary value.
Finally, once the budgets are established, apply a monetary value to these carbon emissions, transforming them into cost considerations. This can be achieved through a variety of methods including:
- Shadow price – the most common mechanism of ICP – where a hypothetical fee is applied to GHG emissions.
- Internal tax, where a levy per tonne of covered GHG emissions is incurred.
- Trading system, where the number of permitted emissions is capped, allowing departments to trade allowances for a price.
Why business travel is a great place to start!
Initiating your ICP with business travel emissions, following the steps above, is an excellent starting point. Why? Because data related to business travel - if gathered and analysed effectively - can be typically detailed and precise, making it the ideal foundation for quantifying your carbon emissions. This will help you to set carbon budgets and shape your ICP strategy.
All the steps outlined above can be effortlessly achieved for business travel through the Thrust Calculator. The Thrust Calculator enables best-in-class emission calculations for travel using live data, and has the functionality to apply carbon budgets and customisable carbon prices.
Interested in finding out more on how you can start your carbon pricing journey with your business travel today? Get in contact. Our expert team is always happy to help make travel effortlessly green.