Putting A Price Tag On Carbon Emissions

Climate-related reporting is racing ahead at full speed, and Internal Carbon Pricing (ICP) is taking more than just a cameo role. ICP is now firmly written into the storyline of climate related reporting with its leading parts in paragraph 29(f) of ISSB IFRS S2 and disclosure requirement E1-8 of the ESRS, which underpins Europe’s CSRD framework.
 

What is it and why is it stepping into the limelight?
Carbon pricing simply means putting a price on each tonne of carbon that a company emits, and governments have been using external mechanisms like Emissions Trading Systems (ETS) for some-time. 
 

Before Brexit, the UK participated in the EU Emissions Trading Scheme (EU ETS). Post-Brexit, the UK established its own UK Emissions Trading Scheme (UK ETS), capping emissions in high-carbon sectors like power generation and aviation. Companies that emit less than their allowance can sell their surplus, creating a cap-and-trade system.
 

Rather than waiting for governments to set the rules, some companies are voluntarily attaching a financial cost to their carbon emissions. This is helping them make greener investment decisions, manage climate-related risks, and stay ahead of future carbon pricing regulations.
 

There are a few ways companies’ can approach ICP depending on their goals, but the most common approaches are set out below:
 

A Shadow Price is a hypothetical cost applied to carbon emissions, used to replicate financial impacts without actual money changing hands. It’s the most common form of ICP and helps assess how assigning a monetary value might affect strategic and financial decisions across its operations, investments, and projects.
 

Internal Trading Systems work like a mini-Emissions Trading System (ETS) within a company. Each business unit has a carbon allowance, and if they exceed it, they purchase credits from business units with a surplus. This competitive approach promotes sustainable thinking and prepares companies for future carbon pricing mechanisms like internal carbon fees.
 

Internal Carbon Fees: Now we’re talking real money! Companies charge themselves a fee per tonne of carbon emitted, creating a financial reserve linked to their emissions. The goal is to fund sustainable projects or purchase carbon credits, driving emission reductions. By internalising carbon costs, companies may increase operating expenses now, but they do so in preparation for stricter carbon regulations coming down the line.
 

Is ICP just a buzzword, or is it actually happening? It’s real, and here’s the proof: major players are already driving impactful action with impressive results.
 

Microsoft has truly been the ultimate ICP ninja, using an internal carbon pricing strategy since 2012. The tech giant charges its business units a carbon fee, using the money to invest in renewable energy and other sustainability projects. Over the years their carbon fee has increased to help Microsoft stay carbon-neutral and supporting carbon reduction projects benefiting over seven million people worldwide.

Ben & Jerry’s has implemented an internal carbon fee to fund emission reduction projects in its supply chain, with a particular focus on dairy farms—one of their largest sources of emissions. The fee is understood to generate over $1 million annually, reinvested to help farmers adopt regenerative farming and carbon reduction strategies, helping to reduce it scope 3 emissions while investing in local farming communities.

Setting the Right Price for Carbon
Currently, there are no specific regulatory standards for the voluntary carbon prices companies should assign. As a result, companies are adopting a flexible approach, setting ICP based on their specific goals. This flexibility can lead to different prices for R&D and capital investment decisions compared to operational decisions like business travel. If the chosen price drives the desired behavioural change and outcomes, it’s likely a good starting point.

Where to start?
A good place to start is by assessing where carbon regulations could impact your company and setting clear goals—whether it’s driving behavioural change, reducing climate risk, funding green projects, or fostering innovation. In sustainability, accountants are increasingly becoming key players. It’s wise to involve the CFO and finance team from the outset as they can help determine the best mechanism for implementation, track ROI on green projects, and ensure ICP aligns with compliance needs.
 

With ICP already playing a key role in climate-related reporting, it isn’t the future—it’s already here. Pricing the cost of carbon emissions into decision-making is not just smart business—it’s essential for staying ahead of evolving regulations and ensuring long-term sustainability.