Policy Brief

55

28 July 2022

Corporate Internal Carbon Pricing: Global Trends andChallenges
Kim Jeong Won, David C. Broadstock and Ho Wei Yuan, Bradley

SYNOPSIS
With global growth in the deployment of mandatory carbon pricing schemes, such as carbon taxing oremissions trading systems, more and more companies are using internal carbon prices to coordinate
their investment decision-making. Given that the roles of the private sector in tackling climate change
will be strengthened and carbon pricing will be more prevalent, internal carbon pricing is expected toexpand among companies. This policy brief reviews the global trends in internal carbon pricing basedon the review of the CDP’s available reports and data (2015-2020) and discusses the opportunities
and challenges of internal carbon pricing.
KEY POINTS● Between 2015 and 2020, the number of companies that use or plan to adopt internalcarbon pricing in the next two years increased approximately twofold from 1,018
companies to 2,012 companies, with growth in almost all regions and industrial sectors.
● Globally, internal carbon prices ranged from USD 0.01/tCO2e to USD 908.85/tCO2e in2017, while the median price was USD 25/tCO2e in 2020.
● Adoption of internal carbon pricing will continue to expand due to companies’ increased
interest in climate change and the expansion of mandatory carbon pricing schemes.
● Challenges and uncertainties still exist regarding the effectiveness of internal carbon
pricing, such as insufficient adoption rates, low price levels and the companies’
preference for a shadow price and an implicit price.

INTRODUCTION
As efforts to combat climate change expand at
various levels, carbon pricing has become acritical greenhouse gas (GHG) emissions
mitigation tool, not only in international
climate negotiations and national politics but
also in the private sector. The launch of the EU
Emissions Trading System (ETS) and emphasison environmental, social and governance(ESG) standards drove the private sector totake more ambitious attitudes towards climatechange and carbon pricing over the past
decade. In 2014, more than a thousandcompanies and investors announced their joint
support for carbon pricing at the UN SecretaryGeneral’s Climate Leadership Summit.
Moreover, corporate carbon pricing has beenencouraged by global initiatives, including theEnergy Studies Institute29 Heng Mui Keng Terrace,
Block A, #10-01, Singapore 119620
Tel: (65) 6516 2000 | Fax: (65) 6775 1831
esi.nus.edu.sg

World Bank’s Carbon Pricing Leadership
Coalition (CPLC) and Caring for Climate,launched by the United Nations Framework
Convention on Climate Change (UNFCCC), theUnited Nations Global Compact (UNGC), andthe United Nations Environment Programme(UNEP).

An increasing number of companies are setting
their own carbon prices and using them incorporate decision-making. This is calledinternal carbon pricing (ICP). ICP refers to acompany’s practice to voluntarily assign aprecise monetary value to carbon generated inits business operations. This ICP is thenfactored into project or investment
evaluations. In doing so, ICP aims at reducing acompany’s direct and indirect GHG emissions
A Research Institute ofCorporate Internal Carbon Pricing: Global Trends and Challenges

by internalising the cost of the company’s GHG
emissions. Given that the roles of the private
sector in tackling climate change will bestrengthened and carbon pricing will be moreprevalent, ICP is expected to expand amongcompanies.

With this background, this policy brief
discusses the opportunities and challenges
around ICP based on examining global
adoption trends and experiences. To this end,
the available reports and data published by theCDP (formerly the Carbon Disclosure Project)between 2015 and 2021 are reviewed. The
CDP is a global initiative surveying selfreported corporate carbon management andpricing strategies. However, selected reports
and data are not publicly available after 2017,as such only reports published in 2015, 2016,2017, and 2021 are reviewed in this policy
brief.

ANALYSIS
Companies Implementing or Planning ICP
In 2020, 2,012 companies reported they wereeither using ICP (853 companies) or plannedto adopt it in the next two years (1,159companies). These numbers represent aneffective doubling of companies comparedwith 2015. The numbers of companies
reporting their use of ICP each year were 435(2015), 517 (2016), 607 (2017), 594 (2018),699 (2019) and 853 (2020). The numbers ofcompanies planning to use ICP were 583(2015), 732 (2016), 782 (2017), 711 (2018),915 (2019) and 1,159 (2020) respectively.

Asian and European companies notably led
this growth. Over the last three years (20182020), companies in Asia and Europe
presented the largest growth in terms ofincreasing
numbersofcompanies
implementing or planning ICP (341 companiesin Asia and 228 companies in Europe) and also
in terms of the rate of growth (75.3% and52.7%). North America, Latin America, andOceania showed 36.0%, 37.3%, and 45.2%
increases, respectively. By contrast, companies
implementing or planning ICP decreased in
Africa from 44 companies in 2018 to 43
companies in 2020. However, this decrease
may be due to the inconsistent reporting
frequency, which is easily observed in the CDP
data. In other words, the companies that had
informed their ICP information might not
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respond to the CDP’s questionnaire in thefollowing year.

The Materials sector had the largest number ofcompanies already adopting or planning toadopt ICP (251 companies), followed byIndustrials (242), Consumer Discretionary(210), Consumer Staples (158), Financials(147),Utilities(93),
Energy(61),
Telecommunication Services (48), and HealthCare (35), in 2017. In terms of the share ofcompanies adopting ICP, companies in theEnergy and Utilities sectors tended to be moreengaged in adopting or planning to adopt ICP(71% of utility companies and 67% of energy
companies in 2020). Other sectors’ adoption
rates ranged from 27% to 52%. Higher
adoption rates in the Utilities and Energy
sectors are not surprising because many fossil
fuels and electric power companies haveadopted ICP due to their immediate andcentral role in decarbonisation.

Key Motivations for Using ICP
Companies are expected to adopt ICP due to its
several benefits. First, ICP can function as aclimate-risk management tool to minimise thephysical, regulatory and financial risks posedby climate change. It works as a key metric formeasuring and assessing the impacts ofphysical and regulatory risks and as a hedge
against future energy price increases andtougher carbon regulations. Second, ICP helps
companies meet their GHG emissions
reduction targets. It facilitates companies inidentifying low-carbon business opportunities
and shifting capital investments to low-carbon
options by incorporating climate change issues
into their decision-making process andsimultaneously building internal awarenessabout climate change. Third, ICP can helpcompanies gain early-mover reputational andeconomic advantages. Adopting companies
can better attract environmentally aware
investors and consumers by signalling that thecompany is doing its bit to avoid dangerous
climate change.
The CDP’s reports disclose such motivations
are found in the real world. Most companies
adopted ICP for multiple purposes rather thanfor a single purpose. In 2020, the most popular
objectives were to drive low-carbon
investment, to drive energy efficiency, and tochange internal behaviour. Meanwhile, theNo. 55 | 29 July 2022 |2

Corporate Internal Carbon Pricing: Global Trends and Challenges

regulatory risk was a key driver in adopting
ICP in certain countries. The companies that
did not expect GHG emissions regulations,such as mandatory carbon pricing, tended toadopt ICP for behavioural change andstakeholders’ satisfaction. On the other hand,the companies facing the regulations tended toadopt ICP to navigate GHG regulations.
Furthermore, the CDP reported that thecompanies in the latter group are five times
more likely to adopt ICP than those in theformer group. Therefore, mandatory carbon
pricing works as one of the significant
determinants of the companies’ adoption ofICP.

Types of Internal Carbon Price
Internal carbon prices are generally classified
into internal fee/tax, shadow price, andimplicit price. While an internal fee mechanism
generates revenue by placing actual monetary
values on emissions and charging those costs
to operational expenditures, a shadow priceand an implicit price do not imply actual
financial transactions. A shadow price is ahypothetical price assigned to carbon
emissions in order to support strategic
investment decision-making by revealinghiddenclimate-relatedrisksandopportunities. An implicit price is a company’s
estimated marginal abatement cost including
the compliance cost with regulations. Ashadow price was the most popular internalcarbon price type in the real world. In 2020,
50.8% of companies adopting ICP usedshadow prices. Implicit prices and internal fees
accounted for 19.3% and 15.0%, respectively.

Ranges of Internal Carbon Price
The internal carbon prices of companies vary
widely because no global standard for carbon
price exists and each company selects its own
price based on its business context. Globally,the internal carbon prices were USD 0.95357.37 per metric tonne of carbon dioxide
equivalent (tCO2e) in 2015, USD 0.28893.29/tCO2e in 2016, and USD 0.01908.85/tCO2e in 2017. The median and mean
prices of each year were USD 22.6/tCO2e andUSD 34.1/tCO2e in 2015, USD 22.97/tCO2e andUSD 36.7/tCO2e in 2016, and USD 22/tCO2eand USD 33.7/tCO2e in 2017. In 2020, themedian price increased to USD 25/tCO2e.
ESI Policy Brief

Companies in Asia, Europe, and North America
had higher internal carbon prices thancompanies in Africa and Latin America. Whilethe median prices of African and Latin
American companies were USD 9.26/tCO2eand USD 5/tCO2e in 2017 and USD 8/tCO2e
respectively in 2020, those of companies in theother regions were USD 15-32.15/tCO2e in2017 and USD 23-28/tCO2e in 2020. Thissuggests that companies located injurisdictions with mandatory carbon pricing
schemes are more likely to have higher
internal carbon prices. Out of 65 mandatory
carbon pricing schemes in effect around theworld, 56 schemes are implemented in Asia,Europe, and North America. Thus, for thecompanies in these regions, putting a price on
carbon should be an inevitable choice.
The variance in median prices among thesectors has decreased. The spread of median
prices by industrial sector ranged from USD
7.85 (Information Technology) to USD
40/tCO2e (Energy) in 2015, but those in 2020
ranged from USD 16/tCO2e (ConsumerDiscretionary) to USD 43/tCO2e (Health Care).

Opportunities and Challenges
The number of companies adopting ICP isexpected to keep growing. As many companies
have pledged their efforts to reduce GHGemissions, they would seek various tools tosupport their climate change strategies, andICP can be an attractive option for them.
Besides industries, ICP is rapidly spreading in
the financial sector as a tool for climate stresstesting and evaluating investment decisions.
Moreover, given that there is a positive
correlation between the implementation of
mandatory carbon pricing schemes and theuse of ICP, the global expansion of carbon tax
and ETS would accelerate the companies’adoption of ICP.
However, several challenges and uncertainties
still exist regarding the effectiveness of ICP.
First, despite the considerable increase in ICPadoption, the share of companies settinginternal carbon prices is still low. In the 2020
CDP climate questionnaire, 41.5% ofrespondents used or planned to adopt ICP. Itmeans almost 60% of companies do not yet
have a plan for ICP. Furthermore, consideringthat many companies did not respond to theCDP’s questionnaire, the adoption rates may
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Corporate Internal Carbon Pricing: Global Trends and Challenges

be far lower. Companies may be reluctant toadopt ICP for the following reasons. Somecompanies think the GHG emissions reduction
policies would not significantly affect their
cash flows because they are not carbonintensive
companies.
Besides,somecompanies, particularly small and mediumsized enterprises (SMEs), do not adopt ICP
because of a lack of capacity to assess andrealise how to deal with potential climaterelated risks.

Second, the price levels are lower than
expected to achieve the global climate goal.
The CPLC concluded the carbon price levelshould reach USD 40-80/tCO2e by 2020 andUSD 50-100/tCO2e by 2030 in order to limit
global warming well below 1.5-2℃ in theReport of the High-Level Commission on Carbon
Prices, published in 2017. However, the review
of global internal carbon prices shows that theprice ranges were USD 0.01-908.85/tCO2e in
2017, and the median prices were USD
22/tCO2e in 2017 and USD 25/tCO2e in 2020.
Although the current internal carbon pricelevels are higher than explicit carbon prices
under the mandatory carbon pricing schemesaround the world (USD 0.08-137.24/tCO2e in2021), they still do not reach the expectedlevels needed to avoid irreversible climatechange. These low prices imply a gap between
companies’ awareness of climate risks andtheir practices in coping with such threats.
Third, although a growing level of anecdotal
evidence promotes the effectiveness of ICP atthe corporate level, scientific empiricalanalyses identifying the relationship between
ICP and the company’s GHG emissions
reductions remain inconclusive. In addition,
the companies’ preference for a shadow priceand an implicit price over an internal fee mayundermine the potential effectiveness of ICP.
While an internal fee affects the company
immediately upon its adoption by generating
costs, a shadow price and an implicit price tend
to affect the business in the future and notdrive the near-term GHG emissions reduction.
CONCLUSION
Given its advantages and benefits, ICP needs tobe encouraged. The government may support
the adoption of ICP in collaboration with theprivate sector and NGOs. The government andlarge companies may develop and showcase
ESI Policy Brief

the best practices of ICP. It will facilitate thelearning of SMEs interested in ICP but could
not adopt it owing to the lack of capacity andprovide large companies with an opportunity
to promote their environmental contributions
to the public. Also, the government and NGOs
may create consumer pressure for corporate
sustainability. Lastly, it is required to consider
how to raise the effectiveness of ICP incombination
withothercorporate
sustainability tools and measures.
WHAT TO LOOK OUT FOR● Continuous monitoring of ICP trends● GHG emissions reduction of companies
using ICP
● Impacts of increase in Singapore’s carbon
tax rates on the adoption of ICP among
companies in Singapore

Kim Jeong Won, PhD is a Research Fellow at theEnergy Studies Institute, National University ofSingapore.
David, C. Broadstock, PhD is a Senior Research
Fellow at the Energy Studies Institute, NationalUniversity of Singapore.
Ho Wei Yuan, Bradley is a Research Associate atthe Energy Studies Institute, National Universityof Singapore.

Keywords: Carbon Pricing, Internal Carbon
Pricing, Corporate Carbon Price, Climate Risk
Management
The views and opinions expressed in the ESI
Policy Briefs are those of the authors and do notnecessarily represent or reflect the views of theEnergy Studies Institute, NUS.

Copyright © 2022 Energy Studies Institute. ESIPolicy Briefs can be reproduced, provided priorwritten permission is obtained from ESI, thecontent is not modified without permission fromthe author(s), and due credit is given to theauthor(s) and ESI. Contact: Ms Jan Lui<jan.lui@nus.edu.sg>

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