A game-changer in climate action

The rise of internal carbon pricing

As climate change pressures mount, governments and corporations increasingly use internal carbon pricing to steer investments and policies, aiming for a sustainable future. This pricing mechanism assigns a financial value to greenhouse gas (GHG) emissions, helping organizations transition to low-carbon business models while mitigating economic risks associated with climate change regulations.

Growing Adoption of Internal Carbon Pricing

Many businesses and governments worldwide implement internal carbon pricing as a decision-making tool. Corporations use it to guide investment strategies, shift towards greener business models, and measure carbon footprints. Meanwhile, governments integrate carbon pricing into procurement, infrastructure projects, and climate policies to ensure environmentally responsible decision-making. Financial institutions have also joined the movement, incorporating carbon costs into project assessments. By factoring in the economic impact of emissions, they aim to align their lending portfolios with sustainable development goals. Additionally, the Carbon Disclosure Project (CDP) actively collects and reports on internal carbon pricing data, fostering transparency and improved decision-making.

Methods for Setting Internal Carbon Prices

Governments and businesses use different approaches to determine internal carbon pricing:

1. Social Cost of Carbon (SCC): Estimates the economic damage caused by a ton of GHG emissions, though forecasts are uncertain due to evolving economic and climate conditions.

2. Marginal Abatement Cost (MAC): Based on expected technological advancements, carbon pricing derives from the cost of reducing emissions to meet national targets.

3. Market-Based Pricing: This method uses the current and projected market value of emissions allowances, reflecting the rising costs of emission reductions over time.

Regardless of the method used, internal carbon prices are expected to increase over time as the accumulation of GHG emissions heightens the financial risks associated with climate change. This trend highlights the importance of accurate forecasting and adaptive strategies in maintaining an effective pricing system.

Best Practices for Carbon Pricing Implementation

Organizations are refining their strategies using global best practices as internal carbon pricing gains traction. Several institutions guide to improve implementation:

• The FASTER Principles (World Bank, OECD, IMF) emphasize fairness, policy alignment, stability, transparency, efficiency, and reliability.
• Emissions Trading in Practice Handbook (World Bank’s Partnership for Market Readiness) provides a step-by-step guide to designing emissions trading systems (ETS).
• Carbon Tax Guide (World Bank’s PMR) helps policymakers assess and implement carbon taxation policies.
• Domestic Carbon Crediting Mechanisms Guide (World Bank’s PMR) offers insights into setting up national carbon crediting systems to support policy objectives.
• The GHG Benchmarking for Climate Policy Instruments Guide (World Bank’s PMR) provides structured guidance for policymakers developing emissions reduction benchmarks.
• EU ETS Handbook (European Commission) details the European Emissions Trading System’s operation.
• Executive Guide to Carbon Pricing Leadership (UN Global Compact, World Resources Institute) explores corporate internal carbon pricing approaches and real-world applications.
• Best Practices for Businesses (Ecofys, CDP, The Generation Foundation) outlines corporate approaches to internal carbon pricing.

The Role of Financial Institutions

Financial institutions increasingly use internal carbon pricing to evaluate their investments by integrating the cost of carbon into economic analyses. This shift is driven by their commitment to understanding their carbon footprint and systematically incorporating the external costs of CO2 emissions into their project assessments. Doing so aligns with broader commitments to sustainable finance and low-carbon economic transitions.

Challenges in Implementing Internal Carbon Pricing

Despite its benefits, the implementation of internal carbon pricing faces several challenges:

1. Price Uncertainty: Market volatility and evolving regulations create difficulties in setting a consistent carbon price.
2. Sectoral Disparities: Industries with different carbon intensity levels require tailored pricing mechanisms to avoid economic disruptions.
3. Integration with National Policies: Aligning corporate carbon pricing with national and international carbon market frameworks remains complex.
4. Stakeholder Buy-In: Ensuring businesses, investors, and policymakers are aligned on pricing structures requires ongoing collaboration and education.

Addressing these challenges ensures that internal carbon pricing remains an effective tool for managing climate-related financial risks and reducing emissions.

Future of Internal Carbon Pricing

Experts predict that internal carbon pricing will be increasingly vital in economic and environmental policies. By embedding carbon costs into decision-making, organizations can drive innovation, enhance resilience, and accelerate the shift to a low-carbon economy.

As countries refine their carbon pricing mechanisms, lessons from past experiences will help shape more effective initiatives. Organizations that adopt a proactive approach to internal carbon pricing will be better positioned to navigate regulatory changes and capitalize on emerging opportunities in the green economy. With growing regulatory and market pressures, businesses and governments must act swiftly. Internal carbon pricing is not just a cost-management tool but a strategic imperative for a sustainable and climate-resilient future.

The views expressed here are those of the writer and do not necessarily represent the views of the Sarawak Tribune