Carbon risk and its effects are fast approaching, as seen in January 2021, when the Bank of England alerted businesses about the surge in carbon price to $100 per ton.
Further, the UK Government has set out a system for businesses to report their carbon-related risks by 2050, aligned with the Task Force on Climate-related Financial Disclosures (TCFD) standards. Some industries, specifically those that invest in other areas of the economy, will expect to undergo a commencing effect of interest where there are carbon-related business risks. Also, with governments signed up to carbon reduction targets in line with the Paris Agreement, many are introducing carbon pricing mechanisms to cut emissions; this makes the timeline for change far more straightforward than it has ever been.
Internal carbon pricing generally takes one of three forms:
Internal carbon fee
These are monetary values on each ton of carbon emissions, which is readily understandable throughout the organisation. The fee creates a dedicated revenue or investment stream to fund the company's emissions reduction efforts. The observed price range for companies using an internal carbon fee ranges from $5 to $20 per metric ton.
Shadow price
It is a speculative price on carbon to help long-term business plan their investment strategies. They also encourage companies for low-carbon investments and prepare for future regulation using an ESG platform. Certain companies employ a shadow price much higher than the standard $2-$893 per ton.
Implicit price
This pricing is based on the value the company agrees to spend to reduce greenhouse gas emissions and the cost of abiding by government regulations.
Benefits of setting an Internal carbon pricing
Internal carbon pricing is a crucial risk-reduction means with numerous benefits that focus on climate action and can be combined with other methods to transition towards the advancement of low-carbon projects.
Establishing an internal carbon price can offer significant benefits. While the drivers are specific to each company, the general benefit schemes are as follows,
Business managers can control transition risk, support corporate values, and enhance the investment decision-making process.