Internal Carbon Pricing: How to Set and Use a Carbon Price

Internal carbon pricing puts a monetary value on a company’s greenhouse-gas emissions, so that higher-carbon choices appear more expensive when the business compares investments, suppliers or budgets. That can make a lower-carbon option financially preferable even if it costs more before emissions are taken into account.

The same £75 per tonne can have very different effects depending on how a company uses it. One option is a shadow price: the company adds a notional carbon cost when comparing two investments, but nobody is actually billed. Another is an internal carbon fee: a department is charged real money according to the emissions it creates.

That difference matters. A notional cost can be ignored if it has no formal place in the decision. A real charge comes out of somebody’s budget.

A 2025 study by the World Business Council for Sustainable Development, working with Boston Consulting Group, found that 1,753 companies across 56 countries were using internal carbon pricing in 2024, up 89% from 2021. The more revealing finding came from the people they interviewed: shadow prices often fail to influence behaviour because they do not feel like “real money”. View the study.

You can see the problem in a major investment decision. A company might add £100 for every tonne of emissions to the financial comparison between two pieces of machinery. If the directors making the decision are still free to choose the higher-emitting machine without explaining why, the carbon price has little authority. If the carbon cost changes the project’s expected financial return, affects the budget or becomes a condition of approval, it is much harder to ignore.

So the first design question is not “what price per tonne should we use?” It is “which decisions do we want the carbon price to affect?” That might mean major purchases and investments, supplier selection, travel budgets or the amount of money put into a climate fund.

What is internal carbon pricing?

Internal carbon pricing is a monetary value that an organisation voluntarily applies to its greenhouse-gas emissions when making business decisions.

It is normally expressed as a price for each tonne of carbon dioxide equivalent, written as tCO2e. “Carbon dioxide equivalent” is the standard way of combining the warming effect of carbon dioxide and other greenhouse gases into one comparable number. A company might, for example, use £75 for every tonne of CO2e.

A company might use that value when choosing between two major investments, charge departments according to the emissions they create, work out what it is already paying to cut emissions, or test how a future rise in carbon costs could affect a long-lived asset.

CDP, the global environmental disclosure organisation, recognises several versions of internal carbon pricing: shadow prices, internal fees, implicit prices and internal trading. They work differently, but the purpose is the same: make emissions visible in decisions that would otherwise be based mainly on cash cost, expected return or departmental budget.

A useful 2025 framework for setting internal carbon prices makes a simple point: choosing a price per tonne is not enough. The price also has to be built into decisions strongly enough to change what the company actually does. The framework was developed by Oxford Net Zero, a University of Oxford research programme, with Boston Consulting Group and carbon-market platform Patch.

It sets five tests for a good internal carbon price: it should fit the company’s climate goals, make sense in the company’s circumstances, be clear, be taken seriously by management and lead to action. I would pay most attention to those last two. A beautifully calculated price that nobody has to act on is not doing much. View the guidelines.

Internal carbon pricing vs carbon tax, emissions trading and carbon-credit prices

An internal carbon price is not the same thing as a carbon price imposed or created outside the company.

A carbon tax is set by government.

An emissions trading system sets a market price for regulated emissions. The UK Emissions Trading Scheme and the European Union Emissions Trading System are the two examples most relevant to many UK businesses.

A carbon-credit price is what a buyer pays for a particular carbon credit representing a reduction, avoided emission or removal.

An internal carbon price is different again: the company chooses it for its own decisions.

Those external prices can still be useful reference points. A company worried about future regulation may use an expected UK or EU emissions-trading price when testing whether a new factory or energy system will still make financial sense in ten or twenty years. A company creating a climate fund may look at the cost of the projects it expects that fund to support.

I would not simply copy one of those numbers and call it an internal carbon price. A £25 carbon credit does not tell you whether £25 per tonne is high enough to change a ten-year infrastructure decision. Equally, an expected regulatory price of £150 per tonne may be a sensible assumption for a long-lived asset without being the right amount to charge a department for this year’s business travel.

Internal carbon pricing models: shadow price, carbon fee and implicit price

The main internal carbon pricing models differ in one practical respect: whether the carbon price changes the analysis, moves actual money, or is inferred from money already being spent.

Internal carbon pricing model	Does money move?	What it is used for
Shadow price	No	Comparing investments, suppliers or future risks after adding a notional carbon cost
Internal carbon fee	Yes	Charging departments for emissions and potentially building a climate fund
Implicit carbon price	Already embedded in spending	Working out what the company is already paying to cut emissions
Internal carbon trading	Between internal teams	Giving teams emissions allowances that can be transferred or traded internally

A company can use more than one model. Boston Consulting Group, for example, combines emissions budgets with an internal charge. Microsoft has long charged its business groups for carbon, while companies making large, long-lived investments often use shadow prices when comparing those investments.

Shadow carbon pricing for investment and risk decisions

A shadow carbon price adds a hypothetical carbon cost to a decision without transferring cash between departments.

Suppose two factories have different construction costs and different lifetime emissions. Applying £100/tCO2e to those emissions changes the financial comparison even though the carbon amount never appears as an invoice.

This is particularly useful for major capital spending, such as factories, machinery, vehicles or energy systems, because it lets the finance team test whether an investment still makes sense if emitting carbon becomes more expensive in future.

The obvious weakness is that no money moves. If the carbon-adjusted answer appears on slide 27 and the people approving the investment can ignore it without comment, a £150 shadow price may have less influence than a £30 fee that actually hits somebody’s budget.

CDP calls this the depth of the mechanism. At one end, a company simply keeps an eye on carbon prices. At the other, a project can actually fail to gain approval because of its carbon-adjusted result. I would rather see a modest price with that kind of authority than an impressive headline number that everybody knows can be ignored.

Internal carbon fees and climate funds

An internal carbon fee charges an actual amount against emissions.

A department producing 5,000 tCO2e at a £40 internal fee would incur a £200,000 internal charge. The money can then be directed into an internal climate fund for energy efficiency, renewable energy, sustainable aviation fuel, supplier programmes or external climate finance.

Because budgets move, the incentive is harder to ignore than a shadow price.

Boston Consulting Group uses a particularly clear version. Managers are given an emissions budget. Emissions within that budget are charged at roughly $30 per tonne; emissions above it are charged at about $300. The firm says almost all budget owners stayed within their limits after combining those budgets with internal reporting and the tiered charge. View the case study.

The $300 rate is deliberately punitive. It is not meant to represent the market price of a carbon credit. It is meant to make exceeding the emissions budget expensive enough that the manager responsible notices.

Software company Autodesk uses its price for a different job. Its 2025 impact report says it raised the rate from $20 to $33 per tonne and linked it to spending through its Carbon Fund on cutting emissions, renewable energy, lower-carbon aviation fuel and measures addressing emissions that remain. View the report.

Both are internal carbon prices, but comparing $300 with $33 would tell you almost nothing. Boston Consulting Group is using the higher rate to discourage managers from exceeding an emissions budget. Autodesk is using its rate to help determine how much money goes into climate action.

Implicit carbon pricing and internal carbon trading

An implicit carbon price is calculated from what the company is already spending to reduce emissions.

If a project costs £2 million and is expected to avoid 40,000 tonnes over its useful life, the simple average implied cost is £50 per tonne before allowing for financing, timing and other benefits.

That figure can help the company compare different ways of cutting emissions and see what its existing carbon reduction plan is already costing.

It is backward-looking in a way a shadow price is not. The company is learning from actual expenditure rather than choosing a future decision price.

Internal carbon trading is less common. It gives different parts of the company emissions budgets or allowances that can be transferred between them. In a very large organisation that can create an internal market for emissions, but it adds complexity that most companies do not need when starting out.

How to set an internal carbon price

There is no universally correct internal carbon price per tonne, and copying another company’s rate is usually a poor shortcut.

A manufacturer deciding whether a gas-fired plant still makes sense in 2040 is dealing with a very different question from a consultancy charging teams for flight emissions. The manufacturer may need a rising shadow price to reflect the chance that emitting carbon becomes much more expensive under future regulation. The consultancy may need a fee high enough to make travel choices visible in departmental budgets and to finance alternatives.

So I would set the job first and the number second. Once the company knows which decision the price is meant to influence, the usual benchmarks become much easier to use intelligently.

Internal carbon price benchmarks: reduction costs, social cost and regulation

Companies commonly draw on four broad sources.

A marginal abatement cost curve compares different ways of cutting emissions and estimates the cost per tonne for each one. Despite the forbidding name, the basic question is simple: which reductions are cheap, which are expensive, and how much carbon does each option save? It can help a company set a price high enough to make worthwhile reduction projects compete for investment.

A social cost of carbon estimates the economic damage associated with an additional tonne of emissions. It can provide a broader societal reference but does not automatically tell the company what will change one of its own decisions.

Regulatory carbon prices, including prices in the UK and EU emissions-trading systems, are useful for businesses that may have to pay more for emissions in future.

Climate transition pathways are models showing how quickly emissions would need to fall under a particular climate goal. They can help a company decide whether its internal price should rise over time.

CDP also notes that companies look at what peers are doing, model different future carbon-price scenarios, consult internally and estimate how much investment will be needed to meet their climate goals.

The Oxford framework reaches much the same conclusion. Its emphasis on a price being both climate-compatible and contextual is a useful check against the temptation to lift a respectable-looking number from a report and apply it everywhere.

Uniform vs differentiated internal carbon prices

A uniform internal carbon price applies the same £/tCO2e across the organisation.

Its advantage is simplicity. Everyone knows the rate and calculations can be standardised.

A differentiated price changes by geography, business unit, emissions scope, activity or decision type.

That can make sense where the underlying decisions really are different. A European factory that may face rising emissions-trading costs over twenty years may warrant a different price from office travel in a country with no comparable regulation. A company might also use a high carbon price when judging a long-lived building or machine, while charging a lower real fee on this year’s operational emissions.

The price can also become over-engineered. If Finance needs a flowchart to work out which of twelve internal carbon rates applies, the system is probably too clever.

I would keep one rate unless a different rate changes a real decision. Exposure to the EU Emissions Trading System, a long-lived asset or unusually uncertain Scope 3 data are good reasons to differentiate. Organisational tidiness is not.

Escalating an internal carbon price over time

A static price can become increasingly unrealistic for long-lived investments.

If a company expects regulation to tighten or its own SBTi net-zero target to become harder to meet, it can set the carbon price to rise according to a published schedule.

That matters when a company is valuing an investment over many years. Without an escalating price, emissions expected in 2040 can end up being treated as though carbon will cost exactly the same then as it does today.

The rule for increasing the price should be visible. A number that rises every year because somebody in the sustainability team updates a spreadsheet is much harder for the finance team to trust than a published schedule with a stated source and review date.

How internal carbon pricing changes business decisions

Internal carbon pricing is most valuable where financial and emissions objectives would otherwise pull a decision in different directions.

CDP gives a useful map of where the price can bite. Scope 1 emissions, which come directly from sources the company owns or controls, often connect to production and investment. Scope 2 emissions, which come from purchased electricity and energy, connect to energy buying. Scope 3 emissions sit elsewhere in the value chain, so internal pricing can affect suppliers, purchasing, business travel, product design and research and development.

That is useful because it puts the carbon price into the part of the business that can actually change the emissions, rather than leaving it as another figure owned by the sustainability team.

Internal carbon pricing for major investments and financial returns

Major capital spending is where a shadow price can have the clearest financial effect.

The company estimates the emissions from each investment option, gives those emissions a monetary value and adds that value to the financial comparison. That can alter the project’s apparent cost, payback period or expected return.

Fibre manufacturer Lenzing, for example, reported in 2024 using a €75-per-tonne shadow price for proposed investments above €2 million. It calculates the expected financial return once in the normal way and again after adding the carbon cost, then uses that second figure when deciding which projects to prioritise. View the report.

The €75 figure is less interesting than that last step. If a company calculates a second return that includes the carbon cost but still approves projects using only the original financial calculation, the carbon price has become an extra reporting exercise rather than part of the investment decision.

Internal carbon pricing for procurement and supplier decisions

Procurement can apply a carbon price to emissions differences between bids, materials, logistics options or suppliers.

The calculation can be added to the normal comparison of what a supplier or product will cost over its life:

ordinary commercial cost + carbon cost = comparison value

This is especially useful where the lower-carbon option has a visible upfront premium but lower lifecycle emissions.

Procurement also exposes a trap that is easy to miss. If Supplier A has product-specific emissions data and Supplier B is represented by a rough spend-based estimate, applying £100/tCO2e does not make the comparison more rigorous. It can make a weak estimate look impressively exact.

Where the carbon adjustment is large enough to affect the award, I would improve the material emissions data before treating the result as decisive.

Internal carbon pricing for energy, travel and product decisions

For purchased electricity, an internal carbon price can help compare higher-carbon power with renewable supply, long-term renewable electricity contracts and energy-efficiency measures.

Travel can use a fee or budget mechanism, particularly where departments control the behaviour directly. Boston Consulting Group’s emissions-budget system is a current example of that approach.

For products and research and development, an internal price can bring future customer-use emissions into design choices before they are locked into the product.

I would not force the same mechanism across all three. Energy buying may suit a shadow price. Travel may respond better to a real charge on departmental budgets, worked out per journey with a flight carbon calculator. Product development may need a carbon test built into the formal approval process. What matters is whether the carbon value appears early enough to change the choice.

Internal carbon pricing worked example: when a shadow price changes an investment

A simple investment comparison shows what the price is supposed to do better than another definition.

Suppose a company is choosing between two pieces of equipment.

Project A costs £400,000 more than Project B over the relevant financial comparison, but emits 10,000 fewer tCO2e over the period being assessed.

Without a carbon price, Project B wins by £400,000.

At an internal shadow price of £75/tCO2e, the emissions difference is worth:

10,000 tCO2e × £75 = £750,000

Once that £750,000 carbon cost is included, Project A moves from being £400,000 more expensive to being £350,000 better in the comparison.

That does not mean the company is legally obliged to choose Project A. It means the internal carbon price has exposed a trade-off that the conventional financial case did not show.

If the group approving the investment is required to use that revised comparison, the internal carbon price can change the decision.

If the £750,000 appears in an appendix and nobody has to respond to it, the same £75 price is largely decorative.

Internal carbon pricing across Scope 1, 2 and 3 emissions

Internal carbon pricing can cover Scope 1, Scope 2 and Scope 3 emissions, but the same rate and enforcement mechanism do not have to apply equally to all three.

Scope 1 covers direct emissions from sources the company owns or controls, such as boilers, furnaces and company vehicles. Those emissions often connect directly to equipment, fuels and production decisions.

Scope 2 covers emissions from purchased electricity and energy, so an internal carbon price can affect renewable-energy contracts and efficiency investments.

Scope 3 covers other emissions across the value chain. On the purchasing side that can mean suppliers, freight and business travel; on the customer side it can mean the emissions created when products are used.

The difficult part is often data.

If a large Scope 3 category is still estimated using rough spend data, as it often is in a first business carbon footprint,, applying a high internal price can turn an uncertain emissions estimate into an apparently exact financial number. I would not let the multiplication create confidence the underlying footprint does not deserve.

That does not mean waiting for perfect Scope 3 data. It means matching the strength of the financial decision to the quality of the emissions data behind it.

A differentiated approach can therefore make sense: stronger enforcement where data and control are good, and more cautious use where they are not.

Our Scope 1, 2 and 3 emissions guide explains how those parts of a company’s greenhouse-gas footprint are calculated in more detail.

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Internal carbon pricing and carbon credits

An internal carbon price is not the price of a carbon credit.

The distinction is easy to lose once an internal fee starts generating a pot of money for climate action.

Suppose a company sets an internal fee at £80/tCO2e. It might use the resulting fund for efficiency projects, supplier programmes, sustainable aviation fuel and high-integrity carbon finance. That does not mean every carbon credit it buys should cost £80, or that paying £80 removes the original tonne from the company’s reported greenhouse-gas footprint.

The £80 is the company’s internal financial mechanism.

The credit price is the price of a particular environmental unit.

A beyond value chain mitigation budget is another concept again. This is money a company puts into climate action outside its own value chain. One way to size that budget is to apply a monetary value to the emissions the company has not yet eliminated. That is one use of carbon valuation, but it is not the same thing as the wider practice of internal carbon pricing.

Internal carbon fees, climate funds and beyond value chain mitigation

An internal fee can be a practical way of generating a climate budget.

Microsoft’s long-running model links a carbon-reduction policy, a price on emissions and a fund created from the charges paid by its business groups. Autodesk’s Carbon Fund similarly links its internal carbon price to spending on cutting emissions and dealing with emissions that remain.

Linking the charge to a fund has an obvious attraction: the teams creating emissions also help finance the response. But the fund can quickly become muddled if every use is described as though it reduces the company’s footprint.

Money spent on efficiency, electrification or supplier change may reduce the company’s reported greenhouse-gas footprint. Money spent on carbon projects or carbon credits outside the value chain does not. I would keep those two uses, or at least those two accounting outcomes, visibly separate even if they are financed by the same internal fee.

See our guide to beyond value chain mitigation for the external climate-finance side.

How to implement internal carbon pricing in a business

In practice, internal carbon pricing works only when it is built into a process that already has authority. That might be the paper used to approve a major investment, the scoring system used to choose suppliers, a travel budget, the formal approval stages for a new product or a real charge against a department. A separate sustainability spreadsheet is much easier to ignore.

Set the internal carbon pricing objective and decision rights

Decide what the price is for.

Is the company trying to see how future carbon regulation could affect an investment, steer money towards lower-carbon equipment, change supplier choices, create a climate fund or do several of those things?

Then decide who has to use the result.

If the people approving an investment can ignore the carbon-adjusted financial result without explanation, the system is weak even if the price itself has been calculated carefully.

Define the emissions boundary and carbon-price coverage

Use the company’s greenhouse-gas footprint to decide which emissions, activities, countries and parts of the business are covered.

Do not automatically price everything on day one.

Start where emissions are large enough to matter and where the company still has a real choice. That might be new machinery, purchased energy, business travel or a high-emitting category of goods and services.

The coverage can expand as the data improve and the company becomes clearer about who is responsible for acting on the price.

Embed the internal carbon price in financial and procurement processes

Put the price into the forms, models and approvals people already use.

That can mean adding the carbon cost to the financial case for a major investment, adding it to the lifetime-cost comparison used in procurement, charging an internal fee through departmental budgets or making carbon performance one of the conditions a new product must meet before it proceeds.

A parallel sustainability spreadsheet will always be easier to ignore than a number inside the financial process.

Review whether the carbon price changed decisions

After a year, do not ask only whether teams used the price.

Ask what changed because of it.

Which investment was redesigned or rejected? Which supplier moved up the ranking? Which travel or energy budget changed? How much capital moved towards lower-carbon options? Did the fee raise the expected amount, and where did that money go?

If the answer is “nothing”, either the price is too low, it is being applied in the wrong places, the data are too weak or the people making the decision are free to ignore it.

Talk to us about a carbon price

Internal carbon pricing disclosure: CDP, IFRS S2 and European reporting rules

Internal carbon pricing can also appear in corporate climate reporting. In the UK, SECR reporting does not ask about it, but the international and European standards below do.

CDP, the environmental disclosure organisation, asks companies using an internal carbon price to explain why they use it, where it applies and what price they have chosen.

IFRS S2 is an international climate-disclosure standard for investors. It asks companies using internal carbon prices to explain how those prices affect decisions and to disclose the price per tonne.

For companies reporting under the European Sustainability Reporting Standards, a specific requirement known as ESRS E1-8 asks for more detail, including the type of pricing scheme, where it applies, how the price was set and how much of the company’s emissions it covers.

IFRS S2 internal carbon price disclosure

Under IFRS S2, a company using an internal carbon price should explain whether and how it uses that price in decisions and state the price it applies to each tonne of greenhouse-gas emissions.

That wording is revealing. IFRS S2 is not asking only whether a company has a carbon price; it asks how the price is used in decisions. A number with no decision attached to it tells investors very little. View the standard.

ESRS E1-8 internal carbon pricing disclosure

Under the European reporting rules, ESRS E1-8 asks a company using internal carbon pricing to disclose:

• what kind of internal pricing scheme it uses;
• which activities, countries and parts of the business it covers;
• the prices used and how they were chosen;
• roughly how much of its Scope 1, Scope 2 and, where relevant, Scope 3 emissions are covered.

The guidance also asks companies to explain whether the carbon prices in their internal schemes are consistent with those used in the accounts, for example when valuing assets or testing them for impairment. In plain English, if the transition plan assumes carbon will become expensive but the company’s valuation of a long-lived asset assumes little or no future carbon cost, that mismatch may need explaining. View the requirement.

Internal carbon pricing examples: Boston Consulting Group, Autodesk and Microsoft

The three examples are worth comparing because the companies are using internal carbon pricing for different jobs.

Boston Consulting Group gives managers emissions budgets and applies a much higher charge when those budgets are exceeded. The purpose is behavioural: make excess emissions expensive enough that managers change what they do.

Autodesk reported a $33-per-tonne internal price in its 2025 impact report, up from $20. It links the price to spending through its Carbon Fund.

Microsoft has charged its business groups for carbon since 2012 and uses the money raised to support emissions reduction and other climate measures.

I would not copy any of those prices without first copying the question each company was trying to solve. A number only makes sense beside the rule attached to it.

How to tell whether internal carbon pricing is working

After a year, I would ask to see the decisions that changed, not the carbon-price policy document.

I would review an internal carbon pricing system against five questions:

1. What proportion of the company’s significant emissions is actually covered?
2. Which financial, procurement or operational decisions are required to use it?
3. Which decisions changed because adding the carbon cost altered the normal financial comparison?
4. Is the price still high enough, and relevant enough, to influence those decisions?
5. If money is collected, can the company show how the fund was used?

The Oxford-led framework provides a useful second check, but the test I would press hardest is whether the price actually prompted action. If it has been running for two years and nobody can point to a supplier, investment, journey, product or budget that changed because of it, I would redesign the system rather than congratulate the company for having an internal carbon price.

Internal carbon pricing FAQ

Internal carbon pricing support from C Level

C Level already works at both ends of the internal carbon pricing decision: calculating the emissions base through our carbon footprint consultancy and helping companies decide what to do with the climate finance that follows.

An internal carbon pricing project sits between those two.

The first job is to make sure the emissions data are good enough for the decision. The next is to decide what the price is meant to change, choose a defensible price per tonne and build it into the financial or supplier-selection process where the decision is actually made.

Where an internal fee creates a climate fund, we can also help separate money used to cut the company’s own emissions from money used to support climate projects outside its value chain, so that the accounting and public claims remain clear under frameworks such as the VCMI Claims Code.

• Calculate your business carbon footprint
• Read our Scope 1, 2 and 3 guide
• Read our beyond value chain mitigation guide
• Read how to calculate a business carbon footprint
• See our carbon footprint consultancy
• Read our guide to carbon credits for business

Talk to us about internal carbon pricing

Sources and methodology

This article was checked against current primary and high-authority sources on 24 September 2026.

• WBCSD with Boston Consulting Group, Integrating climate with financials: Internal Carbon Pricing, 2025. Source for the number of companies using internal carbon pricing and the finding that shadow prices often do not feel like real money. View the study.
• Oxford Net Zero with Boston Consulting Group and Patch, Guidelines for setting a net zero-aligned internal carbon price. Source for the five tests of a good internal carbon price. View the guidelines.
• CDP, Technical Note: Carbon Pricing. Source for the types of internal carbon price, the depth of a mechanism and where a price applies across Scope 1, 2 and 3. View the technical note.
• Boston Consulting Group, How BCG Cut Emissions While Growing Revenue, 2026. Source for the emissions budgets and the two internal charges. View the case study.
• Autodesk, FY25 Impact Report. Source for the rise from $20 to $33 per tonne and the uses of the Carbon Fund. View the report.
• Lenzing, Annual and Sustainability Report 2024, page 119. Source for the €75 shadow price on investments above €2 million and the second return used to prioritise projects. View the report.
• Microsoft, Carbon Fee Guide. Source for Microsoft’s internal carbon fee on its business groups and the fund it pays for. View the guide.
• IFRS Foundation, IFRS S2 Climate-related Disclosures. Source for what IFRS S2 asks of a company that uses an internal carbon price: whether and how it is used in decisions, and the price per tonne. View the standard.
• EFRAG, ESRS E1-8 Internal carbon pricing. Source for what the European reporting rules ask a company to disclose, and application requirement 65 on consistency with the financial statements. View the requirement.