Internal Carbon Pricing (ICP) is increasingly recognized as a powerful tool for organizations aiming to drive positive change by valuing greenhouse gas (GHG) emissions. It incentivizes low-carbon decision-making and helps companies meet external regulations like emissions trading systems. A truly effective carbon price isn’t just informational; it’s integral to decision-making processes, garnering consistent buy-in from key stakeholders.
During a WBCSD climate peer problem-solving session, member companies identified three major hurdles: determining the optimal internal carbon price, securing buy-in from key decision-makers, and effectively using internal carbon pricing to reduce scope 3 emissions. This guide explores strategies to overcome these challenges and underscores the importance of ICP in achieving ambitious climate goals.
Establishing Your Internal Carbon Price
Selecting the appropriate internal carbon price is complex, demanding key decisions about price level, update frequency, and scope. Companies often struggle to balance a uniform price across varied contexts and projects, especially amidst cap-and-trade schemes with differing jurisdictional prices.
To navigate these complexities, define clear objectives and align the price with decarbonization targets. A marginal CO2 abatement cost curve can ensure that actions needed to reach those targets become cost-positive or cost-neutral at the set price level. A regional benchmark analysis of peers and regulations provides another valuable perspective. Crucially, this benchmark should be regularly reassessed to keep the internal carbon price aligned with market dynamics, regulatory frameworks, and organizational goals.
Another challenge arises when the internal carbon price lags behind actual external carbon regulations. Progressive companies will anticipate future regulatory and market shifts. This forward-thinking approach distinguishes corporate leadership and exemplifies best practice.
Internal carbon pricing strategies and implementation considerations
Gaining Stakeholder Buy-In
Securing support from key decision-makers necessitates demonstrating the value of internal carbon pricing across different business functions and the organization as a whole. Integrating the internal carbon price into existing processes and promoting inter-functional collaboration is paramount.
To secure buy-in, a business scenario analysis showcasing the anticipated CO2 price in the medium and long term can be highly effective. Linking variable compensation targets to ICP implementation incentivizes senior stakeholders. Reinforce your case by highlighting additional business benefits beyond CO2 reduction, like Swiss Re’s use of internal carbon levies to fund the compensation of residual emissions through high-quality carbon removal projects.
Leveraging ICP for Scope 3 Emissions Reduction
Using internal carbon pricing to address supply chain emissions presents unique challenges beyond business travel. To effectively incorporate carbon cost into decision-making, businesses should integrate the internal carbon price into procurement tenders, investment evaluations, and product development processes.
Starting with pilot projects focused on high-impact areas and scaling up based on business value is a pragmatic approach. However, for ICP to truly drive Scope 3 emissions reductions, it must be implemented alongside complementary policies, targets, and effective carbon accounting, ensuring a comprehensive emissions reduction strategy.
Conclusion
By carefully addressing these considerations and challenges, companies can create an internal carbon pricing strategy that drives informed decision-making, secures buy-in from key stakeholders, and effectively reduces both direct and indirect emissions across their value chains. Internal carbon pricing is not just a financial tool; it is a strategic imperative for a sustainable future.
Want to network with other organizations and find out more? WBCSD is currently developing a series of climate peer problem-solving sessions, where professionals can collaboratively address their climate challenges with like-minded peers in a supportive environment.
