Internal Carbon Pricing: How to Set and Use a Carbon Price
Internal carbon pricing means your organisation puts its own money value on each tonne of greenhouse gas it emits, then uses that number in everyday decisions. You can use it as a hypothetical figure in investment appraisals (a shadow price) or as a real charge on business units (an internal carbon fee). Either way, the aim is the same: make emissions visible in the language finance teams already speak.
This guide covers how the two approaches differ, how to pick a price per tonne, how to roll one out without a revolt in the finance team, and what UK reporting rules now say about it.
Key takeaways
A shadow price changes how projects are scored on paper. An internal fee moves real money between budgets. Most organisations start with the first and graduate to the second.
The price should be anchored to something defensible: a regulatory price, the social cost of carbon or your own abatement costs. Revisit it every year.
Start with the best emissions data you have. The pricing exercise itself will improve the data.
Under UK SRS S2, based on the ISSB standard, the way you apply a carbon price in decisions and the price per tonne are both disclosure items.
If fee revenue vanishes into general funds, staff treat the fee as a tax. Ring-fence it for decarbonisation projects.
What internal carbon pricing actually is
An internal carbon price is a value an organisation sets voluntarily to account for the economic cost of its own emissions. Nobody forces you to adopt one, which is why it is called internal. Ramboll’s beginner’s guide describes it as a tool that lets a business assign a monetary value to its own carbon emissions, and notes that mechanisms vary widely between businesses and sectors.
The point is not carbon accounting. You already count tonnes. The point is decision-making. According to the Policy Levers Library, a price translates abstract climate targets into financial metrics, so that emissions become an explicit factor in capital expenditure budgeting rather than an afterthought.
Think of a simple case. Two boiler replacements cost almost the same upfront. One gas boiler will emit far more over fifteen years. Without a carbon price, the spreadsheet shows two similar options. With a price of, say, £100 per tonne, the difference in lifetime emissions becomes a line in the cost comparison, and the choice looks different.
Shadow price or internal carbon fee?
The two conventional methods are carbon charges and shadow prices. Both set an explicit price per tonne. They differ in what happens next.
Shadow price | Internal carbon fee | |
What it is | A hypothetical cost added to project appraisals | A real charge levied on business units for their emissions |
Does cash move? | No | Yes |
Typical use | Capital investment decisions, scenario analysis, stress-testing | Changing day-to-day operating behaviour, funding decarbonisation |
Data needed | Project-level emissions estimates | Reliable emissions data attributed to each business unit |
Main risk | Ignored if it never changes a decision | Resentment if seen as a tax |
Where it fits | Early stage | Mature stage |
The Carbon Trust explains that a shadow price stress-tests projects against future carbon-constrained markets without moving cash, and reports it is used by over 60% of CDP reporting companies. Internal fees, by contrast, charge business units for their emissions, and the proceeds are typically reinvested into company-wide decarbonisation projects.
A hybrid is common
Many organisations run both. A shadow price governs big, long-lived investments such as plant, buildings and fleets. A smaller fee applies to operating emissions such as business travel or energy use. The two can use the same figure or different ones, but you should be able to explain why.
Which should you start with?
The same Carbon Trust analysis points to a common evolution: begin with a shadow price for long-term capex stress-testing, to avoid stranded assets, and move to a fee only once emissions data collection is robust across all scopes. Starting with a fee too early tends to create internal resistance, because it is hard to attribute emissions accurately to individual business units.
If your data is patchy, that is your answer. Start with a shadow price.
How to choose a price per tonne
There is no single correct number. A firm may base its price on several reference points, including the social cost of carbon, the price of voluntary carbon instruments, the cost of mitigation or a regulatory price.
Option 1: a regulatory price
This is the easiest to defend to a finance director. In the UK, the UK ETS Authority determined a carbon price of £49.41 per tonne for the scheme year beginning 1 January 2026, a figure used for civil penalties. It reflects what the market has recently paid, so it shows what regulated emitters face today. It does not tell you where prices may be in 2035, which is what a capital appraisal needs.
Option 2: a climate-aligned price
For a price based on global climate goals, the World Bank’s paper on the shadow price of carbon cites the High-Level Commission on Carbon Prices. It recommended USD 40 to 80 per tonne of CO2e in 2020, rising to USD 50 to 100 by 2030, in 2017 US dollar equivalents, to stay consistent with the Paris Agreement temperature goals. Organisations often adjust such figures for local regulatory risk or regional markets such as the EU ETS.
If you operate across Europe and Africa, you will likely face very different carbon policy environments. A single global figure can still work as a corporate floor, with a higher price applied where regulation is tighter.
Option 3: your own abatement cost
Some organisations set the price at the marginal cost of the reductions they actually need to make to hit a target. If your next tranche of cuts costs around a given amount per tonne, a price at that level helps those projects win funding. This links the price directly to your own net-zero plan.
Getting the level right
The level matters more than the method. As the Microsoft sustainability blog describes it, too low a price fails to change behaviour or trigger innovation, while too high a price can cause unreasonable hardship for departments. Treat the price as a living figure: calibrate it annually and expect to raise it over time.
Setting it up step by step
Name the decision you want to change. Capex approvals? Supplier selection? Travel? A price with no decision attached is decoration.
Set the boundary. Align the price with your greenhouse gas inventory. The GHG Protocol’s December 2025 progress update on its Corporate Standard revision is the reference for the accounting principles (relevance, completeness, consistency, transparency and accuracy) your inventory should follow. If departments report one figure for compliance and another for pricing, leadership will stop trusting either.
Pick the method. Shadow price, fee or hybrid, using the table above.
Choose the number. Document the reference point and the reasoning, so you can explain it to auditors and your board.
Decide where the money goes (fees only). Ring-fence it. More on that below.
Pilot in one or two units. A finance-led pilot on a single investment round teaches you more than a company-wide launch.
Review annually. Update the price, test whether it changed any decision and publish the results internally.
Do not wait for perfect data
A frequent mistake is waiting until emissions data is 100% accurate. The Policy Levers Library argues the opposite: start with the best available data and let the pricing process improve it, because business units suddenly have a financial reason to track and report their emissions properly.
A practical way to begin is with Scope 1 and 2, where data is usually good, then extend to Scope 3 as supplier data improves. Scope 3 is often where the largest share sits, as one industrial manufacturer’s first disclosure showed in our coverage of Worthington Enterprises’ first Scope 3 report.
Making a fee work: where the money goes
Fee schemes succeed or fail on what happens to the revenue. The Policy Levers Library finds that if fees disappear into general corporate revenue, departments see the mechanism as a tax, which kills the buy-in needed for real behaviour change. The remedy is a dedicated climate budget or investment fund, with transparent reporting on how it is spent, for example on energy efficiency projects.
This also gives business units something to bid for. A site manager who pays a fee on heating emissions has every reason to propose insulation or a heat pump when there is a pot that funds it.
Microsoft’s carbon fee programme is a well-known example of a fee designed to accelerate decarbonisation internally and generate funding for reduction and removal efforts. It began in 2012 with a focus on Scope 1, Scope 2 and some business travel emissions. It is a very large company, so treat it as an illustration of the mechanism rather than a template for your own price.
What UK reporting now expects
If you are a UK business, internal carbon pricing is moving from good practice towards something you may have to explain. IFRS S2, the ISSB climate standard, includes internal carbon prices among its climate-related metrics. The UK’s adopted version, UK SRS S2, keeps the requirement. An entity must disclose:
an explanation of whether and how it applies a carbon price in decision-making, for example in investment decisions, transfer pricing and scenario analysis; and
the price per metric tonne of greenhouse gas emissions that it uses to assess the costs of those emissions.
Whether and when these standards apply to you depends on your size, listing status and any future UK government requirements, so check the current position with your auditor or legal adviser before relying on this summary. What is already clear is the direction of travel: if you use a carbon price, you will be expected to say what it is and how it shapes decisions. If you do not, you should be ready to explain why not.
This is another reason to keep the price documented and consistent. A figure that your finance team uses in appraisals but your sustainability team publishes differently is the ‘data silo’ problem in its most visible form.
Common pitfalls
A price that never bites. If every project would have been approved anyway, the price is cosmetic. Run past decisions through the price to see whether any would have changed.
Mismatched boundaries. Pricing Scope 1 and 2 while the inventory you report covers Scope 3 leaves leadership with two versions of the truth.
One-off setting. A price fixed in 2022 and never moved will not reflect a tightening carbon market. Build an annual review into your budget cycle.
Confusing it with offsetting. An internal price is a management tool. Buying credits is a separate decision, and the two should not be conflated in your reporting. If you want to understand the market side, our course on carbon trading covers the basics, and our news piece on a corporate carbon credit investment service shows how large buyers are approaching credits.
Poor behavioural design. Fees with no way to respond (a unit cannot change its energy supply, for instance) just move cost around. Pair the fee with the means to cut emissions.
Where this fits in a wider ESG strategy
A carbon price works best when it is one part of a joined-up plan: inventory, targets, capital allocation, reporting and training. Our piece on an integrated ESG strategy sets out how these parts connect, and our overview of performance contracts and leasing shows one way to fund efficiency projects that a carbon price makes attractive.
For teams that need the numbers underneath, the course on emissions and greenhouse gas accounting covers how to build the inventory a carbon price depends on, and the carbon footprint reduction course looks at what to do with the results.
How Exereco can help
We bring ESG news, advisory support, reporting software, training and a community of practitioners together, with a focus on Europe and Africa. If you are weighing a shadow price or an internal fee and want to align it with your emissions reporting, our climate action page is the place to start, and you can reach the wider team through Exereco.
FAQ
What is the difference between a shadow carbon price and an internal carbon fee?
A shadow price is a hypothetical cost added to investment analysis, so no money changes hands. An internal fee is a real charge on business units for their emissions, with proceeds usually reinvested in decarbonisation. Many organisations start with a shadow price and add a fee later.
How much should an internal carbon price be?
There is no universal figure. You can anchor it to a regulatory price such as the UK ETS value of £49.41 per tonne for 2026, to climate-aligned ranges such as the High-Level Commission’s USD 50 to 100 per tonne by 2030, or to your own abatement costs. Whatever you choose, document the reasoning and review it annually.
Do we need perfect emissions data before we start?
No. Practitioners advise starting with the best data you have and improving it as you go, since a price gives business units a reason to measure properly. A shadow price on capital projects is a sensible first step while data matures.
Is internal carbon pricing mandatory in the UK?
Putting a price on carbon internally is voluntary. However, UK SRS S2 includes disclosure items on whether and how you use a carbon price in decisions and what the price per tonne is. Whether the standard applies to your organisation depends on its scope and on government decisions, so confirm this with your adviser.
Who should own the carbon price inside a company?
Finance and sustainability should share it. Finance embeds it in appraisal and budgeting, while sustainability owns the emissions data and the link to targets. Having a senior sponsor, often the finance director, helps the price carry weight in real decisions.
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