Internal Carbon Pricing (ICP) and impact to investment decisions ?

EcoVision
Nov 13
2 min read

Internal Carbon Pricing (ICP) is a tool companies use to assign a monetary value to their own greenhouse‑gas emissions, even if they don’t yet pay an external carbon tax.

It’s an internal accounting mechanism that helps them anticipate future carbon costs, guide investments, and steer strategy toward a low‑carbon model.

“We assume each tonne of CO₂  we emit costs  us  X  dollars — and use that assumption when we make business decisions.”

Types of Internal Carbon Pricing

Type	Description	Typical Use Case
Shadow Price	A hypothetical price used in financial models (e.g. USD 60 /  tCO₂e)	To test project sensitivity, investment appraisal
Internal Carbon Fee	Business units pay an actual internal charge per  tCO₂, funds redirected to sustainability projects	Used by Microsoft, Swiss Re, HSBC etc.
Implicit / Hybrid Price	Back‑calculated from existing actions (like offset budgets or ESG investments)	To benchmark or communicate carbon intensity

Typical Internal Carbon Price Levels (2024–2025)

Region / Sector	Common Range	Notes
Hong  Kong  &  Asia – multinationals	US $25 – 80 / tCO₂e	Often aligned with EU  ETS or  future  HK  ETS  signals
Global corporates (Fortune  500 avg.)	US $40 – 100 / tCO₂e	Many align with IEA  Net‑Zero scenarios

(Source: CDP 2024  Carbon  Pricing  Report  &  World  Bank  Carbon  Pricing  Dashboard.)

💰 Impact on Investment Decisions

Decision Area	How ICP Influences It	Result / Example
Capital Budgeting	Adds a “carbon cost” line  item to evaluate ROI	High‑emission assets show lower returns under internal CO₂  charges
Project Screening	Projects failing carbon cost thresholds are delayed /  cancelled	Favors renewable, energy‑efficient options
M&A and Portfolio  Management	Carbon‑intensive acquisitions face higher due  diligence risk  premiums	Divestment from coal, oil  assets
Pricing & Product Strategy	Encourages low‑carbon products with better lifecycle performance	Drives innovation  in  sustainable  offerings
Disclosures & Investor Relations	Demonstrates climate  governance and  TCFD  alignment	Enhances ESG‑related  valuation  and  access  to  capital

Why Investors Care

Investors use internal carbon pricing to evaluate exposure to carbon regulation and check if firms are preparing for policy shifts (and thus the embedded transition risk) like carbon taxes or emissions‑trading schemes.
Companies that use realistic prices (e.g. ≥ US $75 / tCO₂e, consistent with IEA  Net‑Zero  by  2050) are often seen as better positioned against future transition risks.

✅ In Short

Internal Carbon Pricing = Financial lens on climate impact. It internalizes the cost of carbon today, shaping investment, procurement, and innovation before regulators force it. Effect: redirects capital toward low‑carbon, energy‑efficient, and resilient assets — while strengthening credibility in ESG and climate disclosure.