Internal CO₂ Pricing: A Strategic Tool for Sustainable Business Decisions

An internal CO₂ price helps companies integrate their emissions into business decisions and prepare for future climate regulations. It is set internally, influences investments, and promotes sustainable strategies. As more governments introduce carbon pricing and emissions trading systems, internal CO₂ pricing is becoming a proactive tool for companies to anticipate regulatory changes and align with global climate goals. According to the World Bank, over 70 carbon pricing initiatives are in operation worldwide, covering about 23% of global greenhouse gas emissions (World Bank Carbon Pricing Dashboard).

Overview:

• What is it? An internal company price for CO₂ emissions that makes costs visible and supports climate-friendly decisions. This "shadow price" is not paid to regulators but is used internally to guide business decisions and investments (CDP Internal Carbon Pricing Guidance).
• Why is it important? Preparation for rising statutory CO₂ costs, transparency for investors and customers, and achieving climate targets. Internal pricing also signals to stakeholders that a company is serious about climate action and risk management (McKinsey: Internal Carbon Pricing).
• Examples: Companies like Swiss Re, Panasonic, and Bayer set CO₂ prices from 50 to 200 US dollars per ton to steer investments and emission reductions. For example, Swiss Re introduced a $100 per ton internal carbon levy in 2021, planning to increase it to $200 by 2030.
• Regulation in Germany: Fixed CO₂ prices (2025: €55/ton) and the Fuel Emissions Trading Act (BEHG) provide a foundation. These regulatory frameworks are part of the EU’s broader push for carbon neutrality by 2050 (Clean Energy Wire: Germany's Carbon Pricing).

Benefits:

• Better planning for future CO₂ costs and regulatory risks.
• Promotion of environmentally friendly investments and supply chains, as internal pricing can shift capital toward low-carbon solutions.
• Support for Germany’s climate targets by 2045 and alignment with international climate commitments.

Conclusion: Companies that act now secure competitive advantages and actively contribute to climate neutrality. According to CDP, firms with internal carbon pricing are more likely to achieve emissions reductions and demonstrate resilience to future carbon costs (CDP: Internal Carbon Pricing 2023).

How to Set Up Internal CO₂ Prices

Introducing an internal CO₂ price requires a clear strategy and support across the entire company. The first step: establishing a solid foundation—the so-called emissions baseline. This process is critical, as accurate emissions data underpins effective carbon pricing and climate action (US EPA: GHG Inventory Guidance).

Calculate Your Emissions Baseline

To introduce an internal CO₂ price, you must first accurately record all emissions. Without reliable data, any calculation remains imprecise.

The GHG Protocol offers proven guidance for creating an emissions inventory. Companies should consider all three scope categories: direct emissions from owned sources (Scope 1), indirect emissions from purchased energy (Scope 2), and all other indirect emissions along the value chain (Scope 3). The GHG Protocol is the most widely used international accounting tool for government and business leaders to understand, quantify, and manage greenhouse gas emissions.

For emissions in the transport sector, the GLEC Framework is the international standard. It is compatible with the Greenhouse Gas Protocol and CDP reporting, offering flexible application—from basic requirements to complex calculations. The GLEC Framework is also aligned with ISO 14083, ensuring global consistency in logistics emissions accounting (Smart Freight Centre: GLEC Framework).

A real-world example: VRTO, a terminal operator association at one of Europe’s largest ports, implemented the GLEC Framework in 2014 to establish an emissions baseline. Despite a 43 percent increase in container volume between 2008 and 2014, GHG emissions per container were reduced by 17.85 percent—mainly by switching from fossil fuels to electric equipment.

"The GLEC Framework Version 3.0 helps companies calculate their logistics emissions in line with ISO 14083 by translating them into practical and comprehensive business requirements, using real-world examples." – Kathrin Schuller, Program Lead of GLEC at Smart Freight Centre

Companies with well-developed accounting and reporting systems can apply the GLEC Framework independently. Firms with less mature systems should seek support from the Smart Freight Centre (SFC) or SFC-accredited partners. Key parameters should be captured in the Transport Management System and integrated into calculations.

Based on this data, the internal CO₂ price can be set.

Determine Your CO₂ Price

Setting an internal CO₂ price requires considering several factors: the social cost of carbon, future regulatory developments, internal organizational incentives, industry benchmarks, market trends, and the cost of avoidance measures. The social cost of carbon, for example, is an estimate of the economic damages associated with a metric ton of CO₂ emissions and is used by governments and companies to inform policy and investment decisions (US EPA: Social Cost of Carbon).

A reference point: The national fixed price of €55 per ton of CO₂ equivalent for 2025 provides a solid foundation.

Companies take different approaches to tailor the CO₂ price to their business processes:

• Teijin, a Japanese company, started in 2021 with a CO₂ price of €50 per ton for Scope 1 and 2 emissions in capital investments. In 2023, the price was doubled to €100 per ton and extended to M&A projects, renewable energy procurement, and supply chain emissions.
• Panasonic introduced a pilot system in fiscal year 2024 with a price of 20,000 yen per ton of CO₂ (approx. $143 USD), initially for investment decisions in Living Appliances and Solutions. From 2025, the system will be rolled out more broadly and tailored to each business unit (Panasonic Sustainability).
• Klarna, a Swedish fintech, set a price of $100 per ton for Scope 1, 2, and 3 travel emissions in 2020. Other Scope 3 emissions were valued at $10 per ton. In 2024, Klarna raised the price for Scope 1 and 2 to $200 per ton and has invested around $7 million in climate tech start-ups since 2021 (Klarna Press Release).

A step-by-step approach is advisable: Start by applying the CO₂ price to major investments and gradually expand it to other areas. Emission thresholds can be lowered incrementally.

Gain Stakeholder Support

An internal CO₂ price can only be successfully implemented if all relevant stakeholders are involved early on. Without the support of the board, investors, and employees, even a well-designed model will be ineffective.

"It is crucial to foster collaboration between all relevant parties connected to your company from the outset, while setting clear goals that your company’s internal CO₂ price levels are meant to achieve." – SINAI

Aligning with all affected departments and partners along the value chain fosters acceptance among key players such as board members and investors. A sustainability strategy closely linked to the existing business model can help manage the transition during climate change.

Pilot the approach in relevant departments and demonstrate the benefits of the CO₂ price.

Using Shadow Prices in Daily Operations

Once an internal CO₂ price is set, integration into daily business begins. Studies show that companies with such internal CO₂ prices emit, on average, 13.5 percent less CO₂ per employee and 16 percent less per unit of revenue than comparable companies (CDP: Internal Carbon Pricing 2023). The following explains how shadow prices can be used in various business areas.

Investment Decisions

Internal CO₂ prices significantly influence the evaluation of investment projects. By including emission costs in net present value calculations, climate-friendly projects become more economically attractive, while emission-intensive projects lose appeal. According to the Task Force on Climate-related Financial Disclosures (TCFD), integrating carbon pricing into financial analysis helps companies future-proof their investments (TCFD Publications).

Some practical examples:

• Bayer has used a CO₂ price of €100 per ton in investment evaluations since 2022. This value is based on avoidance curves, energy taxation trends, and energy certificates for renewable gas (Bayer Carbon Pricing).
• Unilever applies an internal CO₂ price to all capital investments over €1 million, covering about 80 percent of investments. Additionally, brands like Ben & Jerry’s use internal CO₂ taxes on lifecycle emissions to fund sustainability initiatives (Unilever: Ben & Jerry's Carbon Initiatives).
• Novartis integrates a shadow price of $100 per ton into business scenario development, while National Grid uses CO₂ prices to assess the climate impact of new infrastructure (National Grid: Internal Carbon Pricing).

By incorporating shadow prices into capital expenditure (CAPEX) and operational expenditure (OPEX) decisions, companies can avoid future compensation costs. The benefits are measurable: In 2022, 72 percent of Philips’ revenue came from products and solutions developed according to ecological principles (Philips Annual Report 2022).

Supply Chain Management

Shadow prices help make supply chain management more environmentally conscious. Companies can assess emissions from transport and raw material procurement and factor these costs into purchasing decisions. Suppliers with lower emissions receive a more favorable evaluation, while emission-intensive providers lose appeal due to shadow costs. This approach encourages suppliers to adopt greener practices and supports broader decarbonization efforts (CDP: Supply Chains and Climate).

Shadow prices also offer advantages in transport logistics. Companies can better compare the climate costs of different shipping methods. For example, air freight causes significantly higher CO₂ emissions than sea freight, which highlights sustainable transport options in cost calculations. General Motors demonstrates how climate risks can impact the supply chain: A one-month production disruption at a drought-affected Mexican plant could mean a net profit loss of $27 million (CDP: Water Risks and Supply Chains).

Additionally, shadow prices help procurement departments manage Scope 2 and upstream Scope 3 emissions and motivate suppliers to reduce their emissions.

Risk Assessment and Planning

Beyond optimizing the supply chain, shadow prices enable early identification of climate risks. They are a valuable tool for assessing climate-related risks and preparing companies for stricter regulations. Already, around 25 percent of global emissions are subject to CO₂ taxes or emissions trading systems (World Bank Carbon Pricing Dashboard).

Some companies are leading the way: McKinsey introduced a $50 per ton CO₂ fee on air travel in 2023, which accounts for about 80 percent of total emissions. In 2024, this fee was extended to all emissions and will be gradually increased. Revenues are invested in measures such as CO₂ removal and sustainable aviation fuels. Swiss Re launched a $100 per ton CO₂ levy in 2021 and plans to raise it to $200 by 2030. This supports both the company’s reduction targets and investments in CO₂ removal.

Finance departments use shadow prices to model the potential financial impact of future CO₂ taxes and calculate savings potential through emission reductions or offsets. This prepares the company for a low-carbon future and secures long-term competitive advantages. These measures are a key part of a comprehensive ESG strategy.

Common Challenges and Solutions

To implement the strategies described above, companies must address specific challenges, ranging from technical difficulties with data quality to internal resistance. Below are solutions for the most common problems.

Poor Data Quality and Scope 3 Emissions

Emissions in a company’s supply chain often far exceed direct emissions: They are on average 11.4 times higher and account for about 92% of total greenhouse gas emissions (CDP: Why Scope 3 Emissions Matter). For 40% of companies, collecting Scope 3 emissions data is the biggest hurdle. For companies with revenues over $10 billion, this figure rises to 55%.

Accurately capturing this data is complex. Many firms start with an expenditure-based approach, which often does not reflect actual emissions. An activity-based approach, which considers specific activities such as production volumes, waste disposal, or electricity consumption, delivers more accurate results.

To sharpen the focus, companies should prioritize the most important Scope 3 categories. This requires both internal resources and close collaboration with suppliers and business partners. Combining software tools with qualified professionals helps expand data collection efficiently.

An example is the Toray Group, which uses the CleanChain system. This tool enables monthly uploads of chemical lists and identification of expired or non-compliant products via a dashboard. Automated reminders and data sharing with partners make collaboration much easier (CleanChain).

Besides technical data collection, it is crucial to build internal acceptance for measures such as a CO₂ price.

Gaining Internal Acceptance

The success of an internal CO₂ price largely depends on clear, company-wide communication. Executives must understand how the CO₂ price affects business decisions and what additional benefits—beyond emission reduction—can be achieved. Linking variable compensation targets to the implementation of the CO₂ price is particularly effective in motivating management (CDP: Internal Carbon Pricing 2023).

Transparency is key: The workings of the pricing model and its impact on company strategy must be clearly communicated. It is equally important to involve suppliers early in the process and to be open about the planned use of the CO₂ price in procurement.

Updating Prices Over Time

Internal CO₂ prices should be flexible and adapt to new scientific findings. According to CDP, many companies rely on gradually increasing prices. Regular reviews are necessary to incorporate current scientific data and key developments. Companies should prepare for CO₂ prices to rise to €150 per ton or more by 2030 (IEA: Net Zero by 2050).

An example of dynamic adjustment is Landsvirkjun, Iceland’s national energy company. The internal shadow price was raised from $30 to $144 per ton in 2023 (Landsvirkjun: Internal Carbon Price).

Practical steps include defining clear goals, integrating the pricing system into existing financial processes, and scaling up gradually. Supplementary guidelines and support systems are essential.

The system’s flexibility is crucial. As ASDA describes it:

"its flexible, to allow it to change with time as external factors evolve, and thus ensure our appraisal model remains world class."

A dynamic approach allows companies to respond to market changes, new regulations, and scientific advances—while consistently pursuing their sustainability goals.

Advanced Applications for Internal Carbon Prices

Internal carbon prices can do much more than just influence investment decisions. They are a powerful tool for making sustainable and economically sound choices in areas such as product development, M&A transactions, and software solutions. While their benefits in supply chains and risk management are already recognised, a broader application opens up additional opportunities.

Product Development and Lifecycle Analysis

The way companies develop and evaluate products is fundamentally changed by internal carbon prices. With such a price, the societal costs of emissions can be considered right from the early design phase. This enables alternative materials or production methods to be analysed with a view to long-term climate costs. For example: if an internal carbon price of €100/tonne is applied, emissions-intensive materials appear more expensive. This motivates more sustainable decisions—whether in material selection or process design.

Product managers can use this approach to factor not only direct costs but also long-term climate impacts into their decisions. Development teams also have the opportunity to run different scenarios to simulate the financial effects of various carbon prices. This lays the foundation for responsible action and informed project evaluation.

But it's not just product development that benefits from this approach. Internal carbon prices also open up new perspectives in the area of mergers and acquisitions (M&A).

Mergers and Acquisitions

In the field of M&A, internal carbon prices are playing an increasingly important role, especially in due diligence. They help systematically assess climate-related risks and opportunities. This allows companies to analyse the financial viability of acquisitions or mergers, taking carbon risks into account.

Here’s a real-world example: companies with high emissions are increasingly investing in green technologies to improve their carbon footprint. BYD expanded its capabilities in green technologies through the acquisition of Jabil, while Geely strengthened its global market position by acquiring Volvo. At the same time, regulatory requirements and climate risks in the target country significantly influence M&A decisions. Cross-border transactions can, for instance, be affected by economic damages or higher capital costs.

Software Tools for Carbon Management

To effectively apply internal carbon prices, many companies rely on modern software solutions. These tools automate the monitoring of emissions and the calculation of internal carbon costs. They offer features such as recording Scope 1, Scope 2, and Scope 3 emissions, forecasting future emissions, and identifying saving potentials.

Advanced software enables managers to analyse the financial impact of carbon prices in real time and model scenarios. This allows them to make informed decisions and visualise the cost-effectiveness of reduction measures. This data-driven approach not only promotes sustainable actions but also increases accountability within the company.

Conclusion

Internal carbon pricing has proven to be an indispensable tool for German companies striving to achieve their climate targets while remaining economically successful. Germany faces the challenge of reducing emissions by 65% by 2030 and becoming climate-neutral by 2045. According to the Federal Environment Agency, the societal costs of one tonne of CO₂ amount to €250, while the economic consequences of climate change by 2050 are estimated by the Federal Ministry for Economic Affairs and Climate Action at €280 to €900 billion. These figures highlight the urgency of immediate action.

Lavinia Bauerochse, Global Head of ESG at Deutsche Bank Corporate Bank, sums up the significance of internal carbon pricing:

“We see companies introducing internal carbon prices as an instrument to achieve climate targets. It is still in its early stages, but we expect this approach to gain importance. When a company sets an internal carbon price, a cost is usually assigned to each tonne of CO₂, so it is included in business and investment decisions—encouraging efficiency gains and the promotion of low-emission innovation.”

Companies that use internal carbon prices gain clear competitive advantages. They are better prepared for future regulatory requirements, make more informed investment decisions, and strengthen their risk management. However, practice shows that companies that hesitate risk falling behind. Studies show that many German companies have not yet fully met the requirements for sustainability reporting. While 60% recognise the need for green transformation, their approach often lags behind legal requirements. Without early action, they risk being left behind.

Integrating internal carbon prices into corporate strategy is crucial. Whether for investments, along the supply chain, or in risk management—the possibilities for using internal carbon prices are manifold. They can be used for everything from product development to M&A decisions to optimising the supply chain and offer great potential for sustainable value creation.

For German companies, the message is clear: now is the time to introduce internal carbon prices. Those who act today are optimally positioned for a low-carbon future and actively contribute to achieving Germany’s climate goals.

FAQs

How can companies set an internal carbon price that supports economic and ecological goals?

How Companies Can Set an Internal Carbon Price

Companies have the opportunity to define an internal carbon price by cleverly combining economic and ecological objectives. A proven approach is the use of scenario analyses. These analyses help assess the impact of different carbon prices on business decisions and long-term profitability. In this way, a price can be determined that reflects the true cost of emissions while supporting the company’s strategic goals.

Another important aspect is aligning the internal carbon price with regulatory requirements and current market conditions. In Germany, there are companies that apply internal carbon prices of up to €340 per tonne to deliberately make investments more sustainable. A well-considered internal carbon price can not only help achieve environmental goals but also provide economic benefits—such as minimising risks and using resources more efficiently.

What are the challenges in implementing an internal carbon price and how can companies overcome them?

Introducing an internal carbon price often comes with several challenges. One major issue is the lack of access to accurate emissions data, which makes it difficult to set an appropriate price. Additionally, the measure often encounters internal resistance, as some perceive it as an extra burden.

To overcome these obstacles, companies should develop a well-thought-out communication strategy. This should clearly highlight the benefits of a carbon price—such as long-term savings or a stronger competitive position. It is important to involve employees at an early stage and promote their understanding and acceptance through targeted training. In addition, providing suitable tools and resources for emissions measurement and analysis can significantly facilitate the process and ensure more efficient implementation.

In which corporate areas can internal carbon prices be effectively used besides investments to promote sustainable decisions?

How Companies Can Use Internal Carbon Prices

Internal carbon prices open up numerous opportunities for companies that go far beyond pure investments. They are applied in areas such as risk management, supply chain management, product development, marketing strategies, and corporate reporting.

Such a price helps to better assess the financial impact of emissions, make well-informed and resource-efficient decisions, and choose suppliers with lower emissions. In addition, it makes it easier for companies to meet legal requirements and consistently pursue their climate targets.