What is internal carbon pricing?
Internal carbon pricing puts a company-approved amount per metric tonne of carbon dioxide equivalent (CO2e) beside the emissions attached to a decision. A shadow price changes the comparison without creating an actual charge. An internal fee charges a business unit for covered emissions and may transfer money to an internal carbon fund.
You can apply the price to capital expenditure, product design, procurement, budgets, transfer pricing or scenario analysis. The rule should name the covered Scope 1, 2 or 3 emissions, price year, currency, time horizon, and whether the price stays fixed or rises over time.
Why does internal carbon pricing matter to you?
Three reporting regimes ask for different details:
- CDP: Questions 5.10 and 5.10.1 in the 2026 full corporate questionnaire ask whether your organisation uses an internal price on environmental externalities and for details of its internal price on carbon. Record the objective, mechanism, covered emissions, and business decisions.
- IFRS S2 and AASB S2: Explain whether and how you apply a carbon price in decisions, and disclose the price used for each metric tonne of GHG emissions. This appears in IFRS S2 paragraph 29(f), reproduced in AASB S2.
- ESRS: State whether you use an internal carbon-pricing scheme and how it supports decisions or climate targets. If you do, disclose the scheme type, where it applies, the price, its source and critical assumptions. Also disclose the approximate current-year gross Scope 1, 2 and applicable Scope 3 emissions covered and the percentage of each scope. These requirements are in ESRS E1-8 paragraphs 62 and 63.
If project teams use different emissions periods, scopes or price years, the adjusted figures cannot support a fair capital decision. If nobody retains the approved price and calculation, finance cannot reproduce the result for an investor, auditor or report.
How does internal carbon pricing work?
Define the decision, output, period and emissions boundary for every option. Calculate each option's covered emissions in metric tonnes of CO2e and apply the approved price. The basic formula is: price-adjusted cost = base financial cost + covered tCO2e x internal price per tCO2e. Show the unpriced and adjusted result.
For a shadow price, the amount is not a cash payment or accounting entry. For an internal fee, finance charges the stated amount to the responsible unit under an approved allocation rule. In either case, document the price source, currency, effective date, approval owner, escalation schedule and mandatory decisions.
What mistakes should you avoid?
- Pricing one option's Scope 1 and 2 emissions while comparing it with another option's Scope 1, 2 and 3 emissions.
- Mixing tCO2 with tCO2e, nominal with real currency, or annual emissions with a five-year financial period.
- Choosing a price without a documented source, effective date or sensitivity test.
- Presenting a shadow price as a legal carbon tax, cash cost, carbon-credit purchase or booked provision.
Is internal carbon pricing the same as a carbon tax or carbon-credit price?
No. Your company sets an internal price for its own decisions. A government sets a carbon tax, an emissions-trading market sets an allowance price, and a carbon-credit transaction has its own purchase price. You may use an external price as an input, but record why it fits the decision and period.
What records should you keep for an internal carbon price?
Keep the approved method, price, currency, covered emissions, future price changes, source, decision paper, unpriced and adjusted calculations, results showing whether a different price changes the decision, and approval. ESRS E1-8 application requirement AR 65 also asks whether prices used for asset useful lives, residual values, impairment and acquisition fair values are consistent with those used in the financial statements.