Understanding the dynamics of Internal Carbon Pricing

Every human activity has got a Carbon footprint. Organising a lunch feast may have a lower carbon footprint than running a chemical plant in the city subsurbs.  As part of the Paris Climate convention 2015, internal Carbon Pricing has been accepted as a pricing mechanism by organisations to plan to cover the costs of pollution of environment.This helps organisations to bring in environmental discipline in organisations to help reduce their carbon footprint to achieve the global target of containing the temperature rise to within 1.5 deg C by 2099.

What is Internal Carbon Pricing ?

Internal Carbon Pricing is the price an organisation pays for the carbon gases it releases into the atmosphere as a result of it's business operations and value chains. Across the world already 1389 corporations have already started this practice of pricing their Carbon emissions. In india, 27 companies are developing plans to implement Internal Carbon Pricing (ICP). (click here..)

Why do companies go for Internal Carbon Pricing ?

In future organisations are forecasting a situation where the companies will be taxed according to the pollution it creates on the environment. At that time to prevent being taken aback at the extra costs that have crept into their manufacturing costs, companies are in the process of incorporating those costs into their pricing mechanisms. It also helps the organisations or corporates to be more environmentally aware of the damage the organisation does on the environment helping them take preventive actions.

How can it be applied ?

It can be applied as

• Shadow price refers to future Carbon emissions while Internal carbon tax is charged for present Carbon emissions. Shadow price helps to understand the importance of green initiatives or technologies and its impact on the environment and is used as a management tool to support decision making. 
• Internal carbon tax collected on carbon emissions is used to fund carbon reduction projects with long-term payback periods. Arvind Textiles applies shadow pricing on its electricity usage thus controlling electricity usage while Dalmia Bharat Cements used internal carbon tax to generate funds through the internal tax structure to invest in low carbon technologies.
• Internal cap and trade is used by corporates and conglomerates among their sister companies in which some of them may be low Carbon spewing companies while others may be heavy carbon spewers. As long as the Carbon emissions are within the upper cap limit, it is of no concern as sister companies can trade between themselves with or without financial obligations etc. Tata Sons can use this to fix a total internal upper cap on Carbon release and allow companies within the group to trade between each other so that the total carbon emissions are never exceeded.
• Implicit carbon price is set by companies after they implement the carbon reduction project and from the total costs and Carbon generated till then, fix an interim cost for each tonne of carbon generated on future emissions.  (click here for more details)

How is it going to help companies ?

It will help the companies to measure exactly their carbon impact and strategise on measures to reduce it. 

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