Internal Carbon Pricing Study

In order to promote comprehensive national emissions reduction, China has launched emissions trading scheme (ETS) pilot projects in Beijing, Shanghai, Tianjin, Chongqing, Guangdong and Shenzhen since 2011 and officially opened the national carbon market in 2021. As countries and regions worldwide continue to establish emissions trading systems and expand the scope of mandatory trading sectors, more and more companies are implementing Internal Carbon Pricing (ICP) to meet the challenges of being included in the compulsory carbon market and fulfilling their carbon credit clearance obligations.

What is carbon pricing?

According to the World Bank's definition, carbon pricing is a tool to measure the external cost of greenhouse gas (GHG) emissions, and the core is to internalise the external cost of carbon emissions through pricing, mainly in the form of carbon taxes, emissions trading systems, carbon credit schemes, and internal carbon pricing. Among them, internal carbon pricing (ICP), recognised as the most flexible and low-cost way to reduce emissions, is now widely used by regions, countries and companies worldwide to set and achieve their own carbon emission reduction targets.

ICP, as an internal control mechanism, sets internal prices for carbon emissions, considers carbon emissions to financial value, and serves as a planning tool to help emitters incorporate emissions, emission reduction and other factors into the decision-making system, incentivising low carbon investment, energy efficiency and internal behavioural change. Currently, ICP is mainly used by government agencies and companies (including financial institutions) to analyse the impact of mandatory external carbon pricing, identify potential climate risks and opportunities, and develop investment strategies for low-carbon or climate-resilient activities.

Drivers for companies to set ICP

According to the Putting a Price on Carbon report released in April 2021 by the Carbon Disclosure Project (CDP), the number of companies implementing or planning ICP in 2020 increased by 80% compared to 2018.

Establishing an internal carbon pricing mechanism for companies means quantifying the direct and indirect carbon emissions from operations and setting an internal price on carbon emissions. In addition to meeting compliance requirements (e.g., carbon tax and mandatory carbon trading), companies can also achieve other business objectives through internal carbon pricing, such as:

  • Drive low carbon investment
  • Drive energy efficiency)
  • Change internal behaviour
  • Identify and seize low-carbon
  • Navigate GHG regulations
  • Primary processes for companies implementing ICP

Generally speaking, the specific implementation of carbon pricing within a company will vary depending on its geographical location, local policies and level of risk exposure, but quantifying GHG is an indispensable first step.

Based on the concepts and requirements of the United Nations Sustainable Development Goals (SDGs), the United Nations Intergovernmental Panel on Climate Change (IPCC) and the Working Group on Climate-Related Financial Disclosure (TCFD) in the areas of sustainable development and addressing climate change, CECEPEC can help companies to make continuous efforts to achieve their GHG emissions reduction targets and explore future low-carbon business opportunities by referring to authoritative domestic and foreign GHG emissions quantification standards, tracking future carbon prices, developing, implementing and evaluating the ICP.

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