A carbon pricing strategy involves assigning a monetary value to greenhouse gas emissions to incentivize reduction. Within organizations, internal carbon pricing is used to integrate climate risk and carbon costs into business decisions. Two common internal carbon price designs are the shadow price and the internal fee. A **shadow price** is an assumed or hypothetical carbon cost used in project evaluation and strategic planning. It does not involve actual financial transactions but serves as a tool to assess the potential impact of future carbon regulations or to guide investment decisions towards low-carbon alternatives. Shadow pricing helps companies anticipate regulatory risks and align long-term strategies with climate goals. An **internal fee** (or internal carbon fee) is a monetary charge imposed on business units or projects based on their carbon emissions. The collected fees are usually reinvested in sustainability initiatives or energy efficiency projects within the company. This approach creates a tangible financial incentive for emission reductions and fosters accountability across departments. In summary, shadow pricing is a forward-looking, non-cash method for risk assessment and planning, while internal fees involve real financial flows to motivate emission reductions internally. Both approaches support embedding carbon costs into corporate decision-making but differ in their operational mechanisms and financial impacts.

Published on: 2026-01-23 at 00:15:01