A carbon pricing strategy involves assigning a cost to carbon emissions to incentivize emission reductions. Within organizations, internal carbon pricing is used to integrate climate risk into business decisions. Two common internal carbon price designs are shadow pricing and internal fees. A **shadow price** is an assumed cost of carbon used for scenario analysis and investment appraisal. It is not an actual charge but a hypothetical price applied internally to evaluate projects’ carbon impacts, helping guide strategic decisions toward low-carbon options. It promotes awareness without immediate financial transactions. An **internal fee** (or internal carbon fee) is a real charge levied on business units or operations based on their carbon emissions. Collected fees are often used to fund sustainability initiatives or offset emissions. This creates a financial incentive to reduce emissions and fosters accountability within the organization. In summary, while shadow pricing is a planning tool to inform decisions with a notional carbon cost, internal fees impose real financial costs to drive behavioral change. Companies may use one or both approaches depending on their objectives, maturity in climate strategy, and organizational structure.

Published on: 2026-02-20 at 00:15:02