Carbon Pricing
Carbon pricing is an economic mechanism that assigns a monetary cost to greenhouse gas emissions, incentivizing reductions. The two main forms are emissions trading systems (cap-and-trade, like the EU ETS) and carbon taxes (a fixed price per tonne of CO₂e). Internal carbon pricing is a voluntary tool companies use for investment decisions.
Carbon pricing corrects the market failure of treating the atmosphere as a free dumping ground for greenhouse gases. By putting a price on emissions, it makes polluting activities more expensive and clean alternatives more competitive.
Emissions Trading Systems (ETS): Governments set an emissions cap and distribute allowances. Companies that reduce below their cap can sell surplus allowances; those that exceed must buy. The EU ETS, the world's largest, currently prices carbon at approximately €50–80 per tonne CO₂e. Other ETSs operate in California-Quebec, the UK, China, South Korea, and elsewhere.
Carbon taxes: A fixed price per tonne of CO₂e applied to fossil fuels or emissions. More price-predictable than ETS but does not guarantee a specific emission level. Countries like Sweden (€120+/tonne), Canada, and South Africa use carbon taxes.
Internal carbon pricing: Companies voluntarily assign a shadow price to emissions in investment decisions. This helps assess project economics under future carbon cost scenarios. For example, if a company uses $100/tonne internal carbon price, a project that eliminates 1,000 tCO₂e/year is credited with $100,000/year of carbon value.
Understanding carbon pricing is increasingly important for strategic planning. CBAM, rising ETS prices, and potential US carbon pricing all create financial exposure that carbon accounting quantifies.
Frequently asked questions
What is carbon pricing? +
Carbon pricing assigns a monetary cost to GHG emissions to incentivize reductions. The main forms are emissions trading systems (cap-and-trade like the EU ETS), carbon taxes (fixed price per tonne), and internal carbon pricing (voluntary shadow prices for investment decisions).
What is internal carbon pricing? +
Internal carbon pricing is a voluntary tool where companies assign a shadow cost per tonne of CO₂e to evaluate investments and strategic decisions. It helps assess project economics under future carbon cost scenarios and drives decarbonization investment decisions.
Related terms
Carbon Accounting
Carbon accounting is the systematic process of measuring, recording, and reporting the greenhouse gas (GHG) emissions produced by an organization, product, or activity. It follows standardized methodologies — most commonly the GHG Protocol — to quantify emissions across Scope 1 (direct), Scope 2 (purchased energy), and Scope 3 (value chain) categories, producing an auditable inventory that underpins disclosure, reduction planning, and regulatory compliance.
CBAM (Carbon Border Adjustment Mechanism)
CBAM is the EU's carbon border tax that applies a carbon price to imports of certain goods — cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen — to prevent carbon leakage and level the playing field between EU producers subject to the Emissions Trading System (ETS) and importers from countries without equivalent carbon pricing.
Decarbonization
Decarbonization is the process of reducing greenhouse gas emissions across an organization's operations and value chain through energy efficiency improvements, fuel switching, renewable energy procurement, process changes, supply chain engagement, and technology adoption. It is the operational work that turns reduction targets into real emission cuts.
Net Zero
Net zero means reducing greenhouse gas emissions as close to zero as possible, with any remaining residual emissions balanced by an equivalent amount of carbon removal from the atmosphere. The SBTi Corporate Net-Zero Standard requires at least 90–95% absolute emission reductions before carbon removals can be used.