Guidelines for Setting Internal Carbon Pricing.

A new report by Patch, titled Guidelines for setting a net zero-aligned internal carbon price, is giving organizations a structured framework for designing and implementing internal carbon pricing that is effective, credible, and aligned with science-based net zero targets. Internal carbon pricing, or ICP, puts a monetary value on greenhouse gas emissions before they occur, internalizing the true costs of carbon pollution. By embedding this into decision-making, companies shift from reactive to proactive climate strategies that drive decarbonization and align operations with global climate goals. 

Over the years, ICP has evolved from an experimental sustainability tool into a mainstream corporate practice for managing climate risks and aligning business strategies with net-zero goals. Patch reports that according to CDP data, nearly 1,800 companies across 56 countries reported using ICP in 2024, almost double from 2021 and leading firms such as Microsoft, Ørsted, and Mitsubishi Corporation have already embedded ICPs into strategic and financial decisions.

There are three main approaches to setting internal carbon pricing:

Implicit ICP: derived retrospectively from abatement costs, useful for learning but limited in shaping forward-looking decisions.

Shadow ICP: hypothetical pricing used in planning, risk assessment, and scenario analysis; valuable as an entry point but often too weak to drive real change.

Real ICP: actual internal fees levied on emissions, with revenues reinvested in climate action. This model has proven most effective in shifting capital allocation, supplier engagement, and product design.

The report stresses that the effectiveness of ICPs hinges on governance, price levels, and integration into business decisions. Shadow prices set too low or disconnected from authority often fail to influence investments, while real prices, such as Microsoft’s escalating carbon fee, have financed tangible decarbonization projects. The report also provides a structured framework that companies can use to design, benchmark, and evolve their internal carbon price (ICP). The framework blends economic theory, regulatory benchmarks, and practical corporate governance and is based around five principles for net-zero-aligned ICPs.

The five Principles for net-zero-aligned ICPs

1. Climate-Compatible: ICPs must be anchored in robust, science-based net-zero targets across all emissions scopes. By assigning real financial value to emissions, companies embed carbon into decision-making, incentivizing efficiency, clean energy, and low-carbon technology. Strong linkage to supply chain procurement also ensures broader value chain decarbonization.
2. Contextual: ICPs should be adapted to global best practices and sector-specific realities. The report outlines four main benchmarking approaches:
   1. Implicit price/Marginal Abatement Cost Curves (MACCs): captures actual costs of reductions.
   2. Policy-driven/Emissions Trading Schemes (ETS): aligns internal prices with external market levels (e.g., EU ETS at ~€70/t).
   3. Social cost of carbon (SCC): reflects economic damages of emissions, with recent studies estimating ~$185/t.
   4. Ability-to-pay: ties ICP to company profitability per tonne of CO₂, allowing high-margin sectors to contribute more. A tiered model with differentiating prices across Scope 1, 2, and 3 emissions can strike a balance between ambition and feasibility.
3. Clear: Successful ICPs must be fully integrated into corporate structures, not siloed within sustainability teams. Embedding ICPs into capital allocation, procurement, and operational strategies requires cross-functional collaboration with Finance, Procurement, and Corporate Affairs. Strong governance, board-level ownership, and transparent reporting are critical. ICPs can also be applied across departments, from HR (commuting policies) to R&D (testing and travel), making carbon a visible cost throughout the business.
4. Committed: Revenues from real ICPs should be ringfenced into an internal carbon fund to maximize impact. Without dedicated reinvestment, savings may dilute climate ambition. Funds can be directed toward internal abatement (e.g., efficiency upgrades, renewables) or external climate action, including high-integrity carbon credits. The report references the Oxford Principles for Net Zero-Aligned Offsetting, highlighting the need to transition toward durable carbon removal solutions for residual emissions. Disciplined reinvestment strengthens credibility and demonstrates measurable returns.
5. Catalytic: ICPs should be dynamic and escalate over time. Prices must adapt to evolving science, tightening regulations, and net-zero pathways. The Hotelling Rule supports a rising price trajectory to reflect the increasing cost of delayed action. Organizations should embed escalation triggers linked to milestones, regulations, or best practices to ensure ICPs remain ambitious. Regular reviews reinforce ICPs as long-term drivers of innovation and transformation.

Invert Insights.

💡This report shifts the conversation from why internal carbon pricing matters to how to do it credibly, effectively, and in a way that advances both climate goals and business resilience. By assigning a monetary value to carbon emissions, organizations make the cost of emissions explicit in decision-making. This encourages investment in cleaner technologies, energy efficiency, and low-carbon projects. It also presents the opportunity to use the real ICP to invest beyond value change projects today to help abate emissions that couldn’t otherwise be mitigated at this time.

💡 Regulatory landscapes are tightening, and carbon prices in markets like the EU ETS are rising. Building an internal system now prepares companies for external compliance costs later, while driving cultural change in the process. Leaders like Microsoft, Klarna, and BCG are already using ICPs to reshape procurement, travel, and product design. If companies aren’t, they risk falling behind peers who are embedding climate costs into core business decisions.

💡 A recurring challenge in sustainability is moving from a project for the sustainability team to something owned across finance, procurement, and leadership. This report gives a helpful roadmap for embedding ICP into corporate governance and decision-making.