ICP Adoption Rises 1.5× Since 2015, Yet Only 14–18% Use It, 10 Points

Internal Carbon Pricing: Driving Financial and Sustainability Impact with Data

1. What is Internal Carbon Pricing (ICP)?

• Definition: ICP is a cost per ton of CO₂ emissions voluntarily set by a company to integrate climate into financial decisions.

• Purpose: Embeds carbon cost in operations, investment, and procurement decisions.

• Forms of ICP:

  1. Shadow Price – Notional cost to raise awareness; no direct financial impact.

  2. Implicit Price – Carbon cost used in investment/operational decision-making.

  3. Internal Fee – Direct charge to business units (BUs), creating financial consequences.

Trend: Companies using ICPs grew 1.5× from 2015 to 2022, yet only 14–18% of companies globally implement them.

2. Challenges in ICP Adoption

• Perception that ICP is not “real money.”

• Fairness concerns for high-emitting BUs.

• Difficulty adapting a static ICP across divisions/regions.

3. Key Unlocks for Effective ICP

1. Start small: Use shadow or implicit prices to integrate finance and sustainability.

2. Leverage external inputs: Use regulations, carbon taxes, offsets, and abatement costs for price setting.

3. Tailor ICPs: Adjust by BU, region, or operation type for impact.

4. Align metrics & incentives: Link ICPs to BU performance and financial rewards.

5. Consider carbon budgets: Complement ICPs for multiyear emissions management.

4. ICP Use Cases by Business Function

Example: Bayer, Novartis, Nestlé, and H&M use combinations of ICP approaches across operations.

5. Setting Internal Carbon Prices: Data Insights

• Price range: $10–$130 per tCO₂e.

• Median price: $49 per tCO₂e.

• Trend: In 2024, 15% of companies set prices above $130/tCO₂e, up from 11% in 2023.

Key factors influencing ICP price:

1. Carbon regulations and taxes.

2. Carbon offset prices.

3. Abatement costs informed by marginal abatement cost curves (MACCs).

6. Tailoring ICPs for Maximum Impact

• By BU: Adjust for market and technology maturity (e.g., mining vs chemicals).

• By Region: Higher in regulated markets (EU ETS), lower in emerging markets.

• By BU & Region: Matrix approach to account for regional/product differences.

• By Operation Type: Scope 1, 2, 3 emissions considered based on business model.

7. Driving Buy-in with Metrics and Incentives

• Problem: Carbon fees seen as punitive.

• Solution: Combine ICPs with performance metrics & financial incentives.

• Examples:

  • Mahindra & Mahindra: Energy efficiency measures with 1.2-year payback.

  • Proxy ICPs: Renewable energy certificates charged to BUs proportionally to emissions.

Buy-in Tips:

1. Educate employees on financial benefits of sustainability.

2. Involve BUs in goal-setting and ICP determination.

3. Start with uncontroversial analogues if ICP is sensitive.

4. Accept phased adoption; refine over time.

8. Carbon Budgets as Complementary Tool

• Definition: Allocate emissions like financial budgets across BUs/activities.

• Advantages:

  1. Accountability at all levels.

  2. Measurable targets for net-zero pathways.

  3. Flexibility: overshoots offset in future periods.

  4. Easier adoption vs. “real money” concerns of ICP.

9. No-Regret Moves for Companies

1. Educate teams: Carbon has real financial implications.

2. Explore price-setting inputs: Carbon taxes, abatement costs, peer benchmarks.

3. Evaluate tailoring: Adjust ICPs based on BU, region, and operational realities.

10. Financial Takeaways

Disclaimer:
The Profit India provides this article for knowledge purposes only. Readers should fact-check all data and analysis independently. The Profit India assumes no responsibility for financial or investment decisions based on this content.