FI Analysis 30: Internal price on carbon – what and why?

To reach the climate goals in the Paris Agreement, carbon emissions must go down. The most efficient way to achieve this is by raising the cost of emissions compared to today.

In order to manage the transition that the Paris Agreement entails, firms need to prepare for higher emissions prices. One way is for firms to already incorporate in their internal processes a higher price than the market price, for example when assessing investments or making purchases.

Working with internal carbon pricing can help firms to manage the transition risks that could be associated with future climate measures. It can also aim to create driving forces to transition to a more sustainable business model.

In order for financial firms to be able to live up to demanding standards on transparency of climate risks in their exposures, they need to have reliable and relevant information about the businesses they are financing.

Transparency from non-financial firms about how they are working with internal carbon pricing enables investors and other external stakeholders to identify transition risks in firms. It can also contribute to more capital being allocated to firms that are working actively to transition to improved sustainability. If more firms include in their calculations a higher price on emissions, this could also pave the way for political decisions to raise the cost of emissions around the world.

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