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Assessments & Strategy
Internal Carbon Pricing Mechanism
An Internal Carbon Pricing Mechanism assigns a financial value to carbon emissions to integrate climate cost into investment decisions, capital allocation, and operational planning.
TCFD recommendations and IFRS S2 both require organisations to disclose whether they use an internal carbon price and, if so, the price applied. The World Bank's Carbon Pricing Leadership Coalition identifies internal carbon pricing as a core transition management tool, with shadow prices typically anchored to the EU ETS spot price, CBAM-implied costs, or the SCC (Social Cost of Carbon) published by regulatory bodies. The SBTi Corporate Net Zero Standard also encourages ICP as a mechanism to drive internal alignment with science-based targets. Without a defined internal carbon price, organisations make capital allocation decisions that systematically undervalue carbon risk, leading to stranded asset exposure and slower decarbonisation.
Our approach
A structured internal carbon pricing framework is designed in line with TCFD guidance, World Bank ICP methodologies, and your organisation's regulatory context — including exposure to EU ETS, CBAM, India's CCTS, or other compliance carbon markets. The framework defines the appropriate pricing model (shadow price, implicit price, or internal carbon fee and dividend), sets price levels calibrated to market benchmarks and regulatory exposure, and integrates the mechanism into capital budgeting and investment appraisal. Outputs are designed to support TCFD/IFRS S2 disclosures and internal decision-making.
- Assessment of GHG emissions profile, reduction targets, and regulatory carbon cost exposure (EU ETS, CBAM, CCTS)
- Selection of appropriate ICP model: shadow price for capex decisions, implicit price for product pricing, or internal fee and dividend
- Calibration of carbon price levels against EU ETS forward curves, CBAM-implied costs, and SBTi-aligned abatement cost curves
- Integration into capital allocation frameworks, project appraisal templates, and investment hurdle rate calculations
- Scenario analysis to assess financial impact and investment prioritisation under low, central, and high price assumptions
- Development of governance procedures, implementation guidelines, and disclosure language for TCFD/IFRS S2 reporting
Outcomes
Formal internal carbon price integrated into capital allocation and investment appraisal processes
TCFD- and IFRS S2-aligned disclosure of ICP methodology, price level, and application scope
Improved prioritisation of low-carbon capital investments and early identification of stranded asset risk
Alignment of investment decisions with SBTi targets and net zero commitments
Increased transparency on climate-related financial risk for investors and boards
Speak with an expert
The team can walk you through exactly how Internal Carbon Pricing Mechanism applies to your organisation's context and objectives.
Get in touch