Internal Carbon Pricing: Aligning Financial Strategy with Climate Action

There’s a reason the phrase “what gets measured gets managed” has become a cliché — it’s largely true. And its inverse may be even more valid: what isn’t measured, almost certainly won’t be managed. In most companies, what gets the most attention is what shows up in the financial statements — profit and loss, balance sheets, and cash flows. To truly prioritize something, it needs to register in the language of the CEO and CFO: money.

For sustainability to break out of its silo and make it to the core of strategic decision-making, carbon emissions need to be translated from tons of CO₂-equivalent into financial terms. This is exactly what internal carbon pricing (ICP) does: it assigns a monetary value to emissions, embedding climate considerations into financial planning and unlocking new value opportunities.

Cost reductions: making carbon a line item

When carbon becomes a cost, reducing emissions becomes a business opportunity.

For companies already covered by emissions trading systems (such as the EU ETS), this is standard practice. But for firms not yet in scope — especially small and medium-sized enterprises — adopting an internal carbon price now helps future-proof the business. It turns decarbonization into a strategic lever for cost reduction and prepares the company for a future where carbon taxes could be more widespread and stringent.

Decarbonization planning: from scattered initiatives to strategy

An internal carbon price turns vague ambitions into actionable decision criteria.

Suppose a company sets an internal price of €100 per ton of CO₂. At that price:

• Switching to renewable electricity becomes a no-brainer.

• Investing in heat pumps over gas boilers may break even and warrant further analysis.

• Adopting green hydrogen may still be cost-prohibitive — a conscious decision that higher-impact reductions are prioritized for now.

  
  

Moreover, ICP can help identify currently unavoidable emissions — where mitigation costs exceed the internal carbon price. In these cases, the company might choose to purchase high-quality carbon removal credits, such as afforestation, biochar, or Direct Air Capture, as a bridging solution.

Strategy and value: a financial language for climate leadership

Internal carbon pricing is simple to explain and powerful in aligning climate action with core business strategy. It helps companies develop a coherent decarbonization "playbook," making priorities and trade-offs clearer to internal teams and more credible to investors, customers, and regulators. It also supports broader sustainability frameworks, such as Triple Bottom Line (People, Planet, Profit) and True Pricing.

For example, Philips publishes not only its conventional P&L, but also a version that includes environmental costs — showcasing its 'debt' to the environment and pushing for a fuller picture of value creation.

Financing interventions: turning paper prices into real impact

Internal carbon pricing doesn’t have to remain a theoretical accounting exercise. Some companies go a step further: they charge departments or business units for their emissions, collect the funds in an internal climate budget, and reinvest them in decarbonization initiatives.

A sample allocation might look like:

• 60% toward Scope 1 & 2 reductions (e.g. energy efficiency, electrification)

• 20% toward Scope 3 interventions (e.g. supplier collaboration, low-carbon materials)

• 20% for offsetting residual emissions via high-quality carbon removal projects

This approach turns a carbon price into a concrete funding mechanism for climate action.

Regulatory alignment: ahead of the curve

Fortunately, internal carbon pricing is no longer just a niche best practice — it's gaining institutional momentum. Frameworks like the Corporate Sustainability Reporting Directive (CSRD) and the Task Force on Climate-related Financial Disclosures (TCFD) increasingly encourage or require companies to disclose how they manage climate-related risks — including through internal pricing mechanisms.

As carbon accounting becomes more standardized, internal carbon pricing is on its way to becoming part of the essential toolbox for any business serious about a net-zero future.

In summary

Internal carbon pricing bridges the gap between sustainability and finance. It helps organizations:

• Treat emissions as a material cost

• Prioritize the most cost-effective climate interventions

• Make strategy and sustainability mutually reinforcing

• Fund real action and increase resilience

• Get ahead of emerging regulation

It’s a powerful, practical tool for aligning your business model with a low-carbon future — and making climate action not just the right thing to do, but the smart thing.