How can companies achieve reduction targets and reduction plans through "internal carbon pricing"? 

I. Internal Carbon Pricing Strategies and Functions 

Internal Carbon Pricing (ICP) is a tool used by companies to quantify and value their carbon emissions internally, aiming to promote companies to reduce their carbon footprint, improve cost efficiency, and encourage investment in low-carbon technologies. Enterprises can implement ICP through different pricing methods and strategies, each with its own characteristics and applicability. Here are some common pricing strategies:

 1. Shadow Pricing 

• Definition: Set an imaginary carbon price for internal assessment and decision-making processes to estimate the potential cost impact of actual carbon pricing or carbon tax policies in the future. 

• Purpose: To help businesses consider the cost of carbon emissions when making investment decisions and evaluate the cost-effectiveness of emission reduction measures. 

• Applications: Commonly used in project evaluation and capital investment decisions, especially in regions where carbon costs are unclear but future carbon taxes or trading systems are expected.

 2. Internal Carbon Fee :

• Definition: A carbon fee is levied on the actual carbon emissions of each department or business unit of a company. 

• Purpose: To directly internalize carbon emission costs and make departments financially responsible for their carbon emissions, thereby incentivizing emission reductions. 

• Application: These fees usually go to a dedicated fund to support the company's sustainability projects, such as energy efficiency improvement, renewable energy projects, etc. 

3. Internal Carbon Trading System (Cap-and-Trade ): 

• Definition: 

Enterprises set total carbon emission caps and issue corresponding carbon emission allowances, allowing these emission rights to be bought and sold between departments.

•  Purpose:

 Optimize the allocation of internal resources through market mechanisms and encourage the reduction of carbon emissions between departments. 

• Application: 

Especially suitable for large multi-sector enterprises to create an internal carbon market between departments. 

4. Baseline and Credit (Baseline and Credit) is also known as the fund system or internal carbon credit (credit) system : 

• Definition: 

set a baseline emission level, and departments below the benchmark can obtain carbon credits (carbon credits), which can be sold to departments above the benchmark. 

• Purpose: 

To incentivize the sector to reduce carbon emissions below baseline levels and achieve cost-effectiveness through the trading of carbon credits (carbon credits). 

• Applications: 

Suitable for multi-sector enterprises with different carbon emission levels and emission reduction potential. 

II. Why is it feasible to "achieve climate action or reduction targets" through internal carbon pricing? 

Companies achieve reduction targets and implement reduction plans through internal carbon pricing (ICP), mainly by internalizing carbon emission costs, thereby changing the cost structure of the decision-making process and incentivizing carbon emission reduction behaviors. Here are some key ways and why they are feasible: 

1. Increased cost transparency and accountability : 

• By setting carbon prices, companies can quantify the environmental impact of carbon emissions, which is used to assess the economic costs of various sectors or projects. This approach makes carbon emissions a significant factor in corporate decision-making processes. 

• Why it works: When carbon emissions are linked to direct economic costs, businesses are more motivated to find ways to reduce them. This not only reduces environmental impact but also helps control costs, as reducing carbon emissions often comes with improved energy usage efficiency. 

2. How to Promote Investment Decisions in Favor of Low-Carbon Solutions :

•  Under the framework of internal carbon pricing, activities or projects with a larger carbon footprint incur higher costs. This makes it more cost-effective to invest in low-carbon technologies and processes, as these investments help avoid potential high carbon costs in the future. 

• Why it works: When the return on investment of low-carbon technologies is relatively high, businesses are more inclined to choose these options. This includes investing in renewable energy sources, energy-efficient equipment and technologies, or developing new low-carbon products and services. 

3. How to facilitate environmental performance comparison between internal departments :

•  Through internal carbon trading or carbon credit (carbon credit) systems, it is allowed that better performing departments can earn additional revenue, while lower-performing departments need to pay costs to compensate for their high carbon emissions. 

• Why it works: This system directly combines environmental performance with economic incentives, incentivizing departments to seek more efficient practices and innovative solutions, thereby reducing the company's carbon footprint overall. 

4. Enhancing External Reputation and Regulatory Compliance: 

• By implementing internal carbon pricing strategies, companies can demonstrate their commitment to climate change issues, which can help improve their image in the eyes of investors and consumers, potentially benefiting from meeting or exceeding existing environmental norms. 

• Why it works: Good corporate social responsibility (CSR) and sustainability (ESG) reporting can enhance consumer and investor confidence, positively impacting a company's market competitiveness. 

Through these strategies, internal carbon pricing not only helps companies achieve emission reduction goals but also enhances overall business efficiency and market competitiveness, creating long-term economic and environmental value for them.