Idea in Brief
The Challenge
Companies commonly take into account climate-change threats to their assets and operations. But they are less proactive about considering the risks that climate-change policies pose to their strategy and returns.
The Solution
Predicting that those policies will extract a growing price for firms’ carbon emissions, more and more companies are setting a monetary value on their own emissions to help them evaluate investments, manage risk, and develop strategy.
The Process and the Payoff
Companies must forecast future carbon prices in the jurisdictions where they do business and then set an internal carbon price (ICP) that reflects their emissions and the likely trajectory of carbon prices set by governments. A carefully calculated ICP can position a firm for future regulation and help it gain long-term advantage.
As global weather becomes more extreme, the threat that climate change poses for companies is no longer theoretical. Businesses are working to protect their assets and supply chains from increasingly severe hurricanes, heat waves, fires, and droughts. More and more companies are figuring such “climate risk” into their calculations, and investors are paying close attention. But there is a related threat that many haven’t fully taken in: carbon risk—the impact of climate-change policies on a company’s strategy and returns. As global warming worsens, companies can expect tougher government measures that will extract a growing price for their carbon emissions. These mechanisms could sideline the unprepared. In this article we describe the approach used by more and more companies to brace for the future and even flourish in it: internal carbon pricing. At its core, this involves setting a monetary value on the company’s own emissions that reflects carbon prices outside the firm. In 2017 nearly 1,400 companies were actively using internal carbon pricing or planning to do so. As we’ll show, by putting their own price on carbon, companies can better evaluate investments, manage risk, and forge strategy.
