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What is the price of carbon?

March 22, 2023

Sustainability is an inherently forward-looking endeavor; business and sustainability leaders are constantly looking to the horizon to anticipate impending policy changes, technological breakthroughs and inevitable shifts in social expectations that will affect their organizations. 

One trend sustainability leaders are keeping their eye on is carbon pricing.

Many countries already have compliance carbon pricing in the form of carbon taxes or emissions trading schemes, with many more expected to follow. But it’s not only countries looking to price carbon, companies are also exploring how the cost of carbon fits within their climate strategy and action. 

How is carbon priced?*

Carbon pricing is a powerful tool for both the private sector and governments to leverage to reduce greenhouse gas (GHG) emissions. For companies looking to make high-integrity climate claims, carbon pricing is a tool to catalyze emissions reductions and define a strategy for investing in climate progress.

Carbon Pricing in Government/Public Sector

At a national or governmental level there are four primary policy instruments that put a price on carbon—

1. Carbon tax1: A fixed price, or levy, on GHG emissions. For example:

  • $10 per tonne in South Africa
  • $2 per tonne in Japan
  • $5 per tonne in Argentina

2. Emissions Trading Scheme (ETS)2: A cap-and trade system of emissions allowances that can be traded and auctioned, creating a market-based carbon price. For example:

  • $89 per tonne EU ETS
  • $50 per tonne New Zealand ETS
  • $11 per tonne South Korea ETS

3. Social cost of carbon: A theoretical price used by governments as an economic measure to reflect the cost of emissions to society. While governments don’t charge, the price is applied in cost-benefit analyses and impacts policy decisions rather than as a levy on carbon. For example:

  • In US policy, the social cost of carbon assumption used in cost and benefit analyses is USD $120 per tonne3 
  • In 2021, the German Federal Environment Agency recommended using a cost rate of EUR $201 per tonne for 2021 emissions4

4. Article 6: A provision within the Paris Agreement establishing two market-based mechanisms. Article 6.2 enables decentralized bilateral trades between countries to achieve emission reduction targets set out in nationally determined contributions (NDCs). Article 6.4 establishes a centralized market-based mechanism governed by the UNFCCC for issuing carbon credits that can be purchased by both state and non-state actors.

Carbon Pricing in the Private Sector

Companies can participate in the pricing of carbon in three ways:

1. Voluntary carbon markets: Pricing is determined through transactions, whether through futures contracts or spot trades within a marketplace or through a bilateral contract, which is an agreement between two parties such as a broker and a corporate buyer. 

Key factors impacting price include project location, methodology, vintage year, verifying body or number of credits purchased. While many factors influence pricing, quality is not always one of them. For example prices can vary: 

  • $2 - $10 for the N-GEO (Nature-Based Global Emissions Offset) contract
  • $14.65 and $4 per tonne, for 19/20 and 16/17 vintages respectively, from trades made by a global investment bank for the same Indonesian REDD+ project 
  • $222 per tonne for credits from an upcoming European biochar project5

2. Shadow pricing: A theoretical price defined by the company for a tonne of carbon used as a decision instrument to highlight risks to investments in the event of an externally imposed carbon price, such as a carbon tax or ETS. Companies may arrive at a price based on recommendations from development bodies, such as the World Bank’s High-Level Commission on Carbon Prices (HLCCP), or define their own methodology for selecting a price, based on analysis of peer carbon prices, sectoral context and future projections of carbon pricing regulations. The use of shadow pricing is particularly common in heavy-emitting and regulated industries like transport, power, and fossil fuel. For example:

  • $24-$80 per tonne for BHP
  • $20 per tonne for JSW Steel 

3. Internal carbon fee: An internally imposed carbon tax that generates funds and can be used to invest in diverse climate actions, including carbon credits. Corporates are using a carbon levy to incentivize investments in emissions reductions and to fund the purchase of carbon credits to neutralize residual emissions. For example:

  • $112 for SwissRE’s 2022 emissions6
  • $100 for Microsoft’s scope 3 business travel emissions7

*All price references are from a moment in time and reflect the cost per tonne.

What does an internal carbon fee achieve? Should you be implementing an internal carbon fee?

For companies making a climate commitment claim, whether “net zero”, “carbon neutral” or “carbon negative”, the risk of greenwashing accusations is on the rise. 

The use of carbon credits within a climate commitment has garnered scrutiny, often classified as a license to pollute. There are two key components that drive risk for companies using carbon credits: (i) the quality of credits and (ii) the claims you make about climate action.

Implementing an internal carbon fee program is one way companies can generate funding for sustainability programs that incentivize emissions reductions while also compensating for historical and ongoing carbon emissions. 

The use of carbon credits is frequently characterized as an action divorced from real behavior change to drive emissions reductions across a company’s value chain. Carbon credits and absolute emissions reductions are not mutually exclusive. Using a carbon fee is one way to explicitly link action to emission reductions while also compensating for residual carbon with carbon credits.

Let’s take Microsoft’s decision to implement a carbon fee of $100 per tonne for scope 3 business travel emissions. Microsoft tracks emissions across all scopes and aggregates emissions data at a group level to determine the carbon fee charge. All Microsoft business units pay for the carbon they emit. Setting this carbon fee places a constraint on, and ultimately disincentivizes, carbon emitting behaviors. 

In the case of business travel for Microsoft, knowing that there is an associated expense with taking a flight encourages employees to only travel when necessary. And for those cases when travel is required, Microsoft leverages the carbon fee to invest in energy efficiency, renewable energy and carbon credit projects. 

Corporate climate claims and carbon credit quality

At COP 27 there was a notable shift away from language such as offsetting or compensating for emissions and towards contributions or mitigation contributions. 

Governments are setting up for regulations; the US Federal Trade Commission recently sought public comment on how the agency can regulate the climate claims that corporations make including: “sustainable”, “carbon neutral”, “carbon negative” and “net zero”. 

Moreover companies are facing litigation over dubious or misleading climate claims and advertising. In the fight against greenwashing, 54% of cases filed in 2022 resulted in an outcome deemed “favorable” to climate action litigation.

Putting a price on carbon and internalizing the cost of emissions could offer a path forward that reduces reputational risk and drives meaningful action for climate and nature. It’s not a new strategy. 

Boston Consulting Group and WWF published guidance for this approach in 2020, and one of SBTi’s suggested models for beyond value chain mitigation (BVCM) is a dollar for tonne approach. 

Defining an internal carbon price is one way to decouple climate commitments from tonne for tonne “offsetting” and moving towards a financial commitment model can have several positive outcomes:

  • Steer carbon credit buyers away from cheap, low-quality credits and towards credits with verified impact and quality that deliver long-term results. 
  • Drive low-carbon investment and accelerate emissions reductions across the value chain.
  • Invest in emerging climate innovation and technologies.

How should an organization determine a carbon price?

There are a variety of benchmark prices an organization can consider when defining an internal price for carbon. The IPCC SR15 cites a carbon price range of USD $100 - $400 per tonne is required to stay aligned with a 1.5 °C scenario. 

There is clearly a gap to bridge between the current price of carbon credits and a price that more realistically reflects the cost of emissions. BloombergNEF recently modeled pricing for carbon credits under three different scenarios that sees prices rising to as high as USD $35 in 2050, and even to over $250 in a scenario where companies are only permitted to use removals credits. 

Stakeholders interacting with carbon pricing mechanisms, whether internally defined or externally imposed, should expect prices to increase. Carbon prices that reasonably reflect the environmental and societal cost of emissions are a crucial tool to drive emissions reductions in line with a 1.5°C trajectory and prevent the worst impacts of climate change. 

Even if a company has set ambitious 1.5°C-aligned net zero targets for 2030 or 2050, the reality is the company is still emitting carbon every year along its journey. Setting an internal carbon price generates funds that allow for the investment in high quality carbon credits and for companies to secure a competitive advantage over late-movers. 


1 S&P Global Commodity Insights

2 S&P Global Commodity Insights

3 S&P Global Commodity Insights

4 Umwelt Bundesamt

5 Quantum Commodity Intelligence

6 Swiss Re

7 Microsoft

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About the author
Senior Technical Climate Consultant

Annalise Downey is a Senior Technical Climate Consultant at Sylvera, helping market participants define their carbon strategy and navigate the voluntary carbon markets. Annalise was brought in during the early days of Sylvera as a member of the ratings team, analyzing carbon projects and helping to develop project-type frameworks including REDD+ and ARR. Annalise brings experience in commercialization and new product development as co-founder of a subsea remote sensing company. She is passionate about bridging disciplines to develop data-driven and scalable solutions to tackle climate change.