VII. Frequently asked questions

Greenhouse gas emissions, collectively measured as metric tons of carbon dioxide equivalent (MTCDE), contribute to climate change, which negatively affects humans and the environment.  There is a financial cost associated with these negative impacts. For example, after an extreme weather event damages a building, the renovation costs money. If carbon emissions are not priced appropriately, these costs are generally not paid by those who emit the carbon.  When carbon emissions are priced, emitters pay a price for the negative impacts they cause, bringing actions into better alignment with their true costs.

An internal carbon price is a financial mechanism such as a tax or a proxy price on carbon used to make the normally hidden climate costs of business activities inherent in the cost of doing business. These mechanisms thereby  incentivize climate positive decision making, raise capital for the mitigation of emissions, and prepare for a future in which the cost of climate change is more widely accounted for. These price mechanisms are considered “internal” because they are not overseen by an external regulator. This often involves the organization setting a price on carbon when it makes large financial decisions that touch emissions in one way or another.  Some organizations charge business units, departments, buildings, or individuals for emitting carbon; revenue from this charge is often reinvested in carbon reduction initiatives.

Companies with interests in high-emitting sectors such as oil and gas, utilities, and manufacturing often price carbon to prepare for the possibility of future government regulation.  The practice has spread to other sectors, as well. Yale was the first university to experiment with an internal carbon charge and place a financially meaningful price on carbon. Swarthmore College put a price in all department budgets and both Swarthmore and Smith College have implemented proxy prices.  Arizona State University, University of Maryland, and University of California, Los Angeles have put an internal price on air travel, and many more institutions are now exploring internal carbon pricing.

A proxy price on carbon is an internal price by which no actual funds change hands.  The price is instead added into the financial analysis of investment options—a natural gas turbine versus wind turbines—in order to evaluate the differences in lifetime emissions and potential costs from each.  This practice can advance an organization’s climate goals and serve as a risk mitigation measure against future regulatory costs. Higher proxy prices promote more aggressive climate action.

A societal price on carbon could provide for predictability and stability in planning and lead to much faster and broader climate action. However, there are persistent barriers to societal adoption of carbon pricing. Therefore, having individuals, organizations, and regions put carbon pricing into practice can reduce resistance to and build support for a national regulatory price.  Additionally, regulatory and internal pricing are not mutually exclusive.