How to set an internal carbon fee
This white paper explains the logic behind internal carbon fees, how they differ between industries, and how companies can set a credible fee.
The four steps to credible climate action
Leading frameworks (e.g. SBTi, WWF/BCG, and Gold Standard/Milkywire) all recommend a similar four-step approach to what constitutes credible climate action, showing a clear consensus on what responsible businesses should do:
In addition to reducing emissions in line with science-based targets, companies should set an internal carbon fee and contribute to climate action. In the white paper, we explore the internal carbon fee concept in detail and outline practical steps for how companies can approach the topic.
What is an internal carbon fee?
The terms internal carbon fee and internal carbon pricing are sometimes used interchangeably, and while they both center around assigning a monetary cost on CO₂ emissions for their impact on society, they differ in application.
An internal carbon price (also called “shadow price”) is primarily used to evaluate the impact of mandatory carbon prices on business operations and as a tool to identify potential climate risks.
An internal carbon fee (also called “tax”) takes the idea of carbon pricing a step further. It involves the company actually charging itself a fee for every ton of carbon emissions it produces. In turn, the fee generates a budget that can be spent on external climate projects.
The fee can be differentiated between emissions that a company controls (e.g. Scopes 1-2, and travel emissions) and for emissions where the responsibility is shared (remainder of Scope 3). This can be done in more ways, such as by charging different fees for upstream and downstream Scope 3 emissions.
This self-imposed fee encourages departments to innovate and reduce emissions, with the collected funds often reinvested into sustainability initiatives. The internal carbon fee acts as a powerful tool for companies to internalize environmental costs, aligning business operations with global carbon reduction targets.
Why an internal carbon fee?
Most companies can and should support climate projects to help reach global targets and make up for the damage their greenhouse gas emissions cause.
A powerful way for companies to generate funds for climate projects is to implement an internal carbon fee, voluntarily taxing their emissions and using the money to support external climate projects. This is recommended in the WWF/BCG Blueprint for corporate climate action. In February 2024 the Science-Based Targets initiative (SBTi) introduced its much awaited new Beyond Value Chain Mitigation (BVCM) guidance where they recommend setting a science based carbon price to unabated scope 1, 2 and 3 emissions each year.
This is a shift away from compensating for emissions, so-called offsetting. Instead, companies are making contributions to global net zero. Using an internal carbon fee enables a focus on quality over quantity and does not create a push to buy as cheap credits as possible as the offsetting paradigm does.
Find the right carbon financing strategy
The decision regarding the allocation of a company's funds towards external initiatives is primarily influenced by two factors: its emissions intensity, as measured by profit per ton, and its ability to use those funds effectively to cut emissions. For companies with higher emission levels, the priority should be to reinvest their profits back into the business to lower their own emissions, rather than contributing to external climate initiatives. Conversely, companies with lower emissions intensity may not need to make significant changes to their operations and are thus in a better position to allocate funds towards external climate projects, such as carbon removal.
Companies should implement an internal carbon fee that covers the full environmental and societal cost of their emissions. But how can such a level be determined?
Considering sectoral differences
The fair share of corporate climate change contributions varies depending on the context. Some companies can set a higher internal carbon fee than others. To compare, it's useful to examine contributions through multiple lenses: as a percentage of revenues, a percentage of profits, and in terms of the absolute dollar amount per ton of CO2 emissions. An approach that appears ambitious from one perspective, such as adopting a high internal carbon fee, may seem less significant when assessed as a portion of profits. Conversely, a company that spends a relatively low amount per ton of emissions could emerge as a frontrunner when its spending is evaluated as a fraction of its revenue.
We have divided companies into four groups based on their CO₂ emission intensity and profit per ton of CO₂ emitted. We can see how these two measures strongly correlate; high emitters have low profits per ton and vice versa.
Examples of internal carbon fees
Klarna
The fintech Klarna has set a 100 USD fee on their scope 1, 2, and travel emissions and 10 USD for the rest of scope 3. Klarna uses that money to support climate solutions selected for the Milkywire Climate Transformation fund. In 2021-2023 the fee generated over 5 million USD, used to contribute to projects in the fund.
Microsoft
Microsoft was one of the early companies to set a real internal carbon fee. Currently, the fee is 15 USD per ton for Scope 1 and 2, 100 USD for business travel, and 8 USD for the remainder of Scope 3. The money is used both for internal emission reductions and for supporting external projects such as carbon removal.
Swiss RE
The reinsurance company Swiss Re implemented a 100 USD fee (called internal carbon levy) per ton in Scope 1-3. It will gradually increase to 200 USD per ton in 2030 and was 112 dollar in 2022. SwissRe uses the funds to purchase carbon credits, including high-quality carbon removal, such as with the 10 million USD, 10-year agreement they signed with Climeworks.
Designed for sustainability leaders
The Climate Transformation Fund (CTF) is fully aligned with SBTi’s guidance for Corporate Net-Zero Standard and offers companies a credible, impact-first vehicle for taking responsibility for their emissions.
Focused on the most efficient path to global net zero, the fund focuses on 3 core pillars;
Durable carbon removal
Protecting and restoring nature
Decarbonization through advocacy and policy
About the author
Robert Höglund
CTF Fund Manager
Robert Höglund is a carbon dioxide removal (CDR) and climate policy expert. In addition to managing the Climate Transformation Fund, he co-founded the CDR market overview CDR.fyi, works with the NGO Carbon Gap, and publishes reports and articles on carbon removal and corporate climate contributions. He is a member of the EU Expert Group on Carbon Removals, the Science-based Target initiative's (SBTi) Technical Advisory Group, and the board of the KTH-led research program Mistra sustainable consumption. Robert previously headed Oxfam Sweden's policy and communications team and founded the Climate Goal Initiative in Sweden.
Find the right carbon pricing strategy for your industry
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Frequently asked questions
What is a credible internal carbon fee?
There is no exact answer to what constitutes a credible fee, as the white-paper explains, there a number of ways to view a credible fee. For example, one way is looking at the cost of durably removing and storing CO₂ from the atmosphere. Today that costs several hundred US dollars per tonne for most methods, but industries and governments are targeting 100 USD/t as a likely achievable cost. The research group, New Climate Institute, has determined 100 euros per tonne as a credible level for corporate climate contributions based on the marginal abatement cost.That being said, this can range across different scopes and needs to be defining on a company-by-company basis. If you'd like help understanding what a carbon fee could look like in your organisation - contact us here.
What is the difference between a carbon tax, price and fee?
An internal carbon tax is a fee imposed on the burning of fossil fuels based on how much carbon dioxide and other greenhouse gases are emitted. It works by creating a financial incentive for companies and individuals to reduce their carbon footprint. An internal carbon price (also called “shadow price”) is primarily used to evaluate the impact of mandatory carbon prices on business operations and as a tool to identify potential climate risks.
An internal carbon fee (also called “tax”) takes the idea of carbon pricing a step further. It involves the company actually charging itself a fee for every ton of carbon emissions it produces. In turn, the fee generates a budget that can be spent on external climate projects.
What is the Climate Transformation Fund?
The Climate Transformation Fund is a trusted alternative to carbon credits. The fund is essentially a curated portfolio of the high-impact projects needed to reach global net zero. Typically, our partners use internal carbon fees to decide on their level of contribution to the fund, you can find our more here.
How does carbon removal differ from carbon avoidance?
Carbon removal refers to technologies and methods that directly remove carbon dioxide from the atmosphere, while carbon offsetting involves compensating for emissions by funding emission reduction projects elsewhere.
What is beyond value chain mitigation?
Beyond Value Chain Mitigation (BVCM) is a strategy where companies commit to reducing greenhouse gas emissions beyond their immediate value chains. This approach not only focuses on rapid decarbonisation within their operations but also supports global efforts to finance emission reductions, thereby accelerating progress towards achieving net zero goals. See our guidance here.
What is durable carbon removal?
Durable carbon removal, also known as carbon dioxide removal (CDR) or permanent carbon removal, refers to the long-term sequestration of carbon dioxide from the atmosphere through methods that ensure it remains stored for extended periods, typically centuries or longer. This approach is critical in mitigating climate change by permanently reducing atmospheric CO2 levels, complementing efforts to reduce emissions.
Still have questions?
If you don’t find an answer to your question in the FAQ, you’re always welcome to contact us at partnerships@milkywire.com