External carbon costs and internal carbon pricing
Abstract
The use of internal carbon prices (ICPs) is a practice by which companies voluntarily attach a hypothetical cost to their carbon emissions to help prioritize low-carbon investment projects. We find that ICP use is driven by external carbon constraints and by firms' exposure to formal carbon pricing systems, next to various firm and society characteristics. The size of the gap between countries' actual and intended emissions alone, without a translation into stringent climate policies, does not play a role. These findings inform policymakers and investors about when and why firms account for future carbon constraints internally. A key societal risk is that corporate investments are not sufficiently directed at a future low-carbon economy. Stringent climate policies that provide predictable pathways appear to help firms mitigate the misalignment of their investments by using ICPs and thereby contribute to a less erratic and less expensive transition of the energy system.
Citation
Trinks , A , Mulder , M & Scholtens , B 2022 , ' External carbon costs and internal carbon pricing ' , Renewable and Sustainable Energy Reviews , vol. 168 , 112780 . https://doi.org/10.1016/j.rser.2022.112780
Publication
Renewable and Sustainable Energy Reviews
Status
Peer reviewed
ISSN
1364-0321Type
Journal article
Rights
Copyright © 2022 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY license.
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