External carbon costs and internal carbon pricing

Arjan Trinks, Machiel Mulder, Bert Scholtens*

*Corresponding author for this work

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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.
Original languageEnglish
Article number112780
Number of pages12
JournalRenewable and Sustainable Energy Reviews
Early online date27 Aug 2022
Publication statusPublished - Oct 2022


  • Internal carbon pricing
  • External carbon costs
  • Climate policy stringency
  • Country characteristics
  • Firm characteristics


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