Sometimes also called internal carbon pricing—or an internal carbon charge—an internal carbon fee can help organizations reach their sustainability goals. However, these internal carbon fees do come with challenges.

Maybe your organization has just begun implementing its first sustainability initiatives. Perhaps you’re no stranger to sustainability, but you haven’t made as much progress toward your emissions goals as you’d like.

Whatever the case, if you’ve just briefly heard of internal carbon fees and you’re wondering what they are and if they’re a good fit for your organization, you’re in the right place.

Here’s what you need to know. We’re covering what an internal carbon fee is, how it works, who it impacts, and why it could be beneficial- but also why it comes with certain challenges.

What is an Internal Carbon Fee?

At its most very basic, an internal carbon fee is a set internal charge. The organization enforces the fee for business activities that result in emissions. These business activities can vary. However, one of the most obvious activities that might result in a carbon fee is business travel.

The money collected from internal carbon fees often goes toward the organization’s climate mitigation projects.

Internal carbon fees are growing in popularity, even though they might not be exactly widespread just yet. The Global Business Travel Association, in 2023, noted that about 10% of Travel Managers had implemented carbon budgets or carbon fees. While this is a small number, it was around 5% in 2022.

Similarly, a 2021 McKinsey study looked at approximately 2,600 global companies. The study found that 23% of those companies used an internal carbon charge. Meanwhile, 22% of the companies planned to enact a charge in the coming year.

The study also found that internal carbon charges were most prevalent in the energy, materials and financial sectors. Internal carbon fees were the least prevalent in health care and real estate. Internal carbon charges were most popular throughout Europe.

Why Would You Need an Internal Carbon Fee?

The impetus behind setting an internal carbon fee is the idea that, when faced with such a fee, business teams may make decisions not to engage in activities that would result in emissions and, thus, the fee.

That’s not to say that teams might never make a decision that would result in an internal carbon fee. However, they’ll be more likely to weigh the benefits of making that decision versus the requirement that they then pay the fee. Sometimes, certain decisions suddenly become unprofitable once the fee is incurred. Maybe a business trip that would have been a no-brainer before suddenly seems unwise.

Who is Impacted by an Internal Carbon Fee?

Often, internal carbon fees do not impact the entire organization equally. Instead, different departments or teams receive fees related to their specific decisions and environmental impact.

How Do You Implement an Internal Carbon Fee?

Implementing an internal carbon fee starts with getting familiar with your organization’s carbon emissions overall. In order to reduce carbon emissions, you need to understand your current emissions. Then, set a realistic reduction goal accordingly. After that, you can set a fee that will help you reach that goal. Finally, you’ll decide where you’ll spend the money generated by your internal carbon fee.

Fees often reflect a certain dollar amount per ton of CO2 emissions generated. Ideally, you’ll set the fee in such a way that the dollar amount can directly offset the damage of those emissions. For reference, the McKinsey study linked above cited the average internal carbon fee in Europe as $27 per metric ton. Meanwhile, the average internal carbon fee in Asia was $18 per metric ton. (The study also noted that many experts find these dollar amounts much too small. This is particularly the case when you look at the societal cost of carbon.)

You can charge the fee throughout the year as teams make decisions that result in emissions. However, some companies calculate teams’ emissions over the entirety of the year. Then, they charge the fee as one sum at the end or beginning of the year. This option may inspire teams to adjust their behavior on a greater scale. That way, they can avoid a very large fee.

How Do Companies Set Their Rates?

In some cases, companies will set different rates for different activities. So, for example, there might be different per-ton rates for electricity usage and business travel.

Once you have an internal carbon fee in place, remember to keep things flexible. You’ll very likely need to adjust the fee in the years ahead. Your emissions goals will change, and the cost of emissions will fluctuate. 

Additionally, throughout the entire implementation process, be sure to communicate the fee process and program with your teams thoroughly. Let them know why you’re enacting the initiative. Tell them why it matters, how they’ll be impacted and what they should do. Be open to questions and do your best to get everyone on board with the process.

Are There Downsides to an Internal Carbon Fee?

There are a few downsides to implementing an internal carbon fee. It can be difficult to set the appropriate fee and ensure your teams can remain profitable while ensuring that the initiative is effective. Additionally, there are no global standards for setting fees, so it can be even more difficult to know how to set the right fee for both your company and the planet.

Likewise, it’s not always easy to get departments on board with this type of initiative, as it does come with challenges and may require teams to entirely rethink their mode of business.

Need More?

Whether you’re interested in implementing an internal carbon fee within your organization, you want to begin carbon accounting, or you just want to get started making your organization’s business travel more sustainable overall, JTB Business Travel can help.

Get in touch today to learn more.