Internal Carbon Pricing Explained for Australian Businesses

An internal carbon price is a mechanism businesses use to put a monetary value on greenhouse gas emissions within their own decision-making processes. It isn’t a government-imposed tax or a regulatory requirement — it’s a management tool that makes the cost of emissions visible when evaluating investments, operations, or procurement.

Under AASB S2, you must disclose whether you use an internal carbon price and, if so, at what price. Many Australian businesses haven’t yet considered this — here’s what you need to know.

What an internal carbon price is

An internal carbon price assigns a dollar value per tonne of CO₂-equivalent to emissions generated by your business activities. That value is then factored into business decisions — in much the same way that a fuel cost or labour cost is factored into project economics.

There are two main types:

Shadow price (or implicit price): A carbon price applied in financial modelling and capital project appraisals to test the economic viability of projects under future carbon pricing scenarios. The shadow price is used internally for evaluation purposes but doesn’t create an actual financial transaction.

Internal fee or levy: An actual charge applied to business units or divisions based on their emissions. The charge creates an internal cash flow — high-emitting divisions pay more, and the funds raised can be pooled to finance decarbonisation projects.

Why businesses use it

Testing investment decisions. If a future carbon price is likely (under a government policy scenario or as part of a net zero pathway), projects that appear viable today may not be viable at $50 or $100 per tonne CO₂e. A shadow carbon price reveals these sensitivities before capital is committed.

Driving behavioural change. When business units face a financial consequence for their emissions (through an internal levy), the incentive to reduce emissions becomes explicit. Equipment choices, energy sourcing, and logistics decisions are made differently when emissions have a price attached.

Resilience testing. Scenario analysis under AASB S2 often uses internal carbon pricing as a tool to assess how different carbon price futures affect financial performance. A business that has already embedded carbon pricing into its planning is better positioned to demonstrate resilience.

What price to use

There is no single correct internal carbon price. The appropriate price depends on:

• Your decarbonisation timeline: A net zero by 2040 ambition requires faster, higher-cost action than 2050
• Your assessment of future carbon policy: Australian carbon pricing has been volatile historically; businesses with global operations reference other jurisdictions
• The purpose: A shadow price for testing investment viability might be higher than a levy designed to fund specific projects

Common reference points:

• Australia’s Safeguard Mechanism baseline: The implicit carbon cost in the SMC regime (roughly $30–75/tonne CO₂e depending on abatement required)
• Climate Active carbon neutral certification: The Australian Carbon Credit Unit (ACCU) market price (variable, ~$30–50/tonne in recent years)
• IEA Net Zero by 2050 scenario: Recommends ~USD $130/tonne by 2030 for advanced economies — often used as a planning scenario shadow price

What to disclose under AASB S2

The AASB S2 disclosure requirement is:

• Whether an internal carbon price is used in decision-making
• The price (or range of prices, if different prices apply to different scenarios or business areas)
• The scope of application — which decisions or business units it applies to

If you don’t use an internal carbon price, you simply disclose that it is not currently used. There is no requirement to implement one — only to disclose.

For businesses that don’t currently use internal carbon pricing

If you’re not yet using internal carbon pricing but want to introduce it as part of your AASB S2 preparation, a practical starting point is:

1. Apply a shadow price of $50–100/tonne CO₂e in capital project appraisals for the next 12 months
2. Run a pilot on one or two major investment decisions to assess the impact on project economics
3. Review the results and establish a formal policy if the tool proves useful
4. Document the policy so it can be disclosed under AASB S2

Even a simple, documented shadow pricing policy is a stronger disclosure than having no internal carbon pricing at all.

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Ayika tracks the emissions data that your internal carbon pricing calculations depend on — per site, per project, per business unit, in real time. Book a demo to see how.