ACCA Strategic Professional · Advanced Financial Management · Corporate environmental, social, governance (ESG) and ethical issues
A multinational is considering whether to adopt a carbon pricing assumption in its capital budgeting. Which approach represents an internal carbon price?
An internal carbon price is a notional cost per tonne of carbon that a company applies in its own investment appraisals. It is a shadow price that reflects future regulatory and market risk, unlike external taxes, traded credits or fines.
- AA tax levied by the government on all emissions in the country of operation
- BA notional cost per tonne of carbon applied by the company in its investment appraisalsCorrect
- CA market price paid to buy carbon credits on a trading exchange only
- DA fine charged by regulators for breaching emissions limits
Explanation
An internal carbon price is a shadow price the company sets itself and applies to expected emissions in appraisals, so that future regulatory and market risk is reflected in decisions. Taxes, market purchases and fines are external costs rather than a voluntary internal assumption.
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