CSRD Internal Carbon Pricing
ESRS E1-8 requires companies to disclose whether they use an internal carbon price — and if so, at what level and for what purpose. Internal carbon pricing is one of the most powerful tools for embedding climate costs into business decisions, and CSRD now makes its use (or absence) a public disclosure.
ESRS E1-8 requires companies to disclose whether they use an internal carbon price — and if so, at what level and for what purpose. ESRS E1-8 requires disclosure of: whether the company uses an internal carbon price in decision-making; if yes, the type of mechanism (shadow price, internal levy, fee-and-dividend); the price per tonne CO2e applied; which scopes and business activities are covered by the price; and how the price is used in investment appraisal and business decisions.
What ESRS E1-8 requires
ESRS E1-8 requires disclosure of: whether the company uses an internal carbon price in decision-making; if yes, the type of mechanism (shadow price, internal levy, fee-and-dividend); the price per tonne CO2e applied; which scopes and business activities are covered by the price; and how the price is used in investment appraisal and business decisions.
If the company does not use an internal carbon price: disclose this clearly. There is no regulatory penalty for not having an ICP — but the absence is now public information that investors, NGOs, and employees can see.
Shadow carbon price: Applied as a hypothetical cost in financial modelling and CapEx appraisal — it does not involve actual fund transfers between business units. Used to stress-test capital projects against future carbon pricing scenarios and identify carbon-intensive investments that may become uneconomical.
Internal carbon tax / levy: Business units are charged an actual fee per tonne of CO2e emitted. Funds collected are managed centrally — used to fund decarbonisation projects, offset purchases, or returned to low-emission business units as a dividend.
Fee-and-dividend: A more sophisticated version of the internal levy where high-emission business units pay into a central fund and low-emission units receive dividends. Creates real financial incentives for operational decarbonisation.
Setting the right internal carbon price
If your company decides to implement ICP following ESRS E1-8 disclosure of its absence, the price level is the most consequential decision.
Market reference: The EU ETS carbon price provides a market reference — approximately €60–70/tonne in early 2026. However, EU ETS prices are volatile and sector-specific. Using EU ETS as the ICP means your shadow price fluctuates with the market — which creates complexity in long-term CapEx appraisal.
Science-based references: The IEA Net Zero by 2050 scenario implies carbon prices of $130/tonne by 2030 in advanced economies. The High-Level Commission on Carbon Prices (Stern-Stiglitz) recommended $50–100/tonne by 2030 as the minimum for Paris alignment. These provide a forward-looking basis for ICP that is independent of current market volatility.
Investor expectations: Institutional investors with net zero commitments typically expect ICP at or above the EU ETS price. Prices below €30/tonne are increasingly viewed as token — insufficient to materially affect investment decisions. For credible climate risk integration, prices of €50–100/tonne for near-term decisions and higher for long-lived assets are considered best practice.
For long-lived assets: apply a higher shadow price for infrastructure and real estate investments with 20–40 year lifetimes — reflecting the higher carbon price trajectory over the asset life. A building constructed in 2026 may face €200+/tonne carbon pricing before the end of its useful life.
ICP and investment decision-making — the practical application
Internal carbon pricing creates value only if it actually changes investment decisions. A shadow price that is calculated but never affects the outcome of a capital appraisal is a reporting exercise, not a climate risk management tool.
CapEx appraisal: Include the carbon cost (Scope 1 emissions × shadow carbon price) as a line item in the business case for all major capital investments above a defined threshold. Show the NPV impact of the carbon cost under the base price and a higher sensitivity scenario. Where the ICP-adjusted NPV changes the investment decision, document this explicitly.
Operational decisions: Apply ICP to significant operational choices — fuel selection for new equipment, fleet replacement decisions, building energy source selection. Where the carbon-inclusive cost analysis favours a lower-emission option, document the ICP as the deciding factor.
Business unit scorecards: Include carbon cost (using the ICP) in business unit financial reporting alongside traditional financial metrics. This creates management accountability for carbon performance — business unit leaders see their carbon cost as a real financial line item.
For ESRS E1-8 disclosure: describe specifically how the ICP is used in decision-making — not just that it exists. An ICP that is applied to CapEx appraisal above €5M, covers Scope 1 and 2 emissions, and has changed four investment decisions in the reporting year is a meaningful disclosure. An ICP that 'informs strategic discussions' without specific application is a weaker disclosure that sophisticated stakeholders will question.
Frequently asked questions
Is there a minimum internal carbon price required under ESRS?
No — ESRS E1-8 requires disclosure of whether you have an ICP and at what level, not that you must have one or that it must be at a minimum level. However, investor expectations and leading practice suggest prices below EU ETS levels are difficult to defend as genuinely integrating climate risk into decision-making.
Can we disclose a price range rather than a single price?
Yes — some companies use different prices for different decision types or different time horizons (lower near-term price, higher long-term price for infrastructure). Disclose the price range, the basis for differentiation, and which activities each price applies to. Transparency about the methodology is more important than a single simple number.
If we introduce ICP this year, what is the disclosure for the first year?
Disclose the new mechanism — its type, the price level, the coverage, and how it will be used in decision-making going forward. For the first year, you may not yet have concrete examples of investment decisions affected by the ICP. Commit to disclosing such examples in subsequent years — this creates accountability for genuine implementation.