Internal Carbon Pricing for Australian Businesses: A Practical Guide

Last year, a CFO we were talking to asked us a question we didn't expect: "If I approve a $4 million diesel generator for our new site instead of a $5.2 million grid connection with solar, what's the carbon cost of that decision over ten years?"

He wasn't being philosophical. He was looking at his AASB S2 disclosure obligations and realising that the capital allocation decisions he was making today would show up in his transition plan disclosures tomorrow. The $1.2 million he'd "save" on the generator was about to become visible — to investors, to auditors, and to the board — as a strategic choice to lock in higher emissions for a decade.

That conversation is happening more often now. Internal carbon pricing in Australia isn't a niche sustainability initiative anymore. It's a financial planning tool, and AASB S2 paragraph 29(f) has made it a disclosure item. If you're using one, you have to say so. If you're not, that absence is conspicuous too.

What Internal Carbon Pricing Actually Is (And Isn't)

An internal carbon price puts a dollar figure on each tonne of CO2-e your business emits. That's it. It doesn't mean you're paying a tax. It doesn't mean you're buying offsets. It means you're making your carbon footprint visible inside your own financial models so it can inform decisions before they're locked in.

There are three main types, and the differences matter.

Shadow pricing is the most common. You pick a price per tonne — say, $50/tCO2-e — and apply it as a notional cost in investment appraisals. The money doesn't move anywhere. It just changes the numbers on the NPV model. A project that looked $800K more profitable than its low-carbon alternative might look $200K worse once you apply a shadow price to its lifetime emissions. Wesfarmers does this. Their shadow price starts at $22/tonne for short-term decisions and rises to $98/tonne for longer-term capital expenditure. The long-term number reflects where they think real carbon costs are heading.

Internal fees are different. Money actually changes hands — from business units to a central sustainability fund or carbon budget. Microsoft is the most cited example. They charge their business units US$15/tonne for Scope 1 and 2 emissions, US$100/tonne for business travel, and US$8/tonne for other Scope 3 emissions. That money funds actual decarbonisation projects. It hurts. That's the point. When a division's travel budget takes a visible hit from its carbon fee, travel patterns change.

Implicit pricing is the one most Australian businesses already have without realising it. If you're a Safeguard Mechanism facility, you're already facing a de facto carbon price. Your baseline drops 4.9% per year. Every tonne above that baseline costs you an ACCU (currently around $37 on the spot market) or an SMC. The cost containment ceiling is $82.68/tonne for FY2025-26. That's a real, quantifiable carbon cost embedded in your operations — you just haven't been calling it a price.

Why Now — The AASB S2 Trigger

A year ago, you could run an internal carbon price as a quiet strategic exercise. Something the sustainability team championed, the board nodded at, and the CFO quietly ignored when approving capex.

Not anymore. AASB S2 paragraph 29(f) requires entities to disclose "whether, and if so how, a carbon price has been applied in decision-making (for example, investment decisions, transfer pricing and scenario analysis)." It also asks you to disclose the price itself.

This is a cross-industry metric. It applies to everyone reporting under ASRS, regardless of sector. And it doesn't just ask if you have a price. It asks how you use it. An auditor will want to see evidence that the price actually influences decisions — not just that it appears in a policy document nobody reads.

Here's the uncomfortable part: according to ACSI's research, only 21% of ASX200 companies currently disclose using an internal carbon price. The prices vary wildly — from as low as $12.90/tonne to over A$224/tonne. That spread tells you the market hasn't converged on what the "right" price is. And honestly, we're not sure it should. A construction company with a mostly-diesel fleet faces a very different carbon cost trajectory than a financial services firm whose emissions are almost entirely Scope 3. One price doesn't fit all.

But having no price at all is increasingly hard to defend, particularly when your climate transition plan is supposed to show how climate considerations flow through to capital allocation.

Setting Your Price — Where the Numbers Come From

This is where most companies get stuck. Not on whether to set a price, but on what number to use. Pick too low and it doesn't change any decisions. Pick too high and the CFO dismisses it as activist fantasy. Here are the reference points that matter for Australian businesses.

The Safeguard Mechanism implicit price gives you a floor. If you're a covered facility, you already face a cost of $35-$40/tonne at current ACCU spot rates, rising potentially toward the $82.68 cost containment ceiling. That's real money leaving your business. Any internal carbon price lower than this is lying to your own financial models.

The EU ETS gives you a proxy for where carbon costs might head. EU carbon allowances have been trading between EUR 60-80/tonne (roughly A$100-130) through 2025-26. Australia's carbon pricing trajectory is less certain, but if you're making 20-year infrastructure decisions, ignoring where the EU — our third-largest trading partner — prices carbon is wilful blindness.

The social cost of carbon gives you a ceiling. Academic estimates range widely, but a commonly cited figure from a 2022 Nature study puts it at around A$275/tonne. That's the full economic damage — health, agriculture, productivity — of each tonne emitted. No company prices that high internally. But it's useful context for understanding just how much of the real cost is currently invisible.

The Climate Leaders Coalition Australia released an internal carbon pricing playbook in February 2025 that walks through these reference points in detail. Their recommended approach: start with a price anchored to your compliance exposure, then stress-test decisions at higher prices aligned with your scenario analysis pathways. That's good advice. It means your internal price and your AASB S2 scenarios are speaking the same language.

How Australian Companies Actually Use It

Let's get concrete. Here's how three different types of Australian businesses might apply an internal carbon price — and where it actually changes decisions.

A construction company running 200 pieces of diesel plant. Your fleet consumes 800,000 litres of diesel a year. At NGA Factors, that's roughly 2,160 tonnes of CO2-e. Apply a shadow price of $50/tonne, and that's an additional $108,000 notional cost per year layered onto your plant operations. Not enough to justify an overnight switch to electric excavators, but absolutely enough to shift the NPV on a decision between extending the life of a diesel fleet versus investing in hybrid or electric equipment on your next major project. The shadow price doesn't ban diesel. It makes the carbon cost of diesel visible in the same model that shows the capital cost of alternatives.

A property portfolio with 40 commercial buildings across three states. You're drawing power in NSW (0.64 kg CO2-e/kWh), Victoria (0.78), and Queensland (0.67). A $50/tonne shadow price turns your Victorian buildings' electricity consumption into a visibly more expensive line item than your NSW ones — not because the kWh rate is higher, but because the emission factor is. That changes how you prioritise energy efficiency retrofits. It might even shift tenant lease negotiations toward green power agreements in high-emission states first.

A Safeguard-covered manufacturer running at 120,000 tonnes CO2-e/year with a baseline at 110,000. You're already paying for your 10,000-tonne exceedance — roughly $370,000 at current ACCU prices. But your baseline drops another 4.9% next year, which means your exceedance grows to about 15,390 tonnes even if your actual emissions stay flat. At $37/tonne, that's $569,000. At the cost containment ceiling of $82.68, it's $1.27 million. An internal carbon price for capex decisions at your facility should be at least $50-80/tonne — the range where your actual compliance exposure sits. Anything less and you're understating a cost you're already paying.

Connecting Internal Carbon Price to Scenario Analysis

Here's where internal carbon pricing stops being a standalone exercise and becomes load-bearing for your AASB S2 disclosure.

Scenario analysis under AASB S2 requires you to assess climate resilience across at least two pathways — a low-warming scenario (1.5C) and a high-warming scenario (2.5C+). Both pathways need assumptions about carbon prices. In a 1.5C world, carbon costs rise sharply and fast — the IEA's Net Zero Emissions scenario assumes global carbon prices reaching US$250/tonne by 2050. In a high-warming scenario, policy stays weak and carbon prices stay low.

Your internal carbon price should sit somewhere between those bookends. But here's the bit most companies get wrong: your shadow price for day-to-day capex decisions doesn't have to match your scenario analysis assumptions exactly. They serve different purposes. The capex shadow price is meant to change behaviour now. The scenario analysis price is meant to test what happens to your portfolio under different futures.

What they do need to do is connect. If your scenario analysis shows that a $150/tonne carbon price under a 1.5C pathway would wipe out the economics of your coal-fired asset, but your internal shadow price for new capex decisions is $25/tonne, your auditor is going to ask why your investment decisions don't reflect your own climate risk assessment. That disconnect is exactly the kind of thing ASIC will flag when reviewing sustainability reports.

BHP's approach is instructive. They've used a "Greenhouse Gas Project Screening Value" for over a decade — a shadow price applied to all major capital investments. The exact current figure isn't publicly disclosed in a single number, but they've historically used a range ($24-$80/tonne depending on timeframe and geography), and it directly influences decisions to invest in low-carbon alternatives, carbon capture, and natural gas over coal. The key thing isn't the number — it's that the price feeds into the same decision-making process that their climate disclosures describe. The internal price and the external story are consistent.

Woodside uses US$80/tonne as their internal cost of carbon for evaluating emissions reduction opportunities. Their climate report explicitly ties this to their scenario analysis — the price represents a mid-point between their modelled carbon cost pathways. When they find that abatement options cost more than $80/tonne, those options don't disappear — they go into a company-wide pipeline for cost-reduction and technology maturation. That's what a functioning internal carbon price looks like: not just a go/no-go filter, but a system for staging investment over time.

The Gap Between Disclosure and Action

Here's our honest take on where internal carbon pricing stands in Australia right now: most companies that have one aren't using it properly.

CDP data shows that 1,753 companies globally reported using an internal carbon price in 2024 — an 89% increase since 2021. But KPMG's analysis of the chemicals sector found that while 44% of firms report having or planning an internal carbon price, only about 7% have actually introduced internal charges to business units. The rest have a shadow price that sits in a spreadsheet and gets referenced in sustainability reports. It doesn't touch the P&L. It doesn't change behaviour.

We see the same pattern in Australia. A company discloses a shadow price of $50/tonne. But when you look at their actual capex approvals, there's no carbon line item in the investment committee papers. The price exists in the sustainability team's world but hasn't made it into the CFO's toolkit. Under AASB S2, that gap becomes a disclosure risk. You've told the market you price carbon into decisions. Your auditor can now ask: show us.

The Climate Leaders Coalition's playbook puts it well: declaring a price is a starting point, not an end point. The real work is embedding the price into operational targets and investment choices. That means three things need to happen:

The CFO's team needs to own the price, not the sustainability team. If it doesn't live in the finance function, it won't live in financial decisions.

The price needs to appear in capital expenditure proposals — not as a footnote, but as a line item that changes the NPV. Every project above a certain threshold should show two numbers: the economics without carbon, and the economics with carbon.

The price needs to update. A static $30/tonne set in 2024 and never revisited isn't reflecting the fact that your Safeguard baseline dropped another 4.9%, or that the ACCU market has shifted, or that your scenario analysis now includes a higher transition pathway. Annual review at minimum.

Getting Started — A Practical Sequence

If you don't have an internal carbon price today, here's how we'd suggest approaching it. Not as a twelve-month project. As a four-week sprint.

Week one: know your numbers. You can't price carbon if you don't know your emissions. Pull your most recent Scope 1 and Scope 2 data. If you're still doing this manually from utility bills and fuel receipts, that's your first bottleneck — and it's the problem we built Carbonly to solve. You need kWh by site, fuel by type, refrigerant losses, fleet fuel consumption. All of it. In a format you can multiply by a price.

Week two: pick your price. Start with your compliance exposure. If you're a Safeguard entity, your floor is the current ACCU spot price ($37/tonne). If you're not, use the cost containment price ($82.68) as your starting reference — it represents the government's view of what a reasonable carbon cost ceiling looks like. Then pick a higher price for long-term decisions (10+ years). A$100-130/tonne, roughly aligned with where the EU ETS sits, is a defensible number for scenario testing.

Week three: run the model. Take your last three major capex decisions. Rerun them with your carbon price applied. How many of them change? If none do, your price might be too low. If all of them flip, it might be too high. The goal isn't to make carbon the only factor — it's to make it visible alongside every other cost in the model.

Week four: write the governance. Document who sets the price, how often it's reviewed, what decisions it applies to, and how exceptions are handled. This is what your AASB S2 disclosure will draw on. This is also what your auditor will ask for when they review your paragraph 29(f) metrics. If you can't show a governance document, the price is aspirational, not operational.

That's it. Four weeks to a functioning internal carbon price. You can refine it later — add Scope 3, differentiate by geography, introduce internal fees instead of shadow pricing. But the first version just needs to exist and be applied to real decisions.

Where We Sit on This

We build carbon accounting software. Our job is to get the emissions numbers right — pull data from utility bills, apply the correct NGA emission factors, produce audit-ready calculations. Internal carbon pricing is the step that comes after that. It's what you do with the numbers once you have them.

And that's exactly the problem we see over and over. Companies try to set an internal carbon price before they've got reliable emissions data. They end up pricing a guess. A shadow price applied to Scope 2 emissions that were calculated with last year's emission factors, from electricity data that was manually transcribed from PDF bills with a 3.7% error rate — that's not a decision-making tool. It's theatre.

Get the measurement right first. Then price it. That sequence matters.

If your team is spending more time collecting emissions data than analysing it, you're not ready for internal carbon pricing — you're still stuck on the prerequisite. Carbonly automates the data extraction step so your sustainability team can focus on the decisions that actually move the needle. See how it works or get in touch.

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