How internal carbon fees can help you reduce your business travel emissions

With ESG regulation looming, businesses are going further to accelerate their efforts to reduce emissions, with some introducing “internal carbon fees” across their Scopes 1,2 and 3. For businesses that do not produce physical goods or products, business travel is the single biggest source of CO2 emissions and is therefore a logical place to introduce internal carbon fees. In this guide, we’ll help you understand what internal carbon fees are, how they can help you influence behavioral changes, and how to successfully implement them across your business. 

First of all, what is an internal carbon fee?

An internal carbon fee is a set amount of money that, as a business, you charge internally to compensate for the emissions you create through your business activities. The idea behind setting an internal carbon fee is that you acknowledge that your business activities contribute to climate change and that you will play your part in helping to reduce those emissions. By putting a carbon fee on activities that your business controls, such as business travel, you can incentivize teams to reduce their emissions, while building up the funds to invest in climate solutions.

What's the difference between an 'internal price of carbon' and a 'carbon fee'?

An internal price of carbon is a way for businesses to assess financial decisions on how much those activities will emit, or reduce GHG emissions, but it doesn’t go as far as collecting money from departments to put towards climate initiatives. 

Why have businesses started introducing internal carbon fees?

Internal carbon fees are being introduced for three main reasons:

1. They help businesses consider both the financial and emissions implications of their decisions. By placing a fixed sum of money on, let’s say, 1 tonne of CO2e, it suddenly becomes a very real financial consideration.
2. They give teams a better understanding of the environmental cost of their decisions, so that they can better prioritize what will drive value for the business, and what can be avoided to help the business reach its climate goals. 
3. They gives teams greater autonomy for how they manage their own emissions, while still keeping some guardrails in place from head office.  

If you’re looking to change the way you travel as a business, an internal carbon fee is a good solution to help employees weigh up the carbon emissions of their business trips, whilst also collecting money to put towards climate mitigation projects. Here’s an example:

How to introduce internal carbon fees:

Take a look at the last two to three years of travel data to better understand your travel patterns and their associated emissions. If you don’t have a carbon accounting tool or a Goodwings subscription that automatically calculates your emissions when you travel, it might be a bit of a manual process, but you can still use the GHG Protocol conversion tool to turn travel distances into CO2 emissions. See how you can do this here.

Once you’ve analyzed your travel data, it’s time to set a travel “baseline year”. A baseline is a set period of time that you choose to measure all your future travel activity against. This will give you a strong indicator of how you’re doing with your emissions reductions, compared to a specific year in the past that you’ve selected. 

3. Set a reduction target for your travel
If you’ve set Science Based Targets or have committed to another sustainability framework (such as Carbon Disclosure Project or CPD, you’ll already have some guidance from them as to how much you need to reduce over a set period of time. But by setting a reduction target, you’ll be able to assess timeframes you have to do it in, and what it will take to get there (including how much budget you’ll need to set aside to reduce what’s leftover once you’ve reduced as much as you can internally).

4. Create an investment strategy
Having a clear idea of what you will invest the money in will help you determine what the fee should be set at. At this stage you’ll want to identify the projects that make the most sense for your business, or that are specifically related to the emissions you’re causing (for example, for air travel, investing in Sustainable Aviation Fuel). By setting a clear investment strategy, you'll be able to gauge what’s needed to finance those projects, and set the appropriate carbon fees. 

5. Set the carbon fee amount
With a clear investment strategy in place, you can get to work on setting out your carbon fee structure. This will naturally be different for every business, but there are a couple of factors that you should consider.

- Don’t overlook the social cost of carbon (SCC): This is a way of placing a monetary value on the social impacts that emissions have, which might otherwise not be considered - for example how 1 tonne of carbon affects agriculture, health, ecosystems and infrastructure, and therefore how much you should put aside to mitigate those effects. 

- Create a fee structure that adapts over time: Your carbon fee structure should take global economic growth into account. So even if you’re financing green initiatives, the economy will still continue to grow, so it needs to stay adaptable to market conditions and further emissions increases in the coming years. 

There are a number of ways you can choose to structure the fees, but to make the process as smooth as possible, you’ll want to make this a collaborative effort between your finance team and your environmental or sustainability team. Having input from both will ensure that you land on a carbon fee that’s:

1. Not too small, which runs the risk of not being enough to invest properly in the climate projects you've selected
2. Not too large that you're overcharging your teams, which could be damaging to financial targets. 
   
   

Once you’ve decided the set carbon fee for your teams, you’ll want to allocate those amounts to specific departments or teams so that they can manage their own travel budgets independently. By giving teams a sense of responsibility, you’ll empower them to actually make chances to the way they travel. In Microsoft’s case, they charge the fee upfront to incentivise those individual departments to reduce as much as possible so taht they will be charged less the next year. 

Once you’ve assigned the carbon fees, it’s important that you constantly monitor changes in your company’s travel behavior - has travel activity changed since the introduction of the carbon fees?  But also the carbon budgets. Perhaps the climate projects you’re investing in have become more or less expensive, and this should be reflected in the cost of the fee your teams have to pay to make sure it continues to drive impact. 

Integrating carbon fees into your travel management system is the easiest way to help teams assess in real time how they’re doing against the budget they’ve been assigned, so that they can make adjustments to their plans for the year, to make sure they can make all the trips they need to, without exceeding the budget.

No one likes being told what to do, certainly if it’s not clear why they have to do it. That’s why it’s important to devise a clear communication strategy that actually tells people why the carbon fee has been introduced, and the short (and long) term commitments that the company has made to reduce emissions and invest that money back into projects that can help mitigate the damaging effects of air travel. 

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