Impact of Internal Carbon Prices on the Energy System of an Organisation’s Facilities in Germany, Japan and the United Kingdom Compared to Potential External Carbon Prices

Abstract

Organisations attempt to contribute their share towards fighting the climate crisis by trying to reduce their emission of greenhouse gases effectively towards net zero. An instrument to guide their reduction efforts is internal carbon pricing. Next to choosing the right pricing tool, defining the exact value of an internal carbon price, especially against the background of potential regulatory external carbon prices, and assessing its impact on business units’ energy systems poses a challenge for organisations. The academic literature has so far not examined the impact differences of an internal carbon price across different countries, which this paper addresses by using an optimisation model. First, it analyses the energy system cost increase of a real-world facility based on an internal carbon price compared to a potential regulatory carbon price within a country. Second, we evaluate the energy system cost increase based on an internal carbon price across different countries. The results show that with regard to internal carbon prices the additional total system cost compared to potential external carbon prices stays within 9%, 15%, and 59% for Germany, Japan, and the United Kingdom, respectively. The increase in the energy system cost in each country varies between 3% and 93%. For all countries, the cost differences can be reduced by allowing the installation of renewables. The integration of renewables via energy storage and power-to-heat technologies depends on the renewable potentials and the availability of carbon capture and storage. If organisations do not account for these differences, it might raise the disapproval of internal carbon prices within the organisation.

From a long-term dynamic perspective: how should internal carbon pricing be implemented?

“…In terms of research on the application of internal carbon pricing, foreign scholars such as Oliver Gregor Gorbach first summarized the motivation for using internal carbon pricing and different methods of internal carbon pricing, described the impact of internal carbon pricing, and identified implementation obstacles, producing a process flowchart for identifying internal carbon pricing implementation . They then compared the internal carbon price with the potential regulatory carbon price in different countries using different optimization models and analyzed the differences in internal carbon prices in different countries (Gorbach et al, 2021). Finally, in the context of energy carriers, they compared the robustness of uncertain internal carbon prices in energy systems.…”