Environmental self‐regulation for sustainable development: Can internal carbon pricing enhance financial performance?

Abstract

AbstractInternal carbon pricing is an innovative self‐regulation mechanism where companies set their own carbon prices on business operations to mitigate climate risk and achieve sustainable development. While internal carbon pricing has gained popularity among multinational enterprises, its firm‐level impact is underexplored. This research provides novel theoretical and empirical evidence on how the internal carbon price as a cost component can contribute to profitability growth. We construct a panel dataset of 132 multinational enterprises across Europe, North America, and Asia by tracking their use of internal carbon pricing from 2013 to 2017 based on their records at the Carbon Disclosure Project. To address endogeneity bias, we employ propensity score matching method on a fixed‐effects model. Results indicate that using internal carbon pricing can increase return on assets by 1.1%. Firms with internal carbon prices are more likely to reduce cost of goods sold to improve return on assets. Our study suggests that internal carbon pricing as environmental self‐regulation can generate profitability gains through cost reduction. The research also points out the potential of voluntary internal carbon pricing to complement command‐and‐control carbon pricing regulations.