Is internal carbon pricing an agent of change in the green transition?

This study investigates the effect of internal carbon prices (ICP) on greenhouse gas (GHG) emission reductions. Using a sample of 57 firms over 13 years (2009–2021) with 741 observations, we find that firms adopting ICP significantly reduce their GHG emissions following the adoption. Specifically, following ICP adoption, firms reduced total GHG emissions by 2.677 times, Scope 1 emissions by 2.351 times and Scope 2 emissions by 0.326 times compared with their pre-2014 levels. Additionally, we find that the effectiveness of ICP on GHG emission reduction is enhanced through firms’ commitment to renewable energy and carbon abatement initiatives. Our analysis also reveals that although participation in emissions trading systems (ETS) alone may not directly reduce emissions, ICP adoption within ETS-participating firms amplifies GHG reductions. Our study provides empirical evidence for the effectiveness of ICP in corporate climate management and its role in enhancing the impact of carbon market mechanisms. Overall, the findings suggest that an ICP can serve as an agent of change in corporate transition towards a net zero business environment.