How the implementation of internal carbon pricing impacts on carbon reduction: facilitating or hindering

A growing number of companies are incorporating internal carbon pricing into their climate management strategies, making it one of the ways in which the private sector can combat carbon emissions and respond to the climate crisis. In this study, we used the synthetic control method in an attempt to discover whether the implementation of internal carbon pricing has an impact on the carbon reduction of typical firms at an individual level. As some of the firms cannot be properly fitted, statistical approaches were then applied to the S&P 500 constituent firms to test if there is any correlation between the emission cuts and internal carbon pricing. We also conducted a channel analysis. Through examining three possible channels, internal carbon pricing is found to affect firms' carbon reduction mainly through two channels, namely the level of energy intensity and R&D investments. Among them, the energy intensity plays a positive mediating role between emission reduction and internal carbon pricing. As to another channel, contrary to expectations, internal carbon pricing, to some extent, suppresses the R&D investments which will promote carbon emission reduction. That is, the size of R&D investments has masking effects in the relationship between emission cuts and internal carbon pricing. Our findings contribute to researches on the carbon pricing, emission reduction, and climate management efforts from the private sector and have implications for practices.