Internal Carbon Pricing as a Purchasing Tool for Emissions Reduction

Abstract

Problem The transition toward a low-carbon economy requires firms to internalise the cost of carbon dioxide emissions in their decision-making. This is particularly important within Scope 3, the indirect emissions occurring across the company’s value chain, where the largest share of emissions in manufacturing firms typically resides. Internal Carbon Pricing (ICP) has emerged as a management control mechanism designed to bridge corporate sustainability ambitions with operational decision-making. However, although the existing literature describes the conceptual foundations of ICP, empirical evidence on how the mechanism functions in practice within sourcing processes remains limited. Automotive Original Equipment Manufacturers (OEMs) face particular pressure due to emissions-intensive supply chains and approaching regulatory frameworks such as the EU Emissions Trading System (EU ETS) and the Carbon Border Adjustment Mechanism (CBAM). Understanding the conditions under which ICP can produce its intended effects in this context is therefore critical, both for firms preparing for implementation and for policymakers seeking to design supportive regulatory environments.

Aim The aim of the study is to investigate the organisational, structural, and institutional conditions that determine the effectiveness of ICP as a management control mechanism within the sourcing function of a European automotive OEM. The study seeks to map the practical problems and opportunities that arise when implementing ICP for the management of Scope 3 emissions, and to develop a deeper understanding of what an ICP implementation entails for the organisation. By doing so, the study contributes both theoretical insights into the implementation conditions of ICP and practical guidance for firms and policymakers navigating the green transition.

Theoretical framework The study’s primary research domains are corporate environmental strategy and the organisational implementation of ICP. Within these areas, the previous research draws on peer-reviewed scholarly articles, foundational management literature, and policy reports. Central concepts include institutional pressures on environmental strategy, the structural and pricing dimensions of ICP design, and the behavioural, cultural, and data-related conditions that shape implementation outcomes. The reliability of sources was evaluated against established source-criticism criteria, and the study has prioritised contributions published in peer-reviewed academic journals together with publications from recognised public institutions.

Methodology The study was conducted as a qualitative exploratory case study using an abductive research approach, examining a single embedded case, a European automotive OEM that had completed a structured ICP pilot study during 2024. Two embedded units of analysis were employed, the sustainability function and the purchasing function, to enable comparison of perspectives across functional boundaries. Primary data were collected through ten semi-structured interviews, complemented by contextual observations of approximately six to seven hours from meetings with key informants at the case company. Secondary data were drawn from internal policy documents, the ICP pilot study material, and publicly available sustainability and annual reports. The empirical material was analysed using thematic analysis, with previous research applied throughout to interpret the findings.

Results and Implications The study contributes to the literature on corporate environmental strategy and the organisational implementation of ICP by reframing ICP from a technical pricing mechanism to an organisational control system whose effectiveness depends on structural, organisational, and institutional conditions. The empirical findings show that ICP enters the sourcing process too late to influence early supplier qualification, and that its effect on final selection is concentrated on components with high carbon intensity. At the time of this study, purchasing performance was governed entirely by cost-based KPIs reinforced by external market pressure, and no formal implementation of ICP has been made following the pilot study. Three theoretical contributions are made. First, when carbon cost is small relative to total sourcing cost, shadow pricing cannot shift the decision regardless of managerial involvement. Second, an abatement cost framing developed within logistics sourcing is identified, equivalent to shadow pricing but reversed in presentation, which is not captured by existing ICP design typologies. Third, supplier-market competitiveness is established as a crucial factor for ICP effectiveness within sourcing. The practical contribution is that segment selection matters more than price calibration, and that shadow pricing is a viable first step if supported by clear ownership, aligned KPIs, and formal guidelines linking carbon costs to supplier selection. For policymakers, ICP cannot drive decarbonisation in isolation as long as customer markets do not reward sustainability, and firms outside the EU face asymmetric regulation.