Carbon price assumptions.

We have seen that there are different types of users of carbon price data for a range of purposes, but which carbon price assumptions should they use in their own projections? This carbon price is often referred to as the internal or shadow price because it reflects the theoretical cost per ton of carbon emissions. But where should they obtain this price from? They could obtain it from the prices observed on the emissions trading systems, or they could use their own projections based on macroeconomic and statistical analysis, or they could use forecasts made by others. But which of these is correct? In fact, there is no right answer to that question. The management may prefer to use their own internal projections or carbon prices calculated using their own analysis, or they may prefer to use data from external published sources. These could be the prices observed on the emissions trading system, or may use forecasts or guidance made by institutions, such as the Bank of England or the Treasury in the UK, which publishes the so-called Green Book guidance. Typically, the price is set to a level that reflects the expected future price of carbon. The shadow price or carbon method helps a business understand carbon risk and then prepare for future conditions appropriately, well before the shadow price becomes a real price.