We study the determinants and effectiveness of internal carbon pricing (ICP) by publicly listed firms worldwide. Firms with a smaller board or committed to science-based targets set higher
levels of ICP, while the US withdrawal from the Paris Agreement reduced the likelihood of ICP adoption by US firms. ICP adopters have lower future profitability and allocate less capital to more
profitable divisions. Furthermore, ICP adoptions do not significantly influence risk-adjusted returns but are associated with lower growth of carbon emissions. Overall, our results suggest that ICP contributes to the low-carbon transition by integrating climate into corporate finance decisions.
