Through some combination of government intervention and the development of carbon trading markets, it seems inevitable that a price will eventually be put on carbon around the world. Underscoring this, a carbon price has been proposed as part of several bills before Congress, but other mechanisms like a cap on emissions in a sector or geography would achieve the same effect. Economic models and the experience of the EU Emissions Trading System suggests that a price could likely be between $50 and $100 per ton of CO2 in the near term and rise from there. At $100 per ton that would represent five percent of the global economy. Five percent of the global economy is a huge number. But where does this liability sit? With the world’s corporations.
Carbon Might Be Your Company’s Biggest Financial Liability
The bill on your greenhouse gas emissions is coming. Are you ready to pay it?
October 07, 2021
Summary.
The price of carbon may be zero in many places today, but it’s unlikely to remain zero for long. That means that many companies have hidden liabilities on their books. To cover their carbon short position, executives can take several steps: Measure the position in carbon terms; determine if carbon intensity will increase or decrease as revenues increase; determine a set of carbon prices to use and the timing of putting them into place; price out future emissions; and finally discount the “carbon cash flows” by using your company’s cost of capital to discount the future carbon prices and determine a total economic impact in today’s dollars. Executives should then share these calculations with investors in their quarterly reports.