Companies that rely on their carbon footprint to determine how much financial risk they face from carbon pricing policies could be ignoring other key factors that could lead to future significant losses, according to a new research paper by Trucost.
"Because a significant share of carbon pricing risk could come from supply chain activities and energy-intensive products, it is essential for companies to account for carbon risk beyond their direct operations," the research paper, "Carbon Pricing: Discover Your Blind Spots on Risk and Opportunity," published Jan. 17, said. Failing to do so could "create a blind spot on the true financial implications of carbon policies for companies and their investors."
Trucost looked at the financial risks companies could face under a scenario in which carbon prices climb high enough to reduce global greenhouse gas emissions to levels necessary to achieve the Paris Agreement on climate change's goal of limiting global warming to 2 degrees C by 2100. Globally, carbon prices average around $40 per metric ton of carbon dioxide, or tCO2, but those prices would need to increase to $120/tCO2 by 2030 among the nearly three dozen member countries of the Organisation for Economic Co-operation and Development under a 2 degree C-aligned scenario, the report said.
While President Donald Trump has said he will pull the U.S. from the climate accord, a number of U.S. states, cities and businesses have said they will continue to pursue its objectives. Moreover, governors from a number of states, including Washington, as well as Democrats in the U.S. Congress, have proposed creating a carbon tax. No such regime currently exists in the U.S. at the state or federal level, but two major cap-and-trade programs have been implemented in North America, one involving nine northeastern states and another among California and the Canadian provinces of Quebec and Ontario.
To illustrate the variety of risks carbon prices could pose, the report examined nearly 100 companies in 16 countries across the electric utility, chemical manufacturing and automobile manufacturing sectors. The report looked at the cost of rising carbon prices on emissions from direct operations and indirect costs of higher prices for carbon-intensive purchased electricity and goods and services. And it considered the degree to which companies will be able to pass on those costs to consumers.
The Trucost paper said analyzing broad financial scenarios such as those recommended by the Task Force on Climate-Related Financial Disclosures in June 2017 will help companies make better decisions on low-carbon investments, operational strategies and procurement. An increasing number of companies are bowing to pressure from investors to disclose their climate risks.
Trucost found that the electric sector faces the highest exposure, with nearly 90% of its average profit at risk by 2030 and risk levels exceeding 150% by 2050. The chemicals sector could see more than 30% of its average profit at risk by 2030 and 60% at risk by 2050, whereas the automobile sector could see 15% of its profit at risk by 2030 and 30% by 2050.
The risk exposure companies face can be influenced by both the intensity of their greenhouse gas emissions and the extent to which they can shift operations and supply chains to other locations in response to carbon prices. Because electric utilities have the highest operational carbon footprint and tend to have their physical assets concentrated in a few countries, their options generally are more limited than the chemicals and automobile manufacturing sectors, which have supplies and operations that are more spread out.
A company's business model and market conditions, including how much cost a company can pass on to customers and where the emissions actually occur, are among the important factors that should be considered, the paper said. For example, the report compared two chemical companies with similar operational and supply chain emissions intensities and found that one had 30% higher profit at risk between 2017 and 2050 because its emissions were concentrated in Europe, where carbon pricing is expected to grow significantly.
Globally, more than 42 countries and 25 subnational jurisdictions were putting a price on carbon as of 2017, according to the World Bank.
While electric utilities face the biggest risk associated directly with emissions, supply chain activities account for a smaller share of their total risk exposure than the other sectors. Supply chain activities account for about 80% of automobile manufacturers' carbon pricing risk exposure and for about 53% of that for chemical companies, but only 29% of the total for utilities. The paper noted that as car fuel prices climb due to carbon prices, customers are likely to buy fewer new fossil-fueled powered cars.
"Companies need to understand carbon pricing risk exposure from the entire value chain, beyond just the risk from direct operations most commonly measured by carbon footprints," the report said.
Trucost is a part of S&P Dow Jones Indices, which, like S&P Global Market Intelligence, is owned by S&P Global Inc.
