Carbon: Maybe a company’s biggest financial liability
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, according to a new article recently published in the Harvard Business Review. Its authors conclude that economic models and the experience of the EU Emissions Trading System would suggest that a price could likely be between USD 50 and USD 100 per ton of CO2in the near term and might even rise from there. Therefore, even if the price of carbon may be zero in many places today, it would be unlikely to remain on this level for long. This would mean that many companies might have hidden liabilities on their books.
To cover their carbon short position, the article’s authors recommend organisations to take several steps: i) measure the position in carbon terms, ii) determine if carbon intensity will increase or decrease as revenues increase, iii) determine a set of carbon prices to use and the timing of putting them into place, iv) price out future emissions, and finally v) discount the “carbon cash flows” by using the company’s cost of capital to discount the future carbon prices and determine a total economic impact in today’s USD. Eventually, organisations should then share these calculations with investors in their quarterly reports.
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Thursday, 21 March 2024
Thursday, 20 March 2025