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Climate Financials Heating Up
June 1, 2007
Toby A.A. Heaps is President of Corporate Knights
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Find Out MoreClimate change is more than hot air when it comes to the potential for imminent bottom line impacts in at least three sectors with significant greenhouse gas emissions (GHGs).

Within three years, it will no longer be free in the US to emit carbon into the atmosphere according to market sages JP Morgan, Lehman Brothers, and a broad cross-section of Republican and Democratic powerbrokers including presidential hopeful John McCain.

While the European Union, Japan and Canada already have varying schemes to price carbon, the pending US regulatory changes will elevate carbon emissions from sustainability reports to consolidated financial statements.

In the short-term, the US move to put a price on carbon will produce two effects: it will substantially impact (EBITDA) for high emissions firms, and it will produce global trade tumult in energy intensive products, as heavy industry based in the US lobby Washington move to level the playing field by slapping carbon levies on energy intensive imports from countries like China that do not have carbon pricing in place.

In the medium term, the global trade anarchy will generate significant support for a global carbon pricing regime that sets one price for a tonne of GHG emissions from large point sources no matter which country they occur, with the administration, authority and collection of funds left wholly to individual sovereign countries, annually verified by the IMF or a similar multilateral institution. This will make it easier for firms to optimize and speed the adoption of clean low-carbon technologies, which will likely be the growth story of the 21st century (clean-tech energy market is estimated to grow to $167.2 billion by 2015) and help explain why firms from BP (solar) to Intel (water) are investing millions into clean-tech R&D. That may also explain why Citigroup recently revealed plans to plow $50 billion over the next ten years into climate change mitigation with over $30 billion set aside for clean energy.

While regulations that put a price on carbon will create winners and losers, it is easier to outline bottom line implications from a carbon price scenario with those that have the most to lose.

According to the Carbon Disclosure Project, an investor network backed by US $41 trillion in assets, 80 per cent of global greenhouse emissions from the FT 500 originate from just three broad sectors: electric utilities, integrated oil and gas, and mining and metals.

The UK Treasury estimates the social cost of a tonne of carbon dioxide emissions (CO2e) at $58 in 2007, rising by about $2 per year.

A worst case scenario from a large emitters’ perspective would be a situation in which they had to bare the full social cost of emitting a tonne of carbon, which in Exxon Mobil’s case based on 2005 emissions of just under 140 million tonnes of GHGs would amount to $8 billion per year; for EON a charge of just under $7 billion per year; for Alcoa a charge of just under $3.5 billion per year.

The more likely scenario is that a carbon price will be phased in over time and have a lower initial ceiling. In this vein, Innovest (an investment research firm focused on quantifying intangibles) modeled the prices consistent with the accompanying chart. Electric utilities in North America face the greatest risk with compliance costs representing 25 per cent of their 2005 EBITDA.

Many of the most exposed firms to carbon pricing already have strategies in place to manage the risk--the depth, rigour and execution of these strategies may determine if they sink or swim as the icebergs melt.

Estimated annual cost of reducing BAU emissions by 10% between 2005 and 2012, with an assumed price of $25.34 per tonne of GHG emissions.

  Cost for Company to reach 10% reduction at $25 per tonne
Southern $1,119,026,516
Toyota $61,249,084
BMW $31,379,789
Dow $195,088,734
Praxair $132,326,277
GE $204,090,243
Siemens $266,630,026
Petrobas $2,179,767,126
Statoil $87,748,237
Alcoa $233,368,937
Rio Tinto $317,430,177

Source: The Carbon Disclosure Project

Further Reading

Citigroup Investing in Solutions to Climate Change Jun-06
Sprott Asset Management Investment Implications of an Abrupt Climate Change May-06
JP Morgan All You Ever Wanted to Know About Carbon Trading Jan-06
The Carbon Disclosure Project 4, Innovest, Sept-06

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