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The Actuary The magazine of the Institute & Faculty of Actuaries

Carbon price rise to put fifth of global business profits at risk

Some 20% of the profits generated by global companies are at risk if carbon prices increase to the levels required to limit global temperature rises to 2˚C.

Carbon pricing used to cut emissions / shutterstock
Carbon pricing used to cut emissions ©Shutterstock

That is according to a new report from Schroders, which reveals the most exposed sectors like construction, steel, and commodity chemicals, could see their profits slashed by 80%.

A carbon price is a cost applied to the amount of greenhouse gases firms emit, with economists widely agreeing it is the single most effective way for countries to reduce emissions.

Schroders said that prices will have to increase from under $5 (£3.8) a tonne currently, to well over $100 in order to incentivise decarbonisation on the scale needed.  

“Carbon pricing looks likely to remain a key element of government climate policies for some time to come, as prices inevitably climb from the low levels of recent years,” the report says.

“Large and widespread effects on competitiveness, cash flows and value are almost inevitable, with climate change a defining theme in the global economy, industry and financial markets.”

The report comes as Schroders unveiled its Carbon Value at Risk (carbon VAR) model, designed to help investors more accurately assess the risks higher prices pose for companies, industries, and investment portfolios.

The firm argues that traditional analysis, such as carbon footprints and fossil fuel exposure, assess companies in isolation and fail to reflect how increased prices would affect their profitability in the future.

In addition, it says that investment products and funds that rely on more simplistic approaches may leave investors more exposed to climate risks than they had originally anticipated.

“Carbon footprints continue to dominate but at best provide an incomplete and, at worst, a misleading picture of the risks carbon pricing presents to investors,” Schroders head of sustainable research, Andy Howard, said.

“Carbon VAR is a new approach. It reflects the way companies make money and how their profits would change if carbon prices rose significantly.

“The results don’t bear much resemblance to carbon footprints, underlining the dangers of assuming funds or portfolios with low footprints will be insulated if policies toughen.”

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