The situation of the 503 firms destroying more than $100m in economic value deserves special consideration for two reasons. First, burning stakeholders’ resources will be unsustainable in the medium term. Second, it seems unlikely that these firms can mobilize enough funds to invest in green production processes. The CO2 emissions per firm in this group – 9.4m tCO2e (for comparison, the total emissions of North Macedonia amounted to 9.77m tCO2e in 2022) – are triple the size of firms in any other economic profit segment. In other words, these firms destroy financial value even though they largely externalize the environmental costs of production. If these firms’ license to operate is not to be called into question, then ways must be found to help them become greener and cleaner (accelerated depreciation could be one way to promote green investment).
Chinese firms – notable examples include GD Power Development, China National Building, Xinjiang Tianshan Cement, China Petroleum & Chemical Corporation – account for 3.1bn tCO2e (65.3% of the 4,731bn tCO2e total), US firms for 0.4bn tCO2e (8.5%), Indian firms for 0.3bn tCO2e (6.7%), and Japanese firms for 0.3bn tCO2e (6.5%) of total emissions in this economic profit segment.
Are current business models viable with higher carbon prices?
To incentivize businesses to limit their emissions and transition towards cleaner, more sustainable practices, many governments have introduced carbon prices. Carbon prices are a market-based mechanism that assigns a monetary value to the emission of CO2 and other GHGs. Since carbon prices are an additional cost driver for companies, it is crucial for owners and investors to understand how potential increases in carbon prices will affect the economic profitability of their businesses. To assess how future carbon pricing schemes may affect the ability of firms to generate economic profits, in effect, we draw on research from the International Energy Agency and the International Renewable Energy Agency. Based on their insights, S&P Trucost derived carbon price risk premia which vary by sector, geography, year, and scenario and reflect the additional financial cost paid (per metric ton of emissions) from the price that is currently paid. Three scenarios are considered:
Medium 2030: Policies will be implemented to reduce GHG emissions and limit climate change to 2°C in the long term but with action delayed in the short term.
High 2030: The implementation of policies that are considered sufficient to reduce GHG emissions in line with the goal of limiting climate change to 2°C.
2050: The implementation of policies that are considered sufficient to reduce GHG emissions in line with the Paris Agreement.