Don’t let carbon pricing dull your competitive edge

Carbon pricing is increasingly a fact of life for global businesses. More than 40 national jurisdictions now charge companies for emitting greenhouse gases, using such mechanisms as carbon taxes and emissions cap-and-trade systems. Some of those are planning to raise carbon prices, and 35 more are considering whether to institute carbon pricing for the first time. To help executives understand how carbon pricing can affect business performance, PwC built a model that pins down the cost of carbon emissions that are hidden in the price of various goods. 

The example above looks at the five biggest producers of ferrous metals, which include steel, showing how the cost of carbon will change under two possible scenarios. The first assumes the full implementation of the European Union’s Carbon Border Adjustment Mechanism (CBAM), a carbon-tariff system that takes effect this year and becomes chargeable in 2026. The second is based on the International Energy Agency’s analysis of what it will take for the world to reach net-zero emissions by 2050. 

As the chart reveals, any change in carbon pricing can significantly affect producers’ cost profile, and thus their competitive position. Indeed, PwC’s model estimates that full implementation of CBAM alone would increase the cost of carbon for many goods by a factor of five or more. PwC has singled out four practices that can help executives prepare for anticipated movement in carbon costs.

• Map your emissions and carbon price exposure. Gather information on carbon emissions in your company’s production process, from onsite emissions to the upstream supply chain. Then determine how carbon prices apply to those emissions, paying attention to how prices vary by sector and by emissions type.
• Turn exposure into opportunity. You may be able to fund a sizeable portion of clean-energy investments with grants, low-cost loans and other forms of government assistance. In addition, most emissions trading systems allow companies that reduce their emissions to generate carbon credits that can be sold, opening a new path to value creation.
• Plan ahead to avoid price shocks. By examining your company’s carbon costs under future price scenarios and new regulatory regimes, you can identify opportunities for reducing carbon costs today and avoid pricing risk tomorrow. 
• Engage investors. Some banks and private equity firms are already assessing the carbon pricing risk faced by borrowers and portfolio companies. Executives should engage with investors, lenders, insurers and other financial institutions to explain how the company manages exposure to carbon pricing—and highlight efforts to lessen that exposure.

By identifying where carbon costs hide in your company’s supply chain, you can factor those costs—and any potential increases—into business decisions in a way that helps your company create more value.