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Harvard Business Review: Carbon Might Be Your Company’s Biggest Financial Liability

Revisiting an article from Harvard Business Review (HBR). By Robert G. Eccles and John Mulliken.

To start with, we quote:

"... acting on climate plans is always “the next CEO’s job.” But every company has an uncovered “Carbon Short” position based on their emissions, and it needs to recognize this hidden liability today. This short position arises from the carbon emissions produced by their own operations (Scope 1 and 2, in the argot of climate accounting), and their products and services (Scope 3). Most companies don’t recognize this liability because these emissions are priced at zero today, were priced at zero last year, and so it seems natural to assume that they will be priced at zero in the future."

A (semi)hypothetical example: "In 2020 ExxonMobil released 112 million metric tons of CO2 “equivalent” (along with carbon, they also released other greenhouse gasses such as methane). At $100/ton, they would owe $11B annually on their own emissions. Since the company has earned only $8 billion on average over the past five years, this means they would rapidly be bankrupt."

Five simple steps for companies to start covering their "carbon short":

(1) Measure the position in carbon terms.

(2) Correlate carbon intensity witn revenues

(3) Determine a set of prices to use

(4) Price the forward emissions

(5) Discount the “carbon cash flows”

As such, based on the economic impact of "carbon emissions and prices", companies could better decide about projects that make sense. And even choose to use offsets, "though these are unsettled and the risks remain substantial". By the way, we ask: are offsets expenses? An inventory item? Or what? How to financially hedge carbon prices, as someone once asked us about the Brazilian CBIOS ?

Recall also that Unidroit, mandated by The World Bank, is still working on the legal nature of carbon credits.

Click at the image below for the full 2021 HBR article.

"The price of carbon may be zero in many places today, but it’s unlikely to remain zero for long". Just refer to EU's CBAM starting soon ...





“Nothing in life is to be feared, it is only to be understood. Now is the time to understand more, so that we may fear less.”

“I am among those who think that science has great beauty”

Madame Marie Curie (1867 - 1934) Chemist & physicist. French, born Polish.

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