Companies are facing the prospect of being taxed on greenhouse gas (GHG) emissions, which could reduce profitability and, ultimately, shareholder value. Our analysis finds that even for sectors that are not traditionally viewed as “heavy emitters” this impact is unlikely to be negligible. (This is before considering Scope 3 emissions or more sophisticated liability redistribution mechanisms.). It is imperative for investors and management teams to understand GHG emissions exposure, the strategic implications, and alternative decarbonization pathways, rather than wait for certainty on the future regulatory environment.
As governments around the world grapple with the challenge of decarbonization, a key policy instrument under consideration (and in some countries, already implemented) is taxation on carbon and other GHG emissions. The thinking is that escalating emissions taxes over time will incentivize and accelerate the transition of the private sector to “net zero.” The key enabler for this is a robust and standardized accounting approach for GHG emissions across different economic sectors and jurisdictions, in line with the Scope 1/2/3 classifications. While there is still some way to go in having an established common framework, many corporations are voluntarily reporting their carbon emissions on a recurring basis. Also, there is now substantial published research available (e.g., IEA, Bloomberg NEF) that takes a view on how global average carbon pricing will need to evolve over the long-term in order meet the Paris Agreement climate change targets.