Carbon Beta - A Framework for Determining Carbon Price Impacts on Valuation

Posted: 7 Sep 2019 Last revised: 29 Sep 2019

Date Written: August 31, 2019

Abstract

Greenhouse gas (GHG) emissions create a cost liability for firms exposed to the implementation of carbon pricing. We propose a framework for public equities that links Scope 1 and Scope 2 emissions with changes in firm valuation. This framework considers both 1) larger operating costs that lead to a decrease in value as well as 2) new revenues generated by “green” sales that increase the value of firms. From an initial carbon tax “shock”, we distribute the tax costs across market sectors based on Scope 1 emissions and estimate higher electricity costs based on Scope 2 emissions. In addition, we consider an increase in revenues for companies generating solutions for mitigation of GHG emissions. The framework relies on a host of assumptions that we outline and test through sensitivity analysis. We find negative price responses in four sectors: Energy, Utilities, Materials and Transportation, while we find positive price responses in several sectors including Automobiles, Software and Capital Goods.

Keywords: Carbon pricing, carbon tax, Greenhouse gas scenarios, carbon emissions

JEL Classification: G14, D24, G32

Suggested Citation

Bertolotti, Andre and Kent, Michael, Carbon Beta - A Framework for Determining Carbon Price Impacts on Valuation (August 31, 2019). Available at SSRN: https://ssrn.com/abstract=3446914 or http://dx.doi.org/10.2139/ssrn.3446914

Andre Bertolotti (Contact Author)

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

Michael Kent

BlackRock, Inc

55 East 52nd Street
New York City, NY 10055
United States

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