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

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