🔍 Definition
Carbon earnings at risk (CEaR) quantifies how much of a company’s profits would be at risk under different carbon pricing scenarios. It asks:
"If carbon had a price, how much would it cost this company based on its emissions—and how would that affect its earnings?"
💡 Why It Matters
- Investor perspective: Helps assess climate transition risk and the resilience of earnings in a low-carbon economy.
- Corporate strategy: Identifies carbon-intensive assets, operations, or products that may need decarbonization.
- Regulatory pressure: With increasing carbon pricing and mandatory climate disclosure regimes (e.g., CSRD, IFRS S2), CEaR is becoming a decision-useful metric for boards and CFOs.
📊 Key Inputs
- Reported GHG emissions:
- Scope 1 (direct)
- Scope 2 (indirect from energy)
- Sometimes Scope 3 (value chain)
- Carbon pricing assumptions:
- Current actual prices (e.g., EU ETS ~€75–€100/tonne)
- Internal carbon prices used by companies (e.g., $50/tonne)
- Future scenario prices (e.g., NGFS, IEA pathways)
- Financial data:
- EBITDA, EBIT, Net Income (to benchmark exposure)
📈 Example Calculation
If a company emits 1 million tCO₂e/year, and the carbon price is assumed to be $80/tCO₂e, then:
CEaR = 1,000,000 × $80 = $80 million
If their annual EBITDA is $400 million, then:
Carbon earnings at risk = 20% of EBITDA
🧩 Integration into ESG and Financial Models
- CEaR is often included in:
- ESG materiality assessments
- Climate scenario analysis
- Enterprise risk management (ERM)
- Discounted cash flow (DCF) models as a future liability or cost
🏛️ Leading Frameworks Using CEaR
- TCFD (Task Force on Climate-Related Financial Disclosures)
- IFRS S2 (Climate-related disclosures under ISSB)
- CDP (Carbon Disclosure Project)
- Science-Based Targets initiative (SBTi) recommends carbon pricing strategies
🚨 Criticisms and Challenges
- Uncertainty in carbon prices: Volatility and policy differences across regions.
- Data quality: Emission data may be incomplete or not third-party verified.
- Scope 3 emissions: Hard to quantify but often represent >70% of a company’s total carbon footprint.
