Carbon Earnings at Risk

Environmental
:   
Climate & Environment
May 20, 2025

🔍 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

  1. Reported GHG emissions:
    • Scope 1 (direct)
    • Scope 2 (indirect from energy)
    • Sometimes Scope 3 (value chain)
  2. 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)
  3. 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.

S&P Global Sustainable1 CEaR

Explore more insights

See All Insights