European CFOs, who could see company profitability hit by the soaring cost of carbon credits, must act to protect their future viability, business leaders warned.

The warnings come as delegates congregated for the 2018 U.N.'s COP24 Climate Change conference in Poland, to consider how regulatory and commercial incentives may push businesses to reduce their carbon footprint.

In Europe, the EU Emissions Trading System effectively taxes carbon outputs by awarding each business a carbon allowance. If businesses exceed their allowance, they must buy additional carbon credits on the open market.

The cost of carbon has rocketed in recent years. According to data from Intercontinental Exchange (ICE) , the EUA Carbon Futures price has risen from 7.35 euros on Dec. 4, 2017 to 20.34 euros on Dec., 3, 2018

Ellen Tatterton, finance director at Singleton Birch, said her company offsets the CO2 it generates in the quarrying process, but is anxious that her company’s carbon allowance is going to be cut to around 75 percent of current levels by the year 2021.

“That means that we are in the situation where we will have to buy carbon in the open market,” she told Bloomberg Tax in an interview. “It is something we are having to make customers aware of, ” she said.

Tatterton, like many CFOs affected by the rising cost of carbon, are predicting that prices are going to continue to rise as other businesses are forced to top-up their reducing allowances.

Growing concerns

Boardroom conversations on the issue are becoming common as the reality is starting to dawn on companies, said Dan Bakal, a senior director at Ceres, a non-governmental organization that considers how climate issues are affecting businesses.

“This is an issue that is gaining momentum and is on the radar of CFOs,” he told Bloomberg Tax.

Some companies in carbon-intensive industries have already taken steps to buy additional carbon at the current prices to hedge against future price rises.

In August, Bloomberg reported that German utility RWE had locked in lower prices by topping up its allowance, paying between 5 and 6 euros a ton, which will ensure it is unaffected until 2021.

At the time, RWE’s chief financial officer, Markus Krebber, said that companies “probably” needed the incentive of rising prices to encourage them to look at commercial operations which were more environmentally friendly.

“To have a significant amount of CO2 abatement from fuel switching, we probably need higher prices,” Krebber said.

Commercial Impact

Academics say that businesses in the energy, natural resources, chemicals, and industrial sectors are all affected by the changes. The extent to which business models could be threatened—if they don’t adjust their business models—is largely in the hands of governments, they say.

“It’s really up to government to decide if they still want these industries in Europe,” Brian Scott-Quinn, chairman of the ICMA Centre at Henley Business School, said.

“If they do, then the EU or the U.K. need to impose a Border Carbon Adjustment Tax to ensure that if exporters are undercutting us, because they don’t have a carbon tax, this does not disadvantage our industry,” Scott-Quinn said.

Scott-Quinn said such measures would likely involve putting a tariff on chemical, steel, glass, and cement imports from countries that did not tax carbon outputs.

Charles Donovan, director of the Centre for Climate Finance and Investment at Imperial College Business School, said that many European companies will simply be tempted to pass on the costs to their customers.