Hidden Carbon Emission Costs Require Corporate Forecasting Care

As the United Nations climate summit known as COP28 continues this week, carbon pricing is back in the spotlight.

More than 40 national jurisdictions have carbon-pricing systems, and another 35 are considering them. Last month, the EU began phasing in the world’s first carbon-focused tariff system, the Carbon Border Adjustment Mechanism, or CBAM.

And the UN, with international endorsement, is finalizing the establishment of a centralized international carbon market under Article 6 of the Paris Agreement.

Overall, the average price applied to carbon emissions has risen from $26 per metric ton of carbon dioxide equivalent (CO2e) in 2010 to $36 in 2023, according to estimates based on World Bank data.

It’s safe to say companies are paying more than ever for carbon emissions—both from their own operations and their supply chains. Since the costs tend to be subtly embedded in the price of goods and services, we think of them as the hidden cost of carbon.

The hidden cost of carbon can be hard to tally in part because of how different carbon pricing systems charge for emissions.

High Costs

Emissions trading plans make carbon costs relatively easy to measure. The costs are based on discrete business metrics (such as fuel consumed or carbon emitted), and companies pay them directly to government authorities.

Carbon taxes, however, tend to be absorbed into the prices of goods such as fuel. Because the resulting costs are less visible, executives often find it difficult to track and factor them into the economics of a given project or investment.

Once companies add up all the costs associated with carbon pricing, they sometimes find the bill is surprisingly high.

In certain countries, industrial companies know they bear millions of dollars per year in carbon costs from the combustion of fossil fuels, because they pay directly for carbon emissions to comply with cap-and-trade regulations on large emitters.

But we’ve seen that industrial companies often bear similar costs because of carbon taxes—without knowing it.

Where carbon taxes are in place, companies that have fuel-intensive operations and transportation networks pay indirectly for their emissions because the cost of carbon taxes is built into the prices of fuel and other crucial inputs.

Carbon Price Model

To get a sense for how the hidden cost of carbon builds up across supply chains, we developed a model that combines data on national and subnational carbon prices with data on supply-chain emissions for 65 sectors across 141 countries and regions.

In the 19 individual countries that belong to the G20 (which also includes the EU), the hidden cost of carbon can amount to more than 1.5% of the production value of goods such as steel, cement, and chemicals. For electricity, the hidden cost of carbon can reach 10%.

And the cost of carbon is likely to go higher still, due to the price increases and new pricing systems that are on the way. Implementation of the CBAM, for instance, would lift the prices of certain carbon-intensive goods when they’re imported to the EU.

Consider the example of steel made in the US. Our model shows that it carries a hidden cost of carbon of 0.24% of its production value, on average. Then we modeled this cost under the full CBAM tariff. In that case, the carbon cost for US-made steel imported to the EU is 1.12%.

Such an increase might just be the beginning.

The International Energy Agency envisions that carbon prices would rise significantly in a scenario where the energy sector reaches net-zero emissions by 2050, in line with the goal of limiting the rise in global average temperature to 1.5C.

To explore that outlook, we used our model to apply the carbon prices specified for the year 2030 in the IEA’s net zero by 2050 scenario. Developed nations, for instance, would pay a carbon price of $140 per metric ton of CO2e in 2030.

At those prices, the hidden cost of carbon for an average ton of US-made steel would amount to 7.72% of today’s production value: 32 times the current level.

Moving Forward

Carbon prices appear likely to continue rising—and adding significant costs, which could affect a company’s ability to create long-term value.

A forward-thinking company should start by collecting information on carbon emissions across your company’s value chain, from upstream suppliers to direct operations.

Next, work out what carbon prices are being applied to high-emissions areas of the business and its value chain.

From there, you can project your company’s carbon costs under future price scenarios. Understanding present and potential costs will reveal valuable opportunities to shrink your company’s carbon footprint.

It also can point to opportunities to generate new revenues. A sustainable biofuels business, for example, could produce carbon credits that might be sold, in addition to the fuels themselves.

Finally, you’ll want to explore options for lowering carbon costs and emissions. The green incentives offered by many governments—including grants, tax credits, low-cost loans, and others—could help pay for clean-energy investments.

Getting to a sustainable global emissions pathway will require government and private-sector actions based on a cost of carbon that is much higher than current carbon pricing.

Companies can’t afford to ignore these trends. By finding the carbon costs hidden in your company’s operations and supply chain, you can map out ways to reduce emissions and carbon costs—and generate more value in the long run.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Barry Murphy is PwC’s ESG leader for global tax and legal services. Based in London, he is a partner with PwC UK.

Cameron Stonestreet is director of sustainability and climate change with PwC Canada, based in Calgary.