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25.02.2022

Cascading Effects of Carbon Price through the Value Chain: Impact on Firm’s Valuation

Published 

25 February, 2022

> 10 minutes
25.02.2022
Cascading Effects of Carbon Price through the Value Chain: Impact on Firm’s Valuation
Published 

25 February, 2022

> 10 minutes

Abstract


To avoid the worst climate change scenario, Greenhouse Gas (GHG) emissions should be reduced drastically during the next decades. Placing an adequate price on GHG emissions, either through the adoption of a carbon tax or an internal carbon pricing mechanism by firms, is key to internalize the external cost of climate change.

In this paper, we assess the impact of carbon pricing in a global framework considering both the cost of corporate idiosyncratic emissions and their cross-sector diffusion. The impact on corporate valuation is shared among intensive companies and less intensive ones through the introduction of a carbon cost pass-through in a sector diffusion model, based on a World Input-Output table. Focusing on the constituents of the MSCI World Index, we show that apart from the usual carbon-intensive sectors, such as Energy, Utilities and Materials, less carbon-intensive ones, such as Industrials, Consumer Staples, Consumer Discretionary or Information Technology can contribute significantly to the global risk, due to the expected pass-through of the carbon cost in the value chain. World indices could experience large changes in their investment universe and sector composition.

 

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