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June 3, 2009

Cap-and-Trade Financial Risk Small For Most, Disaster for Some

The financial risk to companies in the S&P 500 would vary greatly under a cap-and trade program requiring the purchase of carbon emission credits, according to a new report released today by the Investor Responsibility Research Center Institute and Trucost.

On a company-by-company basis, financial risk varies widely. Earnings could fall between less than 1% and 117% by company, if carbon costs were incurred. Carbon costs would amount to less than 1% of earnings for 203 companies analyzed, while 71 companies could see earnings fall by 10% or more.

The Utilities sector faces the highest financial exposure to carbon costs. If the 34 utilities analyzed in the study were to pay for each metric ton of emissions, carbon costs could reduce their combined earnings by 45%. Within the sector, carbon costs as a percentage of EBITDA at a company level ranges from 2% for PG&E Corporation to 117% for American Electric Power.

For three companies, carbon costs could wipe out all earnings: Allegheny Energy, American Electric Power and Ameren Corporation. Eleven other companies had negative EBITDA even before carbon costs were internalized.

Direct emissions in 2007 by the companies in the S&P 500 were some 2,173 million tons of carbon dioxide equivalents, according to the report. Total emissions in 2007 – including emissions from first-level suppliers – totaled 4,307 million tons of carbon dioxide equivalents in 2007.

Carbon costs would total over $92.8 billion if a market price of $28.24 – Trucost’s estimate of the carbon market price in 2012 – were applied to each metric ton of emissions from companies in the S&P 500 and their direct suppliers such as electricity providers. This represents more than 1% of revenue from these companies, and some 5.5% of combined EBITDA. (story continued below)

Carbon costs currently are not reflected on a company’s financial statements because there is no charge for emissions. However, the proposed cap-and-trade legislation under consideration by the U.S. Congress would make new carbon costs explicit.

“The cost of carbon emissions has been passed to the public and not reflected in the financial statements of companies,” said Jon Lukomnik, program director of the IRRC Institute, which commissioned the study. “The analysis makes clear that a cap-and-trade system is a real game changer. A number of companies will have to reform how they think about carbon emissions and the associated costs, or their bottom line will suffer greatly.”

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