The document discusses how emissions trading schemes will impact company valuations. It notes that companies with carbon footprints will face costs to acquire offsets or implement mitigation strategies. The key questions for companies are whether added costs can be passed to customers and how management decisions can influence value outcomes. The document recommends companies assess their footprint, mitigation costs, and demand elasticity to understand valuation impacts and develop flexibility to handle carbon price volatility in the new regulatory environment.

1. Emissions Trading: Impacts on your company’s value
Introduction How much value might my company lose? Corporate life in a post-ETS world
The emergence of an emissions trading scheme If your company currently has any carbon footprint, Features of a post-ETS world are likely to be:
[“ETS”] in 2010 signals recognition of a need for our there will be a cost to your business from 2010 in
• A self-assessment regime whereby polluters
economy to move to a polluter-pays regime. the form of some combination of:
determine their carbon footprint and a compliance
There will be value impacts – indeed this is what is 1. The need to acquire carbon offsets under an ETS; assurance systems developed by the regulator to
intended as a consequence of an ETS. monitor the quality of self assessment processes
2. Implement mitigation strategies
Governments of most developed and developing • Offsetting (abatement) will increasingly be regarded
3. Voluntarily abate emissions as nothing more than a “get out of jail free” card
nations have seen the need to limit the production
of greenhouse gases in order to curb the impact of A key question is whether the competitive • Incentives for effective implementation of
global warming. positioning of your business and the relative mitigation plans
effectiveness of your mitigation strategies will • Pollution “havens” will emerge in much the same
The method most widely accepted as the most
enable all or any of the costs of mitigation and way as tax havens – with the same ultimate
effective means to achieve this objective is via a
offsetting to be passed on to customers. outcomes
user-pays system – in this instance, frequently
referred to as a polluter pays system. If the answer is “no” then the cost of mitigation and
, • Demand elasticities will change in unexpected
offsetting (and abatement) will be met by equity ways as customers assess their preparedness to
Fairly obviously, those who pollute most will be
holders. endorse (through higher prices) environmentally
required to pay most. Shareholder value will be
efficient businesses
destroyed in some sectors and by individual The need for an ETS
companies. Some companies will create vast • Some “offensive” industries (such as fossil fuel
shareholder wealth. Yet others will profit Governments of the world have responded to the extraction) will prosper in the near term due to
enormously in the short term and then die. scientific and popular belief that the predicted political expediency and the simple supply/
climate change outcome should be averted. The demand affects resulting from technology inertia
Climate Capital’s carbon valuation model is a response is largely to move to a polluter-pays • Tariff and other forms of protection may be
solution available to all companies, funds managers, regime, in most cases favouring an ETS. employed to mitigate against the affects of wealth
asset consultants and investors seeking to
Accepting this base-line reminds us that some re-distribution within an economy such as Australia
understand the potential value impacts of ETS
introduction and how management decisions can segments of our economy are larger consumers or A business which is environmentally
be employed to influence value outcomes. destroyers of the environment than others. Fairly unsustainable is most likely financially
obviously, industries such as fossil fuel extraction unsustainable.
and conversion into energy (e.g. transport, property)
are among the worst offenders.
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2. Preserving and creating value in a post-ETS world
The aim of the carbon valuation model is not only to • Cost of technologies to assist in changing core The carbon valuation model examines each of the
identify the likely range of potential value impacts business processes key drivers of carbon value explicitly – including the
but, more importantly, provide the insight into the • Cost of mitigation – what will the process change shape and behaviour of curves which describe
actions and decisions which management can take implementation cost the business? Will the cost underlying business responsiveness to management
to manage the value impact. be more or less than the cost to offset? decisions such as mitigation strategy implementation.
The carbon valuation model simulates a range of • What is the likely impact on input costs of ETS Checklist for management action
variables which impact the anticipated incremental introduction (i.e. what is the “carbon intensity” of
The carbon simulation and valuation model has
cashflows arising as a function of the cost of carbon inputs)?
demonstrated that management action can be
offsetting, mitigation and/or voluntary abatement. • Revenue opportunities arising from taken when some basic preparation is complete.
Allowance is made for revenues from the sale of environmentally sympathetic offerings The checklist includes:
offsets arising from (e.g.) bio-sequestration.
What we would like to know is how much value 1. Assess the business’s carbon footprint
There are some key valuation parameters: might be destroyed or created as a consequence of
2. Consider the likely relationship between input
• Demand elasticity – how much of the cost can be the introduction of an ETS and how the business
costs and footprint
passed on to customers? can respond to its GHG emissions.
3. Estimate the likely impact on input costs of ETS
• Policy framework – will the business be positively Strategies for the post-ETS world introduction
or negatively impacted by government policy?
In many cases, the impact of a variable is dependant 4. Estimate the realistically achievable carbon
• The extent to which the capital markets have upon the resolution of key uncertainties – such as reduction from a well-executed mitigation strategy
already captured some level of carbon cost into the initial carbon price and the behavior of that price 5. Fully-cost the mitigation strategy, ensuring that
current valuations over time. This uncertainy is incapable of resolution. both capital and operating expenditures are
• Rate of mitigation change – how fast can the So what can management do to exploit the considered
business respond to the need to re-shape its knowledge that it is one of the most important
6. Research and test the likely demand elasticity of
purchasing, logistics and core processes? variables?
the customer base
• The initial carbon price and rate of carbon price Several strategies are available.
increase change – how will the market for carbon Conclusion
offsets behave? A focus is needed on insulating the business from
For most businesses, the impacts on value of
volatility in carbon prices and developing operating
• The amount of “free” pollution which the ETS an ETS are far from trivial and require urgent
flexibility which minimizes the impact of extremes in
provides us from its inception and the rate of consideration in order to preserve
outcomes. This is the core of the real option
decay to the eventual sunset management flexibility in the face
thinking which pervades the oil exploration and
of potentially dislocational or
pharmaceutical drug discovery industries where
transformational change.
uncertainty is omnipresent.
Level 23, COMALCO Building , 12 Creek Street, Brisbane Qld 4000 Australia
Tel: +61 409 553 335 info@climatecapital.com.au www.climatecapital.com.au