Risk & Compliance

The Cost of Climate Change

A new study predicts the higher cost of carbon, as proposed in Congress, would hurt the earnings of 14% of the S&P 500.
Sarah JohnsonJune 2, 2009

Seventy-one of the S&P 500 companies could take a 10% hit to their earnings from the cost of emitting greenhouse gases under the so-called cap-and-trade legislation wending its way through Congress.

Some of them — Allegheny Energy, American Electric Power, Ameren Corp. — could see their earnings wiped out altogether, if the predictions made in a report released today by environmental data company Trucost and the Investor Responsibility Research Center Institute, a not-for-profit research organization, are correct.

To be sure, these companies would likely foresee that their earnings could be affected and pass on the new cost of their carbon use to their customers through higher prices. A spokesperson at Ameren reiterated that fact, disputing Trucost’s prediction. “Any cost increases as a result of compliance would generally be passed on to…customers and would not be expected to have a significant negative impact to Ameren,” she told CFO.com.

Moreover, she added, the proposed legislation would give companies several years to transition to the higher cost of carbon emissions as well as for making plans to use lower levels of carbon without causing any disruption to their business.

Trucost’s study says most companies’ earnings won’t be affected and the financial risk of the government’s proposal varies according to company and to industry. The firm based its projections on 497 of the companies in the S&P 500 Index, using data about their emissions released in 2007.

The researchers’ findings are limited by the fact that no one yet knows how much companies will have to spend on their carbon allowances. Under a bill recently passed by the House Energy and Commerce Committee, the government would each year auction off permits to companies that would specify how much carbon dioxide they could emit. The permits could be traded with other companies.

By capping companies’ carbon use, President Obama believes greenhouse emissions in the United States can be reduced from 2005 levels by 14% in 11 years and by 83% in 41 years and in turn give the government hundreds of billions of dollars in revenue each year.

The companies most affected  by this legislation would, of course, be those that currently emit the most carbon, such as construction and engineering firms. The study says the most “carbon intensive” companies — utilities, basic resources, food and beverage, chemicals, and oil and gas — would see average carbon costs of between 1% and 2%.

Moreover, the researchers say, those industries will have the most financial risk if the cap-and-trade proposal is approved. The utilities firms alone would see their combined earnings cut in half. The researchers based their earnings-hit projections based on the assumption that every company would have to pay $28.24 starting in 2012 for each metric ton of emissions. Trucost acknowledged that this price could differ, depending on variations within each sector, the final price tag the carbon permits will go for on the auction block, and other factors.

Using the $28.24 figure, Trucost concludes that the more carbon-intensive industries would see an overall risk to their earnings before interest, taxation, depreciation, and amortization of 9% or more. Others, like banking and financial services and health care, could realize carbon costs that amount to less than 1% of EBITDA. Still, the effect of the cap-and-trade system will vary widely; Trucost says EBITDA declines at utilities companies could range between 2% to 117%.

Taking the S&P 500 group as a whole, Trucost predicts that combined corporate EBITDA would drop by 5.5%.

Trucost based its findings on data publicly available  from the businesses themselves about their activities’ impact on the environment, as well as analysis made by Trucost using a proprietary model for companies that don’t make such disclosures. Data on three of the S&P 500 companies, Dr. Pepper Snapple Group, Philip Morris International, and Scripps Networks, weren’t available for the time period being reviewed.