It is time equity investors start pricing in carbon tax in valuations. According to analysts, the risks that investors are going to face in the next few decades are very different from the risks of the past. The analysis says that investors are not prepared for them and could pick up a large chunk of the final bill as a result.
As per a new analysis, markets globally are failing to include global warming mitigation and future effects of climate change in equity valuations. It also estimates that a 20% drop would result in the stock market if the world is suddenly hit by a $75 carbon tax.
The data shows global markets could fall by around 4% if just scope 1 and 2 emissions – covering emissions from a company’s own operations, are eligible for a $75 per ton carbon tax. If scope 3 emissions are included as well, that would translate into a 20% fall.
If the carbon price reaches $150 a ton of CO2, markets could plunge by as much as 41%. It was estimated that US equities could fall by almost 27% due to the $75 carbon price, however, in Europe, the drop could be only 15.4%. The analysis also shows that the cost of the tax would rather hit balance sheets than be passed on to consumers.
However, the research is based on the assumption that the carbon tax would hit suddenly, whereas many other asset managers believe that it will be rolled out with a gradual increase.
Other Carbon Tax Research
According to another estimate by Legal and General Investment Management (LGIM) – the UK’s largest asset manager, global equities could be down around 16% by 2050 than they would be in the event of the imposition of a global carbon price.
The estimate is based on the assumption of a gradual increase of the carbon price to $383 per ton by mid-century. “It is absolutely essential investors factor in the carbon prices,” said Nick Stansbury, head of climate solutions at LGIM.
A big challenge for analysts is trying to calculate how much of the cost would be passed on to consumers and how much would hit the companies’ profits. In either scenario, customers would also have to pay part of the check.
It is not surprising that all research points that the energy sector would be hit the hardest, followed by utilities and basis materials sectors. LGIM’s analysts claim that 60% of the value of energy stocks are at risk over this period of time because of carbon risks.
Research examining the climate change mitigation and effects of climate change risks on companies and financial markets are helping businesses realize the huge implications of delaying climate actions. Profits saved now could be paid with a premium later on if companies, especially in the energy sector continue underestimating carbon tax and climate change policy.