Abstract

The US Securities and Exchange Commission recently proposed a rule that would mandate that public companies report their greenhouse gas (GHG) emissions. This follows similar efforts in the European Union (EU) and United Kingdom. One rationale is that disclosure will provide information on material risks to investors, making it evident which firms are most exposed to future climate policies. In addition, some believe that reporting will galvanize pressure from companies’ key stakeholders (e.g., customers and employees), leading them to voluntarily reduce their emissions. This reasoning is in line with evidence for financial markets and disclosure mandates that form the third wave of environmental policy, which follows a wave of direct regulation and a wave of market-based approaches. But what might such disclosure reveal? We provide a first-cut preview of what we might learn about the climate damages caused by each company’s GHG emissions by drawing on one of the largest global datasets, which covers roughly 15,000 public companies.

Methodology

The analysis uses one of the largest global data sets on reported and estimated corporate GHG emissions, covering roughly 15,000 publicly traded firms. The vast majority of these emissions are estimated by S&P Trucost because companies do not report emissions. Moreover, a major challenge is that even for the companies that do report their emissions, they rarely provide third-party validation and there are no penalties for false reporting, underscoring the need for mandatory disclosure. For each firm, “corporate carbon damages” are calculated as the product of their Scope 1 CO2 equivalent emissions and the social cost of carbon (SCC)—the monetary value of the damages associated with the release of an additional ton of CO2. To account for differences in firm size and facilitate comparisons across firms, the authors then divide the (absolute) climate damages by the respective firm’s operating profit or sales to develop their measures of corporate carbon damages.

What is the Social Cost of Carbon?

The Social Cost of Carbon is the cost—in real dollars—of an additional ton of CO2 emitted into the atmosphere.

Carbon emissions lead to storms and floods that destroy property, droughts that ruin crops, extreme heat that cuts worker productivity and increases mortality, and more costs to society.

Combined together, these costs can be added up to one dollar figure and expressed per ton of CO2. The Biden Administration uses a Social Cost of Carbon of $190.

Simply put, the Social Cost of Carbon is the cost of climate change.

Or, it is the benefit that comes from reducing carbon emissions.

For example, if a regulation reduces 10 tons of carbon and the Social Cost of Carbon is $190 then the regulation would produce $1,900 in societal benefits. These benefits can then be compared to the costs that the regulation imposes to determine if the policy is net beneficial.

For this reason, the Social Cost of Carbon is arguably the most important component of regulatory policy.

But it can also be used in other ways, like in this study, where it unveils how the carbon costs caused by a company’s activities stack up against the profits or revenues from these activities. And by making it easier to compare carbon damages across firms, the Social Cost of Carbon enables peer benchmarking, which should pressure firms to reduce their emissions and the costs their activities impose on society.