The reforms of the EU Emissions Trading System (EU ETS) and the introduction of the Carbon Border Adjustment Mechanism (CBAM) are likely to lead to significant CO2 risks for certain industries and companies in the future – particularly in Europe – due to increasing climate ambitions. For this reason, it is essential for investors to recognise CO2 risks and their influence on the company valuation at an early stage.
China lags behind
CO2 emissions are taxed in different ways. As a result, the CO2 markets are strongly affected by regional differences. In Europe, for example, market-based CO2 pricing using emission certificates is a potentially important incentive to reduce emissions, whereas it plays a subordinate role in the USA. Instead, that country preferentially encourages green investments through tax incentives. Looking at China, the world's largest CO2 market, we can see that the country is still in its infancy in terms of CO2 taxation compared to Europe.
The planned introduction of the CBAM from 2026 and the associated cross-border incentive system should also encourage non-EU countries to price greenhouse gas emissions more intensively in the future. Furthermore, the scope of pricing in most regions focuses heavily on power generation and industry and largely excludes other sectors.
Nevertheless, pricing CO2 has the potential to become one of the most effective technology-independent methods of decarbonising the global economy. However, significant investments in clean technologies will also be required, regardless of the price of CO2 certificates. According to an analysis by the consulting agency McKinsey, this entails annual investments amounting to 8 to 9% of global gross domestic product. That would be between eight and nine trillion dollars (as of 2021).
Focusing on CO2 "sinners"
The regional differences in the pricing of greenhouse gases make it difficult to determine a global CO2 price. Putting such a global CO2 price in place would challenge those sectors that are greenhouse gas-intensive in particular.
These sectors include independent electricity suppliers, construction material producers, metal producers as well as oil and gas producers. Considering sector affiliation alone, they potentially face a high valuation risk, to put it very simply.