Value at Risk (VaR) is an old concept. It is a statistic that quantifies the extent of loss a firm can incur in a specific time frame. It is a measure of risk that a firm faces. Carbon emissions are also a risk that companies face. Hence, the concept of value at risk can be extended to carbon (GHG) emissions.
Carbon VaR measures the impact of a rise in carbon prices on the company’s profitability. The effects of rising carbon prices can be complex and change dynamically.
- Companies costs will rise as the amount of emissions from the company and supplier increases.
- The rise in costs can be offset only if the selling prices rise at an industry level
- Increased selling prices could lead to a fall in demand depending on the consumers’ sensitivity to prices. This could impact the company’s profitability.
Carbon VaR considers these linkages to estimate the impact on a company or industry’s profitability. Thus, the shift to net-zero will require a company to assess the effects of carbon prices on their profitability and arrive at better decisions.