Carbon VaR

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.

Published by Utkarsh Majmudar

Utkarsh Majmudar is a Fellow, IIM Ahmedabad and a professional with experience encompassing academics and administration at top business schools in India (IIM Lucknow, IIM Udaipur, and IIM Bangalore) and working with large corporations. His interest areas include corporate finance and CSR.

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