If Global Corporations Paid Damages for Their Climate Emissions, Their Profits Would Plunge by 44%

If the world’s corporations were to pay damages for the climate pollution they cause, their profits would drop by 44%, according to a new study of nearly 15,000 publicly traded companies. The “corporate carbon damage” from these businesses – a fraction of all firms – could seep into the trillions, with the US alone accounting for hundreds of billions.

Published in the peer-reviewed journal Science, the study previews the implications of proposed rules in the US, the UK and the EU, which would make it mandatory for public companies to report their climate emissions. This would provide material risk information to investors and make it evident which firms are most exposed to future climate policies, as well as push stakeholders to voluntarily reduce their companies’ emissions.

The researchers followed the Environmental Protection Agency’s proposed cost of carbon pollution, which is estimated at $190 per ton. The numbers are staggering. If companies were to pay for their contribution to environmental pollution, it would eat into nearly half of their profits, and 3% of their revenues. In the US, the damages are 18.5% of profits and 2% of revenues.

The largest carbon damages come from four power-intensive industries. The energy, utilities, transportation and materials manufacturing sectors account for 89% of the total corporate carbon damages. The utility industry’s damages were more than twice its profits, while the rest all had damages exceeding profits too.

Meanwhile, the banking and investment sectors were on the other end of the spectrum, averaging damages less than 1% of their profits. In terms of countries, Russia and Indonesia were top of the list for corporate climate damages, while the UK and the US were the lowest.

The study’s caveats

However, there are certain confines to the study’s results. For example, the calculated damages only measured direct emissions, which don’t include downstream emissions. This means that what goes into the production of a car is counted, but the pollution it produces after being manufactured doesn’t.

The calculations are also only for only a fraction of the world’s companies, with many public firms excluded and private ones not listed at all, according to study co-author Christian Leuz. But in the journal, the authors state: “However, to be successful, emissions disclosures have to be credible, and the regime should ideally cover all but the smallest private and public firms.”

Additionally, the research showed “which activities are particularly costly to society from a climate perspective”, but Leuz notes that it would be wrong to “just blame the companies”, as it isn’t possible to “divide responsibility for these damages between the firms that make the products and consumers who buy them”.

“The results are important, but perhaps not that surprising,” Stanford University economist Marshall Burke told the AP. “The bigger take-home is the number of caveats that are needed to do this analysis, indicating what a mess our emissions accounting systems currently are.”

Mandatory disclosure could reduce climate emissions

The economic experts behind the study say that mandatory disclosures can help curb GHG emissions in three ways. First, without reliable measurement and credible data, it’s not possible to have emissions-restricting policies. Second, such disclosures would help financial markets price existing and expected future environmental policies. And lastly, studies have shown that such mandates can incentivise businesses to control their environmental contributions (like GHG emissions) even without climate policies.

The authors argue that mandatory disclosure can hold firms accountable for their pledges about reducing emissions and reaching net-zero by necessitating the annual publication of their progress. This is because currently, there is a lack of data showing whether firms are living up to their climate promises or merely engaging in greenwashing.

“Put plainly,” they conclude, “it is difficult to imagine a successful approach to the climate challenge that does not have widespread mandatory disclosure as its foundation.”