Carbon Competitive Advantage
Companies that recognize the potential to secure defensible advantage through a period of decarbonization will thrive. Recognizing the potential risks & rewards can lead to differentiated strategies and capital allocation approaches. Standard risk-management tools can be applied by CFOs, CEOs and boards to ensure that companies are prepared to not only react but to create long term shareholder value. Disruptions of this magnitude do not happen frequently, but to those companies that recognize and seize the opportunity can thrive. They can also be instrumental in bringing forward the political will to take action to create economy-wide emissions limits.
Recognizing The Carbon Emissions Liability
Companies' future emissions represent a liability as the cost of emissions increases by type and across geographies and sectors. Unpredictability in the costs of emissions are a risk for companies, who often do not recognize the risks embodied in potentially rapid changes to their cost structure. The standard tools of risk management can be applied to companies emissions to begin to bring them into the CFO's and boards' traditional toolbox of input cost management. A simple first approach to recognizing this liability stream is outlined in the Harvard Business Review article Carbon Might Be Your Company's Biggest Liability.
Carbon Arbitrage
As the costs of emissions and the perceived potential future costs of emissions rise, investors will act to move high emissions assets to the lowest cost jurisdictions, geographies, and ownership structures. Examples of this already abound when the costs of emissions are still quite low, as outlined in this Boston Globe article, Big Oil Gets Clean and the World Stays Dirty. Creating clarity around the waste in these disparities in emissions costs are helpful to CEOs and boards asking why they should be advocating for consistent global policies on emissions.
Carbon Competitive Advantage
Those companies that understand their own cost structure and those of competitors in their industries can reduce risk and create defensible advantage in a world of decarbonization. Especially in a world where some low emissions assets may be scarce, the time to develop this advantage and advocate for consistent and stringent rules is now.
