The hidden cost of carbon

Calculate the hidden cost of carbon in your organisation

Carbon pricing mechanisms impose costs that are deeply—and subtly—embedded in supply chains, affecting companies’ profitability and competitiveness.

Facing expectations from stakeholders to help address the climate challenge, more and more businesses are making efforts to monitor the carbon emissions of their operations and supply chains. Less obvious than the emissions themselves, though, are the financial costs of those emissions—in particular, the costs embedded in the price of goods due to carbon taxes, cap-and-trade emissions systems and other mechanisms that charge companies for the greenhouse gases they produce.

Knowing that carbon costs hide in the prices of major commodities, executives may want to determine more precisely where those costs occur across their company’s operations and supply chains. Costs may be concentrated in the country where final goods are produced or at points further upstream in the supply chain.

As carbon prices rise, businesses that produce or purchase carbon-intensive goods could find their competitive position shifting. But by anticipating movement in the hidden cost of carbon, how the hidden cost of carbon builds up in supply chains today, how it might change as carbon pricing expands and evolves, and how companies can maintain an edge amid these dynamics, executives can begin to prepare.

PwC has developed a global Hidden Cost of Carbon model covering 65 economic sectors in 141 countries and regions to shed light on carbon’s hidden cost. The model provides two key outputs:

1. Hidden cost of carbon at current prices

Estimate how much carbon is emitted, on average, at each step of the value chain of a given sector in a particular country or region and how much companies are charged, on average, for those emissions by various carbon pricing mechanisms. Adding up the current carbon pricing charges lets us estimate the average hidden cost of carbon per euro of sales.

2. Carbon pricing scenario analysis

To illustrate how much the hidden cost of carbon might change if carbon prices were to go up, the model considers carbon costs under two alternative scenarios:

• CBAM scenario: this envisions full implementation of the EU’s Carbon Border Adjustment Mechanism (CBAM) and estimates the cost of carbon only for goods imported into the EU.

• Net zero scenario: this models the global application of the carbon prices set out for 2030 in the International Energy Agency’s (IEA) economic scenario for reaching net zero emissions by 2050.

All organisations should consider the exposure of business models and supply chains to increasing carbon taxes and costs, along with an understanding of the many green tax incentives, grants and subsidies available to assist with the transition to low-carbon business models.