Dan Page
Accounting for the costs of climate change is an increasing focus globally. In 2024, the United States alone had 27 “confirmed weather/climate disaster events with losses exceeding $1 billion each,” according to the National Centers for Environmental Information.
Who will pay these costs?
One idea is to create “climate superfunds” by charging companies for the costs of climate change. New York State, for example, enacted a law in December that makes fossil-fuel companies fund a climate-change adaptation cost recovery program. But some research suggests that the price of climate change is more than public companies can possibly pay.
The social costs generated by emissions from US companies may total $87 trillion and outweigh the market value of those companies, according to Chicago Booth’s Lubos Pastor and University of Pennsylvania’s Robert F. Stambaugh and Lucian A. Taylor.
Their calculations are based on year-end 2023 emission levels, forecasts of future emission levels, and a baseline assumption of the cost of those emissions. If the US were to achieve the emission reductions laid out in the 2015 Paris Agreement, which seeks to hold global warming to less than 2°C above preindustrial levels, the researchers estimate its carbon burden would decline by as much as 32 percent. But that goal is now seen as overly optimistic, they write. (And President Donald Trump has withdrawn the US from that agreement, as he did in his first term.)
The US government began tracking the economic cost of climate-related disasters in 1980. In that decade, 33 climate disasters caused at least $1 billion in damage (adjusted for inflation), with a total cost of nearly $220 billion. In the three years from 2021 to 2023, 66 large-scale disasters caused more than $441 billion in damage.
And that only includes the direct immediate cost of climate disasters, such as replacing damaged buildings and homes and accounting for business interruptions. There are also many consequential indirect costs, which can play out over decades, including health issues, disruptions to productivity, and stresses on the food and water supply.
In calculating the societal cost of greenhouse gases, or the “carbon burden,” Pastor, Stambaugh, and Taylor used the social cost of carbon metric produced by the Environmental Protection Agency. The SCC estimates the economic impact of an additional metric ton of CO2 emissions. For their study, they also pulled in government data forecasting emission levels for the overall economy, and added company-level emission forecast data from finance company MSCI, which they rolled up into industry-level forecasts.
A massive footprint
An analysis of carbon emissions through 2050 finds that many US industries’ carbon burdens far exceed their market value. In energy, accounting for customer use, among other actions taken outside the scope of the company, pushes the burden past 20 times market cap. Meanwhile, fossil-fuel financing is a major contributor to the finance sector's carbon burden.
As with calculating a net present value for a stock’s dividend, forecasting the future cost of emissions requires an embedded discount rate. The researchers focused on 2 percent as the rate, which experts in social discounting—who make a cost-benefit determination in the present about the future value of a given policy—deem most appropriate. The discount rate for the EPA’s SCC forecasts was also 2 percent.
The researchers adopted the framework of the Greenhouse Gas Protocol. This globally followed system sorts greenhouse gas emissions into Scope 1 (direct emissions from a company’s own operations), Scope 2 (indirect emissions used to generate the energy sources that the company purchases), and Scope 3 (all other indirect emissions in a company’s value chain.)
When the researchers considered only Scope 1 emissions, 13 percent of companies, accounting for 9 percent of total market value, had carbon burdens exceeding their market value. When they considered Scopes 1, 2, and 3 together, more than 77 percent of companies, representing half of total US market value, had carbon burdens that exceeded their individual market value. (For more, read “Corporate carbon emissions equated to 44 percent of profits.”)
To explore further, the researchers calculated the ratio of a given industry’s carbon burden to its current market cap. Using MSCI forecasts through year 2050 for Scope 1 emissions, Pastor, Stambaugh, and Taylor estimate that the utilities and energy industries carry a heavier burden (2.71 and 1.06 x market cap, respectively) than the financial sector, with direct emissions that don’t even register as a burden.
When considering all direct and indirect impact, the researchers find that the finance sector—which is in the business of financing and investing in other industries, including energy and utilities—has a carbon burden ratio of 5.28, in line with the ratio for the utilities sector. The energy sector’s ratio exceeds 20. But as the study notes, the energy sector provides the literal fuel on which corporate America relies. And while those three industries bear a significant responsibility, so too do we as consumers in what and how much we consume and as citizens in setting energy priorities.
“Carbon burden is inherently shared, and assigning responsibility for it to individual firms is somewhat arbitrary,” write Pastor, Stambaugh, and Taylor. “Nonetheless, firms can surely be held responsible for some of their emissions. Designing policies that reduce the aggregate carbon burden fairly, efficiently, and significantly is an important task for scholars and policymakers alike.”
Lubos Pastor, Robert F. Stambaugh, and Lucian A. Taylor, “Carbon Burden,” Working paper, October 2024.
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