So the broad question we ask in our research is: How valuable are firms to society? Typically, when you ask people about the value of a firm, they think about the market value. The market value is easily observable. It’s tradable. It’s the natural place to start. But firms create value not only for shareholders but also for consumers, employees, and other stakeholders. In addition, they create externalities or spillover effects on society. And we’re interested in quantifying all of these bits and pieces of a firm’s value to society.
The specific question we ask is: What is the size of the carbon externality of the corporate sector? So that’s the externality associated with corporate carbon emissions. A firm’s carbon burden is essentially a measure of the firm’s carbon footprint, which takes into account not only today’s emissions but also all of the carbon emissions that the firm is expected to emit in the atmosphere in the future. So think about a given firm and all of its carbon emissions today and in the future, assign social costs to those carbon emissions, and then bring them to the present to construct just one measure of carbon burden.
Strictly speaking, we define the carbon burden as the present value of the social costs associated with the firm’s future carbon emissions. In order to calculate the carbon burden of the US corporate sector, we need forecasts of future carbon emissions and we also need forecasts of the social cost of carbon associated with these emissions. So those are the two things we need. We get the social cost of carbon from the EPA, the Environmental Protection Agency of the US government. They have a multimodal model in which they forecast future emissions, they forecast future economic damages associated with these emissions, and then they bring those emissions into the present. So the social cost of carbon is meant to summarize the economic damages associated with emitting 1 ton of carbon into the atmosphere.
And as far as forecasts of future carbon emissions are concerned, at the aggregate level, we get them from US government agencies, specifically the Energy Information Administration and the EPA. And at the individual-firm level, we get them from MSCI, a leading financial services company.
So our main finding is that these carbon burdens are large. At the aggregate level, we find that the total carbon burden in the US is actually larger than the total value of corporate equity. Specifically, total carbon burden, as of the end of 2023, is equal to $87 trillion in our baseline estimate. And $87 trillion is 131 percent of total corporate equity.
If you go down to the individual firm level, we find that for 13 percent of firms, so roughly one out of seven firms, the carbon burden, the firm’s carbon burden, exceeds the company’s equity market value. That does not mean that these firms are somehow not useful to society. That doesn’t mean that these firms should be shut down, not at all. Firms create value not only for shareholders but also to consumers, to employees, to many other stakeholders. And they have both positive and negative externalities. We’re simply focusing on one element of a firm’s value to society, the carbon externality. We’re not including in the calculation the value of the firm to consumers, employees, or any other stakeholders.
So if you take a utility company, for example. A utility company has a large carbon burden, just about any utility company, and yet, utility companies create an enormous amount of consumer surplus by delivering high-quality electricity at reasonable prices to millions of households and companies. So we should view the carbon burden as just one small piece, small part of a mosaic that characterizes a firm’s value to society.
The fact that the carbon burden is so big suggests that we should continue having a debate about what to do about carbon. Should we subsidize technological innovation so that renewables become even cheaper, and so that we can store the electricity produced by solar and wind more cheaply? Or should we levy a carbon tax? What should we do? We don’t have any solutions for that, unfortunately. We’re simply saying, “Given the magnitude of the carbon burden, it’s important to continue having this debate.”
