By Martyn Roetter
The first step in solving a problem is to identify what it is and then ascertain its scope and the underlying causes. One of the (but not the only) impacts of business activities on climate is the consequence of their greenhouse gas emissions. Until now, public firms have not been obliged to disclose these emissions, or at least not in an independently verifiable manner. Disclosure would allow us to compare them within and across market sectors, as we do with traditional financial measures of performance such as EBITDA (earnings before interest, depreciation, and amortization).
A recent article in Science, Michael Greenstone, Christian Leuz and Patricia Breuer delve into technical and policy issues, including the potential for misinformation inherent in a proposal by the Securities Exchange Commission (SEC) to require public companies to disclose their greenhouse gas (GHG) emissions and quantify their total costs to society. These costs can be calculated as the product of a firm’s direct emissions (in terms of tons of carbon dioxide and other emissions converted to their CO2 equivalents) and the social cost or monetary value of the damages per ton of CO2 emitted. The results can be compared or normalized across businesses by dividing them by a firm’s operating profit or sales.
The core findings of the article are that firms’ carbon damages are large on average and vary greatly across countries and industries and even within industries. The authors argue that it is essential to include mandatory disclosure of corporate emissions in policies to reduce GHG emissions. They analyze the sensitivity of the findings to assumptions about the social costs of a ton of CO2, emphasizing the value of benchmarking firms against each other to incentivize them to reduce their GHG emissions.
Read the article in the August 24th issue of Science.
