How Prepared Are Companies for Rising Carbon Costs?

Understanding the Risk of Carbon Cost Internalization

Carbon pricing has been described as "the most important number you've never heard of" (The Washington Post, 2025). The metric is meant to capture the harm caused by a ton of carbon emissions, making it a foundation of national climate change policy. A lower value would justify weaker regulations, while a higher one would warrant more aggressive policies. This interplay between carbon cost internalization and financial risk is shaping global markets, regulatory frameworks, and investment strategies.

Why a Global Social Cost of Carbon Matters

There is a growing debate on whether GHG pricing should be based on domestic or global SCC figures. The Washington Post notes that, beyond moral reasons, using a global SCC makes strategic sense: "If one country is imposing harms on another, its policymaking should take those harms into account." (The Washington Post, 2025).

Carbon pricing is a critical mechanism for driving emissions reductions and influencing investment decisions in a decarbonizing economy (European Commission, 2024). The European Union Emissions Trading System (EU ETS) sets the baseline for carbon costs in Europe, but many countries impose additional national carbon taxes (Regjeringen.no, 2024). This dual-layered pricing system has significant implications for companies, investors, and financial institutions.

The Impact on Financial Markets and Corporate Strategy

The Need for Policy Stability

"A clear, predictable framework is vital for the business sector. This applies to climate policy just as it does to other areas. For example, businesses need a predictable framework if they are to invest in climate-friendly technologies and solutions. It must pay to make green choices." (Regjeringen.no, 2024)

According to a Stanford-MSCI Sustainability Institute survey, climate risks dominate investors' concerns, with 93% believing these issues will affect investment performance in the next two to five years. The study, which polled asset owners and managers — 43% of whom oversee more than $250bn — found that only 4% believe climate risks are fully priced into financial assets. Nearly three-quarters say these risks are only partially reflected in asset values.

For asset managers and institutional investors, carbon pricing has become a material financial risk. Companies operating in multiple jurisdictions face varying carbon cost burdens, influencing competitiveness, capital allocation, and investor sentiment.

Key Risks for Companies in High-Carbon Industries

• Increased operating costs due to layered taxation.

• Shifting valuation models as carbon liabilities affect earnings.

• Stranded asset risks in fossil fuel-intensive businesses.

• Investor pressure for carbon disclosure under frameworks like TCFD, SFDR, CSRD and ISSB.

The EU ETS: The Market-Based Carbon Price

The EU ETS, established in 2005, is the world's largest cap-and-trade system. It covers power generation, large industrial facilities, and intra-EU aviation (European Commission, 2024). Companies within the ETS must purchase emission allowances (EUAs) for each ton of CO₂ emitted. As of 2025, the EU ETS price fluctuates between €76-85 per ton CO₂, driven by supply and demand dynamics (Trading Economics, 2025).

National Carbon Taxes on Top of the EU ETS

While the EU ETS establishes a market-driven price, many European governments impose national carbon taxes to reinforce incentives for decarbonization. These taxes often apply to sectors outside the ETS, such as transportation, buildings, and agriculture, but in some cases, they complement ETS-covered emissions (Regjeringen.no, 2024).

For example

• Norway imposes an additional NOK 1,176 (€100) per ton CO₂ tax (Regjeringen.no, 2024), set to rise to NOK 2,400 (€200) by 2030.

• Sweden enforces a SEK 1,510 (€134) per ton CO₂ tax (Government.se, 2025), making it the highest globally.

• Germany applies a €45 per ton CO₂ tax (European Commission, 2024) on non-ETS sectors, increasing to €55 in 2025.

• France and Denmark impose similar national levies.

Not all industries in Europe are affected by the EU Emissions Trading System (EU ETS)—only specific high-emission sectors are covered. Other industries fall under different carbon pricing mechanisms, such as national carbon taxes or the upcoming ETS2 in 2027 (European Commission, 2024).

Preparing for a Carbon-Constrained Economy

• Understanding Industry-Specific Exposure: Businesses should assess their environmental cost burden using databases like EcoMap, which quantify and monetize emissions. Understanding exposure will help firms develop risk-mitigation strategies.

• Adjusting Investment Strategies: Investors should integrate carbon-adjusted financial metrics into risk assessments. Metrics such as Environmental-Adjusted EBIT provide a clearer picture of true profitability in a carbon-constrained economy.

• Aligning Business Models with Decarbonization: Transitioning to low-emission processes and energy-efficient technologies will be key. Companies investing in carbon capture, renewable energy, and circular economy practices may benefit from lower long-term costs and improved investor confidence.

How Ready Are Companies for Internalizing Further Carbon Costs?

As carbon pricing expands, businesses need to consider how these costs fit into their long-term strategy. The EU ETS and national carbon taxes have laid the groundwork, and with ETS2 arriving in 2027, transport and heating sectors will also be included, broadening the impact.

Some see aligning carbon pricing with the global social cost of carbon as a way to enhance clarity and drive emissions reductions, while others highlight the challenges for industries still transitioning to lower-carbon solutions.

The question remains: Should businesses view carbon pricing as a regulatory requirement or as an opportunity to innovate and strengthen their position in a low-carbon economy? As policies continue to evolve, integrating carbon costs into financial planning and sustainability strategies can help companies navigate this changing landscape.

References

• European Commission. (2024). EU Emissions Trading System (EU ETS). Retrieved from https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets_en

• European Commission. (2024). ETS2: buildings, road transport and additional sectors. Retrieved from https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/ets2-buildings-road-transport-and-additional-sectors_en

• MSCI. (2024). Climate change dominates investors' outlook, Stanford-MSCI Sustainability survey finds. Retrieved from https://www.msci-institute.com/insights/climate-change-dominates-investors-outlook-stanford-msci-sustainability-institute-survey-finds/

• Regjeringen.no. (2024). Norway's Climate Action Plan for 2021-2030. Retrieved from https://www.regjeringen.no/contentassets/a78ecf5ad2344fa5ae4a394412ef8975/en-gb/pdfs/stm202020210013000engpdfs.pdf

• Government.se. (2025). Sweden's carbon tax. Retrieved from https://www.government.se/government-policy/taxes-and-tariffs/swedens-carbon-tax/

• Regjeringen.no. (2024). CO₂ Tax Exemption for ETS-Covered Undertakings. Retrieved from https://www.regjeringen.no/en/dokumenter/notification-co2-tax-exemption-for-undertakings-covered-by-the-ets2/id3028459/

• Bundesregierung.de. (2024). CO₂-preis beträgt jetzt 55 Euro. Retrieved from https://www.bundesregierung.de/breg-de/aktuelles/co2-preis-steigt-abfallbrennstoffe-2061622

• The Washington Post. (2025). Opinion | The High Cost of Scrapping the Social Cost of Carbon. Retrieved from https://www.washingtonpost.com/opinions/2025/02/05/trump-climate-environment-emissions-carbon/

• Trading Economics. (2025). EU Carbon Permits - Price. Retrieved from https://tradingeconomics.com/commodity/carbon