The Lux Carbon Canvas evaluates companies’ levels of resilience to a future carbon price
BOSTON, MA, JULY 15, 2021 – Growing regulatory pressure for decarbonization continues to drive interest in putting a price on carbon. Carbon pricing schemes continue to emerge as an instrument for governments and industries to incentivize greenhouse gas (GHG) emission reduction, with the thought that a pricing scheme would ultimately favor processes with lower GHG emissions over those with higher GHG emissions. As the world’s major economies begin to align on decarbonization efforts, Lux Research, a leading provider of tech-enabled research and innovation advisory services, has developed the Lux Carbon Canvas to evaluate the slowly emerging financial risks associated with carbon pricing.
In the 2021 edition of the Lux Carbon Canvas, Lux analyzed global companies in the oil and gas, utility, aluminum, cement, fertilizer, and steel industries. In order to quantitatively measure a company’s resilience, Lux developed two corresponding metrics that incorporate the company’s emissions, cash position, and profitability, resulting in a critical carbon price and available capital from sales. To assess the financial risks of carbon pricing, Lux plotted the two metrics on the Lux Carbon Canvas. Within the Lux Carbon Canvas, companies sharing similar levels of resilience and a viable carbon management strategy fell within one of four quadrants:Quadrant I – Scramble Strategy: Low critical carbon price, less available capital.
- Companies located in Quadrant I are immediately vulnerable to carbon pricing. If a carbon price were enacted, they would see a significant impact on their profitability. Additionally, they do not have an excess of capital to put toward decarbonizing their business and are thus locked into their current assets. These companies are, for now, stuck – carbon prices pose a risk, but they have limited ability to move to another quadrant of the Lux Carbon Canvas and reduce their risk.
- Companies located in Quadrant II are not immediately vulnerable to carbon pricing. If a carbon price were enacted, they would likely see little impact to their profitability. However, although these companies have a strong financial position that will allow them to compete in the long term, they have lower available capital to rigorously change their existing assets. Thus, while a future carbon price poses less of a risk to these companies, they only have limited ability to address new market opportunities in a low-carbon future.
- Companies located in Quadrant III are profitable enough to divest from their carbon-intensive assets and operations but are also immediately vulnerable to carbon pricing. If a carbon price were enacted, they would see a significant impact to their profitability, and as a result, their assets would not be able to compete in the long term. Yet, unlike companies in Quadrant I, these companies are not stuck.
- Companies located in Quadrant IV are not immediately vulnerable to carbon pricing and have enough capital to divest from their more carbon-intensive assets and operations. They are, for now, in a safe zone: Carbon prices pose no immediate threat to their current, extremely profitable businesses.
Examples of companies analyzed, positioned in the following quadrants: Quadrant I (RWE,
Yara International, Thyssenkrupp), Quadrant II (Nutrien, BP, E.ON), Quadrant III
(LafargeHolcim, NextEra Energy), Quadrant IV (Tata Steel, ExxonMobil, Total, Iberdrola).
“Carbon pricing is a growing area of concern for companies,” explains Yuan-Sheng Yu, Managing Consultant at Lux Research and lead author of the report. “More than 600 companies currently have an internal carbon price, with another 600 considering implementing one. The Lux Carbon Canvas serves as a starting point for companies looking to develop a roadmap for a zero-carbon business. Companies can use this framework to not only assess their resilience to carbon pricing but also improve both their carbon management and financial performance in preparation for a carbon-free future.”
“When we introduced the Lux Carbon Canvas in 2018, we only looked at the oil and gas and utility industries,” adds Yu. “But with growing pressure for the industrial sector to decarbonize, we added the steel, cement, fertilizer, and aluminum industries as well. The energy transition will change the economic fabric of industry, making current business indicators less likely to drive actions and decisions that will sufficiently transform a company. Executives need to create a roadmap for innovation and investment and act on it very explicitly.”
Despite unprecedented action against climate change, global emissions continue to grow steadily. This steady rise has led to concerns about its potential consequences on the environment, society, and health. Renewed momentum has catalyzed many governments around the world to publicly commit to achieving carbon neutrality in the next three decades, increasing pressure on companies to develop a strategy today.