Cap and trade would slash profits for US utilities – study
London, 4 June: Carbon costs in a cap-and-trade programme could wipe out earnings for some companies in the Standard & Poor’s 500, according to a study by the Investor Responsibility Research Center (IRRC) Institute.

Ohio-based American Electric Power’s carbon costs would equal 117% of its expected earnings before interest, tax, depreciation and amortisation (EBITDA), based on a carbon price of $28.24 a tonne of carbon dioxide equivalent (CO2e), said the IRRC on Tuesday. Two other utilities, Allegheny Energy, based in Pennsylvania, and American Corporation in St. Louis, Missouri, would also face carbon costs equal to or surpassing their EBITDA.

Across the S&P 500, however, the risk is varied. Carbon costs would amount to less than 1% of earnings for 203 companies, out of 497 analysed. Seventy-one companies would see earnings fall by 10% or more.

“The utilities sector is most exposed to carbon costs, with almost half of EBITDA at risk across the sector, depending on the ability of companies to pass costs through to customers or switch to low-carbon power generation,” the IRRC said. Utilities, which are responsible for close to 59% of operational greenhouse gas emissions from S&P 500 companies, would see combined earnings fall 45%.

The report, researched by environmental data company Trucost, showed that carbon exposure would total more than $92.8 billion if a market price of $28.24 – Trucost’s estimate of the US carbon price in 2012 – was applied to each tonne of CO2e from companies in the S&P 500 and their direct suppliers, such as electricity providers. This would equate to more than 1% of the companies’ combined revenue in 2007 and 5.5% of combined EBITDA.

Direct emissions in 2007 by the companies in the S&P 500 were 2,173 million tonnes (Mt) of CO2e, more than the emissions caused by all cars, buses, trucks and aircraft in the US, the IRRC said. When indirect emissions from suppliers were included, the companies' 2007 emissions were 4,307 Mt of CO2e.

The growing liklihood of a US federal cap-and-trade system has also led to more investor scrutiny over carbon disclosure.  “Already we are seeing increased interest from investors looking to reduce their own risk by positively selecting those companies with lower carbon emissions,” said Simon Thomas, chief executive of Trucost. Two-thirds of companies in the S&P 500 did not publicly disclose their carbon data in 2007, the IRRC said. However, 90% of utilities companies covered by the index do disclose such information.