The Corporate Carbon Overhang Project

Why Carbon Costs Matter for Valuation

Carbon pricing—through emissions trading systems, carbon taxes, and fossil fuel taxes—has become a central policy tool in the global response to climate change. By attaching a financial cost to greenhouse gas emissions, these mechanisms turn environmental externalities into direct cash-flow obligations for firms.

The scale of these liabilities depends on how much a firm emits, where it operates, and how carbon prices evolve. As more jurisdictions adopt or strengthen carbon-pricing regimes, climate policy exposure is becoming a material driver of long-term value. Yet, corporate liabilities tied to future carbon costs remain largely underexplored in capital markets research, which has focused on historical emissions rather than forward-looking, location-specific forecasts of emissions and carbon prices.

The Corporate Carbon Overhang (COH) is a forward-looking valuation framework that translates future carbon emissions into firm-level carbon liability. COH measures the present value of expected future carbon costs under plausible carbon-price scenarios by combining firm-level emissions projections, jurisdiction-specific carbon price forecasts, and firm-specific discount rates. Conceptually, COH represents the internalized portion of future societal carbon damages reflected in corporate financial exposure under current and projected regulatory carbon pricing.

Applying the COH framework to U.S.-listed firms yields several key insights:

• Aggregate Exposure: The baseline total corporate carbon overhang is estimated at $3.1–$3.6 trillion, equivalent to 6.5%–7.5% of total market capitalization.
• Concentration: The distribution of COH is highly skewed—the top 25 firms, primarily in Utilities and Energy, account for more than half of the aggregate carbon liability.
• Within-Sector Variation: Despite this concentration, there is substantial variation within sectors, driven by differences in operational structure and the geographic distribution of emissions.
• Pass-Through Effects: Accounting for carbon-cost pass-through reallocates exposure from regulated utilities to downstream firms, with 55% absorbed by public companies and 45% by the broader economy.
• Internalization Gap: Even under the most ambitious policy scenario, current and anticipated carbon pricing mechanisms would internalize less than one-third of total societal damages from corporate emissions.
• Implication: These results underscore the importance of forward-looking, location-specific emissions and carbon price forecasts as essential inputs for integrating carbon risk into corporate financial analysis and valuation.