Companies expect carbon pricing

Over a third of companies will adapt their business models in anticipation of a future carbon price over the next three years, according to a survey of Fidelity International sector analysts. In high-emitting industries such as energy and materials, our analysts believe the proportion is closer to two-thirds (see chart 1). This suggests many companies are acting to get ahead of the financial and regulatory effects of carbon pricing, especially in those sectors where a carbon price will make new technologies more viable.

Some form of carbon pricing is likely to be on the table at next week’s UN climate conference in Glasgow. A global regime would push companies to adapt, but could be inflationary if implemented too aggressively (see this recent white paper from our Macro team). Keeping the carbon price too low, however, would slow the transition and make companies more vulnerable to sharper price hikes in the future. 

Analysts have put hard numbers on the effect a carbon price could have. “A carbon tax or carbon cost above $100 a tonne [from $3 today] would have a dramatic impact. Capex plans would be adjusted quickly,” argues an analyst covering European and North American chemicals companies. 

Companies are beginning to adapt

The good news is that our analysts believe over half of companies globally have begun to adapt their business models for a pathway to net zero by 2030 - far sooner than the Paris Agreement deadline of 2050. However, only seven per cent are taking far-reaching action, fewer than may need to in order to achieve that target (see chart 2). Government policy may be required to fill the gap. Fidelity analysts have identified incentives and regulation as the most effective measures to help firms get to net zero, with carbon pricing being the top policy choice for the energy sector.

The transition will fuel ‘greenflation’ 

Policy interventions will, however, have consequences. Fidelity analysts expect that around a quarter of their companies will incur higher costs due to carbon pricing over the next three years, with the energy, materials, and industrials sectors most exposed. “European airlines are required to purchase carbon credits under the EU cap and trade system. Prices are rising as allowances reduce,” reports one analyst covering European industrials.

Many companies will face other types of costs from going green. Just over half our analysts expect the low-carbon transition to increase operating costs for their companies over the next three years, while 60 per cent believe it will push up capital expenditure (see chart 3).

But that investment could pay off. Firms that increase transition-related capex today could lower their operating costs sooner. The utilities industry is one example. “Utility companies are moving towards renewable generation,” reports one analyst covering utilities in Emerging Europe, the Middle East, and Latin America. “This requires significant upfront capex, but the marginal cost of production then falls to zero. This is compared to traditional generation methods which require a commodity input.”

Paying for it all

Nonetheless, the transition is likely to increase upfront costs for most companies. Our analysts expect companies will predominantly fund these costs from internal resources such as cash (see chart 4). But a growing proportion of analysts expect companies to raise prices for consumers, which could further fuel greenflation.

Not all companies have the pricing power to do this, however. Some will need government subsidies, while others will rely on debt. “As my companies are price takers, they can’t pass prices onto consumers, so they will need fiscal incentives to continue investment,” says an analyst covering European materials companies. 

Conclusion

We are carbon-based organisms in a carbon-fuelled economy. Transitioning to a lower carbon world will require new policies to break energy-usage habits that have become entrenched over centuries. Even if new technologies ultimately lower costs, the policies needed to get there could pour greenflation fuel on the post-pandemic price fire already underway. But Fidelity’s analysts suggest that, for some companies, the costs of delaying policy action, even by a few years, will be many times higher. 

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