Corporate Carbon Performance Indicators Carbon Intensity, Dependency, Exposure, and Risk

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Corporate CarbonPerformance IndicatorsCarbon Intensity, Dependency, Exposure,and Risk

Volker H. Hoffmann and Timo Busch

Keywords:

carbon managementclimate changeenvironmental indicatorfossil fuelgreenhouse gases (GHGs)industrial ecology

Summary

The dependency on carbon-based materials and energysources and the emission of greenhouse gases have been rec-ognized as major problems of the 21st century. Companiesare central to the effort to grapple with these issues due tothe large material flows they process and their capabilities fortechnological innovation. It is important, on the one hand, todetermine the individual stake companies have in these issuesand, on the other, to measure companies’ performance. Sincethe results of studies thus far have been ambiguous, we definefour comprehensive and systematic corporate carbon perfor-mance indicators: (1) Carbon intensity is physically orientedand represents a company’s carbon use in relation to a busi-ness metric. (2) Carbon dependency illustrates the changein physical carbon performance within a given time period.(3) Carbon exposure reveals the financial implications of usingand emitting carbon. (4) Carbon risk estimates the change infinancial implications of carbon usage within a given time pe-riod. On the basis of these general definitions, we specify theindicators for a standardized application that can support twoimportant stakeholders in their decision making: policy mak-ers, who can include such information when evaluating currentclimate policies and formulating future ones, and investors andfinancial institutions, which can compare companies with re-spect to their carbon performance and corresponding financialeffects.

Address correspondence to:Prof. Dr. Volker H. HoffmannETH ZurichDepartment for Management, Technology

and EconomicsKreuzplatz 58032 Zurich, [email protected]

c© 2008 by Yale UniversityDOI: 10.1111/j.1530-9290.2008.00066.x

Volume 12, Number 4

www.blackwellpublishing.com/jie Journal of Industrial Ecology 505

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Introduction

The world faces twin energy-related threats:“that of not having adequate and secure suppliesof energy at affordable prices and that of envi-ronmental harm caused by consuming too muchof it” (IEA 2006, 1). With respect to the supplyside, the availability of all fossil resources is nat-urally limited in the long run, and crude oil, asone key carbon input for economies, is thought bymany to be about to peak (Bentley 2002; Deffeyes2003; Campbell 2005). As a result, further priceincreases for carbon-based inputs are inescapablein the long run (Reynolds 1999; IEA 2006). Withrespect to the consumption side, global warmingwill have drastic ecological consequences (IPCC2007a) and possibly far-reaching economic impli-cations (Stern 2006). Policy makers have startedto take up these challenges: For example, the Eu-ropean (EU) has set a greenhouse gas (GHG)reduction target of 20% for 2020 and developedthe vision to decarbonize society by 60% to 80%by 2050 (EC 2007b).

Companies are central to paving the way to-ward a low-carbon society, because a large por-tion of carbon inputs and GHG emissions stemsfrom industrial production. As a consequence,stakeholders increasingly require companies todisclose their strategies for addressing climatechange. In particular, actors in financial mar-kets are investigating the implications of climatechange and corporate responses on the com-petitive position of companies and on risks toshareholder value (e.g., CERES 2006; Innovest2006). However, business responses to climateand carbon issues have been characterized asambiguous, and external assessments of corpo-rate efforts have been contradictory, even whenthe same firms are analyzed (Jones and Levy2007). Furthermore, for many companies, emis-sions from their own operations are dwarfed byemissions that occur upstream or downstream inthe value chain—for example, those connectedto energy provision or product usage, whichare often not covered in voluntary GHG emis-sion reports. To increase the reliability of lifecycle–wide carbon assessments and to determineperformance differences between companies, re-searchers must have indicators that concisely

measure a company’s performance with respect tocarbon.

Industrial ecology literature stresses that ac-counting for carbon-based materials and GHGshas always been an important part of life cycleanalysis and modeling (Lifset 2007). For exam-ple, Morioka and colleagues (2005) use carbondioxide (CO2) emissions as an indicator to designadvanced loop-closing systems for the recyclingof end-of-life vehicles and electric household ap-pliances. With respect to products and services,the carbon footprint method has become a dom-inant method (EC 2007a): The Climate Foot-print Calculator1 and analyses of carbon foot-prints in supply chains (Carbon Trust 2006a)are recent examples. Regarding organizations, theGlobal Reporting Initiative (GRI 2006) definedbroadly applied reporting standards that also in-clude carbon emissions, whereas the World Busi-ness Council for Sustainable Development andthe World Resources Institute (WBCSD andWRI 2004) developed a sophisticated account-ing method for GHGs. Nonetheless, neither thescientific nor the practitioner-oriented literaturecontains a consistent set of indicators that alsoincludes carbon input materials and that relatesthe way companies use carbon to their underly-ing business activities. Rather, different defini-tions and interpretations of the same expressionsabound, and there is no common understandingof how to report or analyze a company’s use ofcarbon or emission of GHGs.

To help in filling this gap, in this article we aimto increase the transparency of corporate carbonperformance assessments by defining four com-prehensive and systematic indicators for analysisand reporting purposes. The indicators shed lighton the physical and monetary dimensions of acompany’s current and future activities with re-spect to carbon inputs and outputs. We suggesta specification for practical application of theseindicators that enables stakeholders to assess acompany’s stake in climate change and its ef-forts toward better managing carbon usage: Pol-icy makers can use such information to formulateand evaluate policies, whereas financial marketscan obtain insights regarding the performanceof companies with respect to carbon and corre-sponding financial effects.

506 Journal of Industrial Ecology

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A Company’s Link to Carbon

We refer to the extent to which a company’soperations and its value chain are based on car-bon as carbon usage. A company’s carbon usagecomprises (1) an input dimension that relatesto production processes that utilize carbon-basedmaterials and energy and (2) an output dimen-sion that refers to the emission of GHGs fromthese production processes (Busch and Hoffmann2007). Although not all GHGs directly relate tocarbon, we include them in our considerations interms of their CO2 equivalents.2

System Boundaries and Scopeof Carbon Usage

The carbon usage of a company depends onthe industry it operates in, its position in thevalue chain, and company-specific factors, suchas product portfolio or technological equipment.For a comprehensive analysis of a company’s car-bon usage, a cradle-to-grave perspective is im-portant (cf. Butner et al. 2008), and direct andindirect carbon inputs and outputs have to bedistinguished (see figure 1). For the output di-mension, the Greenhouse Gas Protocol Initia-tive (WBCSD and WRI 2004) developed a clas-sification scheme. This approach is sufficient foranalysis of the output dimension of corporate car-bon usage. For analysis of monetary implications,however, carbon inputs also matter. Therefore,we extend this scheme and describe different sys-tem boundaries as three scopes for direct and

Figure 1 Carbon inputs and outputs with varying system boundaries.

indirect levels of carbon usage in the input andoutput dimensions (see table 1).

Within the gate-to-gate view of scope 1, onlydirect carbon usage is taken into account, andneither upstream nor downstream aspects areconsidered. The determination of scope 1 car-bon usage requires the least effort in terms ofdata gathering and analysis. The results displayonly a very limited part of the actual carbonusage, however, excluding, for example, “gray”carbon usage that occurs during the productionof supplied products. In contrast, the combinedconsideration of scopes 1 and 2 also includesthe carbon usage relating to purchased energy.Nonetheless, negative financial effects can stilllurk behind other parts of the value chain—forexample, when suppliers pass on emission coststo their customers. To address this problem, onecan analyze the full value chain, including theupstream carbon usage of the company’s sup-ply chain as well as the downstream carbon us-age linked to a company’s products and services(scope 3). Nevertheless, the determination of thisscope is shaped by practical limitations, such asdata availability and the time required for preciseand reliable data analyses.

Measuring Corporate CarbonPerformance

Thus far we have centered our remarks onthe absolute carbon usage of companies (e.g.,the total amount of GHG emissions). Thisis important for general or aggregated trend

Hoffmann and Busch, Corporate Carbon Performance Indicators 507

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Table 1 Carbon usage within three scopes

Scope Carbon input dimension Carbon output dimension (GHG protocol)

Scope 1 Direct carbon input: Direct GHG emissions:• Used as material component within

on-site production processes• From on-site production processes

• Used for direct combustion of fossilfuels in boilers and furnaces

• From direct combustion of fossil fuels inboilers and furnaces

• Used as energy source for on-site powergeneration

• From on-site power generation

Scope 2 Indirect carbon input: Indirect GHG emissions:• Used as energy source for purchased

energy (electricity, heat, steam)• From consumption of purchased energy

(electricity, heat, steam)Scope 3 Other indirect carbon inputs (not included

in Scope 1 or Scope 2):Other indirect GHG emissions (not

included in Scope 1 or Scope 2):• Required for or within upstream and

downstream processes• From upstream and downstream sources

• Associated with outsourced orcontracted activities

• Associated with outsourced orcontracted activities

• Other inputs • Other emissions

Source: Based on WBCSD and WRI (2004).Note: GHG = greenhouse gas.

investigations with a sectorwide or macroeco-nomic view that can help to identify situationsin which individual companies or industry sec-tors continuously increase their absolute emis-sions even while governments pursue nationalemission reduction goals. Nonetheless, to com-pare the carbon usage across companies and toincorporate changes in a company’s business ac-tivities over time (e.g., through mergers and

Table 2 Business metrics relevant to carbon indicators

Business metric Description

Unit of production Business output in physical units; no consideration in monetary termsTurnover (or sales) Value of the company’s production step in the value chain plus all

upstream business activities; considers cradle-to-gate value creationTotal costs Expenses for generating the business output; considers company’s costs,

including all expenses in the profit and loss statementCosts of goods sold Expenses that exclude indirect costs, such as office costs; shows direct

expenses incurred in producing the company’s outputValue added Sales less intermediate costs for purchased goods and services; emphasis

is put on the company’s production step within the value chainEarnings before interest and

taxes (EBIT)Approximate measure of a company’s operating cash flow; focal point is

the profitability of the companyMarket capitalization or

equityMarket value of a company or value of equity; emphasis is put on the

value of the company as a whole

Source: Our own compilation, based on Horngren and colleagues (2006) and Henderson and Trucost (2005).

acquisitions), it is important to place the absolutecarbon usage in relation to a business metric.

The generation of this type of ratio has beenthoroughly discussed in the ecoefficiency litera-ture (e.g., Schaltegger and Sturm 1990; WBCSD2000). Ecoefficiency measures illustrate the eco-nomic output that is obtained from a given re-source input or that generates a given envi-ronmental effect (DeSimone and Popoff 1997;


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Figure 2 Corporate carbon performance indicators.

Burritt and Saka 2006).3 In contrast, the in-verted ratio, ecointensity (Bartelmus et al. 2004;Ehrenfeld 2005), considers the amount of envi-ronmental impact in relation to a business metric.Depending on the business metric chosen (seetable 2), the ecointensity metric can have differ-ent explanatory powers. The advantage of usingan intensity measure instead of an efficiency mea-sure to illustrate corporate carbon performance isthat comparisons between companies and reduc-tion potentials become more transparent.

Considering a company’s carbon usage andthe delineated business metrics, we propose fourcorporate carbon performance indicators (seefigure 2): First, we take a static view and analyzethe physical carbon performance from a materialflow perspective (carbon intensity). Second, weagain analyze physical flows but take a dynamicview by considering how much the company re-lies on carbon over time (carbon dependency).Third, we go beyond the purely physical carbonflows and analyze the monetary implication ofcarbon intensity from a static perspective (carbonexposure). Fourth, we combine the dynamic viewregarding carbon dependency with monetary im-plications and discuss how to derive a corporaterisk figure that allows conclusions on carbon’s fi-nancial importance over time (carbon risk). Wenow describe each indicator in detail.

Determining Carbon Intensity

The term carbon intensity has been used in vari-ous ways in the literature as well as in practical ap-plications. On the macro level, approaches have

considered carbon inputs (EIA 1995; Bosettiet al. 2006; Huesemann 2006) as well as car-bon outputs (Lebel et al. 2007; Raupach et al.2007) to determine intensity indicators that de-scribe carbon flows within an economic system.On the micro level, carbon intensities are usedfor the internal or external analysis of compa-nies, for reporting purposes, and for ranking dif-ferent companies (for examples, see table 3).The current usage of these indicators is prob-lematic for four reasons, however: Different syn-onyms abound for the same underlying indicator,the same synonyms are used for different under-lying indicators, system boundaries vary amongscopes 1–3, and carbon intensities are only basedon carbon outputs, not on carbon inputs. Thismakes it very difficult for external stakeholdersto compare the carbon intensities of differentcompanies.

To derive a consistent terminology, we suggesta general definition of the term carbon intensity.

Definition 1: Carbon intensity relates to a com-pany’s physical carbon performance and describes theextent to which its business activities are based oncarbon usage for a defined scope and fiscal year.

The intensity is measured by the ratio of acompany’s carbon usage in absolute terms to arelated business metric. The carbon usage spec-ifies the amount of carbon the company utilizesor emits for a chosen scope and fiscal year. Thebusiness metric is a measurement of a company’sfinancial performance for the same fiscal year. Inthe determination of a company’s carbon inten-sity, the time frame and the material flow levelare relevant.


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Tabl

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inus

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the

term

carb

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ity

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tor

Car

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rics

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ries

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(no

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offm

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006)

Com

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cost

(200

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(no

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axim

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2006

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(in

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(in

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(in

kWh)

Hut

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(200

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(in

tons

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EBIT

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(in

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Uni

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nkg

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part

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s(in

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ram

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Key

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les(

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Emis

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svol

ume

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unit

CO

2-eq

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Sale

s(in

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oyot

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Spec

ific

emis

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2(i

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ancs

.


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With respect to the time frame, the status quo(to) and the predicted (t1) carbon intensity canbe distinguished. The status quo carbon intensity isbased on verified data (e.g., of the previous fiscalyear) and as such provides a realistic picture ofthe company’s current carbon intensity. It con-forms to the established use of this indicator, asexhibited in table 3. The predicted carbon inten-sity relates to a future time t1 and is commonlynot reported. It requires specification of three pa-rameters: First, a time period has to be definedover which the analysis of the company’s carbonperformance will be conducted. Second, futureprice and market conditions have to be estimatedon the basis of forecasts such as those issued bythe International Energy Agency (IEA). Theseshould specify carbon-related conditions of thebusiness environment and incorporate all rele-vant information known or assumed to influencethe carbon and energy market (notably, futurecarbon prices; cf. table 4). Third, the company-specific carbon usage in the future has to be esti-mated. Reflecting the assumptions regarding thefuture price and market conditions, technologi-cal options and alternative production processeshave to be identified that a company is likelyto use to realize carbon optimization potentials.These potentials relate to efficiency increases(e.g., energy efficiency) and substitution options(e.g., using renewable energy sources instead offossil fuels). The extent to which a company isable to take advantage of these potentials is de-termined by the individual status of a company’stechnology equipment, current government poli-cies, and other factors.

Given the material flow level, a company’scarbon input or carbon output intensity can bedistinguished, depending on the way carbon us-age is calculated. The carbon input intensity re-lates to the amount of carbon that is neededwithin the production process. For example, inthe plastics industry, the carbon flows can be in-cluded that are required for the production ofpolymers and do not produce emissions. In con-trast, the carbon output intensity accounts forthe emission of GHGs and acknowledges thecompany’s internal and external efforts to curbemissions via measures such as carbon offsetting(WBCSD and WRI 2004).

The amount of carbon inputs CI in tons ofcarbon is calculated as CI = ∑K I

k=1 CIk ,t wherek = 1, . . ., K I is the index for the K I different in-puts and t is the fiscal year of analysis. The scope 1input data can be obtained from an input-outputanalysis or derived from the company’s accoun-tancy or controlling systems. The determinationof scope 2 carbon inputs requires the amount ofpurchased energy and information regarding thespecific energy mix—that is, the carbon inputs forproducing the purchased energy—which is avail-able in standard databases, such as the ecoinventdatabase.4 For a complete allocation of scope 3carbon inputs, a life cycle assessment is usuallynecessary (e.g., Ardenti and Gilardi 2007; Wei-dema et al. 2008). The carbon input intensity(CIIn) can be derived for a chosen scope i = 1, 2,3 and fiscal year t when a business metric (BM) istaken into account.

CI Ini ,t =

K I∑k=1

CIk ,t

B M(1a)

The carbon output intensity is based on a com-pany’s GHG emissions, measured in CO2 equiv-alents and denoted by k = 1, . . . , KO. Scope1–3 emissions can be obtained from the samesources as described for carbon inputs. In addi-tion, carbon-relevant activities, such as GHG re-ductions via offsetting, have to be taken into ac-count. The carbon output intensity (COIn) canbe derived analogously to equation (1a).

COIni ,t =

KO∑k=1

COk ,t

B M(1b)

Determining CarbonDependency

In the literature, the notion of carbon depen-dency has been treated on a macroeconomic level(e.g., Liberatore 2001). It is related to the en-ergy dependency of nations, which refers to thedependency on external energy resources, suchas the EU’s dependency on Russian natural gas(Kuik 2003). Carbon dependency can be inter-preted in the sense of such an energy dependencybut also as one country’s dependency on anotherfor meeting emission reduction targets through


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the importation of low-carbon fuels or emissionstrading (Wieczorek 2003). In this way, carbondependency is a “carbon (trading) dependency”(Kuik 2003, 236). We transfer this idea to themicro level and extend it by introducing a timecomponent.

Definition 2: Carbon dependency describes thechange in a company’s physical carbon performancewithin a given time period. The indicator is measuredas the company’s relative performance change fromthe status quo to the predicted carbon intensity.

A company’s carbon dependency indicateswhat percentage of the current status quo (t0)carbon intensity will remain, with the presump-tion that the company pursues its business underthe assumptions made for estimating its predictedcarbon intensity (t1) in the three steps (above).If a company undertakes all economicallyfeasible efforts to reduce its carbon intensity un-der these assumptions, the carbon dependencydescribes the degree to which the company isable to reduce its carbon intensity. As a result, ahighly carbon dependent company is hardly ableto reduce its carbon intensity over the consideredtime period. Given the same scope i = 1, 2, 3 forboth carbon intensities (t0 and t1), the carbondependency (CDe) is expressed as a percentageof the t0 carbon intensity for the time period�t = t1 − t0.

CI Dei ,�t = CI Ini ,t1

CI Ini ,t0× 100 or

CO Dei ,�t = COIni ,t1

COIni ,t0× 100 (2)

Determining Carbon Exposure

The term carbon exposure is often usedin practitioner-oriented reports. Carbon Trust(2006b), Henderson and Trucost (2005), andSociete Generale (2007) deliver ratio-based def-initions that relate current carbon outputs todifferent hypothetical future cost figures. As aresult, their metrics mix two time frames whencarbon usage of t0 is related to carbon prices of t1.Furthermore, these authors utilize different busi-ness metrics and scopes for carbon usage. Takinga broader view, Schultz and Williamson (2005)also recommend including diverse cost effects re-lating to customer and shareholder sentiments

and climate change events (e.g., rising sea levels)in assessments of a company’s carbon exposure.In sum, there is neither a clear distinction be-tween different time periods nor a common un-derstanding of the underlying parameters for as-sessing companies’ carbon exposure. Therefore,we suggest a combined consideration of the inputand the output dimensions of a company’s carbonusage in one monetary term for one point in time.

Definition 3: Carbon exposure relates to a com-pany’s monetary carbon performance and describesthe monetary implications of the business activitiesdue to carbon usage for a defined scope and fiscal year.

The exposure is measured by the ratio betweena company’s carbon usage in monetary terms anda related business metric. Through the use ofprices, the two ratios that were necessary on thematerial flow level (i.e., carbon input and out-put intensity) can be combined in one monetaryfigure (carbon exposure). One calculates the car-bon usage in monetary terms by applying the in-put prices pIk with k = 1, . . ., K I for each unitCIk and the output prices pOk with k = 1, . . .,KO for each unit COk. Carbon input prices aredetermined by the mass fraction of each carbon-containing input (e.g., the extent to which pro-ducts are composed of specific carbon inputs) andthe expenditures associated with the initial car-bon source (e.g., costs for crude oil and relatedcarbon taxes). On the basis of equation (1), acompany’s carbon exposure (CEx) can be derivedfor a fiscal year t.

CExi ,t =

K I∑k=1

CIk ,t × p Ik ,t +KO∑k=1

COk ,t × pOk ,t

B M(3)

Similar to carbon intensity, the status quo (t0)and the predicted (t1) carbon exposure can bedistinguished. For a company’s status quo (t0) car-bon exposure, we differentiate between two costapproaches, one representing a company-internalperspective and the other a market perspective.The company-internal perspective considers ac-tual costs of fossil fuels and purchased energy dur-ing one fiscal year (t0) as obtained from the com-pany’s cost accounting system. To determine thecost of the fossil fuel–related purchased energy,one has to incorporate the country-specific en-ergy mix into the calculations (the percentage of


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Table 4 Cost approaches for determining future carbon prices

Approach Costs to be determined for Source (e.g.)

Price scenarios Carbon inputs Scenarios or forecasts: IEA (2006) or EIA (2008)Carbon outputs (GHG) Scenarios or forecasts: Trexler (2005), Urdal and

colleagues (2006), Carbon Trust (2006b),Trucost (2006), or Hourcade and colleagues(2007)

Abatement costs basedon mitigation options

Efficiency increase andfossil fuel substitution

Industry specifications: Metz and colleagues(2001), Llewellyn (2007), or Vattenfall (2007)

Estimates for fossil fuel alternative energytechnologies: Barker and colleagues (2006)

Offsetting Average prices per ton via CDM project:Capoor and Ambrosi (2007)Estimates for CCS: IPCC (2005) or Anderson

(2006)Cost of internalizing

external effectsDepletion of fossil fuels External costs of oil consumption: Sabour (2005)

Losses due to the depletion of resources such as oil:Weitzman (1999)

Damage related to carbonemissions

Social cost of carbon emissions: Clarkson andDeyes (2002)

Optimal carbon price: Nordhaus (2006)

Note: GHG = greenhouse gas; CDM = clean development mechanism.

carbon-based energy production). Similarly, car-bon output costs due to, for example, the Eu-ropean Emission Trading Scheme (EU ETS) orvoluntary emission reductions (e.g., offsetting viaclean development mechanism [CDM] projects)have to be accounted for. In contrast to thiscompany-internal perspective, the use of carboncost based on market prices follows an opportu-nity cost logic, and company-specific price condi-tions are not taken into account. The advantageof utilizing carbon costs based on market pricesis that for comparative analyses of different com-panies, only one price for each input and outputhas to be determined, which can be obtained frompublic sources.5 This reduces complexity and fa-cilitates the monetary assessments involved whenmore than one company is analyzed.

To estimate the company’s predicted (t1) car-bon exposure, one has to take into account thesame carbon-related conditions of the businessenvironment as applied for the t1 carbon inten-sity. For the future carbon prices (pIk,t1 and pOk,t1)for the carbon inputs (CI,t1) and outputs (CO,t1),we distinguish among three approaches (seetable 4).

First, scenarios for future prices can be applied,which have to take into account regulatory and

market risk and can be based on one’s own anal-yses or on forecasts in the literature. Notably, thescenarios must account for typical correlationsbetween market prices of fossil fuels and CO2

allowances (Bailey 1998; Montero and Ellerman1998; Voisin and Lamotte 2006). An estimationof future costs of carbon (CO2 equivalents) hasto be included, for example, when an emission-trading scheme is likely to be in place. One cando this either by choosing an opportunity costperspective or by assuming a fixed percentageof grandfathered allowances. In the former case,the same price is applied for all GHG emissions;in the latter case, a price would be consideredonly for a certain percentage of all emissions. Al-lowance prices have fluctuated considerably inthe past and are likely to remain volatile in thefuture. Forecasts for future GHG price levels aregenerally difficult, as prices will depend on not yetfully specified variables, such as evolving climatepolicy (Trexler 2005). One the one hand, fore-casts can be derived from historic market prices orforwards for EU ETS allowances, but they shouldfurther include a scenario component. One canobtain this component by following a dynamicapproach—for instance, taking into account de-cision points in the international policy process


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and historic price volatilities. Alternatively, toreduce complexity, one could choose a linearapproximation assuming a steady price increase(e.g., due to inflation). On the other hand, GHGprice forecasts can take into account policy sce-narios, resulting effects on carbon markets, andfurther variables, such as market psychology. No-tably, this approach is relevant for companieswhen they are incorporating future GHG pricesin strategic management by determining a “bestavailable corporate forecast” (Trexler 2005, 12).

Second, sector-specific abatement costs canbe applied that are associated with corporatemeasures to curb carbon usage. Basically, threeoptions exist to reduce a company’s carbonusage: efficiency increases in existing produc-tion processes, substitution away from fossil fu-els to become independent of carbon resources,and offsetting strategies to compensate emissions(Weinhofer and Hoffmann, forthcoming). Whenone is applying abatement costs to determine fu-ture carbon costs, it is important to acknowledgethat corresponding measures not only generatecosts (e.g., by requiring investments) but also re-duce costs (e.g., by increasing efficiency) or evenmight generate additional revenues (e.g., by anexcess of allowances). Therefore, the dynamicsbetween additional incurred costs and resultingcost savings and revenues have to be taken intoaccount.

Third, external costs can be included in along-term business perspective (Scholz and Wiek2005). Costs of external effects are usually calcu-lated on the macroeconomic level (e.g., Peskinand Angeles 2001); their application on the com-pany level follows the “polluter pays” principle.With respect to carbon inputs, there are efforts inthe economic literature to attach a price to thedepletion of fossil fuels (e.g., Weitzman 1999).With respect to carbon outputs, cost due to ex-ternal effects of emitting GHGs can be deter-mined by the cost–benefit or the marginal costapproach (Clarkson and Deyes 2002). Both ap-proaches utilize a figure for the damage per ton ofcarbon emitted.

Determining Carbon Risk

In general, the term carbon risk is often usedto describe any corporate risk related to climate

change or the use of fossil fuels. Most of thepractitioner-oriented reports cited thus far donot explicitly distinguish among carbon expo-sure, carbon risk exposure, and carbon risks. As aclear definition, Urdal and colleagues (2006) usethe term value at risk from carbon and calculatethe effects of different price scenarios for CO2

on the equity value of an energy utility. Also,Carbon Trust (2006b) measures the risk fromclimate change in terms of a carbon exposure(a price for emissions is applied) and further reg-ulatory and market dynamics as well as broaderclimate change impacts. The resulting risk valueis expressed as a percentage of the earnings be-fore interest and taxes (EBIT). We build on thisunderstanding of carbon risk as a foresight in-dicator but emphasize that carbon risk describesthe likely change in carbon-related monetary im-plications for a company, which one can obtainby determining a company’s carbon exposure forboth time periods separately and comparing thechange between t1 and t0.

Definition 4: Carbon risk describes the changein a company’s monetary carbon performance withina given time period. The indicator is measured as therelative performance change from the status quo tothe predicted carbon exposure.

A company’s carbon risk indicates by the whatpercentage current status quo (t0) carbon ex-posure will change if the company pursues itsbusiness under the assumptions for the predictedcarbon intensity (t1). On the basis of the car-bon price scenarios designed for determining thepredicted carbon exposure (t1), the carbon riskdisplays how the relative monetary relevance ofcarbon is likely to decrease or increase for thecompany. As such, it facilitates the comparisonof the monetary implications of different com-panies’ carbon usage over time. As a result, acompany with a high carbon risk will face a sig-nificant increase in the relevance of its carbonperformance for the company’s costs and prof-its over the considered time period. If we as-sume the same scope i = 1, 2, 3 for both car-bon exposures (t0 and t1), the resulting carbonrisk (CRi) is derived for the time period �t =t1− t0.

CRii ,�t =(

CExi ,t1

CExi ,tO

− 1)

× 100 (4)


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Specification of thePerformance Indicators

The four indicators describe different areasthat are important in the analysis of a company’scarbon performance. The choice of scope of anal-ysis, business metrics, and cost approach deter-mines the explanatory power of the results. Dueto the multitude of options pursued in the litera-ture, there is currently a lack of transparency re-garding the applied methods. Comparative anal-yses are impeded, as companies as well as ana-lysts use different approaches arbitrarily. There-fore, we specify our general definitions and suggestone specific set of indicators that appears mostpromising as a standardized approach to the prac-tical application of the external analysis of com-panies (table 5). Data availability can be limited,however—for example, regarding scope 3 carbonusage or company-specific costs. Therefore, ourapproach represents a trade-off between the pub-lic availability of data and the requirements for astandardized application of comprehensive indi-cators.

To determine the carbon intensity, we sug-gest the consideration of carbon outputs, as thisindicator points to corporate efforts in terms ofoffsetting as well as internal measures, such as effi-ciency increases. Furthermore, we suggest a focuson scope 1–2, as the determination of scope 3 re-mains complex (Carbon Trust 2007). The carbon

Table 5 Specification of a standardized approach for practical application of the four indicators

Required data Suggested approach

Business metrics Sales for highly diversified industries and unit of production for industries withone specified product/service (e.g., energy utilities)

Time period Rather a long-term focus, as applied by official forecasts, such as the IEA or EIA(e.g., 2015)

Carbon usage t0 Actual scope 1–2 GHG emissionsCarbon usage t1 Estimated scope 1–2 GHG emissions that reflect company- and market-specific

conditionsCarbon input prices t0 Actual market prices for fossil fuelsCarbon output prices t0 Actual costs for emission reduction certificates related to scope 1 GHG

emissions; if an emission trading scheme is in place, application of theaverage price of allowances of year t0 for all scope 2 GHG emissions

Carbon input prices t1 Official market forecasts (e.g., IEA or EIA) for fossil fuel pricesCarbon output prices t1 Average price of EU ETS allowances of year t0 for all scope 1–2 GHG

emissions in year t1 in combination with an annual inflation rate of 2%

Note: IEA = International Energy Agency; EIA = Energy Information Agency; GHG = greenhouse gas; EU ETS =European Union Emission Trading Scheme.

exposure indicator in t0 relies on market prices,because this significantly reduces data-collectingefforts in analysis of different companies. For de-riving the carbon output cost for t0 carbon ex-posure we suggest to consider the actual costs foremission reduction certificates related to scope1 GHG emissions. For all other emissions wesuggest taking an opportunity cost perspective.This entails considering a price in t0 for all scope2 GHG emissions if an emission trading is inplace and a price in t1 for all scope 1–2 GHGemissions; potential effects of grandfathering andother effects, such as the actual amount of re-quired allowances in t1, are neglected. Further-more, we suggest taking the average price of EUETS allowances of t0 and applying an annual in-flation rate to approximate for the future carbonprice.

An Example

To illustrate the practical application ofthe suggested indicators, we analyze two hy-pothetical companies that face identical start-ing points. Both are industrial companies basedin the United States that generate their ownGHG emissions (scope 1) and require exter-nally produced energy (scope 2). As both com-panies produce a variety of products, we chosesales as business metrics and assume an annualgrowth in production and sales of 5%. We assess


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the carbon performance within the time frame2006–2015 for both companies. The price perton of carbon for scope 1–2 carbon input hasbeen calculated to be US$200 in 2006 and isassumed to increase to US$300 in 2015.6 In2006, neither company was subject to emis-sion trading requirements, nor did either con-sider offsetting options; therefore, no carbon out-put prices have to be considered. The averageEU ETS allowance price in 2006 was aboutUS$25.47, which is applied for all scope 1–2GHGs in 2015, taking into account an inflationrate of 2%.

Figure 3 Carbon performance assessment of two companies. t = tons; Mio $ = million U.S. dollars.

Due to increasing stakeholder pressure, bothcompanies undertake measures to optimize theircarbon performance. Company A identifies ar-eas for internal process improvements, whichserves to hold fossil fuel consumption constantwhile production increases. Nevertheless, thecompany’s efficiency for purchased energy doesnot improve and, thus, its energy consumptiongrows proportionately to the production increase.Company B takes advantage of governmental fi-nancial support programs and substitutes half ofits fossil fuel consumption with renewable en-ergy sources. Furthermore, the company increases


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operational energy efficiency and cuts down onscope 2 carbon inputs, although this is counter-balanced by a production-related increase in en-ergy consumption.

Figure 3 shows the assessment results. For2006, both companies have the same carbon out-put intensity of 1,243 tons of carbon per millionU.S. dollars in sales. Due to its efforts, companyA reduces its intensity, which results in a car-bon dependency of 79%. Company B reduces itscarbon intensity more strongly, bringing it downto 53%. This has implications for the monetarycarbon performance: For 2006, both companieshave a carbon exposure of 6.78 cents per dollarsales. Company B almost remains at this leveland, thus, faces a moderate carbon risk of 10%.By contrast, company A has to cope with a signifi-cant increase in the financial relevance of carbon,expressed by a carbon risk of 62%. The increasein carbon costs results in an increase of its carbonrisk, although the company reduces its carbon in-tensity. For policy makers, the assessment resultsindicate that the financial support program canbe effective: Company B’s carbon dependency isone third lower than company A’s. For financialstakeholders, the assessment results illustrate thatan investment in company B is less risky from acarbon perspective than investment in companyA: Company B’s likely increase of the financialrelevance of carbon is six times lower.

Discussion and Conclusion

In this article, we discuss existing approachesfor assessing the carbon performance of com-panies and conclude that there is no commonagreement on how to conduct correspondingassessments. We suggest a holistic perspectiveon carbon flows on the micro level and define asystematic and comprehensive approach basedon four corporate carbon performance indicators.We differentiate between the physical andmonetary spheres and between current andfuture performance. The suggested specificationof the indicators facilitates their practical useand aims at a standardized approach for analysisand reporting purposes.

We see two main stakeholders as users of thesuggested indicators. For policy makers, the twophysical indicators illustrate the carbon hot spots

in a value chain that could be targeted for car-bon reduction policies. The two monetary indi-cators reveal which carbon costs and risks lurkbehind the business activities of companies andhow companies’ policies might affect their fu-ture competitiveness. As such, policy makers canutilize the indicators when formulating climatepolices and as tools to evaluate whether exist-ing policies have been effective. For financialmarkets, the physical indicators provide insightsregarding a company’s carbon management ef-forts and its optimization potentials. The mon-etary indicators show carbon’s present andfuture financial implications for companies. Ac-cordingly, information can be used to optimizeinvestment portfolios or determine risk premi-ums. As such, actors in financial markets will beable to readjust their investment analyses andloan assessments and therefore help pave the waytoward a low-carbon future. In addition to thesetwo external stakeholders, companies can obtaininsights regarding the carbon-related enhance-ments or risks of their production processes andfacilities. On the basis of such information, theycan assess future investments and projects or ana-lyze existing processes. Moreover, they can utilizethe corresponding information within marketingor corporate reporting.

Our suggestion for a standardized approachencompasses corporate scope 1–2 carbon usage.This raises the question of whether a life cycle–wide consideration would be more appropriate.Life cycle assessments (LCAs) can deliver pre-cise results for the life cycle–wide carbon analysisof products and services.8 If this is the purposeof an analysis, an LCA should be conducted. Forthe purpose of analyzing organizations (our aimin this article), the GHG protocol (WBCSD andWRI 2004) seems to be more appropriate. Be-cause the applicability of scope 3 is rather com-plex, however, we suggest a specification basedon a scope 1–2 approach. Nevertheless, future re-search should focus on facilitating a scope 1–3approach. Most importantly, this requires clearindustry-specific conventions on which carbonusage should be considered in scope 3, given thefeasibility of data collection. Specialized serviceproviders, such as Centre Info SA9 or TrucostPlc,10 can provide initial data sets as a basis forthis research. Furthermore, organizations such as


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the Global Reporting Initiative11 or the CarbonDisclosure Project12 could extend their report-ing frameworks to help gather these data. Thisalso applies to other discussed data, such as car-bon input costs or expenses relating to emissionstrading. Such considerations could then furtherinclude the costs of internalizing external effectsand could describe for stakeholders the overallnegative carbon externalities caused by individ-ual value chains.

Notes

1. See http://bie.berkeley.edu/files/ConsumerFootprintCalc.swf.

2. In the Kyoto Protocol, six greenhouse gases arespecified, which are measured according to theirglobal warming potential in CO2 equivalents: car-bon dioxide, methane, nitrous oxide, hydrofluoro-carbons, perfluorocarbons, and sulfur hexafluoride.To consider all six under the umbrella of carbon isconsistent with the other approaches (e.g., the car-bon footprint; Carbon Trust 2007). Furthermore,CO2 accounts for the main proportion, as, on av-erage, about 93% of GHG emissions of companiesin the FTSE 100 (i.e., a share index of the 100 mosthighly capitalized companies listed on the LondonStock Exchange) are CO2-related (Henderson andTrucost 2005). For a description of the methods forcalculating CO2 equivalents, see IPCC 2007b.

3. Editor’s note: For extensive analyses of eco-efficiency, see the special issue of this jour-nal on ecoefficiency and industrial ecology, vol-ume 9, number 4 (www3.interscience.wiley.com/journal/120129080/issue).

4. See www.ecoinvent.org; a list with furtherdatabase providers can be found at http://lca.jrc.ec.europa.eu/lcainfohub/databaseList.vm.

5. See, for example, www.pointcarbon.com orwww.wtrg.com.

6. To determine these costs, one has to consider sep-arately the amount of each carbon input (for scope1 and 2) and the related prices in t0 and t1. For ex-ample, carbon input prices in 2006 were $719.30/tcarbon for distillate fuel oil, $474.52/t carbon fornatural gas, and $85.96/t carbon for other indus-trial coal (on the basis of our own calculations andEIA [2008, table A3]). Within this example, weassumed scope 1 and 2 to have the same averagecarbon costs in t0 ($200/t) and t1 ($300/t).

7. The average price was about EUR18.1 per ton, andwe applied an exchange rate of US$1.4/EUR. Forsimplicity, we disregarded the high volatility of thisprice in 2006.

8. This was one main outcome of the recent ex-pert workshop 34th LCA Discussion Forum:Life Cycle Assessment Versus CO2 Footprint?held on 14 March 2008, Lausanne, Switzerland(www.lcainfo.ch/DF/DF34/Program.htm).

9. See www.centreinfo.ch.10. See www.trucost.com.11. See www.globalreporting.org.12. See www.cdproject.net.

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About the Authors

Volker Hoffmann is an assistant professor andTimo Busch is a Post-Doctor at the Swiss Fed-eral Institute of Technology (ETH) in Zurich,Switzerland.


Documents

Corporate Carbon Performance Indicators Carbon Intensity, Dependency, Exposure, and Risk