Turning Carbon Risk into Sustainability investments through carbon pricing
Carbon isn’t just a climate issue anymore, it’s a business risk. Rising costs, tightening regulations, and shifting market expectations are pushing companies to act. But here’s the challenge: how do you decide which sustainability investment to make first?
The answer is simple in principle but powerful in practice: treat carbon like a financial risk, not just a sustainability metric.
By assigning a price to carbon emissions, through internal carbon pricing or using real-world benchmarks like the EU Emissions Trading System (EU ETS), companies can turn climate risks into numbers that finance and procurement teams understand. That’s when sustainability stops being an abstract goal and starts becoming a smart investment strategy.
In this blog, we’ll walk you through:
- What’s driving carbon risk today
- How carbon pricing helps assess and prioritize investments
- How to calculate carbon-inclusive business cases using carbon pricing.
- How ClimateCamp supports this approach with data and tools
Why Carbon Is a Financial Risk
Carbon has moved from the sidelines to the center of financial and strategic decision-making. Companies with high-carbon operations are facing rising costs, tighter regulations, and growing demands from customers, investors, and lenders.
Several trends are driving this shift:
- Regulations like the EU ETS and CBAM are making emissions financially visible and costly.
- Investors and customers are asking for credible reduction plans and verified carbon data.
- Suppliers are facing carbon costs themselves, and they pass those along through price increases.
- Banks and lenders are factoring climate risk into financing decisions, affecting interest rates and credit access.
These forces are already showing up in real contracts, procurement criteria, and investment planning. If carbon is not yet on your balance sheet, it will be soon.
What Are the Financial Risks of Carbon?
Fines and Compliance Costs
New regulations are no longer voluntary. Under the CSRD and other frameworks, emissions reporting is mandatory, and failure to comply can be costly.
Example: In Germany, companies can face fines up to €10 million or 5% of annual turnover. In France, criminal liability is on the table for severe breaches. Sustainability is now a legal obligation.
Operational Costs Are Rising
The EU ETS is a cap-and-trade system where companies must buy allowances to emit CO2. As the cap tightens, the price of these allowances goes up. That means your cost to emit CO2 is rising year by year. Currently, it's regularly over €90 per ton.
CBAM, coming in 2026, will apply similar pricing to imported materials. If you rely on carbon-intensive inputs like steel or aluminium, and your supplier hasn’t decarbonized, you will pay the price.
Example: In the packaging industry, several European firms including DS Smith are investing in low-carbon raw materials and energy-efficient production to stay ahead of compliance costs under EU ETS.
Capital Is Getting Climate-Smart
Financial institutions are under pressure to align with net-zero goals. They increasingly expect the companies they finance to do the same. If you don’t have a solid carbon reduction strategy, you could face higher borrowing costs or struggle to access sustainable finance.
Having an Internal Carbon Price (ICP) isn’t enough on its own. If it's not linked to real reductions, banks may still consider your company high-risk.
Example: In 2023, Danish brewer Carlsberg received a favourable sustainability-linked loan, partly due to its publicly disclosed science-based targets and packaging decarbonization efforts, showing how financial benefits follow credible reduction strategies.
Supply Chain Price Hikes
Your suppliers are paying more to comply with emissions regulations and are starting to pass these costs on. If you rely on imported materials or outsourced logistics, you’re likely already feeling this pressure.
At the same time, low-carbon products and services are in high demand, and limited supply. If you're not prepared, you may be priced out or left behind.
Examples:
- CBAM is already increasing costs on imported steel and aluminium.
- Food companies like Arla and Nestlé have signalled that increased Scope 3 emissions tracking requirements are affecting how they choose suppliers, raising pressure across the food and beverage industry.
Lost Bids and Brand Trust
Carbon transparency is becoming a must in both B2B and B2C markets. Buyers increasingly include emissions performance in RFPs. If you can't provide reliable carbon data, you may lose contracts. Consumers are also watching and they expect brands to show real progress.
Example: In 2024, FrieslandCampina began requiring its packaging suppliers to disclose CO2 emissions at product level to qualify for new contracts. This move rewarded suppliers with transparent reduction strategies and excluded others lacking traceability.
Planning Blind Spots
Ignoring carbon risk in your long-term planning could lead to stranded investments. Future carbon prices are uncertain, but the trend is clear: up. If your business model depends on low-cost emissions, it may not be viable for long.
Example: A 2023 industry review of the European beverage sector found that smaller bottling plants without decarbonization roadmaps struggled to attract investors during capacity expansions, while those with low-carbon packaging plans secured better financing terms.
Using Carbon Pricing to Assess Risk & Prioritize Action.
Once you accept carbon as a financial risk, the question becomes: How do you account for it in investment decisions?
1. Comparing Two Options: A Practical Example
Let’s say you’re choosing between two suppliers:
- Product 1 offers a lower upfront price but has a high carbon footprint.
- Product 2 is more expensive but uses low-carbon materials.
To make an informed decision, you need to look beyond the sticker price and include the carbon-adjusted cost.
The Formula:
Total Cost = Product Price + (Product Footprint in kg CO₂e × Carbon Price)
Where:
- Product Footprint is the Scope 3 emissions associated with the good or service.
- Carbon Price can be either the current EU ETS price or an internal carbon price you’ve set based on your risk exposure or future expectations.
This simple calculation can be applied to:
- Supplier comparison
- Equipment upgrades
- Capital expenditure decisions
- Decentralized energy or transport solutions
- Packaging or product design choices
2. Calculating the Long-Term Value of Sustainability Investments
If you're investing in something with a multi-year lifespan, like machinery, facilities, or long-term supplier contracts, you should account for the fact that the price of carbon is likely to rise.
Carbon price inflation is difficult to predict, but based on recent EU ETS trends and tightening policy, a conservative estimate of 10% annual increase is reasonable.
Image showing the evolution of EU ETS Carbon Price
Sitarz, J., Pahle, M., Osorio, S. et al. EU carbon prices signal high policy credibility and farsighted actors. Nat Energy 9, 691–702 (2024). https://doi.org/10.1038/s41560-024-01505-x
Extended Formula with Inflation:
Total Carbon Cost over N years = Σ [Annual Emissions × Carbon Price × (1 + Inflation Rate)ⁿ]
Where:
- N = number of years you plan to use the product or contract
- Inflation Rate = assumed annual increase in carbon price (e.g., 10%)
- Carbon Price can be either the current EU ETS price or an internal carbon price you’ve set based on your risk exposure or future expectations.
This helps you compare not just today’s cost, but the total cost of ownership including emissions liability.
Why Set an Internal Carbon Price?
An Internal Carbon Price (ICP) helps you plan ahead by giving emissions a real monetary value. Even if you're not paying a carbon tax today, an ICP helps you factor future risks into today's decisions.
With an ICP, you can:
- Compare investment decisions more accurately
- Prioritize emissions cuts with the best ROI
- Prepare for upcoming costs from EU ETS or CBAM
Typical ICPs range from €50 to €200 per ton.
But an effective ICP requires real, high-quality data. That includes emissions from your supply chain. This is where ClimateCamp helps: by collecting supplier-specific data so your ICP reflects actual performance, not rough estimates.
ClimateCamp helps you collect the supplier data you need to calculate your Product Carbon Footprint
ClimateCamp makes it easier to:
- Map your carbon footprint across Scope 1, 2, and 3
- Gather supplier data to improve accuracy
- Simulate carbon pricing scenarios
- Identify and prioritize impactful projects
- Track your progress and report results
With ClimateCamp, you can connect sustainability data to real financial decisions.
Final Thoughts
Carbon risk is business risk. And business risks need financial strategies.
Start simple:
- Know your emissions
- Set an internal carbon price
- Use cost-per-ton analysis to guide your actions
Tools like ClimateCamp can help you do all of this faster and with more confidence.
Ready to Turn Carbon Risk into Actionable Strategy?
To dive deeper into how carbon pricing can help your business tackle these risks, join us for our upcoming webinar. We'll explore how assigning a price to carbon emissions can guide your sustainability investments, prioritize the right actions, and help you build a business case that integrates both financial and environmental goals. This session will give you practical insights on how to apply carbon pricing effectively, whether you're refining your Scope 3 strategy or planning for future investments. Don’t miss out on this opportunity to transform your approach to carbon risk; reserve your spot today!