Carbon cost pass-through and access to capital shape firms’ carbon strategies

Abstract Regulators globally deploy carbon pricing to drive down emissions through market forces. The effect of carbon pricing on firms’ financial profiles is not well understood. However, a financially successful transition of industrial firms is critical for maintaining macroeconomic stability and achieving comprehensive decarbonisation. Here we analyse the costs of carbon pricing compliance and decarbonisation, and their effects on the cashflows and margins of six steel and cement firms across various future cost scenarios. We used a model framework that estimates the impact of carbon pricing and decarbonisation costs on operating margins and capital expenditure on a company level for a range of scenarios. We conclude that the key determinant of how readily energy-intensive companies can adapt to the climate transition is the ‘carbon cost pass-through’, that is, their ability to effectively pass on carbon-related expenses to consumers. Importantly, even the ability to pass through all costs does not guarantee financially successful decarbonisation, as capital markets can restrict the financing of zero-carbon solutions.