Chapter 2: Carbon Accounting Fundamentals

Carbon Accounting: Risk and Opportunity

May 18, 2023
August 30, 2023
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carbon accounting risk and opportunity overview

Lesson Overview

Risk and Opportunity

Climate risk is financial risk.

Most companies are now recognizing climate risk as financial risk. The implementation of increasingly stringent government regulations has begun to resonate with both companies and investors.

With carbon accounting, organizations can make accurate assessments of where to concentrate their efforts at decarbonization.

Those that can adapt to the growing demand for climate disclosure may improve the sustainability of their companies. And those standing idle may increase their chances of regulatory sanctions, reputational damage, and exposure to climate risk.

Carbon accounting is critical in business today. It's important because it can help mitigate risk, identify business opportunity, and shape the perception of a company and its stakeholders.


Carbon accounting helps companies understand, better manage, and mitigate exposure to climate risk.



Carbon accounting enables companies to identify opportunities to innovate and reduce impacts while increasing business value.



By providing accurate, auditable emissions data, a business can differentiate itself as a sustainability leader for customers, employees, and investors.


Risk Types

Companies recognize that climate change poses financial risk and opportunities to their business, primarily in the form of physical risk and transition risk.

IMF (2019), Climate Change and Financial Risk.

Physical Risks

Physical risk refers to the economic costs and financial implications resulting from climate change, such as increasing extreme weather events, severe climate shifts, and other indirect effects of climate change (e.g. water shortage).

An example of a physical risk would be the destruction of real estate, infrastructure, or land during a storm or flood event.


Transition Risks

Transition risks are related to the process of transitioning away from reliance on fossil fuels toward a low-carbon economy, including shifts in climate policy, regulation of certain industries, and global market sentiment.

A carbon tax is an example of a transition risk.

According to the Tax Foundation, "a carbon tax is levied on the carbon content of fossil fuels. The term can also refer to taxing other types of greenhouse gas emissions, such as methane. A carbon tax puts a price on those emissions to encourage consumers, businesses, and governments to produce less of them."

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