Weighted average cost of carbon
Encyclopedia
The Weighted average cost of carbon is used in finance
to measure a firm's specific cost of carbon. It expresses how much an organization is expending to either reduce carbon emissions internally or offsetting externally (carbon offset
). As such, the weighted average cost of carbon is the cost a company incurs to balance its carbon liability (carbon footprint
).
It is a term with growing importance as legislation globally moves to internalize the impact of emission through cost mechanisms.
) and Joint Initiatives. These credits are largely traded in form of Certified Emission Reduction
(CER), or Emission Reduction Unit
(ERU). Voluntary Emissions Reduction
(VER) have a similar function but have not registered / cannot be registered under the rules of the Kyoto Protocol
.
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
to measure a firm's specific cost of carbon. It expresses how much an organization is expending to either reduce carbon emissions internally or offsetting externally (carbon offset
Carbon offset
A carbon offset is a reduction in emissions of carbon dioxide or greenhouse gases made in order to compensate for or to offset an emission made elsewhere....
). As such, the weighted average cost of carbon is the cost a company incurs to balance its carbon liability (carbon footprint
Carbon footprint
A carbon footprint has historically been defined as "the total set of greenhouse gas emissions caused by an organization, event, product or person.". However, calculating a carbon footprint which conforms to this definition is often impracticable due to the large amount of data required, which is...
).
It is a term with growing importance as legislation globally moves to internalize the impact of emission through cost mechanisms.
The formula
C = ((Va × Ea) + (Vo × Eo)) / L| Symbol | Meaning | Units |
|---|---|---|
| C | Weighted average cost of carbon | currency |
| Va | Volume of carbon abated through internal projects and demand reduction per annum | tons/pa |
| Ea | Averaged annual expenditure to achieve 'Va' over life of projects | currency |
| Vo | Volume of purchased carbon offset per annum | tons/pa |
| Eo | Expenditure per annum to acquire 'Vo' | currency |
| L | Total carbon liability per annum | tons/pa |
How it works
Corporations have multiple ways to balance their carbon liability. They can reduce their carbon emissions (their "carbon footprint") through capital investment, projects and demand reduction. They can purchase emission permits, be allocated quotas (such as European Union Allowances (EUA)) or buy carbon credits. The latter are largely produced by CDM projects (Clean Development MechanismClean Development Mechanism
The Clean Development Mechanism is one of the "flexibility" mechanisms defined in the Kyoto Protocol . It is defined in Article 12 of the Protocol, and is intended to meet two objectives: to assist parties not included in Annex I in achieving sustainable development and in contributing to the...
) and Joint Initiatives. These credits are largely traded in form of Certified Emission Reduction
Certified Emission Reduction
Certified Emission Reductions are a type of emissions unit issued by the Clean Development Mechanism Executive Board for emission reductions achieved by CDM projects and verified by a DOE under the rules of the Kyoto Protocol...
(CER), or Emission Reduction Unit
Emission Reduction Unit
The Emission reduction unit is a trading unit under the Kyoto Protocol representing a reduction of greenhouse gases under the Joint Implementation mechanism, where it represents one tonne of equivalent reduced....
(ERU). Voluntary Emissions Reduction
Voluntary Emissions Reduction
Voluntary Emission Reductions or Verified Emission Reductions are a type of carbon offset exchanged in the voluntary or 'Over-the-Counter' market for carbon credits...
(VER) have a similar function but have not registered / cannot be registered under the rules of the Kyoto Protocol
Kyoto Protocol
The Kyoto Protocol is a protocol to the United Nations Framework Convention on Climate Change , aimed at fighting global warming...
.