Measuring the Carbon Delta in Financial Performance

Incorporating carbon price risk in valuation and investment decisions poses significant challenges for power sector investors. To the extent that carbon emissions are a cost of production for fossil fuel generators, capital markets theory would suggest that a rising price for any factor of production would lead investors to revise their expectations of future profits, leading to lower company valuations (Veith, 2009). Thus, in principle, carbon emissions create a contingent liability for carbon-intense generators and the valuation implication of this depends upon the extent to which these liabilities can be passed on to consumers. This chapter explores how carbon pricing changes the competitive dynamics of fossil fuel and renewable energy technologies in European power markets.