The Cost of Inaction 2024

Transition risk of 20+% EBITDA for some sectors in a rapid transition FIGURE 16 Average annual financial impact of carbon pricing by 2030, by scenario % annual EBITDA at risk Europe North America South America Asia-Pacific Sector averageAfrica & Middle EastMaterials Metal & mining Chemicals Utilities Industrials Oil & gasRapid transition Slow transition >50% 20-30% 20-30% 10-20% 5-10% 5-10% 30-50% 30-50% 20-30% 30-50% 5-10% 5-10% >50% 20-30% 10-20% 5-10% 5-10% 5-10% >50% 30-50% 10-20% 30-50% 1-5% 5-10% >50% 30-50% >50% >50% 5-10% 1-5% >50% 30-50% 30-50% 30-50% 5-10% 5-10%Materials Metal & mining Chemicals Utilities Industrials Oil & gas >50% 20-30% 10-20% 10-20% 1-5% <1% 1-5% 1-5% 1-5% 1-5% <1% <1% 1-5% <1% <1% <1% <1% <1% 20-30% 1-5% 1-5% 1-5% <1% 1-5% <1% <1% <1% <1% <1% <1% 20-30% 5-10% 1-5% 1-5% <1% <1% Notes: Europe data excludes Russia; slow transition scenario is based on average share of emissions taxed per region (excluding EU where sectors under ETS and future share of free allowances are used) and price of carbon per country; net-zero emissions scenario is based on IEA assumptions for carbon prices by country type and BCG estimates for share of emissions taxed (advanced economies: $140/ton, 70%; emerging markets & developing economies with net-zero commitment: $90/ton, 50%; emerging markets & developing economies without net-zero commitment: $24/ton, 20%); translation of impact from share of carbon costs to EBITDA margin is carried out using EBITDA margins assuming sector and regional composition in 2030 is identical to current levels; individual company impact estimates can vary vs. sector estimates shown here depending on differences in e.g. EBITDA margins and carbon intensity vs. benchmarks; carbon intensity is averaged by top 25 companies per sector in the region (per tons of carbon emitted per $ million); see Appendix for methodology and sources. Sources: International Energy Agency (IEA), company filings, Oxford Economics, Capital IQ, BCG analysis.An accelerating transition could trigger financial losses in several ways Today, returns of fossil fuel business models still benefit from substantial government subsidies – up to $7 trillion globally in 2022, according to the International Monetary Fund.40 As they accelerate decarbonization, governments would need to reduce or eliminate these subsidies and are more likely to price in negative externalities. As a result, increasing carbon prices or other forms of penalizing climate regulation could increase operational costs. Fossil fuel-based assets may have to be prematurely written down. Demand for fossil fuels or technologies could decline much earlier than companies currently expect, putting entire business models at risk. Carbon pricing is key to accelerating the low- carbon transition, but it is a risk for companies that do not decarbonizeSince the Paris Agreement, carbon pricing mechanisms have expanded steadily and are now covering around a quarter of global emissions,41 with Europe leading the charge. By 2030, ETS I & II are expected to cover nearly all emissions in Europe,42 with prices reaching $90 to $150/tCO2e,43 while similar schemes are beginning to emerge in North America and Asia-Pacific. To meet “well- below 2°C” goals, both coverage and price levels would need to rise further. This would strengthen the business case for green technologies but expose companies that have delayed action until the regulation is in place to additional costs – and a potential loss in competitiveness if they pass them through. In particular, fossil utilities and energy-intensive sectors such as materials, metals and chemicals that do not decarbonize could risk significant cost increases, potentially up to a level equivalent to 50% of their EBITDA by 2030 (see Figure 16).3.2 If transition risks materialize, they could translate into material financial losses Demand for fossil fuels or technologies could decline much earlier than companies currently expect, putting entire business models at risk. The Cost of Inaction: A CEO Guide to Navigating Climate Risk 26