Carbon emission costs in capital budgeting - The effect of the EU ETS on Swedish companies -
In this essay we studied how Swedish companies that are included in the European Union Trading Scheme (EU ETS) handle the cost of carbon emissions in their capital budgeting processes. We especially investigated whether there were any di®erences between the di®erent sectors included. The results also made it possible to give an indication on the e±ciency of the EU ETS. After characterising the EU ETS in Sweden with respect to its relevance for investment decisions, an analysis model was developed. By applying the model to the results from inter- views with actors from all sectors, it was concluded that the ¯rms do treat the cost of carbon emissions in their capital budgeting. The level of sophistication di®ers between ¯rms, but is generally low. The companies chosen had all among the highest emissions and the general practice in Sweden could therefore be assumed to be even lower. Among the actors, the Mineral sector and the Energy sector were found to have the most sophisticated processes. The former most likely due to the nature of the production processes and the latter due to previous experience with similar types of derivatives. In the evaluation of the EU ETS, indicators were found that the allocative e±ciency of the system can be questioned. On the other hand, the only noticeable negative e®ect was a price related risk connected to the emission allowances.