The Cost of Carbon Is Rising. Here’s What Companies Need to Know

The EPA’s social cost of carbon could quadruple, posing significant regulatory, economic, and reputational impacts for US and European businesses

When S&P Global released its latest environmental, social, and governance (ESG) scores in May, Tesla’s score of 37 lagged behind gas producers like Chevron (43) and automakers like General Motors (67) and Toyota (45). Even on its Environment score, Tesla trailed General Motors and Conoco Philips by 8 points.

Tesla has criticized ESG ratings as fundamentally flawed, contending, for instance, that an automaker that modestly reduced process emissions at a manufacturing plant could move up in the rankings even as it churns out more gas-guzzling cars and trucks. That’s because emissions may account for only 2 percent of a company’s overall ESG score. Hence, General Motors can report that its customers created 209 million metric tons of emissions by driving the cars and trucks the company makes, and the carmaker’s ESG score still beats Tesla by 30 points.

This state-of-play speaks to a larger issue: as The Economist concluded last year, ESG has been a distraction from “the vital task of tackling climate change.” According to its editors, rather than the current “dizzying array of objectives,” ESG should focus just on the E, and only one part of the E—emissions.

Amid a broad effort to inject credibility into ESG ratings and focus on “real-world impact,” as Tesla calls it, carbon emissions and their cost to society are likely to become increasingly important. Here’s what business leaders should know.