Solving climate change will depend on our ability to reduce emissions. One of the surest ways to do this is to constrain carbon by applying budgets.
Whether or not a company can continue to operate and create value in a carbon constrained economy is what drives the gap, otherwise known as carbon transition risk.
The risk associated with this gap won’t remain arbitrary for long. While we don’t yet have a global price on carbon, it is imminent. Budgets will be enforced. Companies with big gaps will struggle to operate and deliver returns.
So while a lot about the gap is still unknown like how budgets will be allocated and who will have to pay, one thing we know is for certain: carbon will become constrained and those with the ability to transition will create immense value.
The thing is, it wasn't deliberate. It's been driven by the external costs of doing business on a global scale. And it’s been hugely destructive to our planet.
Carbon emissions lead to an increase in global temperatures. A warmer world sees more events that drive physical risk. Think: fires, floods and droughts.
Reducing our emissions helps us keep physical risks under control. But how we do this, and how it impacts organisations and people is called transition risk.
Just like a household budget, scientists are guiding the transition by setting 'carbon budgets' - limiting the amount we can emit to defined levels.
As budgets are enforced, those who overshoot will be penalised. These penalties could eventually be so great that some will be priced out of doing business.