Corporate carbon overhang: Valuing corporate exposure to future carbon costs

This study develops a forward-looking valuation framework to quantify firm-level exposure to future carbon costs. We introduce the Carbon Overhang (COH) metric, defined as the present value of future carbon costs based on firm-level emissions projections and jurisdiction-specific carbon prices. Applying this framework to U.S.-listed firms, we estimate a market-level COH of $2.4 to $4.1 trillion—equivalent to 5 % to 9 % of total market cap. The distribution of COH is highly concentrated, with the top 25 firms—mainly utilities and energy companies—accounting for over half of the total. Still, we find substantial variation within sectors, driven by differences in operational structure and emissions geography. Accounting for carbon cost pass-through reallocates a material share of COH from regulated utilities to downstream customers, with 55 % absorbed by public firms and 45 % by the broader economy. Importantly, even under the most ambitious policy scenario, existing and expected carbon pricing mechanisms would internalize less than one third of the societal damages from corporate emissions. Overall, our framework underscores the importance of forward-looking and location-specific emissions and carbon price forecasts as essential inputs for integrating carbon risk into corporate financial analysis and valuation.