Carbon policies creating credit risks but also driving innovation

The positive and negative impact of carbon reduction policies has been highlighted in a new report from Moody's Investors Service.

The study found that the policies are creating credit risks in carbon-intensive industries while also driving significant innovation and change across many industrial sectors.

Brian Cahill, managing director for Moody's Fundamental Group in Asia Pacific, said: “An increase in 'direct carbon liabilities', such as carbon permits and/or carbon taxes, as well as the emergence of disruptive technologies, such as solar power, are already having a tangible impact on rated companies in select carbon-intensive industries.”

However Raffaella Altamura, senior analyst in Moody's Corporate Finance Group in Europe, added that “such policy action is also driving innovation and change across many industrial sectors. For example, technological innovation is very advanced in power generation where renewable energy, especially in parts of Europe, is established."

Moody's report, Environmental Risks and Developments: Impact of Carbon Reduction Policies is Rising Globally, states that even the most affected sectors enjoy some mitigating factors.

It says that in the power generation sector, “regulated utilities are likely to experience some protection through adjustments to regulation, and thermal coal producers will continue to enjoy the growth of demand in emerging markets, especially China and India”.

In addition, many of the players in sectors that are high carbon emitters have significant operating and financial flexibility that would mitigate the impact of policies for reducing carbon emissions.

Gretchen French, senior credit officer in Moody's Corporate Finance Group in the US, said: “Increased costs from regulations are likely to be manageable for most companies, many of which have strong financial and operating profiles and a long history of adapting to and absorbing rising regulatory costs."

The report also stresses that policy and regulatory risks are creating uncertainty that is hindering investment decisions and investor flows, “and while the impact of this uncertainty on most industries is harder to quantify, it is likely to become more significant as global carbon reduction policies tighten further”.

Specifically, Moody’s state that such uncertainty can raise questions about the future profitability of a business model, impacting both corporate decisions on future capital expenditure and investor decisions regarding investment allocations to certain corporates or industries.