Explaining How Carbon Becomes a Financial Risk

Policy instruments such as Emissions Trading Systems (ETS), the EU Carbon Border Adjustment Mechanism (CBAM), and carbon taxes place a price on carbon. These regulations are expanding by sector and geography, converting emissions into explicit cash outflows. When carbon becomes a cost, it immediately becomes a risk to profit margins. If carbon costs rise while prices and volumes stay flat, margins compress. Companies must either increase revenue, lower other costs, or cut emissions to protect margin.

At the same time, investors and customers demand credible data, and tighter greenwashing rules raise legal and reputational stakes. Inside companies, CSRD’s thousand plus KPIs and fragmented manual data strain finance and operations.

This lesson outlines the global trendlines that turn carbon into costs.

Below are the global trends due to which carbon is turning into costs.

• Expansion of carbon pricing: Global carbon pricing revenues earned by governments via ETS and carbon taxes reached a record high ~$104B in 2023 (World Bank 2024), continuing to exceed $100B in 2024 (World Bank, 2025). There are now 75 80 carbon pricing instruments in operation worldwide, covering roughly 2428% of global emissions (World Bank, 2025).
• Investor and customer pressure: About 60% of the largest investors (69% in Europe versus 50% among North American investors) integrate say ESG is important to their into investment decisions. When asked which ESG factors fund managers explicitly consider when making an investment decision, climate change ranks as the most important, selected by 78% of respondents. Moreover, 73% of investors in Europe and 26% in the US operate under an investment mandate that limits their investment choices based on ESG criteria. (Stanford University and MSCI Sustainability Institute, 2023).

  Consumers rate environmental impact as highly important in purchasing. On average, consumers worldwide are willing to pay 9.7% more for sustainably produced or sourced goods (PWC, 2024). At the same time, global consumers are skeptical of sustainability claims of most brands: Across 18 markets, 55% of consumers expressed skepticism about brands' sustainability claims, with only 9% believing them (YouGov Global Survey, 2023).

  To protect consumers from buying into false green claims, Greenwashing rules are tightening, increasing legal and reputational risk from inaccurate claims for companies. For example, France prohibits misleading environmental claims by companies under it’s "Climate and Resilience Law" (2021), Canada has amended its Competition Act with the anti-greenwashing Bill C-59 (2024) and environmental claims guidelines (2025), allowing it to investigate unsubstantiated or misleading environmental claims, and the EU is working on a Green Claims directive which would require companies to deliver proof of their product’s sustainability claims.

• Internal Barrier: More than 1000 CSRD KPIs from across the business demand tremendous data collection efforts. Data silos, a lack of high-quality data, and manual processes lead to long cycle times and errors.

Carbon has become a measurable cost and a material risk. With carbon pricing expanding globally, EU ETS payments tightening, EU CBAM moving toward payment, and global ESG scrutiny intensifying, inaction translates into margin compression, penalties, and reputational exposure.

Businesses need to mitigate these costs and risks to save their margins from depleting.