Weighted average cost of carbon

The Weighted average cost of carbon is used in finance to measure a firm's specific cost of carbon. It expresses how much an organization is expending to either reduce carbon emissions internally or offsetting externally. As such, the weighted average cost of carbon is the cost a company incurs to balance its carbon liability.
It is a term with growing importance as legislation globally moves to internalize the impact of emission through cost mechanisms.

The formula

C = + ) / L

Symbol	Meaning	Units
C	Weighted average cost of carbon	currency
V_a	Volume of carbon abated through internal projects and demand reduction per annum	tons/pa
E_a	Averaged annual expenditure to achieve 'Va' over life of projects	currency
V_o	Volume of purchased carbon offset per annum	tons/pa
E_o	Expenditure per annum to acquire 'Vo'	currency
L	Total carbon liability per annum	tons/pa

How it works

Corporations have multiple ways to balance their carbon liability. They can reduce their carbon emissions through capital investment, projects and demand reduction. They can purchase emission permits, be allocated quotas or buy carbon credits. The latter are largely produced by CDM projects and Joint Initiatives. These credits are largely traded in form of Certified Emission Reduction, or Emission Reduction Unit. Voluntary Emissions Reduction have a similar function but have not registered / cannot be registered under the rules of the Kyoto Protocol.

Relevance

In a carbon constrained economy, the efficiency of corporations to respond to the cost factor carbon is an important indicator of competitiveness. Financial analysts are beginning to compare companies within industries based on their ability to either reduce their carbon footprint internally or offset carbon liabilities externally through comparatively low cost channels.