A study published by academics at the University of Chicago has found that corporate emissions are undermining prosperity.

The damage caused when publicly traded companies emit greenhouse gases is equivalent — on average — to about 44% of operating profits, according to an analysis by Michael Greenstone and Christian Leuz of the University of Chicago, and Patricia Breuer of the University of Mannheim.

The remedy is to impose mandatory disclosure requirements that would reveal to financial markets just how much is at stake, the authors wrote. Their conclusion comes as the US Securities and Exchange Commission struggles to push through its climate disclosure rule, in the face of intense corporate lobbying against the measure.

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“In too many parts of the world, it is free to emit the greenhouse gases that are causing climate change that is now becoming disruptive,” Greenstone, the Milton Friedman Distinguished Service Professor in Economics and director of the Energy Policy Institute at the University of Chicago, said in an email.

“Disclosure is inexpensive and has the potential to help set off reductions in greenhouse gas emissions that benefit us all,” he said.

The fact that such a message should come from the University of Chicago, where Friedman nurtured a generation of libertarian economists whose views would collectively be known as the Chicago School, shows how far the debate around climate regulations has come.

“Disclosure of emissions data is vital to holding firms accountable for their emissions,” Leuz, who’s the Charles F. Pohl Distinguished Service Professor of Accounting and Finance at the University of Chicago’s Booth School of Business, said in a statement.

The report comes as the damage wrought by climate change dominates news headlines, with wildfires, floods and other weather extremes terrorizing populations and habitats across the globe.

At the same time, direct and indirect subsidies for fossil fuels hit a record $7 trillion last year, or more than 7% of global gross domestic product, according to a fresh analysis the International Monetary Fund. Failure to price in the environmental damage caused by fossil fuels accounts for 60% of that figure, the IMF estimates.

Demand for Crude Oil Is Under Pressure

The authors cautioned that the figures in the University of Chicago study don’t show by how much profits would decline if emissions were taxed. Nor do they reflect implicit subsidies from inadequate carbon regulation. Instead, their research highlights the cost of emissions using a ratio that markets understand.

The study looked at reported and estimated Scope 1 emissions — the narrowest measure — generated in 2019 by almost 15,000 publicly traded companies, representing roughly 80% of the global market.

To price the damage caused by the emissions, the authors multiplied companies’ CO2 footprint by a unit called the social cost of carbon (SCC). Estimated at $190 per ton of CO2 equivalent by the US Environmental Protection Agency, SCC is defined as “the monetary value of the damages associated with the release of an additional ton of CO2.”

The authors found considerable variations across countries. In the US, unadjusted average carbon damage as a percentage of corporate profits was about 26%, compared with roughly 130% in Russia.

“Bringing transparency to the damages from firms’ emissions could galvanize pressure from stakeholders and help inform policy and markets,” said Breuer of the Collaborative Research Center TRR 266 Accounting for Transparency, who recently completed her PhD at the Graduate School of Economic and Social Sciences at University of Mannheim.

“But importantly, it would also allow firms and their shareholders and customers to see how they stack up against competitors and think more strategically about their emissions and the toll they are having,” she said.

Not surprisingly, there were also differences across sectors, with utilities, energy, materials and transportation accounting for 89% of global carbon damage. Within a given industry, emissions could be slashed by as much as 70% if the worst polluters were to step up efforts to address their footprints, the study’s authors said.

The research was based on emissions data provided by S&P Global Trucost, which compiles publicly available information and estimates emissions for companies that don’t disclose data.

“It is important to note that most of the reporting in the dataset is voluntary and done without penalties for inaccuracies,” Greenstone said. “One of the great benefits of mandatory disclosure is that it can vastly increase the credibility of reported emissions.”

(Adds reference to IMF report on fossil-fuel subsidies in ninth paragraph, comment from Breuer in fourth-to-last.)