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Weighted average cost of carbon |
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Weighted Average Cost of Carbon is a measure of the cost incurred by a firm on carbon. It measures how much cost an organization is incurring in order to reduce internal emission of carbon or by offsetting it externally.
This term has assumed global significance today on account of the growing concern over carbon emission. The formula for calculating Weighted Average Cost of Carbon is:
C = ((Va × Ea) + (Vo × Eo)) / L
where,
C = Weighted Average Cost of Carbon (currency)
Va = Volume of carbon abated through internal projects and demand reduction per annum
(tons/pa)
Ea = Averaged annual expenditure to achieve ' Va ' over life of projects (currency)
Vo = Volume of purchased carbon offset per annum (tons/pa)
Eo = Expenditure per annum to acquire ' Vo '(currency)
L = Total carbon liability per annum (tons/pa)
Companies have different ways to reduce their carbon liability, also referred to as ‘carbon footprints’. Acquisition of carbon credits and emission rights, capital investments, reduction of demand or by acquiring quotas like European Union Allowance are some of the ways by which firms can reduce their carbon liability and thus cut down on carbon costs.
Cost mechanism is a good way of curbing carbon emission and this has resulted in the popularity of calculating the Weighted Average Cost of Carbon. Higher costs will make company’s reduce investments in carbon and thus eventually lead to reduction of carbon emission. The importance of calculating this is that it helps in measuring a company’s competitiveness in a carbon restricted economy. By comparing abilities of organizations to reduce carbon emission internally or offsetting it externally will help in determining their efficiency level.
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