Abstract

In response to the quest for net zero carbon emissions, many countries and regions have recently proposed new regulations that require corporations to disclose their greenhouse gas emissions. Corporate carbon damages (CCD) that account for a firm’s actual emissions and profit can be a useful indicator. Companies and corporations, especially those that are in sectors that are inherently difficult to decarbonize, will have to rely on carbon credits to meet their emissions commitments. However, there is still a lack of adequate systematic methodology for the equitable allocation of available carbon credits to multiple corporations in a common market. To address this research gap, this work first proposes a new indicator called the net corporate carbon damage (CCDnet), which is the ratio of the net climate damage to net profit considering the effect of carbon credits and their cost on corporate performance. A mathematical model is then developed for the optimal and equitable allocation of available carbon credits by minimizing for a given set of corporations. The proposed model uses CCDnet as its central metric, ensuring that the allocation balances carbon reduction and profitability while prioritizing the worst-performing companies to promote equity. Two case studies with contrasting levels of difficulty in decarbonizing are presented to demonstrate the capabilities of the model. Results suggest that achieving net zero emissions relies on a careful balance between available carbon credits, emissions reduction requirements, and company profitability. Companies with initially low CCD (between 0.0475 to 0.342) can achieve net zero emissions and equitable allocation. However, for difficult-to-decarbonize companies with higher CCD (between 2.61 to 15.77), net zero emissions and equitable allocation may not be possible even with external carbon credits.  The model shows that equitable allocation is achievable when profit constraints are not binding; otherwise, a fundamental process technology change will be a better option.