Hey everyone, welcome back to My Weird Prompts. I am Corn Poppleberry, and I am sitting here in our living room in Jerusalem with my brother, Herman. We have got a really dense, fascinating, and honestly kind of high stakes topic to dig into today. We are talking about the carbon math paradox. It is this bizarre reality where two companies can have the exact same physical emissions, the same number of smokestacks, the same fleet of trucks, yet report completely different social costs based on which mathematical benchmark they choose to plug into their spreadsheets.
Herman Poppleberry, checking in. And yeah, Corn, this one is a bit of a mathematical minefield, but in the best way possible. Our housemate Daniel sent us a voice note earlier today basically challenging us to follow up on some of the threads we started a few months back. We are moving past the era of voluntary, fuzzy environmental, social, and governance reporting, or E S G, and entering the era of hard-math, impact-weighted accounting. This is where the numbers actually start to hit the balance sheet, and that is where the friction begins.
Right, if you guys remember episode one thousand three hundred thirty-eight, we were looking at the International Foundation for Valuing Impact, or I F V I. We were talking about this big shift toward impact-weighted accounting, which is the idea that companies should not just report their financial profits, but also the dollar value of their social and environmental impact. It is about making the invisible visible. But as Daniel pointed out in his prompt, the visibility is currently very blurry. He called it the valuation gap.
It is the ultimate apples to oranges problem, but the oranges are on fire and the apples are being measured in a language nobody speaks yet. We are trying to turn externalities, things like pollution or climate change that usually fall outside a company's financial statements, into actual line items. But if you ask three different experts what the social cost of a single ton of carbon is, you might get three answers that are hundreds of dollars apart.
And that is what we are tackling today. Why is the carbon math so broken? Why can two companies with identical emissions look like heroes or villains depending on which model they use? And what does this mean for the future of impact investing? Let us start with the basics of the topic introduction here. When we talk about the social cost of carbon, or S C C, we are trying to put a price tag on the future damage caused by one metric ton of carbon dioxide emitted today. We are talking about lost agricultural productivity, human health impacts from heatwaves, property damage from sea level rise, and even the increased energy costs for cooling.
Right, and in our previous discussion on the I F V I, we treated this as a foundational metric. But the reality is that there is no gold standard. Even within the United States government, we have seen massive swings. For years, the official number used by the federal government was around fifty-one dollars per ton. Then, in late two thousand twenty-three, the Environmental Protection Agency updated their estimate to one hundred ninety dollars per ton. That is for emissions occurring in the year twenty-twenty, and it scales up every year after that.
Think about that jump. That is nearly a four hundred percent increase in the perceived cost of every single ton emitted. If you are a company trying to calculate your impact-weighted profit, your environmental liability just quadrupled overnight because of a change in a government benchmark. It is not like the carbon became four times more poisonous; the math we use to value the future just changed.
And that is just one benchmark. There are private sector models and academic frameworks that put the number as low as twenty dollars or as high as four hundred dollars. So, the question Daniel wanted us to answer is, why? If this is based on scientific consensus, why is the variance so gigantic?
Well, let us get into the core of that in our first major discussion block. Herman, you have been digging into these models like the D I C E model, the F U N D model, and the P A G E model. These are the big integrated assessment models researchers use. Why do they disagree so much?
It mostly comes down to what we call the discount rate. This is probably the single most important and most debated number in all of climate economics. For the listeners who might not be finance nerds like us, a discount rate is basically how we value future money compared to today’s money. In traditional finance, we use it to calculate the present value of future cash flows.
Right, because a dollar today is worth more than a dollar fifty years from now, generally speaking, because you could invest that dollar today and earn interest.
But when you apply that to the environment, it gets ethical and political very quickly. If you use a high discount rate, say five percent, you are essentially saying that damages happening in the year twenty-one hundred do not matter very much to us today. They get discounted away to almost nothing. If you use a low discount rate, like two percent or even lower, you are saying that the well-being of future generations is almost as important as our economic output today.
And that is where the Environmental Protection Agency’s big jump came from, right? They moved their central discount rate from three percent down to two percent.
Precisely. It sounds like a tiny change. One percent. Who cares, right? But because we are talking about cumulative damages over centuries, that one percent change is exponential. It is the difference between saying a ton of carbon costs fifty dollars and saying it costs one hundred ninety dollars. The E P A basically decided that we owe it to our grandchildren to value their climate stability much more highly than we previously did.
It feels like there is a bit of a scientific consensus fallacy here. People hear science and they think of a laboratory experiment with a clear result. But these models are highly subjective. They rely on the Ramsey Rule, which is a formula for determining the discount rate based on things like the pure rate of time preference and the elasticity of marginal utility of consumption.
Look at you, Corn, dropping the Ramsey Rule! You are right. The models also have to make assumptions about future G D P growth. If we assume the world will be much richer in one hundred years, then a thousand dollars of damage then might not feel as bad as a thousand dollars of damage now. But if growth slows down, those damages become much more catastrophic. Then you have the climate sensitivity parameter, which is how much the earth actually warms when you double the concentration of carbon dioxide. Some models assume a three degree Celsius increase, others assume four or more.
You hit on another sensitive one earlier, which is the damage function. Some models, like the F U N D model, actually include benefits of carbon, like increased crop yields in some northern regions or fewer cold-related deaths in the winter. Other models focus entirely on the catastrophic risks and the tipping points, like the melting of the permafrost. So, depending on which model a company or an investor chooses to use for their impact-weighted accounting, they are essentially choosing their own adventure.
And from a conservative or a pro-American perspective, there is also the question of domestic versus global cost. Under the Trump administration, the focus was often on the domestic social cost of carbon, looking specifically at how emissions affect the United States. The current administration and many international bodies use a global cost, arguing that carbon does not respect borders. If you only look at domestic impact, the price per ton drops significantly, often into the single digits.
That is a huge point, Herman. If I am an American manufacturer, and I am being told I have to account for the global social cost of carbon, I am essentially being asked to subsidize the environmental protections of the entire world on my balance sheet. If we use a domestic cost, my business looks much more viable. This is not just a math problem, it is a policy debate disguised as math.
It really is. And it leads to this massive divergence where a company can literally shop for a benchmark that makes their impact-weighted accounts look better. But even if we agreed on a single price, say we all agreed it is one hundred dollars per ton, we still have the second half of the problem Daniel pointed out, which is the reporting inconsistencies.
Oh, the reporting is a nightmare. This is what we call the units of measure crisis. Right now, if you look at a corporate sustainability report, you are seeing a mix of Scope one, Scope two, and Scope three emissions.
Let us break those down quickly for everyone. Scope one is what you burn directly, like the gas in your company trucks or the furnace in your factory. Scope two is the electricity you buy from the grid. And Scope three is everything else, your entire supply chain, the emissions from your customers using your products, even the emissions from your employees commuting to work.
Right. And Scope three is where the math goes to die. It is often ninety percent of a company’s footprint, but it is almost entirely based on estimates and secondary data. If I am a clothing retailer, how do I accurately measure the carbon footprint of a cotton farm in India that I do not own, which sells to a mill I do not manage, which sells to a factory I only have a contract with?
You can’t. Not accurately. So you use industry averages. But if every company in that chain is using different averages and different reporting standards, you get massive double counting or, more likely, massive gaps where emissions just disappear. It is like trying to run a global economy where every country has its own version of the meter and the kilogram, and they change the definition every Tuesday.
And then you have the disparate units. Some industries report in intensity metrics, like carbon per dollar of revenue or carbon per square foot of office space. Others report in absolute tons. Some talk about carbon dioxide equivalents, or C O two e, which includes methane and nitrous oxide, but the multipliers they use to convert those gases into carbon equivalents are also not standardized.
Methane is a great example. Over a twenty-year horizon, methane is about eighty times more potent than carbon dioxide. But over a hundred-year horizon, it is only about twenty-eight times as potent. If a natural gas company chooses the hundred-year multiplier, their impact looks much smaller than if they use the twenty-year one.
We have these competing standards like the Global Reporting Initiative, or G R I, the Sustainability Accounting Standards Board, or S A S B, and now the International Sustainability Standards Board, or I S S B. They are all trying to be the gold standard, but until one actually wins and becomes legally mandated, companies are just picking the one that tells the best story. It makes data normalization for an investor almost impossible.
Let us move into the third part of our discussion, which is where we really see the impact of these valuation differences. Daniel asked us to look at how these small differences in benchmarks result in what he called gigantic financial discrepancies. This is where the rubber meets the road for impact-weighted profit.
This is my favorite part. Let us run a simulation. Imagine a major global airline. Let us call it Poppleberry Air just for fun. A large airline might emit roughly ten million metric tons of carbon dioxide in a year. That is a pretty standard figure for a major carrier.
Okay, ten million tons. Now, let us apply three different benchmarks to that same ten million tons to see what happens to their impact-weighted profit.
Right. First, let us use a conservative benchmark, maybe something close to what some private sector models use, around fifty dollars per ton. Ten million times fifty is five hundred million dollars. That is a significant hit to their earnings, but for a major airline making two billion in net income, it might represent a manageable chunk of their operating profit. They are still in the black, still looking like a viable business.
Okay, now let us use the updated Environmental Protection Agency number, one hundred ninety dollars per ton.
Ten million times one hundred ninety is one point nine billion dollars. Think about that. For most airlines, a one point nine billion dollar environmental liability would completely wipe out their annual net income. Suddenly, a profitable company on paper becomes a massive net negative for society according to this accounting method. They are literally destroying more value than they are creating.
And what if we go to the high end? Some academic models and European carbon taxes are pushing toward three hundred or even four hundred dollars per ton to reflect true long-term damage and the cost of carbon removal.
At four hundred dollars per ton, that same airline has a four billion dollar liability. At that point, the company is not just unprofitable, it is effectively insolvent from an impact perspective. Their existence is costing the world four billion dollars a year. If an impact investor is looking at that, they aren't just selling the stock; they are treating the company like a stranded asset.
This is the gigantic discrepancy Daniel was talking about. The physical reality of the company hasn't changed. They still flew the same planes, used the same fuel, and moved the same number of people. But depending on whether you use a two percent or a three percent discount rate in a climate model, that company is either a successful business or a societal disaster.
It also creates a huge incentive for greenwashing or, more accurately, benchmark shopping. If I am the C E O of that airline, I am going to lobby incredibly hard for a higher discount rate or a domestic-only cost model, because my compensation and my company’s stock price might soon depend on it. It is a total lack of auditability.
In traditional accounting, we have G A A P, the Generally Accepted Accounting Principles. If I tell you my revenue is a billion dollars, an auditor can verify that by looking at bank statements and contracts. But if I tell you my social cost of carbon is five hundred million dollars, no auditor can truly verify that because the price of carbon itself is a theoretical construct based on assumptions about the year twenty-one hundred.
And we haven't even touched on the Scope three problem in this calculation. If that airline has to account for the carbon cost of manufacturing the planes they buy from Boeing or Airbus, or the carbon cost of their passengers driving to the airport, their ten million tons could easily jump to fifteen or twenty million. Now you are doubling that four billion dollar liability. You are looking at an eight billion dollar hole in the balance sheet.
It is a house of cards built on top of a swamp of bad data. We actually touched on some of the financial stakes of this back in episode five hundred thirteen when we talked about sustainability-linked bonds. There is a six trillion dollar market where the interest rates companies pay are tied to these environmental targets. If the targets are based on shifting sands, the entire financial system is at risk. If a company misses a target because the benchmark changed, they might default on their debt.
So, where does this leave us? We have established that the math is subjective, the reporting is inconsistent, and the financial implications are massive. Let us try to pull some practical takeaways out of this for our listeners. If you are looking at a corporate sustainability report or an impact-weighted account, what should you actually look for?
The first thing I would tell anyone is to ignore the final dollar figure. If a company says, "our net impact is plus fifty million dollars," that number is essentially meaningless without context. You have to go straight to the assumptions section, if they even provide one.
Right, look for the social cost of carbon they used. Did they use fifty dollars? One hundred ninety? And did they explain why? If they don't disclose their benchmark, the report is just marketing. A truly transparent company will provide a sensitivity analysis.
A sensitivity analysis is key. They should say, "look, at a fifty dollar carbon price, we are profitable. At a two hundred dollar carbon price, we are not. Here is our plan to reduce emissions so that we are viable even at that higher price." That is real risk management. Most companies aren't doing that yet because they are afraid of the volatility it shows to investors.
I think another takeaway is that we need to stop looking for a single scientifically correct price for carbon. It doesn't exist. It is a value judgment. As a society, we have to decide how much we value the future versus the present. As an investor, you have to decide which side of that bet you want to be on. If you believe the E P A is right about the two percent discount rate, then you should be divesting from almost every high-carbon industry right now.
And look at the units. If a company is reporting their progress in terms of carbon intensity, like emissions per unit of product, that can be a bit of a shell game. They could be getting more efficient but still increasing their total emissions because they are growing so fast. You want to see absolute numbers, especially for Scope one and Scope two.
We also need to be wary of the shift toward standardized multipliers. There is a push right now to just have a central body, like the I S S B, dictate a single price for carbon that everyone has to use. While that would solve the consistency problem, it might actually hide the underlying risks. If the official price is set at one hundred dollars, but the real damage is four hundred, we are just institutionalizing a massive mispricing of risk.
That is the big danger. It is the same thing that happened with credit rating agencies before the two thousand eight financial crisis. If everyone agrees on a number that turns out to be wrong, the whole system fails at once. We need a common denominator, but we also need to maintain the transparency of the underlying assumptions.
Let us move into the final part of our discussion, which is the future of auditability. Herman, do you think we are going to see carbon auditors with the same regulatory weight as financial auditors? Like a Big Four for carbon?
I think it is inevitable. In fact, we are already seeing the Big Four accounting firms hire thousands of climate scientists and engineers. But I think they are going to struggle for a long time. You can audit a bank statement because the money either moved or it didn't. You can't audit the future damage of a ton of carbon because that damage hasn't happened yet. It is a forecast, not a fact.
That is the heart of it. If the math is this subjective, is it still impact or is it just narrative? I think for a lot of companies right now, it is still narrative. They are using the language of math to tell a story that makes them look good to investors who want to feel good. But the pressure is mounting. As more capital flows into these impact-weighted funds, the demand for rigor is going to increase.
We might see a world where companies have two sets of books, their financial books and their impact books, and both are equally important to their valuation. Imagine a stock ticker that shows two prices: the financial price and the impact-adjusted price. That would change the way everyone invests.
It is a brave new world for the Poppleberry brothers, that is for sure. I am not sure I want to be the one signing off on those impact balance sheets. The liability for an auditor who gets the carbon math wrong could be astronomical.
No way. I will stick to reading the papers and complaining about the discount rates. It is much safer. But seriously, the takeaway for our listeners is that we are in the middle of a massive transition. We are trying to build a new operating system for capitalism, and right now, the code is full of bugs.
Well, I think we have covered a lot of ground here. We went from the technicalities of the D I C E model to the existential crisis of a major airline. Daniel, hopefully that answers your question about the valuation gap. It is a gap that might never truly close because it is based on how we value human life and future generations, but at least now we can see how deep it really is.
Yeah, and if you guys enjoyed this deep dive, you should definitely check out episode one thousand three hundred thirty-eight for the background on the I F V I, and episode four hundred thirty-nine where we talked about the rules of impact investing more broadly.
And hey, if you are finding these discussions helpful or even if you just like listening to two brothers talk about carbon math in Jerusalem, we would really appreciate it if you could leave us a review on your podcast app or on Spotify. It genuinely helps the show reach more people who are interested in these weird prompts.
It really does. And remember, you can find all our past episodes and our R S S feed at myweirdprompts dot com. If you want to get notified as soon as a new episode drops, search for My Weird Prompts on Telegram and join our channel there.
We are also on Spotify, obviously, so make sure you hit that follow button. We have got a lot more coming your way. We are nearly at one thousand four hundred episodes, which is just wild to think about.
It is a lot of talking, Corn. A lot of talking.
And a lot of listening. Thanks to all of you for being part of this journey with us. We will be back soon with another prompt.
Until then, keep an eye on those discount rates. They matter more than you think. This has been My Weird Prompts.
See you next time.
So, Corn, I was actually thinking about the airline example again. Do you think we should have mentioned the S A F credits?
Sustainable Aviation Fuel? We could have, but that is a whole other rabbit hole of reporting inconsistencies. Some companies count the carbon reduction at the point of production, others at the point of combustion. It is another unit of measure crisis waiting to happen.
Fair enough. Let us go get some coffee.
Sounds good. Bye everyone.
Bye.
You know, I was just reading that the Environmental Protection Agency is actually considering another update to the social cost of methane specifically.
Oh, don't even get me started on methane. The global warming potential of methane over a twenty-year horizon versus a hundred-year horizon is one of the most contentious numbers in the whole field. If you are a natural gas company, whether you use the twenty-year or the hundred-year multiplier is the difference between being a "transition fuel" and being a "climate bomb."
It is another one of those multipliers that can completely change a company’s footprint. It just goes back to what we were saying about value judgments. There is no mathematical way to say which time horizon is correct. It depends on whether you are trying to prevent a short-term tipping point or manage long-term warming.
Right, and most corporate reporting just picks one, usually the hundred-year one because it is the industry standard, and they don't even explain the trade-offs. It flattens the complexity in a way that can be really misleading.
It is why I always say, look for the footnotes. The truth is always in the footnotes. Or in the assumptions section that nobody reads.
Well, we read them, Herman. That is why we are here. That is why we are the Poppleberry brothers.
Alright, now let us actually go get that coffee. I think my brain is officially at its carbon capacity for the day.
Agreed. Let us head out.
I wonder what Daniel is going to send us next. Probably something about quantum computing or the history of salt.
I would take salt. Salt is much easier to count than carbon.
You say that now, but wait until we get into the social cost of sodium and its impact on global healthcare systems.
Oh, please no. Let us go.
Thanks again for listening, everyone. We really do appreciate you spending your time with us. It means a lot to have such a dedicated audience for these deep dives.
Yeah, we see the numbers growing and it is really encouraging. We will keep digging as long as you keep listening.
This has been episode one thousand three hundred twenty-eight of My Weird Prompts. We will see you in the next one.
Take care, everyone.
One last thing, Herman. Did you see that new paper on the impact of cloud feedback on climate sensitivity?
The one from the group in Zurich? Yeah, it suggests that the climate might be even more sensitive than the E P A’s model assumes. Which would mean the one hundred ninety dollar price is actually a lowball estimate.
We could be looking at a true cost of over five hundred dollars if those feedback loops are as strong as they think. The math never stops.
Never. Alright, coffee time. For real this time.
For real. Bye.
