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Direct climate risks on companies' cash flow

In addition to the risks coming from the macroeconomic developments, infrastructure companies will suffer losses due to physical risks (physical damages and operational losses) and transition risks (carbon emissions). The extension of these risks depends on an asset’s specific exposure and vulnerability and on the scenario considered. When a hazard event occurs, physical damages affect an asset’s production capacities (i.e., their capacity to generate revenue) and increase the repairment costs. Another burden to the operating costs of infrastructure companies is the potential introduction of carbon taxes that would increase the costs of carbon emissions. We estimate both risks and describe how they impact assets’ financials.

We assume that the relationships between financial and macroeconomic variables described above hold in the future (until 2050, at least). The calibrated equations to forecast total assets, revenues, and OPEX can thus be used, provided that forecasts of GDP and inflation are available. NGFS and Oxford Economics provide such forecasts for six distinct climate scenarios with different levels of expected climate risks. We added the index s to the equations to denote scenarios. On top of macroeconomic forecasts, we include expected damages (physical risks) and additional costs related to the price of carbon (transition risks) in the estimated forecasts of financial variables.

Our model assumes that climate risks affect corporate and project companies in the same manner. Since the goal is to make projections at the industry level and, more granularly, at the sector level, long-term projections on projects and corporates are needed. Hence, we disregard the limited lifetime of firms in the projection part (i.e., the Percent Lifetime term is excluded). This is equivalent to assuming that projects are replaced or renewed upon completion or are considered evergreen.

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