Financial Planning Flashcards

A company applies an internal 'shadow price' of carbon. What is its primary purpose?

Answer: To factor a hypothetical carbon cost into investment appraisals without moving actual cash

A shadow price is a theoretical cost added to project evaluations to reveal carbon risk, with no actual money transferred.

Which internal carbon pricing approach charges business units per tonne emitted and collects real funds?

Answer: Internal carbon fee

An internal carbon fee charges divisions a real amount per tonne, often funding emission reduction projects.

An energy-efficiency retrofit costs $200,000 and saves $50,000 per year. What is its simple payback period?

Answer: 4 years

Simple payback equals initial cost divided by annual savings: $200,000 / $50,000 = 4 years.

On a marginal abatement cost curve (MACC), what do bars below the horizontal axis represent?

Answer: Measures with negative cost that save money while cutting emissions

Bars below zero on a MACC indicate abatement options with net savings per tonne reduced.

Why does the choice of discount rate matter when evaluating long-lived emission reduction projects?

Answer: Higher discount rates reduce the present value of long-term benefits, making such projects look less attractive

A higher discount rate shrinks the present value of distant cash flows, penalizing projects whose benefits arrive later.

Under the TCFD framework, which of the four core pillars addresses how climate risks affect financial planning?

Answer: Strategy

The Strategy pillar covers actual and potential impacts of climate risks and opportunities on business, strategy, and financial planning.

A company budgeting for carbon offsets expects prices to rise. Which procurement strategy best limits budget exposure?

Answer: Enter forward purchase agreements at fixed prices

Forward contracts lock in prices and reduce exposure to future price increases.