Carbon costs, WACC and a cement producer's DCF

Where the double counting arises

• A carbon price applied to uncovered emissions is a company-specific cash-flow item. It belongs in free cash flow: free allocation declines annually, CBAM charges on embodied emissions in exports to the EU phase in from 2026, and the carbon price path should be explicit (e.g. €85/t rising over time).
• The +200bp WACC and lower terminal growth are a second charge for the same risk. A discount-rate premium is defensible only for non-diversifiable risk, or for uncertainty that cannot be modelled in cash flows. Using both overstates the haircut, and 200bp is arbitrary.
• The terminal value is the bigger error: if the carbon cost stops in 2032, the model silently assumes Aurelia's kilns become carbon-free afterwards. Carbon costs must persist and grow in the terminal year, and the capex for CCS or fuel switching must be included.

What to do instead

1. Model carbon costs across the asset base: free allocation, auctioned allowances, CBAM and pass-through to cement prices, limited by import competition.
2. Treat stranded-asset risk as an impairment or a shorter asset life in the terminal value, not as a WACC add-on.
3. Present scenario values (Net Zero vs Current Policies) and probability-weight them rather than relying on one point estimate.
4. If a cost-of-equity premium is used at all, document its empirical basis and apply it consistently across the portfolio; evidence for a carbon premium is mixed.
5. Check the vendor label: a 2019 dust fine is likely immaterial relative to EBITDA, and a CDP score measures disclosure process, not environmental outcome.

Capex and grant

• Build the €600m as a phased capex line across 2028-2032, not a single number: contingency, commissioning delays and the ramp-up of low-carbon output all matter. Check whether the grant reduces capex or is recognised as income; do not count it twice, once as lower capex and once as other income.
• Test the economics against the carbon-cost saving. A low-carbon kiln reduces allowance purchases and CBAM exposure, but only if output meets customer specifications and the carbon cost can be passed through.

Taxonomy claim

• Alignment requires three tests, not one: substantial contribution (clinker CO2 intensity below the delegated act's technical screening threshold), do no significant harm (water, air emissions, circularity, biodiversity) and minimum safeguards (OECD Guidelines, UN Guiding Principles, ILO core conventions, anti-corruption, tax).
• Revenue alignment requires revenue from eligible activities that meet all three tests. A capex plan can at most support the capex KPI; it does not make 40% of revenue aligned. Ask for the taxonomy disclosure, the activity mapping and whether it has been assured.
• Check scope: lime, aggregates and concrete are separate activities with different criteria. Blending them into one green-revenue figure is a red flag.

Valuation

• Net the risk-adjusted capex, grant, carbon-cost savings and any green price premium. A kiln commissioned in 2031 has a 20-30 year life under a 2050 net-zero pathway, so residual emissions and CCS availability must be modelled, not assumed away. A scenario range is more honest than a single revised target price.

• Different exposure, different horizon. The 2029 bond is exposed to refinancing and covenant risk over 2026-2029, not to the perpetuity. Carbon costs, CBAM and the €600m capex all hit before maturity, so free cash flow and leverage matter more than terminal growth.
• Metrics to run: EBITDA margin after carbon costs, funds from operations, net debt/EBITDA, interest cover, covenant headroom, liquidity and the refinancing plan. Check whether the capex is debt-funded and whether grant timing creates a funding gap.
• Recovery value. If carbon regulation accelerates, kiln assets may be impaired. Review collateral, asset life and the market for second-hand cement assets; recovery rates fall if the asset is a stranded asset.
• Green bonds and SLBs. If Aurelia issues a green bond for the kiln, check use-of-proceeds and allocation reporting. A sustainability-linked step-up is a contingent cash cost that belongs in the credit model.
• Engagement. A bondholder has less access than an equity holder but can engage through creditor meetings and transition-plan disclosure. Capex assumptions, carbon-cost assumptions and covenant definitions are legitimate topics, and clients increasingly expect bondholder stewardship.
• Do not import an equity ESG score. The credit conclusion depends on cash-flow timing and recovery, not on the vendor's controversy rating.