Carbon Stress Tests: Building Business Resilience and Ensuring CO₂ Compliance

Companies must take action to comply with CO₂ limits and minimize climate-related risks. A carbon stress test helps assess how resilient business models are to rising CO₂ costs and strict climate targets. The goal is to identify risks, seize opportunities, and remain competitive in the long term. As regulatory frameworks tighten and investor expectations rise, proactive adaptation is not just prudent—it's essential for long-term business resilience.

• Climate targets in Germany: Net greenhouse gas neutrality by 2045, 65% fewer emissions by 2030 (base year: 1990).
• CO₂ pricing: €55–65 per ton from 2026.
• EU Emissions Trading System (ETS): From 2027, more sectors will be included, resulting in additional costs for companies.
• Three core questions of the test:
  1. Which investments are at risk due to decarbonization?
  2. Which investments benefit from a low-carbon economy?
  3. What internal CO₂ price should the company set?

3-Step Guide:

1. Define boundaries: Categorize emissions into Scope 1, 2, and 3 emissions.
2. Collect data: Analyze energy consumption, transportation, and waste.
3. Create scenarios: Assess risks and opportunities for different climate scenarios.

Tools & Standards: ISO 14064 and the GHG Protocol support emissions accounting. Digital tools make data collection and analysis easier.

Practical Examples:

• Steel industry: Transition to green hydrogen technologies.
• Automotive sector: Use of recycled materials and circular economy principles.

Conclusion: Companies that conduct CO₂ stress tests early gain a competitive edge and minimize risks from rising CO₂ prices. Act now and make your business model CO₂-fit!

The ECB climate stress test: Best practices and upcoming challenges

How to Conduct a Carbon Stress Test: Step-by-Step Guide

A carbon stress test helps you accurately assess your company’s CO₂ compliance and derive informed actions. You can successfully implement this process in three clear steps.

Step 1: Define Company Boundaries

First, you need to define your company’s organizational boundaries. The Greenhouse Gas Protocol divides emissions into three categories:

• Scope 1 emissions: Direct emissions from company-owned sources such as vehicle fleets or production facilities.
• Scope 2 emissions: Indirect emissions resulting from purchased energy like electricity or heat.
• Scope 3 emissions: All other indirect emissions along the value chain—often the largest but also the most complex category. Learn more about Scope 1, 2, and 3 emissions.

Since Scope 1 and Scope 2 are easier to quantify, a complete greenhouse gas inventory is recommended to provide a solid foundation for analysis.

Step 2: Collect and Analyze Emissions Data

The quality of your data is crucial for the validity of the test. Gather information on all emission-relevant activities, such as energy consumption, fuel use, transportation, and waste generation.

You have several methods available for data collection:

• Spend-based: Focus on financial expenditures to estimate emissions.
• Activity-based: Detailed data on specific activities.
• Hybrid methods: A combination of both approaches for a more comprehensive analysis.

Modern carbon accounting software can be extremely helpful here. It automates calculations and ensures transparent reporting, improving the accuracy of your CO₂ balance. This data forms the basis for the next step.

Step 3: Conduct Scenario Analysis

Scenario analysis is the core component of the carbon stress test. It helps companies assess climate-related risks and their potential impact on operations, finances, markets, and supply chains.

"Scenario analysis is a proven method for developing strategic plans that are more flexible or robust against a range of plausible future states." – TCFD Knowledge Hub

Both physical risks (e.g., from environmental impacts) and transition risks (in the shift to a low-carbon economy) should be considered. It is advisable to define multiple scenarios, including a 2°C scenario, to map out various possible developments. For example, the Network for Greening the Financial System (NGFS) provides open-source climate scenarios that companies can use to model impacts under different policy and market conditions (https://www.ngfs.net/ngfs-scenarios-portal/).

A case study using Climate Credit Analytics examined an automotive manufacturer portfolio from Germany, the USA, China, Korea, and Japan under a delayed transition scenario. The results showed that companies with more flexible assumptions performed better—in aspects such as prices, volumes, costs, and asset valuation.

Adapt the scenarios to your business context, update them regularly, and set clear triggers to respond quickly to changes.

Tools and Frameworks for Carbon Stress Tests

Choosing the right tools and standards is crucial for conducting effective carbon stress tests. Companies in Germany can rely on proven international standards and modern digital solutions that significantly simplify the process. These form the foundation for practical and precise testing.

Standards for Emissions Accounting

Two key standards are available for CO₂ accounting: ISO 14064 and the GHG Protocol.

ISO 14064, also known as DIN ISO 14064, is the national standard in Germany. It provides a structured approach for quantifying, reporting, and verifying greenhouse gas emissions. The standard is divided into three parts: organizational inventories, projects for reduction and removal of emissions, and verification of greenhouse gas statements. Read more about ISO 14064.

The GHG Protocol, on the other hand, is widely used internationally and often adopted by companies. It frequently serves as the basis for regulations such as the CSRD. The protocol focuses on company-level reporting and offers detailed guidance for calculating emissions. Third-party verification, however, is not required.

For specific audits and regulatory requirements, ISO 14064 is often better suited due to its structured verification process. However, if comprehensive Scope 3 accounting is needed, the GHG Protocol offers detailed guidance for indirect emissions.

Digital Tools for Carbon Data Management

Digital tools make the complex task of emissions accounting significantly easier.

“You cannot manage what you cannot measure.”

When choosing software, ensure that all scopes are covered, supplier data is integrated, AI-supported planning is available, and reporting meets standards. It’s also important that the platform transparently displays the emissions factors used (whether standardized or custom).

Investing in such tools pays off: Companies that disclose their environmental data and pursue ambitious emissions reduction targets achieve 67% higher returns on capital. Companies with science-based reduction targets also outperform their competitors by 5.6% in shareholder returns (https://sciencebasedtargets.org/companies-taking-action).

A practical example of the benefits of modern tools is the pilot of the carbon management solution from carbmee: Schaeffler was able to quickly and extensively calculate its suppliers’ emissions, leading to more detailed transparency for Scope 3 emissions.

“Just as how ERP and CRM systems were pivotal in the 80s and 90s, I have no doubt that Carbon Management and ESG Platforms will play a similar, essential role in the future of any business.” – Felipe Daguila, Chief Customer Officer, Terrascope

Integrating Carbon Risks into Business Systems

In addition to precise accounting, integrating carbon data into existing business systems such as ERP systems is crucial. This integration enables real-time insights and informed decisions.

The benefits are manifold: Not only do you improve transparency and regulatory compliance, but you also increase operational efficiency and create competitive advantages. One example is the outdoor company evo, which assessed its carbon footprint with Carbon Direct. Opportunities for emissions reduction were identified in areas such as facilities, products, and shipping. By adopting more sustainable practices throughout the supply chain, evo was able to improve both environmental performance and efficiency.

To implement this successfully, emissions should be included as a cost factor in decision-making processes. It’s also important to prepare for expanded disclosure requirements, clearly define ESG metrics, and strengthen collaboration between finance and sustainability departments to break down silos.

Carbon Stress Tests in Practice: Company Examples

The theory behind carbon stress tests may seem complex, but German companies in emissions-intensive industries demonstrate how such tests are implemented in practice. This not only highlights challenges but also provides solutions for various sectors. Below, we take a look at some practical examples.

Case Study: CO₂ Reduction in Steel Production

The steel industry in Germany faces a massive challenge: By 2030, more than 50% of the EU’s primary steel capacity—equivalent to 37 out of a total of 70 million tons—must be converted to Direct Reduced Iron (DRI) technology. This process replaces coal with green hydrogen and is key to decarbonizing the sector. However, the transition comes with enormous costs. Each plant faces a financing gap of about €3 billion.

Despite these high costs, the industry is pushing ahead with the transformation, supported by the EU Fit-for-55 package. Another success factor is collaboration across the entire value chain. This can increase demand for low-carbon products and justify the additional costs. The steel industry also enjoys a special status in the EU Emissions Trading System (ETS), thanks to its strategic importance and successful lobbying.

Best Practice: Circular Economy in the Automotive Supply Chain

The automotive supply industry also delivers impressive examples of CO₂ reduction. The German automotive sector shows how circular economy principles can be effectively implemented. With a 10% share of EU plastic consumption and almost 20% of steel demand, the automotive sector is a major player.

Mercedes-Benz integrates 184 components containing a total of 78.3 kilograms of recycled plastics and renewable raw materials into its EQE model. Similarly, Renault uses 25 kilograms of recycled plastics per vehicle, accounting for 12% of its total plastic consumption.

The Volvo Group goes even further: It uses about 50% recycled metal for forged iron and as much as 97% recycled iron for cast iron. The EU Battery Regulation also requires that by 2036, batteries must contain minimum shares of recycled material—including 26% cobalt, 12% lithium, and 12% nickel. Companies like Mercedes-Benz and Volkswagen are already testing battery recycling plants, while Volvo Cars is reusing used batteries from plug-in hybrid vehicles as stationary energy storage.

Lessons Learned: Common Mistakes in CO₂ Accounting

A frequent problem in carbon stress tests is errors in CO₂ accounting, which can significantly reduce the value of the results. Double counting in Scope 3 emissions, inconsistent methods across reporting periods, and the use of outdated emissions factors are among the most common sources of error. Especially with Scope 3 emissions, accuracy is often overestimated, as many companies rely on secondary data. Without close supplier engagement, credibility also suffers.

Solutions include clearly defined organizational boundaries in line with the GHG Protocol and close alignment of Scope 3 reporting with suppliers and customers. Companies should also conduct annual materiality assessments to focus on the largest emission sources. Regular updates of emissions factors are equally important. Quarterly data reviews in collaboration with finance and sustainability teams, as well as third-party verification, can help ensure data quality.

Actions for CO₂ Compliance

After the carbon stress test, companies face the challenge of implementing concrete steps to comply with CO₂ requirements. Here are some practical approaches—from CO₂ pricing mechanisms and technology roadmaps to financing.

Implementing CO₂ Pricing Mechanisms

Internal CO₂ pricing mechanisms are becoming increasingly important due to the Carbon Border Adjustment Mechanism (CBAM). The mandatory phase begins on January 1, 2026, when companies must purchase CBAM certificates.

How companies can proceed:

• Check whether your products are subject to CBAM. The EU Taxation and Customs website provides a helpful overview.
• Example: A manufacturer from Wisconsin supplying aluminum manhole covers to an Austrian customer must prove the embedded CO₂ emissions—even for sales through intermediaries.
• The financial impact is significant: In the transition phase, fines of up to €50 per ton of CO₂ may apply. Later, the price will be based on the EU-ETS, currently around €85 per ton of CO₂. The average EU-ETS price was recently about €65 per ton.

Companies must prepare quarterly reports and adjust their supply and sales contracts to provide EU customers with the necessary data.

Developing Technology Roadmaps

Technology roadmaps help companies translate global climate targets into concrete, time-bound actions. This is crucial, as industrial sectors could account for about 60% of global emissions by 2050 (https://www.iea.org/reports/net-zero-by-2050).

Steps for implementation:

• Record emissions: Start by collecting your Scope 1, Scope 2, and Scope 3 emissions data.
• Analyze product lifecycle: Identify optimization opportunities throughout the entire lifecycle.
• Develop a roadmap: Define achievable decarbonization targets and set concrete measures.

Successful examples show how it’s done: Cleveland-Cliffs Steel Corporation is planning a hydrogen-ready DRI plant that will save around 1 million tons of CO₂ annually. Roanoke Cement Company is reducing carbon-intensive cement components by using widely available clay types.

The Science Based Targets Initiative (SBTi) calls for at least a 90% reduction in emissions by 2050. To achieve this, companies should train employees in data collection and implement energy-efficient practices.

Securing Financing for Decarbonization

Identifying risks opens access to extensive funding opportunities. Germany has launched a €50 billion program for energy-intensive industries.

“Germany is the first EU member state to implement climate protection contracts, positioning us as a pioneer in industrial decarbonization.” – Economy Minister Robert Habeck

Possible funding options:

• The Federal Ministry for Economic Affairs and Climate Action provides about €3.3 billion annually from the Climate and Transformation Fund.
• Funding of up to €200 million (Module 1) or €30–35 million (Module 2) is possible depending on the module.

In October 2024, 15 industrial companies—including BASF and Südzucker—received grants of up to €2.8 billion. These projects are expected to reduce CO₂ emissions by 17 million tons over 15 years.

Conclusion: Building Business Resilience through Carbon Stress Tests

Carbon stress tests are much more than a compliance tool—they offer companies the opportunity to strategically position themselves in a low-carbon economy. Those who adapt their business models early to CO₂ limits not only meet regulatory requirements but also unlock financial potential.

The numbers speak for themselves: Companies with strong ESG practices achieved valuations 10–15% higher than their competitors in 2023. In contrast, companies that delay decarbonization risk losing up to 20% of their economic profit by 2030 (https://www.mckinsey.com/capabilities/sustainability/our-insights/the-economic-case-for-combating-climate-change).

“ESG-linked value creation doesn’t happen by itself; it requires a conscious strategy.” – Tony Christensen, Director at Position Green

The shift to a sustainable economy opens up enormous market potential. By 2030, shifting capital and consumer demand to low-carbon products could generate annual revenues of $9–12 trillion (https://www.weforum.org/agenda/2022/01/low-carbon-economy-business-opportunity/). Even today, customers are willing to pay premiums of 15–30% for sustainable products. One example is SSAB, which produces fossil-free steel with hydrogen and achieves price premiums of 20–30% through partnerships. H2 Green Steel has also raised over €1.8 billion in equity for its first plant (https://www.ssab.com/news/2023/10/ssab-and-mercedes-benz-expand-collaboration-on-fossilfree-steel).

In addition to market opportunities, sustainable processes offer operational benefits. They reduce energy costs, minimize waste, and increase efficiency—which is reflected in stronger stock performance. Sustainability is also crucial for talent acquisition: 71% of employees and job seekers prefer environmentally conscious companies, and nearly half would accept a lower salary for such commitment (https://www.ibm.com/thought-leadership/institute-business-value/report/sustainability-at-work).

Carbon stress tests help companies systematically identify opportunities and create a clear data foundation for investment decisions. They turn regulatory requirements into a competitive advantage. Companies that act now and make their business models CO₂-fit will not only secure a place in the climate-neutral economy but also strengthen their long-term resilience by combining compliance, market opportunities, and operational efficiency.

FAQs

How can companies set an internal CO₂ price to better manage future costs and risks?

Companies can set an internal CO₂ price by incorporating a shadow price into their investment decisions. This is a notional value that takes into account the long-term environmental and financial consequences of CO₂ emissions. This enables strategic decisions to be made with a clear environmental focus.

Another option is to introduce an internal CO₂ fee. This is charged for every ton of CO₂ emitted, and the proceeds can be reinvested in emission reduction projects or sustainable initiatives. This not only increases transparency but also strengthens credibility in ESG reporting. Both approaches allow companies to prepare early for future CO₂ requirements while gaining a competitive advantage.

What advantages do digital tools offer when conducting a carbon stress test for companies?

Digital tools offer companies many ways to efficiently conduct a carbon stress test. They help automate data collection and analysis, saving time and increasing the accuracy of CO₂ emissions calculations. These tools allow companies to model different CO₂ reduction scenarios, enabling informed decisions to comply with both current and future CO₂ limits.

Additionally, such tools support the integration of climate strategies into business processes and simplify ESG reporting. They provide a clear overview of emissions data and help companies implement their climate goals in a targeted and efficient manner.

What benefits does the circular economy offer the automotive industry for reducing CO₂ emissions, and how can companies profit from it?

The Role of the Circular Economy in the Automotive Industry

The circular economy plays a key role in reducing CO₂ emissions in the automotive industry. By closing material loops, the CO₂ footprint can be significantly reduced while dependence on primary raw materials decreases. According to forecasts, European automakers could cut their CO₂ emissions by up to 60% by 2040 through the use of recycled materials (https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/toward-a-circular-economy-in-european-automotive). The vehicle recycling rate could also rise from the current 80% to nearly 97%, meaning almost all vehicle parts could be reused.

This approach offers companies several advantages: lower costs, a more stable supply chain, and new business opportunities. More efficient resource use not only leads to lower material costs but also improves competitiveness. Partnerships and innovative solutions are essential to fully realize the potential of the circular economy and successfully pave the way for more sustainable business models.