What can organisations do to transition to a truly sustainable economy?
Carbon dioxide (CO2) is the most important cause of climate change. To prevent a climate change disaster, we need to not only reduce CO2 emissions but also remove CO2 from the atmosphere. We need to reach net-negative emissions. The scale of this challenge is summarised by the following chart, which shows a worrisome trend and the “carbon-debt” problem:
The carbon-debtor nations
After reviewing the data used for the chart, here is what we found most interesting:
- the US has emitted more CO2 than any other country: 400+ billion tonnes (t) since 1751 (~25% of historical emissions)
- followed by the EU-27 (which does not include the UK) and China
- large annual emitters today – India and Brazil – are not large contributors in historical context
- Africa’s regional contribution has been very small – both historically and currently
US economists estimated that carbon allowance prices need to reach 50–100 USD per ton of CO2 to achieve the goals of The Paris Agreement. This is a widely accepted range. However, a study found that the actual social cost of carbon is 220 USD per ton. And another study found most counties’ targets are insufficient.
The EU Carbon Emission Allowances (EUA) futures traded on the ICE closed at circa 27 EUR (or 33 USD) per tonne today. (The European carbon market is the world’s largest of its kind.) At 33 USD per tonne, the “value” of 400 billion t of carbon emissions is 13.2 trillion USD.
To put it in context: The US government debt is 21 trillion USD. (You do the math to value the US carbon debt using a carbon price that reflects the “fundamentals”.)
The EUA futures price is near the all-time high. It should continue to increase as the EU each year reduces the emission allowances. However, the fact that the market price is still so low begs the question – is the market part of the solution or part of the problem? We will cover this in a future article.
(Note that ton and tonne are not exactly the same, the EU measures CO2 in tonnes, the US in tons.)
The carbon-debt problem incomplete solution & challenges (opportunities)
In terms of reducing CO2, Renewables and electrification are part of the solution. However, they need technologies such as lithium-ion batteries and hydrogen fuel cells to store power from renewable (but intermittent) energy sources and power electric vehicles, homes, etc.
These technologies rely on metals and other materials (e.g. plastics) whose life-cycle (mining to disposal/ recycling) is anything but clean. In fact, it may even include the use of fossil fuels. These materials are often sourced in unstable countries.
For more on hydrogen technology, see our article: Fuel Cells: a reason why Elon Musk may be wrong.
To remove CO2, part of the solution are land management practices, but they are not enough. Technological solutions are needed too, but they are in their infancy.
Green finance: debt-based money to sort out the carbon-debt problem?
Green finance primarily means green bonds. But these may not be the best instruments to cut CO2, The Economist suggests. They are for institutions who invest in relatively “low risk” projects, not always really clean. These may be low risk for investors in the short/ medium term, but chances are they are high risk for society in the long term, especially if they fail to cut carbon.
We are not saying that there is no place for bonds in the pursuit of sustainability, but they may need to be re-thought. For more on this: The problem with debt-based money.
Green fintech: a long way to go
Financial technology companies (fintechs) could play a role in making not only the global financial system inclusive but also the global economy green. There are already some fintechs that we classify as ‘green fintechs’, particularly in the realm of clean energy money. But a lot more needs to happen here.
For more: The state of green fintech.
Some corporations have started to pay off their carbon debt. They want to eliminate not only current pollution but also the one they generated in the past.
In January, Microsoft pledged to eliminate 27.3 million tons of carbon dioxide, their estimated emission since its founding in 1975. More recently, Velux A/S, a Danish maker of roof windows, announced similar plans. However, most corporations are only beginning to take the Environmental, Social, and Governance (ESG) factors seriously. (The myriad of ESG standards available now is not helping.)
Technological and financial innovation alone may not be enough to solve the carbon-debt problem. The conversation should include a behavioural change to address issues such as overconsumption (propelled by the debt-based money system). And even the controversial overpopulation (better education rather than control may be needed).
In a sharing economy, the number of cars on roads could be reduced by 80% according to a former automotive executive. How many people do really need to own a car? And we do not need to be all vegan, but how many people really need to eat meat every day?
One thing COVID-19 has made clear: we all need to plan well ahead and listen to scientists.
If you want to learn more about this, please join the following webcast hosted by the Chartered Institute for Securities and Investment (CISI) that I will chair on 8 October:
The future is electric and green: how can finance accelerate a truly clean energy and transportation revolution?
(If you are not a CISI member, you will need to register an account with the CISI, which should take 30 seconds by just inputting your name and email address. You will then be able to sign up to the event by signing in.)