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ET Index blog series: Environmental Tracking as a practical solution to the climate crisis

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The Holy Grail in the quest to tackle climate change, within the confines of the existing economic paradigm, is to place a price on carbon. In other words to make people pay for it. Within the laws of economics that govern our free market capitalist economy, the path of least resistance – cost – is king in the pursuit of profit. The ability to make the course of action that is detrimental to the environment the most expensive one, would enable us to realign the system towards a less destructive paradigm. Sam Gill, CEO of ET Index writes.

The simplest way to put a price on carbon and make companies pay for emissions would be through taxation. To some extent this happens already, e.g. fuel duty in the UK. But we do not currently have a global taxation regime whereby we have a ubiquitous and sufficiently high carbon price across all sectors and geographies. It is highly likely that we will eventually have some kind of global carbon pricing mechanism, especially with the emergence of more and more regional schemes that can be linked together. But this is still a long way off; and yet we will have blown our all time carbon budget at today’s rate within 15-20 years’ time. We need something that can start putting a price on carbon today.

The financial markets offer a mechanism through which a global carbon price can be implemented immediately. Let me explain how.

Whilst there are many different factors that influence an investor’s perception of the value of a company – e.g. the amount of profit the company made, the appointment of a new CEO, the news the company has destroyed the Gulf of Mexico etc. – the only thing that matters in determining a company’s actual share price is the supply versus the demand for its shares. Sam Gill, CEO of ET Index writes.

A company could be the most profitable company in the world, but if no one wants to buy their shares, thus killing the demand, its share price will drop. Price is always only ever a function of supply and demand.

The Environmental Tracking mechanism is designed to link the demand for a company’s shares to its environmental performance, in turn, linking a company’s share price to its environmental actions. The objective is to pioneer this approach for carbon, given the urgency of the climate crisis, before adding additional environmental indicators to the system.

Why would targeting a company’s share price be so powerful? Company management and key staff often have bonuses and compensation packages tied to the company’s share price. A suppressed share price for a company makes it more vulnerable to a hostile takeover. It also raises the cost of capital for a company. But above all every company’s raison d’être is to make money for its shareholders. If the shareholders of a company can see that the management’s actions are causing their shares to lose value, it is likely the management will be voted out.

So how can we achieve all this? The Environmental Tracking mechanism is made up of two key components. The first is a set of public Environmental Tracking Carbon Rankings (available here). Here, the largest companies in the world are ranked according to their publicly disclosed greenhouse gas emissions data. This includes their supply chain (Scope 3) emissions, which are often the most significant source of emissions. In the case of companies failing to publicly disclose data, they are awarded the same emissions intensity as the company with the highest reported emissions figure within the same sector, providing a constant incentive for disclosure. Since the ranking is relative is is designed to always push companies towards zero emissions.

The second is a series of Environmental Tracking indexes. These are stock market indexes just like, for example, the FTSE 100 or S&P 500. They contain all of the same companies as conventional market capitalisation benchmark indexes, not just those which are ‘low-carbon’. The difference between Environmental Tracking indexes and traditional stock market indexes is that they are designed to redirect capital from high-carbon to low-carbon companies. They do this by re-weighting companies according to their position in the fully transparent Environmental Tracking Carbon Rankings.

Unlike the approach of divestment, which only targets fossil-fuel companies, each and every company within the stock market is penalised or rewarded based on their carbon emissions. This is designed to push up the cost of capital for carbon-intensive companies.

This approach is the embodiment of engagement. Since all companies are publicly ranked it provides an open platform for Environmental Tracking investors to monitor progress in a transparent way and demand that companies lower emissions. For companies, the only way to move up the ranking is to lower emissions and to encourage the companies within their supply chains to do the same, in turn gaining a greater weighting in the index and therefore a greater share of investment from those tracking the index.

As any investor will know, money speaks louder than words. This is a way to use the stock market to make companies pay for the carbon they emit.

For investors who champion engagement this is the perfect mechanism on the way towards full divestment. Indeed, an investor could tell a company that unless it achieves a certain position within the ranking or clearly demonstrates a drop in emissions intensity of, say 20% per year, it will be excluded altogether.

ET Index recently produced a series of briefing notes demonstrating how investors can achieve a greater emissions-intensity reduction through Environmental Tracking than divestment alone, without compromising on returns. For investors committed to pursuing a divestment strategy, ET Fossil Free indexes offer the ability to combine divestment with Environmental Tracking, re-weighting the remaining companies in the portfolio according to their carbon emissions once fossil-fuel companies have been excluded.

Once the logic of divestment has been embraced, that shifting capital in line with emissions, can be so powerful, why stop at fossil fuel companies?

Economy

Will Self-Driving Cars Be Better for the Environment?

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self-driving cars for green environment
Shutterstock Licensed Photo - By Zapp2Photo | https://www.shutterstock.com/g/zapp2photo

Technologists, engineers, lawmakers, and the general public have been excitedly debating about the merits of self-driving cars for the past several years, as companies like Waymo and Uber race to get the first fully autonomous vehicles on the market. Largely, the concerns have been about safety and ethics; is a self-driving car really capable of eliminating the human errors responsible for the majority of vehicular accidents? And if so, who’s responsible for programming life-or-death decisions, and who’s held liable in the event of an accident?

But while these questions continue being debated, protecting people on an individual level, it’s worth posing a different question: how will self-driving cars impact the environment?

The Big Picture

The Department of Energy attempted to answer this question in clear terms, using scientific research and existing data sets to project the short-term and long-term environmental impact that self-driving vehicles could have. Its findings? The emergence of self-driving vehicles could essentially go either way; it could reduce energy consumption in transportation by as much as 90 percent, or increase it by more than 200 percent.

That’s a margin of error so wide it might as well be a total guess, but there are too many unknown variables to form a solid conclusion. There are many ways autonomous vehicles could influence our energy consumption and environmental impact, and they could go well or poorly, depending on how they’re adopted.

Driver Reduction?

One of the big selling points of autonomous vehicles is their capacity to reduce the total number of vehicles—and human drivers—on the road. If you’re able to carpool to work in a self-driving vehicle, or rely on autonomous public transportation, you’ll spend far less time, money, and energy on your own car. The convenience and efficiency of autonomous vehicles would therefore reduce the total miles driven, and significantly reduce carbon emissions.

There’s a flip side to this argument, however. If autonomous vehicles are far more convenient and less expensive than previous means of travel, it could be an incentive for people to travel more frequently, or drive to more destinations they’d otherwise avoid. In this case, the total miles driven could actually increase with the rise of self-driving cars.

As an added consideration, the increase or decrease in drivers on the road could result in more or fewer vehicle collisions, respectively—especially in the early days of autonomous vehicle adoption, when so many human drivers are still on the road. Car accident injury cases, therefore, would become far more complicated, and the roads could be temporarily less safe.

Deadheading

Deadheading is a term used in trucking and ridesharing to refer to miles driven with an empty load. Assume for a moment that there’s a fleet of self-driving vehicles available to pick people up and carry them to their destinations. It’s a convenient service, but by necessity, these vehicles will spend at least some of their time driving without passengers, whether it’s spent waiting to pick someone up or en route to their location. The increase in miles from deadheading could nullify the potential benefits of people driving fewer total miles, or add to the damage done by their increased mileage.

Make and Model of Car

Much will also depend on the types of cars equipped to be self-driving. For example, Waymo recently launched a wave of self-driving hybrid minivans, capable of getting far better mileage than a gas-only vehicle. If the majority of self-driving cars are electric or hybrids, the environmental impact will be much lower than if they’re converted from existing vehicles. Good emissions ratings are also important here.

On the other hand, the increased demand for autonomous vehicles could put more pressure on factory production, and make older cars obsolete. In that case, the gas mileage savings could be counteracted by the increased environmental impact of factory production.

The Bottom Line

Right now, there are too many unanswered questions to make a confident determination whether self-driving vehicles will help or harm the environment. Will we start driving more, or less? How will they handle dead time? What kind of models are going to be on the road?

Engineers and the general public are in complete control of how this develops in the near future. Hopefully, we’ll be able to see all the safety benefits of having autonomous vehicles on the road, but without any of the extra environmental impact to deal with.

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Economy

New Zealand to Switch to Fully Renewable Energy by 2035

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renewable energy policy
Shutterstock Licensed Photo - By Eviart / https://www.shutterstock.com/g/adrian825

New Zealand’s prime minister-elect Jacinda Ardern is already taking steps towards reducing the country’s carbon footprint. She signed a coalition deal with NZ First in October, aiming to generate 100% of the country’s energy from renewable sources by 2035.

New Zealand is already one of the greenest countries in the world, sourcing over 80% of its energy for its 4.7 million people from renewable resources like hydroelectric, geothermal and wind. The majority of its electricity comes from hydro-power, which generated 60% of the country’s energy in 2016. Last winter, renewable generation peaked at 93%.

Now, Ardern is taking on the challenge of eliminating New Zealand’s remaining use of fossil fuels. One of the biggest obstacles will be filling in the gap left by hydropower sources during dry conditions. When lake levels drop, the country relies on gas and coal to provide energy. Eliminating fossil fuels will require finding an alternative source to avoid spikes in energy costs during droughts.

Business NZ’s executive director John Carnegie told Bloomberg he believes Ardern needs to balance her goals with affordability, stating, “It’s completely appropriate to have a focus on reducing carbon emissions, but there needs to be an open and transparent public conversation about the policies and how they are delivered.”

The coalition deal outlined a few steps towards achieving this, including investing more in solar, which currently only provides 0.1% of the country’s energy. Ardern’s plans also include switching the electricity grid to renewable energy, investing more funds into rail transport, and switching all government vehicles to green fuel within a decade.

Zero net emissions by 2050

Beyond powering the country’s electricity grid with 100% green energy, Ardern also wants to reach zero net emissions by 2050. This ambitious goal is very much in line with her focus on climate change throughout the course of her campaign. Environmental issues were one of her top priorities from the start, which increased her appeal with young voters and helped her become one of the youngest world leaders at only 37.

Reaching zero net emissions would require overcoming challenging issues like eliminating fossil fuels in vehicles. Ardern hasn’t outlined a plan for reaching this goal, but has suggested creating an independent commission to aid in the transition to a lower carbon economy.

She also set a goal of doubling the number of trees the country plants per year to 100 million, a goal she says is “absolutely achievable” using land that is marginal for farming animals.

Greenpeace New Zealand climate and energy campaigner Amanda Larsson believes that phasing out fossil fuels should be a priority for the new prime minister. She says that in order to reach zero net emissions, Ardern “must prioritize closing down coal, putting a moratorium on new fossil fuel plants, building more wind infrastructure, and opening the playing field for household and community solar.”

A worldwide shift to renewable energy

Addressing climate change is becoming more of a priority around the world and many governments are assessing how they can reduce their reliance on fossil fuels and switch to environmentally-friendly energy sources. Sustainable energy is becoming an increasingly profitable industry, giving companies more of an incentive to invest.

Ardern isn’t alone in her climate concerns, as other prominent world leaders like Justin Trudeau and Emmanuel Macron have made renewable energy a focus of their campaigns. She isn’t the first to set ambitious goals, either. Sweden and Norway share New Zealand’s goal of net zero emissions by 2045 and 2030, respectively.

Scotland already sources more than half of its electricity from renewable sources and aims to fully transition by 2020, while France announced plans in September to stop fossil fuel production by 2040. This would make it the first country to do so, and the first to end the sale of gasoline and diesel vehicles.

Many parts of the world still rely heavily on coal, but if these countries are successful in phasing out fossil fuels and transitioning to renewable resources, it could serve as a turning point. As other world leaders see that switching to sustainable energy is possible – and profitable – it could be the start of a worldwide shift towards environmentally-friendly energy.

Sources: https://www.bloomberg.com/news/articles/2017-11-06/green-dream-risks-energy-security-as-kiwis-aim-for-zero-carbon

https://www.reuters.com/article/us-france-hydrocarbons/france-plans-to-end-oil-and-gas-production-by-2040-idUSKCN1BH1AQ

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