ET Index blog series: Cutting through the carbon: knowing your carbon reserves from your carbon emissions

As we discussed in the previous post, in concrete terms greenhouse emissions represent the physical source of the climate change problem. Sam Gill, CEO of ET Index writes.

The Kyoto Protocol specifies 6 greenhouse gases (carbon dioxide, methane, nitrous oxide, and the so-called F-gases – hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride). Each of these has a global warming potential, meaning that when they are released into the atmosphere they trap heat causing the temperature to rise. Emissions of these gases are then converted into tonnes of CO2 equivalent so that they can be compared. This also means that generally when ‘carbon emissions’ are talked about this is shorthand for greenhouse gases (GHGs). Throughout this series I use ‘carbon emissions’ as shorthand for ‘greenhouse gas emissions’. This is pretty common within the industry and amongst commentators, but it is always good to make sure the other gases are not forgotten.

Carbon Tracker’s ‘carbon bubble’ thesis has drawn much-needed attention to fossil-fuel reserves and their embedded carbon. The thesis can be distilled down to a few straightforward questions. Would you invest in a company that owned a warehouse in which 4/5 of the stock could never be sold? And, if you already owned one of those companies – as many investors do – should you be worried? These are valid questions for any prudent investor or fiduciary to ask, and this way of framing the debate has been extremely important in helping to propel the climate change debate into the public and investor consciousness.

However, it does shift the focus somewhat from the fact that it is actual realised emissions that are the problem. As long as fossil fuel reserves stay in the ground and are not burnt, there is no problem. Hence why the Guardian has decided to call its campaign Keep it in the ground.

Therefore I would argue that if we are going to create an incentive mechanism designed to apply pressure to greenhouse gas emissions, measuring greenhouse gas emissions is a good way to go.

Similarly, just as many companies may say they are doing lots of amazing things, sometimes they are  actually doing some pretty bad things. Sadly, the world is awash with greenwash. That is why quantitative measurements such as the total emissions produced by a company in a given year are a much better, and safer, indication of the actions they are taking to address climate change when compared with more subjective measures such as what the company says it is doing to cut emissions.

If we apply pressure to the emissions, everything else will follow: the strategy, the actions and the investment.

More recently there is growing move towards seeking to measure the amount of money a company is investing in the types of energy technology that will facilitate a shift towards a zero carbon economy. Whilst there is certainly logic behind this approach, if we keep things simple and apply pressure to company carbon emissions, investments in new technologies will be a necessary by-product as companies seek out ways to lower their carbon emissions.