Earth’s Carbon Budget — A Primer
Climate-Tech Investing In The Time of COVID-19 — Article 3
As the climate investing lead at Inherent Group, I often encountered a knowledge gap between what climate scientists take for granted and what investors and your average citizen understand about climate science. For the third topic in this series, I am going to cover the scientific basics behind global warming. Most people, no matter their predilections, do not dispute the fact that the planet is warming. But, I’m often asked: “how do we know that humans are warming the planet?” If you want to go back to the beginning of this series which covers separate but related climate investing topics, here are links to Article 1 — Whither Climate Investors’ Opportunity Set and Article 2 — There Is No Climate Change Deus Ex Machina, That’s Not How Energy Works.
Annual global temperatures from 1850–2017.
Lacking sufficient time and resources to research every complex topic, we all use various mental short-cuts to form our opinions. As behavioral economist and author Dr. Daniel Kahneman explains, “When faced with a difficult question, we often answer an easier one instead, usually without noticing the substitution.”
Only when a risk rises to the point of severely impacting our lives, do we become experts in understanding it. Case in point: our new familiarity with how to manage through a pandemic versus three months ago. Now we are all experts in social distancing and understand it’s meant to flatten the curve until the medical field can catch up with therapeutics and a possible vaccine. Most of us probably know what Ro (R naught) means now and that SARS-2 has a much higher Ro than SARS-1 which is why it’s, er, taking up all the oxygen on Earth right now. But back to climate investing…
Whenever I get this question of global warming provenance, I am tempted to emulate Greta Thunberg’s gangster move when Congress asked a 16-year old to submit written testimony in defense of her stance on climate change. As her testimony, Greta submitted the 630-page 2018 IPCC Report stating, “I am submitting this report as my testimony because I don’t want you to listen to me. I want you to listen to the scientists. And I want you to unite behind the science.” So. Good. Greta.
The 2018 IPCC Report is the latest production by the Intergovernmental Panel on Climate Change (IPCC) established by the UN in 1988 to, “assess on a comprehensive, objective, open, and transparent basis the scientific, technical, and socio-economic information relevant to understanding the scientific basis of risk of human-induced climate change, its potential impacts and options for adaptation and mitigation.”
In other words, the UN determined that the topic of climate change, given its complexity and embedded tragedy of the commons, required an unbiased group of scientific experts to review all the scientific research that most people do not have time to read. The IPCC were tasked with forming a view on where things stand and reporting back.
Here is what the 2018 IPCC Report said in bullet one:
“Human activities are estimated to have caused approximately 1.0°C of global warming above pre-industrial levels, with a likely range of 0.8°C to 1.2°C. Global warming is likely to reach 1.5°C between 2030 and 2052 if it continues to increase at the current rate. (high confidence) [See graph below]”
So the scientists have formed a consensus. And scientists rarely agree on anything so if you were ascribing odds, you would heavily favor the scientists.
But scientists sometimes get things wrong, even when they all agree, which leaves a certain nagging doubt for some people. Setting aside the risk assessment that it pays to err on the side of safety when betting something you cannot afford to lose (the planet), we still need to exercise judgment about just how much risk we are taking.
For me personally, in order to confidently invest other people’s money in climate resiliency, I needed to immerse myself in the source material, so I started a part-time Masters in climate science at Columbia University. I wanted to learn the science from the scientists producing the research.
I thought it would take many classes to fully grasp the science behind the climate risks we are facing, and that confidence intervals would leave room for some degree of scientific debate. But I was wrong. After day one of my first class, Carbon Sequestration Utilization and Storage taught by Dr. David Goldberg, the science behind global warming was so rudimentary and simple, I realized why climate scientists have difficulty expressing it. It is as if you had to explain why having a singular place for using the bathroom was important to a group of adults. Isn’t it obvious?
In defense of the non-scientific community, I believe the resistance is due to the economic inertia propelling individual actors forward. Said another way, until we are faced with a crisis, we do not have much incentive to get into the details because things more or less work for us right now. But that is a topic for another day. For now, and as a quick reference point for future posts, I think it’s important to lay out the basic science behind global warming.
Most people are familiar with the water cycle. Water evaporates into the clouds, then it rains, and the water is returned to the oceans / rivers / lakes where it begins a new cycle. Sometimes the water is frozen as ice and is removed from the cycle, and sometimes ice melts which returns the water back to the cycle. Overall, the total amount of water on Earth stays relatively constant. There is an analogous carbon cycle, pictured below.
Without getting into the minutia, the carbon cycle can be broken into two parts: a short-term cycle, and a long-term cycle. The short-term cycle was taught to most of us in high school biology. The Earth’s animals, soils, and oceans respire CO2 and the planet’s plant life happily breathes in this CO2 via photosynthesis. The longer-term cycle is probably less familiar and occurs over centuries, if not eons. Rock captures carbon semi-permanently through sedimentation in which CO2 is combined with other molecules to form new rock. Constant weatherization degrades the rock slowly over time releasing some of that calcified CO2 back into the atmosphere. These two cycles have historically balanced themselves out until major geologic events happen, such as a massive volcano, or perhaps an asteroid strike.
The natural hydrocarbon movement occurs somewhere between the short and long-term cycles. Hydrocarbons, (what we commonly use as the fossil fuels: coal, oil, and natural gas) are compressed organic matter that is buried beneath the Earth’s surface. Some hydrocarbons naturally make their way to the surface via seeps as they have for millennia. There are even microbes that have evolved to consume and digest hydrocarbons which is part of the reason why the Deepwater Horizon oil spill wasn’t much worse.
Enter the Anthropocene. Ever since we commenced the commercial combustion of coal, oil, and later natural gas, humankind inadvertently short-circuited the natural carbon cycle.
Anthropocene — a proposed geological epoch dating from the commencement of significant human impact on Earth’s geology and ecosystems, including, but not limited to, anthropogenic climate change.
Today humankind emits nearly 33 gigatons of carbon dioxide into the atmosphere each year. (Note the 33Gt number does not include other forms of greenhouse gas (GHG) emissions, such as methane which takes total GHG emissions up to 40 gigatons of carbon dioxide equivalent).
The Earth’s atmosphere is shockingly small. Defined by most scientists as the space between Earth and the Karman Line, it’s all of 50 miles straight out. That means you could drive to the end of the atmosphere and enter outer space in about an hour.
Within this 50 mile layer, resides primarily nitrogen (78%) and oxygen (21%). Of the remaining 1%, argon makes up the majority, while carbon dioxide is only ~0.04% or approximately 415 parts per million (ppm).
That sounds like an astonishingly small amount of carbon dioxide gas, but CO2 is devilishly more complex than Nitrogen (N2) or Oxygen (O2). Carbon dioxide molecules trap heat because they vibrate significantly upon absorbing the sun’s radiation which then emits heat to other nearby CO2 molecules or back to Earth. Greater vibrations occur in more complex molecules which is why water vapor (H20) and methane (CH4) are also significant greenhouse gases. You could think of a molecule as a set of springs interconnecting each atom. Because CO2 is made up of three atoms, it vibrates significantly more than Nitrogen (N2) or Oxygen (O2) which happens to be bound together extra tightly.
Carbon dioxide’s other devilish attribute is that once emitted, it does not leave the atmosphere easily. According to the IPCC, much of the CO2 is absorbed by the oceans and some may be escaping the atmosphere entirely, but the rest can reside in the atmosphere for hundreds of years (recall the bathtub reference in Article 1). In some ways, CO2 is the single-use-plastic of the Earth’s atmosphere. Once used once, it sticks around for eternity.
CO2 is not all bad, of course, as it is carbon dioxide’s ability to trap heat around the Earth that we have to thank for life on Earth. Without CO2 in our atmosphere, Earth would be a cold inert planet. But therein lies what is so obvious to climate scientists. Carbon dioxide is the thermostat for Earth. Add more into the atmosphere and the surface temperature of Earth warms up. Take some away, and the Earth cools down. It’s that simple.
Until humankind started burning fossil fuels about 100 years ago, the CO2 in the atmosphere was a stable 280ppm. Now we are at 415ppm and we are adding 4–5ppm per year. Every net new 2 gigatons of carbon dioxide residing in the atmosphere work out to approximately 1 part per million (ppm). Based on historical measurement, roughly every 80–100ppm adds 1–1.2 degrees Celsius of warming. That much scientists are sure about as we can simply observe this phenomenon as depicted in the chart below.
What climate scientists are debating now are two mysteries:
1) Despite adding 40 gigatons (Gt) of GHG emissions annually to the atmosphere through burning fossil fuels, only 8–10GT are actually staying in the atmosphere. This means that 30Gt is “sinking” somewhere. Scientists are confident that the majority of the carbon sink is being absorbed by the oceans which is why the oceans are acidifying at an alarming rate. In addition, there is something known as the CO2 fertilization effect in which the Earth’s plant life has exhibited an increased rate of photosynthesis. It’s also possible that some CO2 is escaping the Earth’s magnetic pull and exiting into outer space.
2) Will we have tipping points in which feedback loops create a runaway warming of the Earth? For example, could the melting of the polar ice caps cause the Earth to absorb more heat due to a reduction in the Albedo Effect? Simply explained, white snow and ice reflect more sunlight back into space than does the blue ocean. As the Earth is covered more frequently in blue ocean instead of white ice/snow, does it absorb more heat causing the ice to melt faster?
I will likely revisit these questions in subsequent posts. For now, I will conclude with what’s known as the carbon budget.
At 450–480ppm, scientists believe we will reach 2 degrees Celsius (2C) of warming. If we continue pumping 40 Gt of carbon equivalent emissions into the atmosphere, and if only 8–10 Gt stays in the atmosphere, then we will reach 2C of warming at some point in the next 15–20 years. If we manage to dramatically drop our annual emissions, we could extend out the timeframe we have before we reach 2C. In other words, we could flatten the curve of warming which could give humankind time to perfect carbon-free energy and negative emission technology such as carbon sequestration.
As an investor, when you compare our diminishing carbon budget to how long it takes to identify, develop, and scale climate resiliency solutions, it seems obvious that climate investment opportunities are due to increase exponentially. At Inherent, I sought to identify sub-themes within climate investing and then hone in on the “tip-of-the-spear” to make an educated guess on the next logical step an industry must take. To find the next great company or sector to invest in, bear in mind Victor Hugo’s observation, “There is nothing more powerful than an idea whose time has come.” First, we have to get past COVID-19, but then climate resiliency’s time has surely come. Doing nothing will all but lock-in events that will make this COVID-19 pandemic feel like a walk in the park.
Benjamin M. Hogan, CFA
At Inherent Group, Ben led investments into companies enabling the transition to a lower-carbon economy, with a particular focus on the energy sector. In addition, Ben engaged with management teams to improve their ESG practices. Prior to Inherent Group, Ben led energy investing at Orange Capital, a $1.5B AUM special situations and activist hedge fund. Prior to Orange Capital, Ben worked in private equity at AMF, a subsidiary of Credit Suisse, which successfully invested $1B into 21 asset managers. Ben started as an M&A Analyst at Berkshire Global Advisors, a boutique M&A advisory firm focused on the asset management industry. Ben holds a B.Sc. in Economics from Duke University as well as the Chartered Financial Analyst (CFA) designation. In addition, Ben is pursuing a part-time M.Sc. in Sustainability Science at Columbia Universit with a focus on climate science.