The Great Carbon Opportunity — Part 1: pricing and measuring climate and environment
It has been our long held thesis that we are in the early stages of a decade long shift where ‘externalities’ are priced into financial and corporate decision making. The rapid development of the carbon and climate markets are the next exciting evolution of this theme.
Net-zero pledges cover 68% of the global economy
It’s impossible to avoid the constant headlines and statements being made on the state of the climate and what the political, corporate, and individual responses to this global challenge should be. Most recently the Intergovernmental Panel on Climate Crisis (IPCC) report drew attention for emphatically stating: “It is unequivocal that human influence has warmed the atmosphere, ocean and land.”
Over the past decades the scientific language and community have moved from highlighting ‘likelihoods’ to ‘virtual certainties’ in these changes, and that human influence is the main driver. The impacts are becoming increasingly felt by communities who are now living through near annual ‘one in a hundred’ year events from flooding to heatwaves and bushfires to landslides.
The public and political pressure for change has been a critical component in the wave of ‘net-zero’ corporate and government pledges. While there is still a huge amount of work to be done, and these pledges often reference a far-out date, it indicates the intention is there and beginning to drive change.
We value what we measure — so how do we measure ‘climate’ and the ‘environment’?
Saying a business or government will get to ‘net-zero’ is one thing… but figuring out what that means, and doing it, is entirely another. One of the biggest challenges embedded in net-zero is in the name. ‘Net’. To get to ‘net’-anything we need a mechanism to work out what we are measuring and why. When quantifying externalities like this for the first time there are a host of considerations that need to be made about which factors are the most representative. It’s not going to be perfect, but we need to start somewhere.
Turning to the changes underway in the environment because of climate change, the science clearly points to the increase in emissions (carbon dioxide and greenhouse gasses) as the primary driver of global warming, and the severe climate related events we are living through. These emissions come from varied sources, but the main culprit is burning fossil fuels — one of the key activities that has enabled global industrialisation and wealth creation since the mid-1800s. The challenge of global warming has become synonymous with ‘emissions’ and ‘emissions’ have become synonymous with carbon. Carbon is the ‘gross’ figure. The left-hand side of the equation we are trying to balance in the quest for ‘net-zero’; this is the climate battleground.
Carbon — the emerging price mechanism for climate
We believe we are moving to a world where environmental assets are priced, and carbon is the leading measurement mechanism.
There are multiple different figures, reports, studies and estimates on what our global annual carbon emissions are. One that is widely publicised is the 51bn tons referenced by Bill Gates in his recent book, How to Avoid a Climate Disaster. This 51bn tons roughly represents what we need to stop releasing into the atmosphere annually to be ‘net-zero’. There is an active debate that we need to go further than this and have a period of negative emissions to compensate for the past 100 years, but I’m setting that to one side. Whatever you believe that figure needs to be, what is consistent is that the scientific community has converged on ‘carbon’ being the unit of measurement.
For the corporates, investors and consumers who are all trying to do their part to put a dent in this mammoth figure, they face a huge challenge. They need to:
- Quantify something they have never measured before (carbon emissions or ‘footprint’),
- Work out how they can reduce this figure through behaviour change and, where they can’t,
- Find some kind of external balance or mitigation to get to their pledged target.
Did I mention there are scant guidelines, no harmonised standards or any ‘GAAP’ equivalent?!
The cost of inaction is enormous — so the opportunity to find solutions is equally huge
Setting aside the PR fallout that would come from a company backing down from a public commitment to reduce their environmental footprint, the estimated economic costs for society failing to act are confronting. These eye watering numbers have pushed carbon to the top of every board, government, and investor’s agenda.
The early-stage investment community has taken notice and we are seeing record sums of money being invested into early stage ClimateTech businesses who are helping solve these challenges — from corporate footprinting; to assets at risk from extreme weather events; to the emerging carbon offset market; to hard technologies to sequester carbon; to direct investment into natural assets.
We agree with this bullishness and believe that along the carbon/climate value chain we will see multi-billion (trillion?) dollar companies who emerge and empower their clients/users to transition to a climate positive business model or lifestyle.
If you agree with us and are building one of these pioneering companies we would love to speak :)
