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Net Zero Plans Must Face Forensic Scrutiny

The use of carbon jargon to camouflage flimsy net zero plans will come to an end, exposing bad players, warns Gary Smith, Partner at Haven Green Capital Partners.

It is like the ‘Wild West’ out there. Everyone and anyone can announce that they have a plan to achieve net zero carbon emissions in 2050. The rapid pace of announcements by corporations, industries and governments has been driven by a desire to satisfy customers, shareholders, and voters. Many plans have been rushed out against a backdrop with few accepted rules or guidance on what a credible plan should look like.

The primary problem with the phrase ‘net zero’ is the first word, which introduces a fog of uncertainty and has encouraged many organisations to promise carbon offsetting in the future instead of reducing emissions today. This is a problem on two levels. Firstly, emitting leads to a problem of accumulation, and offsetting later is unlikely to address the issue of a delayed start. Secondly, a promise on carbon offsetting in the future will be empty if there is not sufficient availability of credible schemes.

However, as we are all becoming better informed we will begin to refuse to accept poor net zero plans. Customers, shareholders, and voters will no longer be bamboozled by carbon jargon. A more forensic and sophisticated analysis of net zero plans will be inevitable.

Much of the burden of analysis will fall on the investment management industry. Analysts will need to deal with the challenge that policies intended to combat climate change will affect financial returns over a long time horizon. For the first time, they might need to consider factors that affect the financial outlook for the next 40 quarters, not just the profit and loss account for the next four.

Change might happen fast. Analysis will improve, bad players will be exposed and will face a challenge that will have been compounded by a failure to react sooner. Disruptive technological progress combined with policy action, and the demands of the public, will all impact in a non-linear manner. There will be cliff-edge consequences. Companies that underestimate the changes ahead may fail.

Take-off for transition?

One net zero plan that has caught our eye is the one that was published by the airline industry in late 2021. It is extremely ambitious and would be a fantastic achievement if it can be achieved – but could have significant consequences for the airline industry if it fails.

The IATA (International Air Transport Association) report on how the airline industry plans to get to net zero emissions by 2050 explains that changes that are within our grasp (making planes lighter, more aerodynamic, and cutting the time spent taxiing) will contribute only 3% to the net zero journey. Carbon offsetting, with all is faults and likely future scrutiny, accounts for 19% of the plan. A significant 13% will come from brilliant technological inventions that will be delivered in suitable time to have an impact on emissions in 2050, such as the commercial arrival of either hydrogen or electric battery powered aircraft.

The good news is that sustainable jet fuel accounts for a chunky 64% of the plan, and this fuel has already been invented and used in trial flights. However, note that the IATA’s own projections are that production will have to increase from 100 million litres in 2021 to 450 billion litres in 2050. Yes, that would be an astonishing increase in production of 450,000%.

Sustainable jet fuel is a mixture of 50% regular fuel, and 50% cocktail of animal fats and vegetable oil. Where is all this going to come from? These numbers suggest a need for a massive increase in vegetable oil production, with attendant forest clearing, biodiversity loss and water resource challenges.

Palm oil is the leading vegetable oil, and Indonesia is the biggest producer. Who has thought this through and joined the dots? It does not look as though the IATA plan squares with COP26 commitments to limit deforestation, especially given the refusal of the Indonesian government to fully support the pledge to halt deforestation by 2030.

Biting the bullet

If governments bite the bullet and get serious about carbon pricing, industries with inadequate net zero carbon plans might face existential crises. It is not beyond the realm of possibility that the EU might one day introduce taxes on traditional jet fuel (astonishingly currently free of tax in most nations) and simultaneously introduce carbon pricing.

Such a combination of policy changes could trigger an enormous increase in airfares that really would test passenger determination to have that long weekend in Spain.

The wild west of net zero carbon plans will inevitably come to an end. As the clock ticks towards 2050, forensic scrutiny of net zero plans will increase and improve. This will prove uncomfortable for companies, industries, and even governments that continue to use the camouflage of carbon jargon. Asset owners are demanding more, and asset managers will become key agents in highlighting the bad players. The tide is going out and we will soon see who is not wearing shorts.


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