It is this uncertainty – alongside the layering of various carbon accounting processes between the real economy and financial services – that enables specious claims of net zero ‘alignment’ and the outright misunderstanding of how carbon offsetting is achieved.
Earlier this year, Mark Carney pronounced that Brookfield Asset Management was effectively operating at net zero because its renewable energy portfolio balanced the emissions of its non-renewables portfolio. Days later he was forced to back-peddle on the claim on grounds that it simply wasn’t accurate. This incident illustrates the deeply concerning but alarmingly common and long-lasting fallacies that surround the concept of carbon offsetting.
Along with Carney, other leaders in the space – including Nobel Prize-winning economist William Nordhaus – have made gaffs by assuming that the mathematics of climate change is static or linear. Economic damage analyses, like that created by Nordhaus, are generally ‘equilibrating’, they use today’s climate dynamics to model tomorrow’s, and imply a smooth and continuous distribution without sudden change, disruption, or fundamental shift (also known as ‘tipping points’). And, (in)famously, they may massively underestimate the economic impacts of climate change by assuming that only activities which cannot be undertaken in spaces which can be air conditioned are likely to see productivity levels fall!
Renewables do not ‘balance out’ non-renewables
Uncertainties surrounding a myriad of warming relationships in the natural world (including terrestrial, atmospheric and oceanic), remain a question of intense debate. Experts are similarly yet to agree on the precise quantities, timing and location of sources of emissions and emissions reduction. It is within – and not around - this uncertainty that the responsible fiduciary operates.
What is not a matter of debate is that demonstrable and additional emissions removal is the only offsetting counterbalance to current and future emissions. It is not correct to suggest without qualification that renewable energy already being generated offsets for emissions from non-renewable primary energy or from emissions from final energy use.
If climate impacts cannot be treated as smooth functions then the arithmetic of net zero cannot be treated as one-dimensional.
Notionally balanced energy production and consumption does not equal net zero emissions – in other words, not all gigajoules are created equal. Under this false logic, an investor could finance as much new fossil-fuel powered electricity generation as they could match with wind turbines without deviating from net zero.
Even if the entire global energy supply were to transition to renewables tomorrow, this would not be net zero. An investor’s geographically and technologically diverse renewable energy portfolio cannot be treated as a like-for-like equivalent to the emissions of its unequally geographically and technologically diverse non-renewables portfolio.
It is too simplistic and wrong to think of renewables and non-renewables as being on either side of some sort of weighing scale and balance them out. Greenhouse gases and climate change are natural scientific phenomena, not discreet units to be delineated on a balance sheet.
Renewable energy projects are not zero emission
This is the stark reality: net zero cannot be achieved through ‘greening’ the entire energy system at its current output nor by offsetting emissions at their current rate of increase. Absolute emissions must be reduced. The quicker they fall and the sooner emission reductions are ‘designed in’ to all economic activity, the more economically efficient it will be. Legal, regulatory and systemic-risk parameters can now be quantified with sufficient certainty that to fail to do so could well be construed as a breach of fiduciary responsibility. This has not yet struck home for many investors.
The assertion that 'claiming renewable energy holdings can be used to internally offset other portfolio emissions is akin to asserting that 0 + 2 = 0', has been repeated often of late to much mirth. It is, however, more accurate to say it is akin to asserting that 0.5 + 2 = 0, because crucially renewable energy projects are not zero emission. ‘Embodied’ emissions occur across the full lifecycle of energy infrastructure projects (and operationally zero emission buildings), most notably in the extraction of the raw materials from which they are constructed and the construction process itself. A 200-metre concrete hydropower dam is not carbon neutral on the day you switch it on.
Net zero presents a range of investment opportunities
Net zero decarbonisation can be modelled as a series of asset management decisions with its own financially and economically efficient frontier and return opportunities, not a rhetorical device or necessary sunk cost. A comprehensive net zero pathway, properly understood, presents a range of investment opportunities within and outside of existing portfolios for all investors. 'Real' offsetting itself (or ‘sequestration’) – where it is undertaken with reference to the dynamic complexity of climate science, 100% additionality and a holistic consideration of nature and local communities - is one such investment opportunity. This approach enables us to offer our end investors the only science-based and fully auditable (and most economically efficient) mechanism for removing their emissions from the atmosphere and reaching net zero.
Sustainable investment is about operating within dynamic, volatile and uncertain systems, not seeking comfort in fragile simplicity. The route to net zero is not a straight , nor a winding road; it is a horizon, to be handled humbly and with an approach firmly based in natural science, not spreadsheet accounting.