ESG Feature – Low carbon transition


There is a lot more to the transition than renewable energy and banning fossil fuels.”


John Anderson, Manulife Investment Management


tional asset class. “Carbon capture technology is in its infancy and is untested,” Anderson says. “It is an area the market has not cracked the code on how to do it successfully.” In addition, there is also an unattractive economic case. “To make carbon capture economic, what you are capturing needs to have some value,” Sheehan says, adding that she has heard quotes of $400 (£322) per tonne for carbon capture directly from the air, which is “crazy economics”. Carbon capture solu- tions at point of power generation are far lower and economi- cally viable today. So the carbon capture market needs more attention from regu- lators. “If there was a higher price for carbon, there would be a greater incentive to capture it and do something with it,” Atkin- son says. “Progress and policy on that front is lagging.” The European Union’s Emissions Trading System was created to put a price on carbon, but, unfortunately, only 15% of global carbon emissions are priced, according to Atkinson, and only 1% is priced at Paris levels.


chain in the electrification of transport, from batteries to sen- sors to software,” he adds.


Anderson points to studies showing that the “biggest bang for your buck” in reducing carbon could come from investing in energy efficiency, but this is not yet an institutional market. “A challenge with efficiency investments is that they are frequently small and widely dispersed,” he says.


Capturing the bad guys Carbon capture and storage is another angle. If CO₂ can linger in the atmosphere for thousands of years, as some scientists claim, cutting the level of harmful gas emissions will not help achieve the lower than 2-degree Celsius rise target set by the Paris Accord. But this is not a case of just accepting our fate because the damage has already been done. Planting trees, conserving for- ests and investing in tech that removes harmful gas from the atmosphere are ways to reverse some of this damage. The issue is that the carbon capture and storage industry needs to mature. “It is not something that is easy for someone to winvest in public equities and capture the upside,” Lees says. “That is going to need time before the technology becomes more widespread and cost competitive.”


A barrier for investors is that the market is not yet an institu- 30 | portfolio institutional April 2020 | issue 92


“This is an example of market failure,” Atkinson says. “Carbon emissions impose a cost that is not being paid for. Through a tax or a market-set carbon price we could correct that.” He prefers a market mechanism to a levy. “A flat tax is not ide- al because a company could take the hit, pay the tax and, in the- ory, pollute as much as they want,” Atkinson says. Hengerer describes carbon capture as being at an early stage but believes the world should prioritise stopping harmful emis- sions. “That’s where the low hanging fruits are. It’s always eas- ier


to avoid pollution than trying to clean up the mess


afterwards.” He adds that fining companies for breaching emission caps could be a good way to reduce greenhouse gas levels. “If pollut- ing a river is fined, why not polluting the atmosphere, too?” Despite the lack of interest in carbon capture, Hengerer remains optimistic that the world can build the tools needed to decarbonise the world. “It will require a global effort, but if one country managed to fly to the moon within a decade, the whole world should be able to build up the required industries – from mostly existing technologies – within three decades,” he adds.


Engaging in the transition


One of the reasons why renewables have surpassed fossil fuels is that using coal to generate energy in the UK is being phased out and will be illegal from 2025. Electricity generator Drax plans to close its coal-fired power plants in North Yorkshire three years ahead of the deadline and will stop using coal earlier than that. It has re-positioned itself away from fossil fuels. This has, Drax’s chief financial officer Andy Skelton says, made the company the largest renewable power generator in Britain, which also controls the biggest decarbonisation project in Europe.


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