Navigating the complexity of net zero carbon commitments

It’s the Wild West out there! Everyone and anyone can announce that they have a plan to achieve net zero carbon emissions. Who is checking the credibility of these plans? The burden of analysis will likely fall on the investment management industry.

However analysts will face a significant challenge, because policies intended to combat climate change will affect financial returns over a more than usual timescale for analysts. 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 couple of quarters.

One net zero plan that has caught our eye is the one published by the airline industry in late 2021. It is very ambitious, but could have enormous consequences for the airline industry if it cannot be delivered.

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. The remaining 97% will come from progress in the field of carbon capture, carbon offsetting, and most importantly of all, from a switch to sustainable jet fuel.

The good news is that sustainable jet 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 animal fat/ vegetable oil 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 doesn’t look as though the IATA plan squares with COP26 commitments to limit deforestation.

If governments bite the bullet and get serious about carbon pricing, industries with inadequate net zero plans might face existential crises.

Consider 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. Could investment managers give us their opinion please?