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The Many Challenges of Going Green

The Many Challenges of Going Green

It’s not that easy being green.


Issues to be addressed in this research paper

A few weeks ago, I attended Institutional Investor’s European Pension Fund Symposium which was quite handily (at least for me) held in Copenhagen this year.  Although the symposium was not specifically about climate change, it didn’t take long before it became obvious to me what was on everybody’s mind. Various wildfires (mostly in the US) and floodings (mostly in Europe) have made it painfully clear to pretty much everyone that something rather drastic must be done now unless we are prepared to accept even more dramatic incidents in the years to come.

Having said that, net zero proposals are simply not enough. This research paper is about why things are not that simple; why even more radical action is needed now in order to minimise the problem.  I hope that, by reading this paper, you will realise that this problem simply cannot be fixed anytime soon. This should impact your portfolio construction, which I will touch on towards the end.

One more point before I start.  I have not been as productive in recent months as I would like to be, and I owe you an explanation why that is.  As I informed you earlier this year,  I am in the process of setting up a Danish subsidiary to Absolute Return Partners, a decision which has been dictated by Brexit.  Over the last few months, much of my time has been allocated to a very laborious application process.  Dealing with regulators is never easy!  The good news is that we are now only a few weeks from submitting the application to the Danish financial regulator.  In other words, I can soon begin to allocate more time to research again.

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A few hard facts

Although there are still a few who argue it is not manmade, the facts are overwhelmingly in favour of the argument that the ongoing change in climate (a fact which is disputed by hardly anyone) is a by-product of growing industrialisation.

The argument in favour of human causality becomes particularly strong if one looks at studies where ice core samples from various glaciers have been analysed.  The beauty of this technique is that one can collect highly reliable data, on for example CO2 concentration levels, over hundreds of thousands of years.  Planet Earth has been through plenty of glacial cycles over the last 800,000 years, i.e. our glaciers provide a wealth of information.

Now to the bad news. The rise in CO2 levels since the beginning of the industrial revolution is stunning (Exhibit 1).  As you can see, concentration levels have always varied but, until post-industrial times, always in a relatively narrow range of 170-300 ppm (parts per million).  Now, some 250 years into the post-industrial era, concentration levels have risen to well over 400 ppm.  Therefore, one can no longer argue that humans have had no impact on CO2 emission levels.

Exhibit 1: CO2 emissions, last 800,000 years

So far so good (!), but is there any evidence to support the argument often made by the green lobby that rising CO2 concentration levels is the reason why the planet is getting warmer?  If you are in denial, I suggest you take a look at Exhibit 2.  As you can see, the correlation between CO2 levels and temperature is almost perfect.

Exhibit 2: CO2 concentration in atmosphere vs. temperature, last 800,000 years
Source: National Centers for Environmental Information

You often hear deniers argue that, although the climate is changing, you cannot blame man for that and, furthermore, there is little one can do about it anyway.  Regrettably, and for reasons I will come back to in a moment, the deniers may be right about how difficult the task will be, but not for the reasons they think.  

Before I go there, though, allow me to make another point.  One could argue that the link between CO2 concentration levels and temperatures, as is so evident, is due to the relationship between temperatures and the solubility of CO2 in the ocean. That is at least partially correct, but research has shown that the majority of the correspondence is consistent with feedback between CO2 emissions and climate (source: National Centers for Environmental Information).  In other words, there is now firm evidence to support the thesis that higher CO2 levels and higher temperatures go hand in hand.

The seriously bad news

Scientists increasingly subscribe to the view that every tonne of CO2 causes about the same amount of warming, no matter when and where it is emitted (source: International Panel on Climate Change).

Secondly, and most worryingly, it has become obvious that the rise in temperatures is not a function of present  CO2 emission levels but of the cumulative rise since the middle of the 19th century.  In fact, the link is nearly linear (Exhibit 3).

Exhibit 3: Global surface temperature since 1850 as a function of cumulative CO2 emissions
Notes: The black line equals historical data. The coloured areas show the assessed very likely ranges of global surface temperature projections, and the thick coloured lines show the median estimate as a function of cumulative CO2 emissions from 2020 until 2050 for the set of illustrative scenarios.
Source: Intergovernmental Panel on Climate Change

This finding has a genuinely profound implication, as it means that even if world leaders succeed with the policy of going carbon neutral, temperatures will continue to rise for hundreds of years.  If the aim is to limit the rise to +1.5°C, much more drastic action shall be required – going carbon neutral is not nearly enough.  We need to develop new technologies which allow us to remove CO2 from the atmosphere to stand any chance of limiting the rise to 1.5°C.

Let’s assume we manage to arrest the growth in CO2 emissions by 2050.  As you can see in Exhibit 4 below, for the next 200 years or so, temperatures will rise significantly regardless.  For at least another 300 years, temperatures will continue to rise although more modestly.  This is because the temperature rise is driven by the cumulative rise in CO2 emission levels.

Exhibit 4: Schematic impact on temperature from no growth in CO2 emissions
Source: Intergovernmental Panel on Climate Change

The story gets worse

As if that isn’t bad enough, the story gets even worse.  In Exhibit 5 below, you can see that, in addition to what we just learned, i.e. that the impact on global surface temperatures from rising CO2 emission levels is long-lasting, CO2 is far from the only greenhouse gas we have to worry about.

Exhibit 5: Effect of a one-year pulse of present-day emissions on global surface temperature
Note: I apologise for the grey shadows in the lower right corner of Exhibit 5, but this report from IPCC is still in draft form, hence the watermarks stating that.
Source: Intergovernmental Panel on Climate Change

The data has been provided by the CO2 emitting industries, i.e. the agricultural industry has reported the numbers on agriculture, etc.  The yellow bands denote the effect from CO2.  As you can see, they are much the same after 100 years as after 10 years, confirming my view that even if we attain net-zero, the climate will continue to change for hundreds of years.

The other colours correspond to other greenhouse gases.  As you can see, methane, which is often quoted as worse than CO2, does not last beyond a decade. C02¬¬ remaining in the atmosphere is part of what makes it such a problem.  This shows another problem with the net-zero policy.  There is no sense of risk management.  It presumes we will get it right the first time. However, if we use up the carbon budget in trying to get to net-zero and get it wrong, we have no more room to try again.  It's a double down strategy without a stop loss.

One final point.   Exhibit 6 illustrates HFC-23 emission levels in recent years.  HFC-23 is a refrigerant that was introduced after the CFC ban to protect the ozone layer and was used mostly in air conditioning.  In terms of warming up the atmosphere, it is about 11,000 times worse than CO2 and lasts for about 200 years in the atmosphere.  After the Montreal Protocol in 1985 to cut CFCs, HFC-23 was introduced.  The so-called Kigali Amendment was signed in 2016 to ban it.

Exhibit 6: Increase in global emissions of HFC-23
Source: K.M. Stanley, D. Say, J. Mühle

The green line and the dotted line are what the concentration of HFC-23 should be when counting the pledges made.  The solid blue/purple line is the concentration actually measured in the atmosphere.  As you can see, the pledges do not correspond to action.  The only good news is that the EPA under the Biden administration have finally passed a ruling for companies to capture and destroy the gas.  Likewise, China has reaffirmed its intention to stop producing it.  However, the chart reiterates the importance of actual production cuts over empty pledges.


COP26 is the 26th conference on climate change, currently being held in Glasgow (1-12 November). 197 countries will present their latest updated plans to reduce CO2 emissions.  It will be the “turning point for humanity”, Boris Johnson bravely declared a couple of months ago, but things are not that simple.  Let me explain.

In December 2009, Copenhagen hosted COP15.  The then Prime Minister of Denmark, Lars Løkke Rasmussen, made half-baked promises, just like Boris Johnson is doing now, and COP15 ended up being an unmitigated disaster with Copenhagen temporarily being named “Brokenhagen” in the world media.

Believing that the key to a successful outcome was a deal between the world’s two superpowers, Løkke Rasmussen and his team of negotiators paid so much attention to the US and China that many other important countries – including India, Indonesia, Brazil and Russia, all of which are critical to get the rise in temperature under control – felt steamrolled, leading to a complete collapse in the negotiations.  Now, Boris Johnson is about to make the same mistake.  Just like Løkke Rasmussen did twelve years ago, Boris Johnson is leaning against presidents Biden and Xi,  hoping that everybody else will sign up to a deal those two have agreed on.

Another problem facing Boris Johnson is that many EM countries are saying that they won’t agree to anything unless the richer nations start to honour promises made earlier.  Take for example the commitment made in Copenhagen, where the wealthiest nations committed to providing $100Bn to the poorest nations, allowing them to turn green(er) much faster.  Now, some 12 years later, $21Bn of the $100Bn has not yet been paid out.  In that context, it won’t make Boris Johnson’s job any easier given that the UK has just decided to cut back on its aid programme earmarked for climate change.

All over the EM world, the view is that climate change is a problem caused by the rich nations; therefore, they need to take the lead in fixing it.  Although there is some truth to that argument, it is still a phony one as far as China is concerned.  In 2019, the US emitted 5,107 million tonnes of CO2, making it the world’s second worst offender.  However, China emitted no less than 11,535 million tonnes, making it hard for the Chinese to argue that this is not their problem (source: World Population Review).

For all these reasons, one shouldn’t bet  too much on a positive outcome in Glasgow.  It is in fact quite easy to see how things can go horribly wrong there.  In that context, I should point out that, according to the latest climate research, if world leaders continue to sit on their hands, the average temperature rise since the industrial revolution will be nowhere near the +1.5-2.0°C agreed in Paris a few years ago but more like +2.5-2.7°C, which will be disastrous for many countries around the world.

Investment implications

The Paris Agreement, adopted by 196 nations in November 2015, is a legally binding international treaty which seeks to limit global warming to well below 2°C, preferably to 1.5°C, compared to pre-industrial levels.  The reason this is relevant from an investment point-of-view is that it is becoming increasingly evident that the temperature rise will not be limited to 1.5°C and probably not to 2°C either.

Precisely how much temperatures will rise is still being debated, and it is clear that certain areas will experience a bigger rise than others, but a consensus around +3°C for the worst affected areas appears to be building, and likewise for the global average which is settling around +2.5°C.

The obvious implication of a rise of this magnitude is (many) more extreme weather events – wildfires, floodings, etc.  Given how the public reacted last time Europe was hit by severe floodings, mostly in Belgium and Germany, it is not hard to imagine the reaction next time we have such an incident on our hands.  The pressure on our political leaders will be immense, and they will most likely react with ever more extreme measures, although – as I stated earlier – average temperatures will continue to rise for hundreds of years, whatever they do (short of finding a magic bullet).

This will most likely accelerate the phasing out of fossil fuels, even if the world, strictly speaking, is not ready for it yet; hence my projection that the phasing out of coal, gas and oil won’t take as long as the (so-called) experts believe.  The big oil & gas producers have caught on to this and have already dramatically reduced capex.  Declining capex in that industry always leads to declining output, meaning that an oil price of $150-200 (before going to $0) per barrel is not as farfetched as you may think it is.

An oil price of $150-200 will effectively act as a huge tax on economic activity and slow everything down.  I therefore predict that, before this energy transition is well and truly behind us, we are faced with some lean years where ΔGDP is worryingly low.  Worryingly, because in a world as indebted as it is, we desperately need some economic growth to services all that debt.

Adding it all up

Summarising my findings, it is obvious that going carbon neutral is not nearly enough if the aim is to limit the temperature rise to 1.5-2.0°C.  Negative CO2 emissions shall be required for that to happen.  Having said that, negative CO2 emissions are not possible without a major technological breakthrough (hence the mention of a magic bullet earlier), and a technological breakthrough of that magnitude shall require massive investments which will generate yet more CO2.  In other words, the problem will get worse before it gets better.

That is about how I can best summarise the ‘going green’ dilemma humanity is confronted with today.  This is not at all well understood but, when things are not well understood, the best investment opportunities typically arise.  My colleague, Alison, has recently published part I of her work on climate change;  part II is about to be published, and part III should be out sometime in the second half of November.  In there, you will find some specific ideas as to how you can turn a crisis into an investment opportunity.

Finally, allow me to mention David Ko and Richard Busellato.  The two gentlemen have contributed a lot to this paper, for which I am very grateful.  They delivered a brilliant but also a very troublesome presentation at Institutional Investor’s symposium in Copenhagen.  You can listen to their story here.  Alternatively, you should consider buying their forthcoming book, due out in mid-November.  I can’t think of many better ways to spend about £20, if climate change is on your radar screen (Exhibit 7).

Exhibit 7: The Unsustainable Truth
Source: David Ko and Richard Busellato

Niels C. Jensen

03 November 2021


Carbon neutral

You’re carbon neutral if the amount of CO₂ emissions you put into the atmosphere is the same as the amount of CO₂ emissions you remove from the atmosphere. Your impact is neutral, zero. Putting it bluntly, you’re maybe not making it actively worse, but you’re not making it better either.

Carbon negative

Carbon negative takes that idea a step further. You’re carbon negative if the amount of CO₂ emissions you remove from the atmosphere is bigger than the amount of CO₂ emissions you put into the atmosphere. Your impact is positive, meaning you’re actively doing something to better the climate.

At Compensate, we believe carbon negativity is the only way forward. The “safe levels” of CO₂ (350 ppm) were surpassed back in 1987, so we have both the historical responsibility, and it is critically urgent to actively clean up the atmosphere. Learn more about this.

Net zero, net zero emissions

Net zero is broadly the same as carbon neutral: Emissions are still being generated, but they’re offset by the same amount elsewhere. The “net total” of your emissions is then zero.

The confusion here is that sometimes net zero is used to talk about all greenhouse gases and sometimes it’s used to talk only about CO₂. Technologies play a big part in “net zero” as well: If a process generates CO₂, but also captures and stores it, it can be net zero. An example of this would be a coal-fired power plant that’s fitted with carbon capture and carbon storage tech. A plant like this could possibly qualify as net zero.

Most national and international climate goals are aiming for net zero by either 2030 or 2050. To reach it, emissions must be reduced, but offsetting and sequestering emissions are also absolutely necessary to reach the goals.

Zero emissions

This one should be easy, but it’s actually not. You’re creating zero emissions when there’s no CO₂ released at all. In our current system, however, no technology is truly zero emissions. Even the greenest of tech has so called embedded emissions. These are emissions that are created in the manufacturing of technology. So there might be zero ongoing emissions from use.

Low emissions, low carbon

9 times out of 10 this term tells us that we’ve wandered into marketing territory. You’re “low emissions” when you create less CO₂ than would be considered business as usual. But how much less? What’s business as usual? What are you comparing your numbers to? It’s a confusing term, and therefore best avoided, our sustainability experts say.

Carbon positive, climate positive

Marketing term alert here as well. Some companies have used these terms to describe their efforts to reduce emissions. Both slightly confusing terms are used to talk about what scientists would just call carbon negative.


About the Author

Niels Clemen Jensen founded Absolute Return Partners in 2002 and is Chief Investment Officer. He has over 30 years of investment banking and investment management experience and is author of The Absolute Return Letter.

In 2018, Harriman House published The End of Indexing, Niels' first book.