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Mind the Gap: Environmental Investing and the Greenhouse Gas Emissions Gap

By Shelburne, Vermont Financial Advisor Josh Kruk
July 17, 2020

Each year, the United Nations Environment Program (UNEP) releases its Emissions Gap Report. The purpose is to assess the progress made toward achieving the goals of the Paris Agreement with regard to capping the future increase in global temperatures. The amount by which projected greenhouse gas (GHG) emissions still need to be reduced in order to meet the Paris Agreement’s targets is known as the “emissions gap”.

The latest report1, released late in 2019, provides updated regional and country-specific breakdowns of where the emissions come from. For example, China’s total emissions are more than twice those of the U.S., the second highest emitter. However, the U.S. remains the largest emitter on a per-person basis, with only Russia anywhere close.

The report also examines each country’s performance against its emission reduction goals and suggests steps that can be taken to make further progress. The detail is telling in terms of which countries have lived up to their commitments (e.g. European countries and China), which have not (the U.S. and Canada among others) and which countries that met their goals may have done so simply because they set their targets too low (e.g. India and Russia).

Regardless, the report’s bottom-line is clear: the global emissions gap remains large and daunting. In spite of real progress in some areas, GHG emissions have continued to increase, reaching a record level in 2018. Further, the likelihood of achieving peak emissions and beginning a downward trend in the next few years appears low.

The primary goal of the Paris Agreement is to limit future average global temperature increases to no more than 2oC, and preferably no more than 1.5oC. Even if all countries were to meet 100% of their current commitments, temperatures would still be on course for an increase of about 3oC. To stay on pace with the 2o threshold, emissions would need to be 25% lower in 2030 than they were in 2018, while the 1.5o target would require a massive 55% reduction.

What conclusions can we draw from this and what implications does it have for us as investors? First, the size of the commitment to emission reductions from countries will almost certainly have to increase by a multiple of current levels to have any chance of achieving the Paris Agreement’s targets. Second, based on the fact that emissions are still rising, the pace at which those commitments are put into action will have to increase aggressively over the next decade. Movement in this direction seems likely regardless of whether the targets are ultimately achieved.

The possible negative consequences for companies that are drivers of current and future emissions include greater regulatory constraints, faster development of competing technologies, higher costs, reduced consumer demand, and more aggressive asset write-offs, among others. While some of these companies may be able to adjust their business strategies on the fly to meet the emerging reality, this seems like it will be an increasingly difficult needle to thread.

By Shelburne, Vermont Financial Advisor Josh Kruk

1. Source for all data: "Emissions Gap Report 2019", UN Environment Program, November 26, 2019.

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