Ambitious carbon neutrality targets – teasing myth from reality

This paper is about the protection of assets through the carbon transition which is now upon us. Readers may recall my commentary of December 2020, “Carbon Neutrality – Myths and Reality”. Twelve months on and we still find ourselves in a world in which the “Great Reset” in the context described and the need for a massive push towards a Net Zero World is only gradually evolving. Our “new normal” was defined by The Economist in a recent article as the era of predictable unpredictability. Very true and not only for Covid-19 and its latest variants but also for climate protection as society’s collective mega-challenge.

Indeed, 2021 was another year in which the corporate world, institutions, governments, etc. have been racing against each other to set targets to achieve Net Zero first. Several additional countries made net zero pledges, including natural resource giants such as Saudi Arabia and Australia. Many PR departments, or the more recently created new heads of ‘ESG’ or sustainability chiefs, went way ahead of their respective managements to announce carbon neutrality by 2030 and, in many cases, Boards have accepted the positive messaging, and then handed it to the ESG executives to introduce appropriate measures.

Alongside the aspirational goal of carbon neutrality, a new word and activity has emerged – greenwashing! However, you cannot greenwash your emissions expressed in millions of tons.

The pandemic can be used to excuse some of what was attained in 2021 but whatever the excuse, it doesn’t look good: CO2 emissions surged with the pandemic recovery, and overall coal demand grew by roughly 6% (IEA estimate), further threatening Net Zero goals. With it, the risk has increased that the ambitious green goals will be disappearing into the ether. Let’s look at some of the issues.


The world was hugely excited ahead of the summit with great hopes and expectations routinely expressed. The result was rather disappointing when the actual national GHG reduction pledges and measures are reviewed. It was, indeed, a transition impossible with a whopping 38,457 delegates attending the largest such summit in history. Thousands of scientists, policymakers, NGOs and consultants debated, but few actual industrial/corporate representatives or chiefs from either the old world or the newly dominant technology sector were there and, very poignantly, no farmers, agricultural representatives or forest landowners either. (I will come back to the importance of nature-based aspects later).

On the brighter side, we saw signs of solidarity and some level of awareness that many countries, industries and sectors with the most negative GHG effects need support to drive their transition. Adding to that was the resolve that coal usage must be phased out. The global forest sector which will play a pivotal role going forward was discussed. However, this was more in the context of limiting deforestation in the Amazon (which adds to CO2 emissions) than in boosting new tree planting. These are small steps only but to decelerate global warming soon, we need to remove huge volumes of GHG already in the atmosphere. At least this is a positive step.

Public Perception and the Role of the Media

Last year’s public debate was driven by a heavy emotional emphasis (remember the famous “blah blah blah” from Greta Thunberg) and less rationality. The darlings and opinion leaders of the media world, social or old-fashioned print, were and still are climate activists, scientists, and the inevitable IPCC.

We continue to see much PR along with more and more pledges. These, however, focus mainly on the avoidance and reduction of GHG emissions and as before, this is where the public debate often ends. Emissions reduction is essential but is only part of the story.

Even if an emitter pledges to halve its emissions, that still leaves the other half remaining to be compensated or sequestered. In the absence of any ground-breaking engineering technology, carbon offsets are vital and the only natural and immediately available way still lies in land management – with forests at the forefront.

GlenSilva forest

As described in my last commentary, the most efficient, cost-effective method of capturing carbon and reducing atmospheric CO2 is to increase the global biomass of trees or woody vegetation (ETH Zurich). Planting trees and establishing new, greenfield forests is one way but it takes time for those young trees to sequester meaningful volumes of carbon. Another way to achieve set targets is via reducing harvest volumes and extending production cycles on suitable properties. The first such voluntary projects to generate “Forest Verified Carbon Units” are underway, especially in Europe and North America. The additionality and permanence of the emission reduction (i.e. through holding additional biomass in forests) is the key aspect for such projects.

Peatland restoration and rehabilitation is another critically important aspect of our response to the climate and biodiversity emergency. They store about 30% of global carbon on three percent of the land area (UN-FCCC), and as such, are even more efficient than forests. Peatland absorb CO2 from the atmosphere and stores it via the biological processes in the peat for the long-term. Restoration projects are underway, for example, in Ireland, Poland, Germany and the Baltics. As with agriculture, the challenge lies in measuring and verifying such removals.

Regenerative agriculture, including reduced or no-till farming, extends the potential for carbon capture and increases productivity by allowing soil to regenerate/heal, improve water cycles, increase biodiversity, enhance ecosystem services and, above all, sequester carbon. Conventional arable farming has been a source of GHG as farmers have ‘mined’ soil organic matter. This can and should be reversed.1

Agroforestry is another niche trend where trees are grown around or among crops or in pastureland. Planting trees on agricultural land can lead to the production of more (and more nutritious) food, while sequestering carbon, improving soil fertility, preventing erosion and improving the regulation of water cycles.

The EU and the Role of Economic Blocks

The European Union, or rather the member states, I am afraid to say, have not covered themselves in glory recently. The way the EU has dealt with COVID-19 has driven it further apart at a time when a close collaboration in a crisis unseen before was desperately needed. That should make us concerned as to how the EU will be able to tackle climate risk.

The Commissioner responsible for delivering the Green Deal stated that carbon removals are “vital” to keep the EU’s climate commitments within reach. Very true. However, and disappointingly, in its climate change regulation the EU over-emphasized the role of “carbon farming”. The fact is, farmland-based carbon removals are way more complex to measure and verify/certify (hence, expensive to generate); forestry would have been and remains a lot more efficient! Most farmland in the EU, subsidised by the CAP, continues to be managed in a way which results in net emissions – there is a very large super-tanker to turn around.

On Market Dynamics – Green Wish has led to Green Wash

We continue to see an exploding demand for carbon offsets of all kinds. I am shocked to watch the level of greenwashing sometimes represented by the most obscure “projects”. The number of carbon brokers, project developers and other such platforms has increased like thistles on grazing land. Buyers of all sorts of offsets appear to be either completely ignorant, agnostic, ill-informed or, even, just willing accomplices.

There are significant differences in the quality and effectiveness of such credits or certificates, and so are the prices for them, which brings me to a main point – what is the fair price of carbon?

Twelve months ago, when I said that I had no doubt that carbon market prices will continue to increase they did just that; admittedly, however, they have exceeded my expectations. Prices in the New Zealand ETS have doubled in 2021. In Europe, EUAs have continued their staggering bull-run to reach an all-time high of € 90.75 in December, from their low €30s in January 2021.

Carbon Price History (monthly average*)

Carbon prices 2011 to 2021

Source: Craigmore
* EUA price in Euros converted to NZD at 1.66

As a result, the costs for emitters to offset their pollution have steeply increased…or so you would think…but have they really? Basic principles of economics tell us that if you can buy the same asset or instrument at a cheaper price, say $8, in one market, why would you pay, for example $30, $40 or even more for what appears to be the same underlying asset? In the carbon markets the twist, however, and this is important to understand, is the large difference in price of what to all intents and purposes appears to be the same instrument, and is a reflection of very substantial differences in the effectiveness of the underlying instrument(s). Which brings me back to my comment in the introduction: Many think they have neutralized their footprint, but in most cases they have not!

To illustrate, ‘Forest Verified Carbon Units’ which are certified to comply with a standard set of rules by recognized institutions (e.g. VERRAs VCS, ACR, Gold Standard – who exist to ensure that these carbon offsets actually originate from effective climate protection projects) command a premium. Such a CO2 certificate equals 1 ton of stored CO2 and can be sold to and ‘retired’ by emitters to offset their emissions. BUT, at what price?

By contrast, voluntary carbon credits created from projects that lack rigorous methodologies and audit (REDD+ ‘credits’ from the Amazon, for example) have a different and lower value for a reason. One cannot even arbitrage between such different standards and markets.

But how shall we distribute the additional costs of carbon offsets and of the transition period overall? Solving for these costs is, indeed, the huge responsibility for society and for global markets.

Management of corporate entities should recognize and accept that regular and substantial expenses to get to “Net Zero” will directly impact their net profits or enterprise value, and shareholders and other stakeholders collectively need to be willing to take on some of that burden. If not, the short-term future impact will be that investors will sell those shares of companies that are not “sustainable”. An illustrative quote from a leading European family-owned group runs, “When it comes to net zero, either do it properly or let it be”!

When it comes to fighting to save the planet, we should be in a race to the top not a race to the bottom. In other words, the typical economic model of price arbitrage as a means to achieve economic reward, here through cost savings, must not apply to carbon neutrality strategies. Rather, corporate and government actors should be diverting increasing economic resources to the fight and those who are prepared to divert the most and pay the highest premiums should receive the highest rewards, through recognition and attractiveness as sustainable actors and an inevitable increase in inward investment, all set against an ESG regulatory framework that is increasingly and rightfully pushing in this direction.

The Pivotal Importance of a Global Carbon Standard (Supporting a Global Marketplace)

I agree with Mark Carney and other masters of the financial universe that a global standard is desperately needed and is a prerequisite for a functioning global carbon market where offsets must be relevant to the emission and/or sequestration. A standard that provides consistent principles, definitions, metrics and evidence of effective strategies to meet targets in the real economy.

The sobering reality is that many countries have introduced a national ETS or are currently working on the development of such national standards (for example the UK, France, Switzerland, etc.). “Nation first” is very shortsighted as emissions don’t stop at the Channel or the river Rhine.

Carney’s estimate about the total cost of the global transition to be about $4tn every year for the next three decades caused a heated debate. Does it really matter how many billions or trillions are needed to make that transition? This is extremely difficult to quantify anyway, way more important is the fact that there are now more than enough readily available resources to do the job.

Change in Climate – the Economic Risk

It is worth noting that the emissions, offsets and pricing we have discussed above are not the only financial issues facing companies and managers/custodians/owners of assets due to climate change.

During 2021, a number of new legislative changes took place, especially in Europe where the EU seeks to be at the forefront of addressing climate change. These changes require companies and their owners to address the financial aspects of climate change relating to their own activities. Addressing climate change now translates into an economic reality both in the ‘do no harm’ sense but also in the obligation to adapt to ‘provision against impact’. This is already beginning to focus minds in management of assets, be they agricultural, industrial or commercial.

Not only must companies make clear and verified assessments of their emissions, and how they are making changes to address them, they must also look at their locations, acreage, assets and operations and review through analysis what potential physical risks they face from the change in climate not only in transition but in adaptation (mitigation) to combat the physical risk created by climate change, or Physical Climate Change Risk (PCCR).

Addressing the risks: Listed companies (and private companies with >250 employees), asset managers investing in listed companies, institutional investors and pension funds all now have an obligation to assess their portfolio exposure against the physical impacts of climate change and to make provision for the possible outcome, disclosing any risk on the balance sheet; this is now required by the EU, UK and increasingly other regions (the TCFD disclosures that are almost universally accepted, for instance). PCCR risk must not only be understood but addressed!

The requirement is for a knowledge of the taxonomy (now published) and then adaptation in practices and operations to address the issues that arise. This is now the time of transition: even though the requirements are confusing and, in some cases, still pending, transition has started and 2022 will be the year when it becomes the focus of any capable asset owner or manager.

It is now possible to be aware of and to assess in detail the weather events that are coming as a result of climate change. The pathways have been finely calculated and set out and these pathways take into account the many anthropogenic contributors to the ongoing changes in climate and its effects. Using this analysis, it is now possible to predict extreme and also chronic (longer term) climate events and thus the economic impact of those events. It is this information that advises on the impact and hence, the costs that must be provided for, or spent by asset managers and owners.

To Conclude: 2022 – the Year of Transition

I have no doubt that in the coming year(s) many emitters will no longer get away with greenwashing/trading indulgences to anything like the extent of the past. The world is now in active mode. Companies and investors must now answer for their positioning and thus provisioning for physical exposure as well. Shareholders, investors, pension fund contributors and other stakeholders will want to know how exactly a carbon footprint has been reduced or even neutralized for the past 12 months. And they will also want to know that the physical risks their assets are exposed to have been provided for.

Gigantic sums of money will be paid by institutions to ensure that they will make it through that transition, the transition to neutrality and the transition to protection of assets and infrastructure against assessed impact. Success can only be claimed when atmospheric CO2 ticks down one day….

100 years ago today, on January 5th 1922, the legendary Irish explorer, Sir Ernest Shackleton, died suddenly aboard his ship Quest, while it was anchored in Grytviken harbour in South Georgia, shortly after the start of another Antarctic expedition. For the 1914-1917 Trans-Antarctic Expedition, Shackleton’s ship was the “Endurance” (named after their family motto “By endurance we conquer”).

“Superhuman effort isn’t worth a damn unless it achieves results”
Ernest Shackleton from his book “Endurance”

With best wishes for a prosperous 2022!

J J Naegel

1. See “Dirt to Soil” by Gabe Brown

About: Josef Naegel is a founding partner of GlenSilva GmbH and a partner in Craigmore Sustainables Group. GlenSilva is an investment advisor to institutional clients, including family offices, on timberland, farmland investments and carbon sequestration strategies. Josef also sits on Craigmore’s Forestry Investment Committee, having worked with Craigmore for nearly 10 years.

Disclaimer: The information contained in this document is confidential and is supplied to you solely for your own information. This document may not be copied or further distributed to any person or published, in whole or in part, for any purpose. The responses expressed herein are those of Josef Naegel‘s as of January 2022 and are subject to amendment or revision at any time based on market and other conditions. Forecast and forward-looking statements are based on the reasonable beliefs of Josef Naegel‘s and are not a guarantee of future outcomes. No representation or warranty, express or implied, is made as to the fairness, accuracy or completeness of the information or opinions contained in this document. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. Performance indications are estimates only and actual results may differ materially from those described herein. Any decision to invest should be made solely on the basis of formal legal documentation to be provided separately.