By Canada Life Investment Management Ltd. | Mar. 18, 2022
Global trends can provide strong tailwinds that foster growth. They tell us where cash flows are likely to grow, which drives share prices over the long term. And it’s hard to imagine a bigger trend than addressing climate change. In a recent article entitled, Net Zero Emission – Mission Impossible?, C WorldWide Asset Management took a closer look at what it’d take to get us to net-zero emissions by the middle of the century 1,2. C WorldWide’s Global Thematic Specialist, Morten Springborg, believes the massive value creation and destruction across industries and countries makes this transition “the biggest investment theme of our lifetime”.
We’ve only just begun that transition – and we have work to do. C WorldWide believes that global commitments to introduce carbon neutrality targets and tax emissions of greenhouse gases (GHG), namely carbon dioxide (CO2), are not enough to get us to net-zero emissions. In fact, a recent study estimates that the necessary price of carbon for achieving net-zero by 2050 – in the United States alone – is estimated to be US$34 to $64 per metric tonne in 2025 and $77 to $124 in 2030 3,4.
What exactly is a tonne of CO2?
A tonne of CO2 is equal to the emissions produced from a one-way trip between Paris and New York by plane. In terms of volume, this represents a cube the size of a three-storey building.
What has the world agreed to so far? The Paris Agreement, a legally binding international treaty on climate change, was adopted by 196 parties at the United Nation’s 21st Conference of the Parties (COP 21) in 2015. The International Monetary Fund has estimated that $75/tonne is necessary to meet the targets under this agreement, which were designed to limit global warming to 2˚C over preindustrial levels. Countries later scaled up their commitments in 2021 at COP 26. In Canada, the government established a national minimum price on carbon pollution starting at C$20 per tonne in 2019, increasing C$10 per tonne to C$50 in 2022. This price will then increase by C$15 every year until it reaches C$170 dollars in 2030.
C WorldWide points to Europe as the region that’s closest to setting a price on carbon that’s necessary to reach 2050 net-zero targets. The EU Emissions Trading System trades above €50/tonne currently, a large increase from prior years, and revisions with new targets have been proposed. Of the 64 carbon pricing initiatives already implemented or scheduled, this carbon market is the oldest, largest and most liquid in the world. It currently covers about 40% of the EU’s GHG emissions, with plans to expand scope to include parts of the economy such as maritime transportation. There’s also a chance that Europe becomes the first region to implement CO2 pricing into cross-border trade flows, under a proposal being considered by the European Parliament 5.
Why tax carbon? Emitting CO2 is what’s known as an externality, which means this cost is taken on by all of us rather than the emitter. The most effective way to ensure society captures this cost, according to C WorldWide, is to tax it.
Subsidies for favoured technologies, such as biogas or solar, add a slant to the economic transition that can get in the way. Springborg points to a few examples where this goes awry, such as the Blenders Tax Credit. This credit of $1/gallon awards the American renewable diesel industry the equivalent of $190/ tonne to offset CO2. This has resulted in 40% of U.S. corn production being used not as food but as feedstuff for the U.S. biofuel industry – meaning it’s more profitable for farmers to harvest subsidies than to grow food.
There are many efficiency initiatives or technologies without similar incentives. And what about those that are unknown to policymakers or even those that don’t yet exist? A rising price on CO2 creates a more competitive market environment where these options can compete on cost. Carbon pricing also pushes areas of the economy that can’t be immediately transitioned, such as steel production, to adopt mitigation measures that aren’t cost-effective today.
C WorldWide expects the market for carbon credits will grow to be one of the largest commodity markets. That’s why they’re focused on companies facilitating the transition to a sustainable future. Today that takes the form of investment in utilities with growing renewable energy capacity, for example. It also means they’re searching for the companies that will lead this transition in the future, which they believe are likely to grow to become the largest in the world.
Putting a price on carbon around the world will be key to supporting this transition with emerging technologies, but that’s not all. There are existing ways to mitigate emissions using nature to store CO2 in natural carbon sinks. Springborg suggests this could take the form of soil restoration projects, or the use of natural forms of carbon sequestration like reforestation or biochar (a type of charcoal that holds carbon in the soil).
These natural carbon sinks connect to real economic opportunities. Denmark has recognized the central role biochar is likely to play in reducing the impact of agriculture there, and reforestation could enable the use of wood as a primary construction material in more buildings. One recent study suggests Europe could save up to 1.3 gigatonnes of emissions by 2040 if wood were used as the primary material in 80% of new buildings 6.
How can clients invest in the ideas of tomorrow when that world will look a whole lot different from today? The Canada Life Pathways International Concentrated Equity Fund is purpose-built for this challenge, with a concentrated portfolio of 25-30 stocks that isn’t constrained to a benchmark.
C WorldWide Asset Management use trend-based stock picking to screen the massive universe of global stocks. The global trends and resulting themes identified by Morten and his colleagues help C WorldWide identify areas of opportunity. They pair this screening with a disciplined approach to analyzing company fundamentals to find firms that present sustainable growth opportunities with limited downside. Their unique investment philosophy and high active share results in a high conviction portfolio that’s designed to benefit today and moving forward. Talk to your Canada Life wholesaling team for more information.
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