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Homaio is the climate investing platform that combines environmental impact with financial returns. In this newsletter, we will delve into a particular facet of this symbiosis : time.
In this edition :
🔥 The Story - The symbiosis between climate and finance: Time.
🎙️ Expert Insights - How does the EU ETS benefit people everyday?
🤪A new subscription period is now open - Invest in a financial asset built for price appreciation, while directly contributing to the European fight against global warming.
Homaio is the climate investing platform that combines environmental impact with financial returns. In this newsletter, we will delve into a particular facet of this symbiosis : time.
Time is the bridge between impact and finance in the context of carbon markets. Buying and holding EUAs (European Union Allowances) effectively removes volumes of carbon from the overall available budget. This has an immediate effect on available emissions allowances, and on their price signal.
Upon divestment, other effects come into play, perpetuating the impact on decarbonation trajectories. One of them is the time effect. A medium to long-term investment strategy is equivalent to delaying the release of carbon into the atmosphere.
We can actually size this impact. As we'll see below, timing emissions matters.
Scientific models allow us to quantify the impact on climate change coming from a certain volume of CO2.
Each molecule possesses a radiative forcing potential, meaning it contributes to global warming upon release. The IPCC defines a formula for calculating the Absolute Global Warming Potential (AGWP) of CO2, which quantifies the extent to which a certain amount of CO2 released into the atmosphere over a specific timeframe impacts surface temperatures.
Taking this, and combining it to the concept of the "time decay of CO2 impulse remaining" outlined in the Kyoto protocol has enabled academics to come up with "ton year accounting".
The purpose is to compute the actual effect on the environment from delaying CO2 emissions (or taking carbon off the atmosphere, storing it, and then releasing it back at a later time). They determine the duration for which one would need to delay the release of a ton of carbon to equate to avoiding the emission of one ton of CO2 initially.
Different expert studies have employed diverse methodologies to ascertain this number, so the ranges remain wide. But one of the fundamental academic papers of this concept (Moura Costa and Wilson (2000)) states that 1 ton of CO2 taken out from the atmosphere and held for 55 years can balance out the emission of 1 ton of CO2.
As mentioned above, investing in carbon allowances means that you are effectively taking EUAs from the overall "carbon budget" available in the economy.
The corresponding volumes of carbon are not being released during the time of your investment - your EUAs cannot be surrendered to regulators to fulfill compliance reasons. Hence, carbon investing has an emissions delay effect.
When to exit your carbon invesmtent position? One can decide to sell their EUAs back once the holding climate effect becomes equivalent to their yearly carbon footprint.
With the following assumptions,
- 55 years of delay in order to equate the value of 1 tonne of CO2 not emitted (Moura Costa and Wilson (2000))
- 5.4 tonnes of CO2 emitted yearly by the average European (The World Bank and IEA)
- €70 European Carbon Allowance Price
- Carbon investment of €5 000
Other benefits from delaying the release of carbon are even more straightforward. If we do not act now, it will simply be too late. Very soon.
From a political standpoint, it is convenient to regard climate urgency as a concern for future generations. Taking action today implies immediate sacrifices. Since we cast our votes in the present, politicians strive to ensure our present comfort to secure reelection. However, this stance doesn't align with the urgent reality of climate change—swift action is imperative.
First, the harm from CO2 emissions is irreversible. Waiting until the last minute to reduce emissions will make it impossible to reach humanity’s climate objectives.
Moreover, natural sinks are forests, soils, and oceans that absorb and store CO2 from the atmosphere. Climate change is diminishing their effects (by 20% and 7% for land and ocean sinks respectively) reducing their future capacity to mitigate climate change.
Finally, the more we wait to reduce emissions, the higher the global temperature will be when it will peak. According to a research paper by academics from Imperial College London, extending the peak of global emissions by 10 years results in a temperature increase of approximately 0.5°C by the year 2100.
As seen above, the EU ETS has a positive environmental impact by implementing a carbon budget.
Another facet of the impact of the scheme is visible in your daily life. You just do not know about it. The system directly channels the proceeds from carbon allowance auctions into green projects that we all take advantage from.
In an exclusive interview with Homaio, Eleanor Scott, an expert on EU carbon markets from Carbon Market Watch, discussed her involvement in the Life ETX human stories project. "The project tells how the revenues can be put to good use, improving peoples’ lives and empowering the green transition."
Homaio: How do carbon markets benefit individual citizens on local levels? What is their most important and powerful aspect?
Eleanor Scott: Carbon markets benefit citizens overall by incentivising emissions reductions by making it more expensive to pollute, helping to combat climate change and maintain a livable planet.
The ETS is one of the main tools chosen by the EU to tackle climate change making it a very important element of reaching the EU’s goals. The use of revenue generated from carbon pricing will be essential to tackle climate change. This revenue must be channeled to increase the affordability and access to emissions reductions such as home renovations, heat pumps, zero carbon transport and renewable energy. Currently, 100% of ETS revenue is earmarked for climate action by member states.
H: How is carbon pricing different than any other climate policy tool?
ES: Carbon pricing does not achieve emissions reductions alone. Proper implementation of complementary policies at member state level is needed - such as the correct enabling conditions for green investment under ETS1. Under ETS2, the upcoming extension of carbon pricing to fuel used in buildings and road transport from 2027, member state implementation of complementary policies such as emissions reductions standards and retrofitting schemes for homes that provide access for lower income and vulnerable groups will be vital. These complementary measures will have concrete and tangible benefits in the reduction of air pollution, improving the health of citizens and making our homes cozier and of higher value.
H: What is the “Life ETX ETS Human Stories” project?
ES: Under the human stories project of LIFE ETX we highlighted some of the direct benefits of carbon pricing to citizens who have benefited from the use of ETS revenue. We showed how ETS revenue is used to fund the just transition in Western Macedonia, for nature conservation and increasing cycling infrastructure in Lisbon, Portugal and to modernize the port of Ghent in Belgium. There are many other projects across Europe which bring tangible benefits to citizens.
H: How did the idea to work on the “Life ETX Project” emerge? What was the most interesting or surprising aspect for you?
ES: The LIFE ETX project was inspired by an awareness of the need to make people aware of the opportunities for improving the climate and social impact of the EU ETS. By increasing civil society’s awareness and knowledge of the functioning of the ETS and carbon pricing in general, the aim is to make people capable of campaigning for better policies and implementation.
The most interesting aspect of LIFE ETX is how little was understood about the EU ETS even among those interested in climate. The networks we have created through the LIFE ETX project will continue to share knowledge and learning with each other on how to improve the effectiveness and fairness of the ETS.
H: Are people even aware of the benefits that they have thanks to the revenues from the EU ETS?
ES: The Human Stories project which has highlighted some of the benefits to people that have occurred as a result of the investment of ETS revenue has aimed to make the impact of the ETS more visible in the lives of Europeans. As one of the main engines powering the EU’s emissions reductions, it is essential that we generate enough awareness of the need to reform the system to ensure it is capable of contributing to our climate goals. If we are not aware of the issues within the system it is harder to campaign for the needed level of ambition. Some of the wins from the latest ETS revision such as the earmarking of 100% of ETS revenues to climate action show the power of civil participation in carbon pricing policy making.
H: What do you think are the most important lessons from the “Life ETX Project”?
ES: The most important lesson from the LIFE ETX project is that of the importance of citizen participation. The level of ambition within the ETS has an impact not just on Europe but the whole world who are relying on Europe to be a leader in global climate action. Only through citizen participation will we create an EU ETS that delivers strong benefits to people and the planet. The payment for pollution under carbon pricing creates a large public resource of carbon pricing revenue that can be effectively mobilised to lower emissions and improve the quality of our lives, EUR 152 billion to date and increasing - revenue is expected to peak in 2035 at which point the EC 2040 climate target impact assessment expects the revenue will make up 0.7% of the total GDP of the EU.
H: What are the main ETS milestones in the near future that you are closely monitoring?
ES: Looking forward to the start of carbon pricing for fuel used in buildings and road transport under ETS2 in 2027, the need for citizen participation grows even further to ensure a just transition. As the ETS2 price will be levied equally across the entire EU, the Social Climate Fund was created to ensure access to vulnerable groups to renewable energy and emissions reductions investments such as zero emissions vehicles. Civil participation in the National Social Climate Plan process will be essential to ensure that the correct groups are targeted and that the right support measures are delivered.
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