The backstory for a binary choice for environmentally clean aircraft, is that:
1. Global aviation warms Earth's surface through CO2e and net non-CO2 contributions.2. Global aviation contributes to anthropogenic radiative forcing.3. Non-CO2 impacts comprise about 2/3 of the net radiative forcing.4. Comprehensive and quantitative calculations of aviation effects are measurab,
5. Data are made available to analyze past, present and future aviation climate forcing.
Source: IASC.
Aircraft emissions have fallen by ~5% over the last four decades, as revenue passenger kilometers (RPKs) increased by ~5.8% p.a., and fuel sales increased by ~2.2% annually. If aviation is to meet its CORSIA commitments to reduce aircraft GHG emissions to Net-Zero by 2050, that requires reducing fuel burn by 5-10% p.a., with a parallel reduction in emissions. The conclusion is that new aircraft technology must be invented within the next 10 years, and be successfully introduced into airline service, within the next 20 years, and replace the ~30,0000 commercial aircraft in service, within the next 30 years, to achieve those fuel burn reductions, and engine emissions cuts. https://www.transportation.gov/sustainability/climate/transportation-ghg-emissions-and-trends
Asset class carbon stigma: Abandoned Asset exposure in the absence of fuel burn and emissions engine technologies
Asset class carbon stigma.
This scenario is as of 2022, and is based on only two emissions options on the table for aircraft emissions.
1. NASA Aeronautics technology is researching potential technologies that will reduced fleet fuel usage and harmful emissions. Specifically, the Advanced Air Transport Technology Project under the Advanced Air Vehicles Program is investing in technologies such as:
1. Small core engines.
2. Fuel-flexible combustors.
3. Electrified aircraft propulsion, This presentation will provide a brief overview of these technical approaches as well as a NASA Aeronautics budget outlook.
GE, Pratt & Whitney and Rolls-Royce are the only engine manufacturers with the capability to develop engines that reduce engine emissions to Net-Zero levels, and after that to eliminate emissions completely, the Zero-emissions aspiration.
2. The three manufacturers are offering only one investabel solution, which is the geared turbofan engine (GTE) that powers short to medium haul, narrowbody aircraft. They have no proposal on the table that addresses the Middle of the Market or the long range market. 3. In effect the solution is to replace a gas turbine engine with a gas turbine engine, the only emissions difference, is that the GTE reduses emissions by ~1% to 2% p.a. over the long term.
4. In looking further afield for engine emissions solutions, the options are electric engines powered by battery, hydrogen powered engines or a hybred of the gas turbine engine with an electric generator.
If a scenario was emerging in which the ICAO CORSIA scheme fails to address the emissions from gas turbine engines by 2030, and no viable Net-Zero engine emerges to replace them, then aircraft would continue to emit high levels of CO2.
One scenario is that aircraft, as an asset class, could be stigmatized because:
1. They could rank as the worst polluters in the transportation sector.
2. They could be compared to brown asset and subprime mortgages.
3. They could receive lower credit ratings.
The experience from the sub prime mortages market failure, shows that aircraft investors could behave in a similar fashion. 1. They could flee the entire market.
2. They could stop lending to companies thought to be too exposed to aircraft as an asset class.
The latest vintages of subprime-based securities had the worst credit risks with some borrowers not paying even the first mortgage instalment. Early vintages had much lower levels of credit risk. Many corporates among utilities and electricity production, while not among the worst polluters, are still emitting high levels of carbon. They may also be subject to the same carbon stigma as the worst emitters in their sector. And if they are, then the same could happen to aircraft as an asset class.
When it comes to stigma on an asset class, financial markets can lose their ability to screen risks.
Once exposure to subprime became suspicious, even the early vintages of subprime-based collateralised debt obligations became dubious. As the subprime crisis made it clear:
1. Compounding a stigma with uncertainty on the degree of exposure.
2. Adds up to a risk of financial instability.
At the national level, four nations –
China, USA, India, and Russia –
accounted for a majority of worldwide carbon emissions
in 2019. Bloomberg Terminal accessed June 24, 2021.
"The top 1% of most polluting firms
account for 40% of total Scopes 1 to 3
carbon emissions in 2018." (Ehlers et al. 2020).
Caveat on model.
A caveat on our model: The research referenced herefocuses on the possibility that green assets do better in the low-carbon state and brown assets do better in the high-carbon state.
This may or may not be true. Investors consider many factors to evaluate the payoffs for assets, for example, whether climate-themed investments or not, will they have good or bad returns, the probability that the world moves to a low-carbon economy, and the prices that investors are paying for green and brown assets today based on their preferences.
An asset's impact on climate change does not determine its expected returns.
Expected returns can be determined by many things such as payoffs, probabilities, and preferences.
Spending hundreds of billions of dollars more on clean energy isn’t as big a lift as it might seem. Research done by BloombergNEF and Bloomberg Philanthropies found that G-20 countries spent $3.3 trillion subsidizing coal, oil and gas between 2015 and 2019.
"According to the International Energy Agency, carbon emissions fell in 2020 but are expected to near 2018-2019 peaks again in 2021 and hit a new peak by 2023."
.jpg)
The reputation of the commercial jet aircraft was based on quality manufacturing and safety.......... until the set backs with the B737MAX, B777 and B787.
Source: Akshat Rathi, Bloomberg.July 20, 2021, 1:00 AM EDT Updated onJuly 20, 2021, 6:52 AM EDT
Less than 15% of the $2.4 trillion in government spending to support the post-pandemic economic recovery has gone to investments in clean energy, according to the International Energy Agency. “It’s a good start,” said Fatih Birol, executive director of the IEA, “but the money is not sufficient” to put the world on a path to net-zero emissions by 2050. The majority of the $380 billion in green spending is happening in advanced economies, when it should help accelerate transition to clean energy in emerging countries. The lack of sufficient green spending means that global emissions could go past their 2018 peak as soon as 2023. To keep global temperatures from rising above 1.5°C, the world needs to halve its emissions by the end of the decade relative to 2018.
Less than 15% of the $2.4 trillion in government spending to support the post-pandemic economic recovery has gone to investments in clean energy, according to the International Energy Agency. “It’s a good start,” said Fatih Birol, executive director of the IEA, “but the money is not sufficient” to put the world on a path to net-zero emissions by 2050. The majority of the $380 billion in green spending is happening in advanced economies, when it should help accelerate transition to clean energy in emerging countries. The lack of sufficient green spending means that global emissions could go past their 2018 peak as soon as 2023. To keep global temperatures from rising above 1.5°C, the world needs to halve its emissions by the end of the decade relative to 2018.
Reality check.
Brown assets are unpopular because they contribute disproportionately to climate change. Because of uncertainties surrounding the successful implementation of the ICAO CORSIA scheme , the air transportation industry has to confront the obvious possibility that climate mitigation efforts may fail, the transition to a low-carbon economy may not materialize, and the Paris Agreement temperature targets for 2050 may not be reached.
The two faces of brown assets.
Downside.
The discussion about climate-themed investment choices, generally treats brown assets as high risk investments because cost and uncertainty of transitioning them to a low-carbon economy.
Upside.
Some analysts take the opposite view. Brown assets could turn out to be highly valuable if the world fails to transition out of the high-carbon economy because:
1. The negative media scrutiny is so intense about fossil fuel energy that it may may cause brown assets to be underpriced (generating higher expected returns) and;
2. because brown assets may provide a valuable hedge against the costs of climate change in a world that failed to transition to a low-carbon economy.
Implications for investors.
1. Institutional investors make investment decisions that deliver increases in wealth at a chosen level of risk. If the Paris Agreement targets are not reached , the hard to accept reality, is that brown assets – those that contribute most to carbon emissions, such as fossil fuel exploration and oil production companies – may continue to offer high returns.
2. The trend is to believe that brown assets may continue to thrive only if the hoped-for transition to xxxx fails.
3. As a result of this distopian possibility, investors tend to implement climate-themed investment strategies presuming that brown assets would generate “risks to cash flows if the transition to a low-carbon economy happens."
3. The contrarian outlook is that green assets – the renewable energy companies and those that make products dependent on renewable energy – will thrive in a successful low-carbon transition.
Divesting from oil has its issues.
Many experts point to what they see as a lack of progress toward transition to a low-carbon economy. If that is the case, some argue that institutional investors subject to fiduciary duties of prudent investment, including the duty to diversify, should not divest from brown assets.
Outlook
Optimism about a future transition to a low-carbon economy rests on two assumptions.
1. The assumption that as-yet-unavailable breakthrough technologies will render fossil fuels uneconomic.
2. The assumption that nations will cooperate to implement and enforce carbon mitigation efforts.
The contrarian investor may argue that:
1. Both assumptions are far from current reality.
2. Neither may occur in the future.
3. As-yet-unavailable breakthrough technologies or future engineering advances, may never materialize.
4. It is proving difficult to scale-up the most important green technologies.
5. Some technologies are highly dependent on relatively scarce minerals.
6. The largest carbon producers, the USA, China and India would have to accept the largest burden of the cost of transitioning to a low-carbon economy.
7. International cooperation is little in evidence has beyond countries making unenforceable pledges to do better by distant dates.
8. International cooperation on the level needed to address climate change is unprecedented in human history. I
9. It is unlikely that nations will delink cooperation on climate from areas where their national interests conflict.
14 These uncertainties require us to confront an obvious possibility: climate mitigation efforts may fail, including the hoped-for transition to a low-carbon economy.
The logic of investing in green assets.
Efforts are being made to mitigate the harmful effects of climate change by transitioning the economy away from one with high-carbon intensity to one with lowcarbon intensity. It is expected that a successful transition will reward investors in low-carbon (“green”) assets and punish investors in high-carbon (“brown”) assets.
Doing well by doing good.
The hope is that by investing in green assets and divesting from brown assets, investors can reach the best of all goals: doing well by doing good.
Doing good but making the wrong choice.
Climate change is real, but a move to a low-carbon economy is mostly absent for now. What if efforts to mitigate the harmful effects of climate change are not realized? The economy will remain in a high-carbon state with all the negative implications tha tfollow from that. to a low-carbon state?
How do investors view the climate change issue?
On September 9, 2021, Harvard University announced that its endowment would no longer make “direct investments in companies that explore for or develop further reserves of fossil fuels.” The decision was made on the basis that Harvard does not believe such investments are “prudent.” Harvard’s endowment manager “is building a portfolio of investments in funds that support the transition to a green economy.” Harvard’s decision is in line with much current thinking about the implications of climate change for investment decisions. BlackRock has argued for investments in “companies with a well-articulated long-term strategy, and a clear plan to address the transition to net zero.”