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Wealth Management: Blog – In conversation with: Mike Azlen, CEO of Carbon Cap

Sophie Kilvert - Client Adviser

Listen to the interview

After a watershed year for climate change activism, I spoke with Mike Azlen, Founder and CEO of Carbon Cap Management, which provides climate change solutions related to the capping and reduction of carbon emissions. 2019 was marked by historic leaps in climate change awareness, resulting in significant changes in consumer behaviour, policy and investment attitudes. Despite the potential roadblocks 'green policies' may face in the aftermath of COVID-19, Mike remains hopeful that these are only short-term setbacks, focussing instead on how we can meet long-term emissions targets.

Carbon Cap manages the World Carbon Fund, a globally diversified fund investing in multiple liquid and regulated carbon markets, with direct climate change impact. Held in the Return Assets portion of the Exbury Fund, Carbon Cap offers an alternative investment opportunity to traditional equities, while making a positive environmental impact. It was therefore valuable to hear Mike's insights on carbon trading, the progress of the climate change movement, and the great leaps which still need to be taken to have a long-term, global impact.

Putting a price on carbon is now a widely accepted method for reducing carbon emissions, where the price of carbon is set to reflect the associated costs of climate change on the planet. This explicit pricing system forces firms and individuals to factor these costs into their production and consumption decisions. Emissions trading systems (ETS) are an effective way to implement carbon pricing and set emissions caps that decrease annually to facilitate achieving a climate policy target over time. In Europe, for example, a total cap is placed on emissions from all the largest carbon emitters, such as power, cement and steel companies, which together are responsible for around 1.6bn tonnes of annual carbon emissions. This solution ensures a definitive limit on the amount of emissions produced, but at the same time allows the market to set the price of carbon. Carbon allowances (equal to the emissions cap) are either allocated or auctioned to emitting entities, who can then trade these allowances between them. Firms with low abatement costs will reduce their emissions and sell allowances to firms with higher abatement costs, incentivising least-cost total emissions reduction. These carbon markets are highly liquid and regulated (unlike the carbon offset schemes that many may be familiar with) and are open to non-compliance entities such as banks and investors.  In 2019 over US$250 billion was traded through the EU and US markets.  

Mike maintained that ETS are one of the only policies which has really bent the curve of emissions on a large scale. In Europe, we have now reduced our emissions by 1bn tonnes per year. In a world producing 37bn tonnes of carbon per year, this policy is making a real impact. It's for this reason that countries like China, Indonesia and Mexico are all launching cap and trade programmes. At the same time, carbon pricing is helping shift the energy sector away from greenhouse gas emitting fossil fuels. In fact, on the 28th April, Britain achieved a record-breaking period of 19 days where we burned zero coal, a remarkable achievement considering the global crisis we are currently facing.

Whilst good progress has been made, much remains to be done in order that the goals set out in the Paris Agreement of 2015 can be achieved. The current price of carbon in the EU emissions trading scheme is around EUR 20/tCO2e. It is widely forecast by economists and policy experts that this price would need to rise to between 60 and 100 euros per ton over the next decade in order to stimulate the level of emission reductions required.  

Economic interventions to facilitate emissions reduction also promotes increased climate change awareness. In 2019, we saw Extinction Rebellion shutdown cities, Highstreet shops banning free plastic bags, and many more consumers adopting reusable cups and bottles. Amidst all of this, a 15-year-old schoolgirl took a stand against climate change, and ever since, the name 'Greta Thunberg' has reverberated across the globe. These changes signalled a development in attitudes towards climate change. 2019 was indeed the year sustainability became 'mainstream'.

These changing attitudes were not only reflected amongst normal consumers, but in the investment community too, according to Mike. There has been a greater recognition of the huge threat that climate change poses to investors in both equities and fixed income. For example, S&P and Moody's downgraded more than 100 fixed income issuers in credit rating in 2018, solely due to climate change-related risk factors. Meanwhile, the Task Force on Climate-related Financial Disclosures (TCFD) gathered momentum in 2019. 

Even in the current crisis, we are still seeing fundamental environmental change, as international travel and a large proportion of industrial production has come to a grinding halt. While it is possible that the world will simply revert to its old habits in a post-pandemic world, Mike remains hopeful. If anything, the pandemic has shown our ability to unite and collectively prioritise a global issue. The imposition of policies, restrictions and measures to deal with Coronavirus demonstrates that we are capable of real, meaningful transformation on a global scale.

As a result of these systemic changes, Mike observed, companies may change their working habits permanently. For those businesses which have been able to run effectively with employees working from home, more flexible working policies may remain in place, cutting costs and travel emissions. Companies who have been forced to depend on video conferencing may think twice about international travel from now on when connecting remotely may suffice. There is therefore a possibility that these sustainable practices and lower emissions may prevail beyond the regulations and requirements of lockdown. 

There is a concern, however, that green policies will be side-lined in a post-COVID-19 world where governments will be forced to dedicate huge sums of money towards restarting and sustaining their economies. Yet despite the possible short-term impact on 'green' spending, policymakers like Angela Merkel and Ursula von der Leyen (President of the European Commission) continue to stress that their commitment to climate change policies will not be threatened by the virus.

Focussing on the longer-term, Mike emphasised the importance of net zero targets, hoping for continued commitment to the Paris Agreement thresholds. Having already warmed the planet by 1 degree, we have only 10 years before we reach 1.5 degrees, wiping out 75 percent of all the world's coral reefs. Reducing emissions is crucial if we wish to avoid breaching that threshold. The European Emission Trading System targets an annual decline in emissions of 2.2 percent per year as of 2021, but globally, we are still far from the necessary 7 percent yearly decline needed to avoid such a breach. 

Mike emphasised that now more than ever, all policies, whether that be carbon cap and trading or carbon taxes, need to be used in the fight to reduce emissions. However, with only 20 percent of all emissions on the planet covered by a carbon tax or cap and trade system when China launches later this year, there is still a long way to go to move the needle.

This document is produced by Rothschild & Co for information purposes only.  This document does not constitute a personal recommendation or an offer or invitation to buy or sell securities or any other banking or investment product.  Nothing in this document constitutes advice of any sort and no responsibility is accepted in relation to the content accuracy or any reliance on the information provided.