Stockholm (NordSIP) – Asset managers who propose environmentally friendly investment products often argue that one of their contributions to a less carbon-intensive economy is their engagement with the companies they invest in. By asking questions and demanding measurements, they escalate climate change mitigation to the top of these companies’ management priorities. Not all asset managers, however, practice what they preach. The investment profession is not particularly carbon intensive, at least not relatively to the activities of heavy industry. Part of doing business for investors is travelling of course, and the carbon footprint of flights has increasingly come to the attention of the public.
Someone who earns hundreds of dollars per hour should dedicate each of these costly minutes to generating a return for clients, wouldn’t you think? Many use this argument to justify air transport in the industry. What we argue is that, in the pursuit of climate-change mitigation, the solutions are not “all or nothing” but rather progressive compromises that may seem small on their own but contribute enormously to mitigation, if applied globally. We decided to dig into the details, and find out what the considerations should be, including carbon compensation. We also interviewed Jens Olejak (pictured right), Managing Director Sweden & Director Sustainable Energy at South Pole, an international firm specialised in or carbon mitigation projects.
The short of it: simply said
For asset managers who want to align their behaviour with the standards required by investment companies, paying attention to flights makes sense. It doesn’t have to become a headache, however. When possible, this means finding a more climate-friendly way to travel than flying or skip traveling altogether. When it isn’t (and for many reasons, we probably shouldn’t stop flying 100%), buying carbon offsets is the way to go. Calculation methods are a little tricky and prices can appear to be all over the place. Therefore, it is more efficient for a firm to define a program than to let employees make their own choices. It is also more cost efficient, as economies of scale can be achieved.
Now for the nitty gritty, we wish you a nice read!
How should asset managers think about their air-transport dilemma?
“In general,” says Jens Olejak, “we should, of course, try to minimise flying and favour other means of transportation or communication, but it doesn’t mean that we should stop flying altogether. Whether in the context of business or leisure, it is important to meet other people and visit new places. Not only do we understand each other better, but we also bring valuable economic input to less developed countries that benefit significantly from tourism.”
In down markets, investment managers have historically found many simple and creative ways to minimize travel costs: from train travel to video conferencing, the solutions are time-tested and make economic sense. While face-to-face meetings remain essential and shouldn’t be sacrificed altogether, cost-consciousness could easily morph into climate-consciousness, as a first step. To understand the economics that underpins the decision to fly or not to fly is easy. Price is the first criteria that pops up when we search for a route on the internet. Here we made some calculations to show what the carbon-saving calculations look like.
What’s a flight worth in carbon tons?
As a standard example, we use a return economy-class flight from Stockholm Arlanda to Paris Charles de Gaulle, a 2h30min to 2h50min flight over about 1500km (twice). Right now, we can find return tickets, mid-week, two weeks from now, for approximately €100. From a pure business perspective, that seems rather affordable. From a carbon perspective, the calculation is a little bit more complex. According to the SAS calculator the emissions from the return flight will depend on the aircraft and cabin factor (how full the flight is). Taking the settings SAS suggests (a Boeing 737-600 120 seats with a cabin factor of 71.6%) the return flight should generate 333 kg of CO2, as well as a small amount of other emissions. On several other websites, however, the amount is completely different. On atmosfair, a site that offers carbon offsets to consumers, the same trip is said to have a climate impact of 754kg of CO2, or more than double! The flight distance is about the same as well as the aircraft, but to the direct emissions of 284kg, this estimate adds contrails, ozone formation and other effects of 471kg.
Contrails, short for “condensation trails” are the typical white lines that we see following a flight in the sky. These lines, composed of water in the shape of crystals, also have a negative effect on climate change in addition to direct CO2 emissions, as explained in Nature. Bilan Carbone from the French Agence the L’Environement et de la Maîtrise de l’Energie (ADEME), estimates that radiative forcing (RF) caused by contrails, is about twice that of the CO2 emissions from burning Kerosene.
For any carbon footprint calculation, Olejak recommends using the Greenhouse Gas (GHG) Protocol. It provides guidance on Scope 1, 2 and 3 emission calculations and is widely recognised. When it comes to flights, in particular, South Pole like many other organisations, relies on the UK Department for Environment, Food and Rural Affairs (DEFRA) which provides convenient tables for conversions. South Pole recommends using a RF adjustment of 2, following the recommendation of Kolmuss of the Stockholm Environment Institute in 2009 paper. South Pole’s online calculator provides a result of 0.546 ton for our Arlanda-Paris example, while local competitor zeromission comes to a result of 0.626 ton for the same journey. Other sites like atmosfair are a little more conservative (or a little more commercial, depending on how we look at it) and come to a footprint of up to 0.750 ton. Swedish-based consumer website klimatkompensera.se estimates the same flight at 0.94 tons, but we did not find the justification for this outlying estimate, as the link to their methodology was dead.
So what does flying compare to?
Greentripper has one of the more conservative calculators (at 750kg). It also provides metrics that highlight the proportion of a flight’s emissions relative to other activities. The average annual emission for traveling by car (15,000km) would account for 2.222 tons and the average annual European emissions amount to 7 tons. On atmosfair, we also find that the emissions per capita in India are 1.6 tons and the climate compatible annual emissions budget for one person is just 2.3 tons. On Myclimate, the CO2 footprint of a EU citizen is estimated to be 8.4 tons.
Ok, so… according to these figures, about 3 flights a year from Arlanda to Paris will make the planet dirtier than the entire footprint of an Indian person for the same period. Just one flight accounts for more than a tenth of the average emission of one European in a whole year, which is about 3 times the climate compatible annual emissions budget. What to do if we really can’t miss that meeting? In September, PRI in person will take place in Paris, and thousands of people are expected to fly there from all over the world, for instance. We have to be there. Can we not compensate by planting trees or doing something else, you may ask? Or would that just be a meaningless conscience-clearing exercise?
Buying indulgences or picking up your dog’s poop?
Some of us are old enough to remember the days we walked down the sidewalk, trying to avoid stepping into dog poop. What happened since then? Dog owners were shamed into carrying these thin plastic bags and picking up that warm present their darlings left on the pavement. Today, the vast majority of dog owners pick up poop, even when others are not watching. It’s considered normal. Carbon compensation, especially for something as CO2 intensive as flights, should eventually become normal as well.
“It isn’t unusual for people to compare carbon credits with the indulgences the Catholic church used to sell to sinners in the middle ages,” Olejak comments. “From what we see, it couldn’t be further from the truth. It makes no sense for someone to buy carbon credits to clean their conscience. If they are interested in compensating their emissions, they have already done the right exercise of downsizing their footprint or are in the process of doing so. No one has ever come to us saying ‘let’s buy carbon credit, so we can continue to pollute. If they wanted to continue polluting, why would they buy credits? No one forces them to.”
Perhaps flight shaming will increase the pressure to compensate flights, but ultimately, it should become normal. In fact, for several airlines, the reasoning has already evolved from letting customers choose to “offering” the compensation to passengers (or in other words, including it into the price). SAS, for example, youth flights and Eurobonus passengers can now fly guilt-free, with the caveat that SAS probably does not compensate for RF, as described above. Other airlines either offer options at check out or include it in the price. Norwegian Air Shuttle, for example, has earned the Global Climate Institute’s CO2 Neutral Website mark, as it has planted 13,000 trees in India, among other projects. Another important component of CO2 emission management for airlines is the upgrade of their fleet. The more modern and well-maintained the aircrafts, the more emission-friendly. Routes also matter, as the most CO2 is emitted during take-off, and therefore direct routes should be preferred to stopovers. Local airlines that offer a diversity of well-filled flights should be chosen over those that regroup their routes to hubs.
The economics of carbon offsets
While airlines may be doing their bit, it doesn’t hurt to do some more on our own, especially when flying is part of our business. If anything, attributing a monetary cost to flying over other non-carbon generating activities, may allow for a better prioritisation.
“The cost of carbon offsets depends on several factors,” explains Olejak. “Some projects can save more carbon at a lower cost than others, just like any other business. Location, for example, can change the economics significantly. A project in the Swiss Alps will be significantly more expensive than one in India, for example. Scale is another important factor. A run-of-river (non-dam) hydropower project in Vietnam, for instance will be cheaper than a cook-stove projects in Nepal, which are relatively small-scale. Finally, the certification will also play a role, together with the other measurable positive externalities of a project, such as the contribution to the SDGs. Gold standard is a certification that is linked to the WWF. It has an excellent reputation, and each project is linked to a number of SDGs which are then reported. The Clean Development Mechanism (CDM) is another good quality certification within the UN framework, even if CDM projects may be priced slightly below gold standard projects. Verra, also known as Verified Carbon Standard (VCS) are other credible certifications we use.”
Here are some examples of how much it costs to compensate for the Arlanda-Paris flight for different projects and from different providers:
South Pole’s Swedish-based competitor, Zeromissions proposes only one price (which represents a mix of product) for the flight: 157 SEK (equivalent to 23€ / ton). This offer is made in partnership with Myclimate (see below). The website does not specify if VAT is included.
Tricorona Climate Partner, via its online tool klimatkompensera.se, proposes three projects, of which the most expensive is a Gold Standard and CDM biomass project in Sri Balaji for a the equivalent of €33 / ton. The cheapest project is a Gold Standard and VER project for efficient stoves for the equivalent of €22 / ton. All prices include 25% VAT.
While South Pole only offers solutions tailor-made to businesses in Sweden, we have looked at its website directed to retail customers globally. South Pole proposes a number of projects. The cheapest is a VCS certified biomass to energy project in Thailand for the equivalent of 9€ / ton and the most expensive is a CCB and VCS-certified reforestation project in Columbia for about 17€ / ton. Somewhere in between, a Gold Standard Landfill Gas Capture project in China for the equivalent of €14.8 / ton. These prices do not include the Swedish VAT of 25%, which may be applicable for consumers.
We looked at a number of other international websites, where the numbers also vary significantly.
Carbon Offset proposes seven projects, ranging from €8.50 / ton (for an unspecified range of VCS and Gold Standard projects) to €15.60 / ton (for a VCS UK tree planting project). These prices include 20% UK VAT.
Myclimate proposes the same calculation and price as Zeroemission, but adds a range of projects that was not available on the other site. They ranged from €24 / ton (Nicaragua reforestation project) to €75 / ton (where at least half of the project would be Swiss-based), without specifying whether VAT is included.
At Climatecare.org, offsetting 1 ton only costs €8.55. A list of projects is provided and ranges from cookstove projects to wind energy but there doesn’t seem to be a way to select one over another and there was no clear mention of VAT.
Atmosfair offers compensation at €24 / ton without giving the possibility to pick a specific project. The website specifies that 90% of the projects are CMD Gold Standard. VAT is not specified.
Greentripper proposes a price of €12.10 / ton, including VAT. There is only one price, but the site gives a choice between two projects, one Uganda-based cookstove project and one waterfilter project in Kenya.
At FlyGreen, one ton costs € 8.75 and it is said to correspond to a solar panel project in India certified by VCS-Verra, but it does not allow to select any other project. VAT is not specified.
TerraPass offers a price equivalent to €11.70 to support a portfolio of projects, VAT is probably not included as it is a US-based website.
A market-based mechanism
“You have to remember that the market for carbon credits functions like any other market,” Olejak reminds us. “Everyone along the chain applies a market-based reasoning, from the project owner to the credit broker. Because some people who buy credits associate the transaction with a charitable act, they sometimes believe that the carbon offset business should not generate profits, but that it should only maximise the amount of funding to capture carbon. The public demands transparency to a much higher degree than for other products like coffee or cars. Realistically, for the activity to exist to the extent that is does already today, any actor along the chain needs to be able to make a reasonable amount of profit. This doesn’t mean that we can charge whatever we want. Like any business that intends to survive in the long-run, we have established relationships with customers, and it is our incentive to make sure we propose a fair price to them.”
How much is fair? According to Olejak, it is difficult to give a precise answer for every project, but on average, for a firm like South Pole, which takes part in the entire chain from the project to the end sale (in this case, B2B), 75% of the end-price of carbon credits is used to finance the end project. This includes all project-specific costs such as certification or management costs.
The remaining 25% covers the company’s cost of sales, administration, project scouting and pipeline management, while leaving a decent profit margin to finance the cost of capital. South Pole Sweden AB, the wholly-owned subsidiary of South Pole AG, headquartered in Switzerland, registered a net profit of just below 9% in 2017. Meanwhile, its closest competitor, ZeroMission Aktiebolag showed a margin of just about 5%. A company like Tricorona Climate Partners AB, which mainly buys projects from brokers and does not drive its own project pipeline, recently achieved a net profit margin in excess of 27%.
How to choose a project?
“South Pole, for example, can help your company choose a project by exploring the differences between the certification standards, as well as the overall positive impact,” says Olejak. For a company, like a bank or an asset manager, carbon compensation will potentially cost less also, as a large part of the margin depends on economies of scale on distribution as well. According to Olejak, if retail prices range between €9 and €14 / ton, a company wishing to offset 10,000 tons can benefit from a discount to reach about €5-7 / ton, and for an offset of 100,000 tons or more, the price is halved again to reach about €2.50 / ton. “At these levels of volume, our margin per ton is very small,” comments Olejak.
The short of it
Carbon offsets have been around for years. The consumer market for flight compensation varies widely, just like the price of a bar of chocolate varies. Firms can save money by buying in bulk and picking the right projects with the right providers. The process is no different from sourcing new IT equipment or software.
For more information about the carbon offset market and strategies to avoid flight shaming, South Pole is organising a seminar at their Stockholm office on Kungsgatan 8, on May 28 from 15:00 to 17:00. To register for the event, click here. We hope to see you there!