The International Air Transport Association report on how the airline industry plans to get to net-zero emissions by 2050 is fascinating. If they can pull it off, this would be a great achievement. But if they don’t, our hindsight view of their 2021 report will be damning.
How do they plan to get to net zero? The report explains that changes that are within our grasp (making planes lighter, more aerodynamic and cutting the time spent taxiing) will contribute a meagre 3% to the net-zero progression. The remaining 97% will come from more progress in the field of carbon capture, carbon offsetting and, most importantly, a switch to sustainable jet fuel.
The good news is that sustainable jet fuel has already been invented and used in trial flights. However, IATA projects that production will have to increase to 450bn litres in 2050 from 100m litres in 2021. That would be an astonishing increase in production of 4,500 times, or 450,000%.
Sustainable jet fuel is a mixture of 50% regular fuel and 50% cocktail of animal fats and vegetable oil. Leaving aside the accounting oddity that this delivers an 80% (not 50%) reduction in the carbon footprint of the fuel (thanks to ‘life cycle’ accounting) there remains a fundamental question. Where is all this animal fat/vegetable oil going to come from? According to Statista, the global production of all vegetable oils this year will be around 200bn litres. Not enough for the airline industry alone.
Parking our concern about the viability of the IATA report in the aircraft hangar for a moment, let’s assume that their ambition for sustainable fuel production is achievable. These numbers suggest a need for a massive increase in vegetable oil production, with attendant forest clearing, biodiversity loss and water resource challenges. Palm oil is the leading vegetable oil and Indonesia is the biggest producer. Who has thought this through? It doesn’t look as though the IATA plan squares with COP26 commitments to limit deforestation.
If governments bite the bullet and get serious about carbon pricing, industries with inadequate net-zero plans might face existential crises. Maybe the only realistic route to net zero for the airline industry will be via a drastic reduction in the number of flights. Not likely? Consider that government policies might change, and a combination of carbon pricing and the ending of tax breaks for airlines could trigger an enormous increase in fares that will test our determination to have that long weekend in Spain.
The airline industry is just one example of where a successful net-zero carbon journey is going to trigger knock-on consequences. The investment community should demand that net-zero targets are independently audited, and plans that are based on technologies that are unproven, or don’t yet exist, should be highlighted as speculative.
The world of investing is undergoing profound change. It is evolving from a one-variable maximisation function (financial with a primary focus on quarterly profits), to a multi-variable optimisation function where factors such as policies to abate and combat climate change must have an increased weight (and consequently will affect financial returns over many quarters).
It is going to be a rollercoaster ride for investors. If investment managers are going to help, they will need to demonstrate dexterity and expertise in navigating this new, more complex world.
Gary Smith of Haven Green Capital Partners.