Absolute emissions as top dog

This piece started with a question: how do we marry the macro position (the need to align with Paris / keep temperature rise below 2C and preferably to 1.5C), with the need to produce a meaningful climate-orientated dashboard for an individual portfolio? I explore the issue via a thought experiment and reach the conclusion (a hopefully unsurprising one to many) that our focus must be on absolute emissions – and managing them down to close-to-zero.

First, let’s define our terms:

  • Absolute emissions: the volume of greenhouse gases released into the atmosphere during the reporting period
  • Top dog: a position of dominance, or authority, over others – in our context, other carbon measures (such as net emissions, carbon intensity or carbon avoided) will be argued to be subservient to absolute emissions
  • Close-to-zero: this doesn’t need defining as such, more that we highlight very different beliefs are held in this area. My preference would be to use ‘zero’, so that any negative emissions technologies can start to repair past damage. Those more invested in the existing carbon economy would prefer a higher emissions number, with negative emissions technologies delivering net-zero.

The thought experiment

We know the remaining carbon budget associated with 1.5C of warming is X GtCO2e[1]. By providing the letter X rather than a number I am trying to avoid a distracting argument over the size of the number[2]. The thought experiment treats this as a hard budget – once it is reached any remaining emitting activities must stop immediately.

We assume (#1) that the private sector controls 50% of the carbon economy, and that (#2) 50% of the private sector is privately held (eg family-owned companies). Therefore the investment industry is steward of 0.25X.

To avoid the potential for double-spending the budget, we give the stewardship responsibility to the asset owners and apportion the 0.25X carbon budget among them. [For simplicity we will do this by aum, assuming a total aum of $100trn. In reality we would likely need to find a different apportionment mechanism – think DB pension fund in run-off versus DC default having different ‘natural’ exposures to the carbon economy.]

We provide the asset owners with our best advice – to spread the carbon budget unevenly over the next 30 years. We recommend an exponential distribution with the budget decreasing by 7%pa. This gives a pre-set and highly transparent path for the asset owners, their agents and the underlying investee companies to transition to a (net) zero carbon economy.

The asset owners now appoint asset managers. Asset owner 1 happens to have assets of $1trn and therefore a total cumulative budget of 0.0025X, which gives a first-year budget of fX (year 2 = 0.93fX etc). Manager Y is appointed to manage 10% of the assets, and is given a series of decreasing carbon budgets (0.1fX, 0.093fX etc). Manager Y selects a portfolio of investee companies to both generate strong returns as well as staying within the set carbon budget.

As if by magic, we have ourselves a macro-consistent reporting framework (works at all levels) – provided we ignore the inherent problems.

Problematic wrinkle | it is not a given that reducing carbon guarantees the best returns

We will get to the significant problems shortly, but transparency requires us to acknowledge an inconvenient truth: it might be possible to generate perfectly acceptable returns while doing nothing to help the necessary transition. To illustrate this, let’s extend the thought experiment.

We noted that we provide the asset owners advice to decrease the carbon budget exponentially (-7%pa) over the next 30 years. The asset owners are, of course, free to spread their budget through time as they see fit. Some will immediately go underweight carbon – pushing more of their budget into the future – we will call these ‘group U’. They can only do this because group O are willing to go overweight carbon. Group O know that their carbon budget will not last the full 30-years, and they are happy to run a cliff-edge profile.

When they run out of (hard) budget group O can do one of 3 things:

  1. Buy surplus carbon budget from group U and continue to hold their existing portfolio
  2. Sell their emitting investee companies and buy non-emitting companies
  3. In the absence of a buyer for their emitting companies, they shut the businesses down and write off any terminal value.

For each of these actions there is a plausible case that group O do just fine. For the first option, group U’s zeal leads to their investee companies transitioning early so that group U’s portfolios have zero emissions, and their remaining carbon budget only has the value that group O is willing to pay for it – otherwise it is worthless. Option 2 works well if group O go hard, early and spend their budget fast – and then sell their emitting companies before the market catches on to the real nature of the game. And option 3 can be profitable if the companies are run for cash and aggressively written down each year.

Clearly there are other plausible cases where things work out badly for group O, but we will move on to consider the more significant problems with this experiment.

Problem 1 | the investee companies didn’t get the memo

The thought experiment works beautifully if the investee companies owned by the investment industry (1) do not produce more emissions than consistent with year-1’s budget and (2) are up for de-carbonising at 7%pa, or better. The former is not guaranteed and the latter is highly problematic…

  • 7% is a significant one-off efficiency gain. To repeat this the following year, and the year after that – becomes increasingly hard to imagine
  • For individual companies the decarbonisation steps are likely to be lumpy. Ironically, the oil majors may be best placed to manage the transition smoothly. For smaller businesses, or those where carbon emissions are a side event, 0% and -100% steps seem particularly plausible
  • The incentives within the system (from executive pay to low levels of class actions to the level of shaming) are not currently compatible with serious decarbonisation effort.

Problem 2 | the budget constraint isn’t hard

The thought experiment requires emissions-creating activities to stop when the budget is used up, but we have no such power in the real world. This reinforces the need to reshape the incentive system mentioned immediately above. We can also attempt to create self-reinforcing beliefs (akin to the placebo effect): if enough of us act as though the budget constraint is truly binding, we may shift the beliefs and behaviours of others in a reinforcing manner.

So what does, or can, the investment industry do when confronted by an investee company that didn’t get the memo? The easy-to-say answer is ‘engagement’ – and the Institute’s working groups are working on that. A highly-impractical, but technically-feasible answer would be to acquire a controlling stake and force management to shut down the emitting business[3]. A more practical, if less-immediately-effective, answer is to increase the level of debate within the industry on whether, and how, we might influence real-world change.


We know that we need to reduce annual emissions to (net) zero in order to halt global warming. It follows that absolute emissions is the most important climate metric to report on for our portfolios. It is, and should be, top dog. But dogs are pack animals, and there is room for other metrics to provide a more complete narrative. Even more important is showing absolute emissions that are decreasing over time. Because of this importance, we will need to be alert to metrics being gamed, but that is straying beyond the limits of this current thought piece.


[1] At the planetary level, emissions are measured in gigatons (Gt) of carbon dioxide equivalents (CO2e). A gigaton is one billion metric tons. Equivalents are used to convert the warming power of different greenhouse gases into the same units – in this case, carbon dioxide. For example, methane has a warming potential about 20 times greater than carbon dioxide so 1Gt of methane is (approximately) reported as 20GtCO2e.

[2] The number is arguable because the science is not precise. It is reasonable to use the figures supplied by the IPCC, but even here we need to decide on our preferred probability of staying within the temperature limit (the higher the certainty we require, the lower the remaining budget). As a guide only, the number is around 400GtCO2e which allows us 10 years at our current emissions rate of 40GtCO2e per year.

[3] The logical categorisation of this idea would be ‘philanthropy’ but I would be happy to make an advanced universal ownership argument for anyone willing to listen…