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Mark Carney: Your Aim is Good, but Here’s How to Hit the Bullseye

November 29, 2021

Gabriela Herculano


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Credit: Photo by Michiel from Pexels

Dear Mark Carney:

While we don’t agree with Greta that COP26 was just ‘blah blah blah,’ we share her concern.  A significant risk of greenwashing exists if we do not focus now on the actions needed to deliver the ambitious pledges made during the conference. This is especially true of the unprecedented $130 trillion in private sector funding that you announced from the GFANZ alliance, which has the capacity to be a game changer if properly channelled.  The GFANZ progress report notes the need for a forward-looking tool to help ensure this is the case.  I am writing to you to share the work that we have done and the tools that we firmly believe would allow us to better manage the flow of investments.

By using the metric of Potential Avoided Emissions (PAE) to measure the ability of a product or service to prevent emissions from occurring as compared to the traditional alternative, and then leveraging familiar financial concepts of ROI and the Time Value of Money adapted to a climate-focussed lens, financial institutions could play a vital part in ensuring the companies of tomorrow have the backing today to help our world achieve its goal of keeping warming to 1.5 degrees. In so doing, COP26 may well be known as the COP where the private sector stepped up to the plate.  

iClima is a London based green fintech, shifting the paradigm within climate change investments. We focus on the solution providers rather than users. We focus on the companies that preclude emissions from ever taking place. We work from the “bottom up”, estimating PAE based on the units of green products or services sold. Aggregating all the relevant and broad range of solutions we can estimate overall PAE and understand if we are on track to cutting emissions by half by 2030.

What exactly are we proposing to you?

Potential Avoided Emissions: The Most Relevant Tool to Estimate Impact

Unlike the current tools used in the climate investment world, which are either backward looking or rely on opaque scorecards with questionable impact, the metric of Potential Avoided Emissions is both forward looking and quantitative in measuring impact. It was designed by an NGO called Mission Innovation, which was created out of the 2015 Paris Agreement.  It was set up with the purpose of providing a framework to channel funds towards solutions that can eliminate emissions and help move the world away from ‘business as usual’ (BAU).  As you know, the Paris Agreement led to a global goal of cutting emissions in half by 2030, an important milestone that, if not achieved, would mean chances of getting to net zero by 2050 are almost impossible.  The metric assists in this effort by calculating the emissions that are prevented by an existing solution as compared to the most likely alternative.  For example, the emissions prevented by an electric vehicle journey would be calculated by comparing it to the same journey in a traditional internal combustion engine (ICE) car.  By adopting this framework, climate investors can help scale up the solutions that are increasingly needed.  

PAE calculates a delta. It measures the difference between emissions that take place when a BAU solution is used versus a much lower emission level of an alternative. To achieve the 2030 milestone, we must similarly think of investments required to cut our annual emissions in half by 2030 as a delta as well – what is required beyond what the current market trajectory will deliver.

Time Value of Carbon: A ton of CO2e prevented post 2030 is less impactful than a ton prevented now

A key concept in finance is that of the time value of money; a sum of money is worth more now than it is in the future.  Applying this concept to carbon works in a similar way; the value of emissions prevented today is far higher than emissions prevented at some point in the future. Acting now is imperative to prevent ever intensifying extreme weather events, and to give us the greatest chance of achieving Net Zero in 2050 we need to first deliver on the 2030 milestone of cutting annual emissions in half.  

When assessing investments using the time value of carbon, priority should be given to those with existing, commercially viable technologies that need to be scaled up now as opposed to future technologies that may be too late to make an impact on our globally agreed goals.  

Carbon Returns: Similar to ROI, the ratio of PAE per amount invested

Return on investment (ROI) is a key metric in finance used to determine the profitability of an investment. It calculates the ratio between the volume/amount of capital deployed and how much was earned.  In practical terms, ROI = Net Return / Cost of Investment.  Here again, borrowing a key concept from finance is extremely relevant.

In climate change mitigation, we need to be able to determine what solutions have high PAE impact per investment amount.  Those with the potential to prevent high amounts of emissions would score more favourably than those with less impact, all else being equal.  

Assessing investments using PAE, Time Value of Carbon & Carbon Returns

We can analyse the concepts above by leveraging a final tool from the business world; the BCG four quadrant matrix (shown below). The “stars” highlight investments that deliver high PAE impact now relative to the cost of investment, with a high time value of carbon meaning that they have the potential to scale up quickly now.  The “cows” illustrate high time value of carbon investments that do not deliver as high a carbon return, as measured by PAE impact compared to the amount invested.  Green hydrogen is an example of a solution that will have impact in the future with an eventually high PAE per investment amount. Carbon capture sequestration and direct air capture are further examples of investments that are expected to be negligible pre-2030, with low time value of carbon, and also lower returns in terms of PAE impact per amount invested.

PAE example & estimating investment requirements: iClima estimates that Tesla will sell 20 million Battery Electric Vehicles (BEVs) in 2030, while incumbent players and other pure BEV players will supply an additional 30 million, bringing us to 50 million BEVs by 2030. We estimate the annual demand for passenger vehicles in 2030 to be 90 million (more on our research on this topic please refer to Race to Paris and Tesla's impact articles).  We estimate we are at best at 0.87 Gt of CO2e PAE from now to 2030 from the use of passenger BEVs. A solution avoiding around 1 Gt of CO2e is material and taking place before 2030 is valuable from a time value of carbon perspective. Utilising these metrics, investors can run a similar analysis to determine which potential opportunities best fit their investment goals.

It's worth highlighting that the analogy to ROI should consider the correct investment figure. The cost of electrifying transport should not include the value of all the BEVs sold (let’s say at an average of $30k per car, roughly $1.5 trillion). The correct amount of investment required to electrify passenger vehicles is the investment required beyond the BAU solution; in this case, the network of EV charging stations. Similarly, the investments required to decarbonize the grid should not be the absolute amount to be invested towards renewable assets (solar, onshore and offshore wind). Rather, it should be the amount of investment required into clean energy storage as that is the delta, the cost to decarbonize beyond the BAU.

The investment required for the transition is what is beyond the BAU level. Public opinion matters and not overestimating the amount of investment is therefore important. It also helps to emphasize that several of the solutions are deflationary and increasingly price competitive.

Deflationary Solutions: Key Technologies with high Time Value of Carbon and Carbon Return

There are two key technologies that are becoming increasingly price competitive and are expected to benefit from continuous price reductions, notably solar panels and lithium ion-based batteries. The average utility scale solar farm in the US is about 5 MW in size. To build such a solar project would have cost US$23.6 million in 2010. This plummeted to US$4.4 million by 2020 and could cost as little as $1.1 million in 2030 (that is ca. 95% capex reduction in 20 years). Looking forward on the battery cost reduction, a recent BNEF report states that a complete battery pack in 2020 cost $137/kWh, is set to fall to $101/kWh in 2023, and reach $58/kWh in 2030.

An example that benefits from both downward price trends is distributed renewable energy, beautifully referred to by the author Bill Nussey as “local solar”. Solar PV could potentially avoid 4.71 Gigatons of CO2e between 2020-30 according to Exponential Roadmap. iClima’s base case assumes the US installs 1,000 GW in total of all solar solutions by 2035, a 10 times growth versus current levels. We believe local, distributed, solar could represent 25% of this total, but we modelled a more conservative 10%. As the leader in US residential solar rooftop installation, Sunrun epitomizes this solution. If policies promoting distributed generation were in place, solar rooftops could replace coal fired power plants (as opposed to replacing the average grid). If treated strategically, US distributed generation could be 5.6x more impactful as a decarbonization solution. As of now, the Sunrun clients in California already save money from day one when they add a solar rooftop plus battery solution to their homes. Local solar makes economic sense now. Plus, it adds security of supply and predictability of expense for a household.

The UN Race to Zero Financing Roadmap does allude to solutions being predominantly (above 70-80%) more price competitive than the BAU mainstream by 2030. The argument that decarbonization makes economic sense, that embracing low emission alternatives will generate saving in the short term is the most compelling argument we have to make climate change mitigation universally supported. To further quantify that impact is paramount and can be used to steer policies and investment decisions in the right direction.

Tracking Funding: What is Currently Financed

Barbara Buchner and her team at Climate Policy Initiative (CPI) developed an incredible tool that tracks the Global Landscape of Climate Finance. They estimate that the 2019/2020 annual average financial flow towards both adaptation and mitigation (receiving the bulk of funds, over 90%) added to US$632 billion. It matches sources with uses and tracks the growth trajectory. The amount of investments in the previous report 2017/2018 was US$574 billion. CPI estimates a figure similar to GFANZ as a minimum annual investment to be in line with Paris Agreement at over US$3 trillion per year in this next decade.

Source: Fast track to a low-carbon, climate resilient economy (

CPI will continue to track funding sources towards mitigation and adaptation. Their research will show whether  the GFANZ efforts to accelerate capital deployment are being fruitful. CPI reports every other year. We need to help this quantification effort, so that it can be done on a yearly basis. We would like to suggest that your team support the effort of tracking the sources and uses of climate change financing.

Investing in the Relevant Solutions

The Net Zero Financing Roadmaps are another useful analysis prepared by the UNFCCC Race to Zero campaign and GFANZ. They are based on existing technologies and allude to a broad range of investment opportunities, split into four archetypes based on varying risk and return profiles: early technology bets (5-10%); maturing technologies in emerging regions (50-60%); market creation opportunities (15-30%); and established investment opportunities (~15%). The new group estimates that the private sector could provide over 70% of all the global investments required.

Source: NetZero Financing Roadmap, November 2021

The concept of PAE, alongside carbon returns and the time value of carbon could be utilised to maximize the climate change mitigation outcomes of all this capital we will be committing. Different financial institutions should report similar figures and underwrite investments with a similar methodology and PAE should be a focal point. Analysis should include an indication of PAE pre-2030 (addressing time value of carbon), and investment amount per PAE. Capital markets can be a source of good and investors will also be allocating capital in the secondary markets towards the most impactful, potentially lucrative companies.

Conclusion: Increase Speed & Impact

We often compare the need to use a tangible metric such as Potential Avoided Emissions to a road trip. We want to get to the 2030 milestone of cutting emission by half, but without a thoughtful map we may not reach the destination. We have finite financial resources to support this journey and also face the risk of running out of cash prior to reaching the destination.

We seem to be on the right path, but without a more quantitative approach that clearly measures progress against the stated goal, we are at danger of never reaching our destination. It is paramount we quantify the relevant solutions from a PAE perspective, thinking about the solutions using a time value of carbon concept (giving priority to what can make a difference in the short term) while computing the carbon return of the possible investments. Investing in the solutions that are price competitive makes robust economic sense and will allow us to build resilient and sustainable economies. Who could argue against that?

I would be delighted to talk to your team in more detail about the work we have done. It would be an honour, moreover we sincerely believe that my points above are relevant and I would appreciate the opportunity to further elaborate.


Gabriela Herculano

CEO & co-Founder

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