Isn’t neutralizing a portfolio’s carbon footprint too expensive?
Ultimately, it depends on how valuable climate protection is to an investor. Some investors have a high willingness to pay for environmental protection, while for others a 0.2 percentage reduction in return is problematic.
We are not offering a product for the mass market, but for environmentally sensitive, responsible investors, whose numbers will hopefully increase every year.
Do we influence the price?
Not in the short term; there are too many certificates on the market for that. In the long term, certificates will become increasingly scarce due to the set-up of emissions trading. We are reinforcing this effect. It could be that we raise the price by a few cents.
According to the EU Commission’s official count, 1.3 billion new certificates were issued for CO2 emissions in 2019, and another 1.4 billion certificates were still on the market from previous years.
Even if we were to neutralize capital investments worth 1 billion euros, we would only need allowances for around 90,000 certificates for this, depending on the structure of the portfolio.
Don’t we have to increase the price of emission rights to achieve a benefit for the climate?
The amount of emissions allowed is set by the number of allowances. The only viable way to improve climate protection is to reduce the quantity directly.
That’s exactly what we’re doing: We buy emission rights so that they are no longer available to others. Even a high price for an emission allowance does not change the total quantity; it only determines the distribution of rights.
Who will actually be forced to reduce CO₂ by neutralization?
Those with the lowest marginal avoidance cost will be the first to reduce emissions. These are those for whom saving another ton of CO2 makes the most economic sense. Who that is and where in Europe this saving takes place, we do not know. It’s also irrelevant for the climate.
It tends to affect companies that have usually paid little attention to energy-efficient production in the past. Investors are thus indirectly accelerating the technology shift through their actions.
What if we buy the certificates not from emitters, but from climate „clean“ financial investors?
Financial speculation only works if the certificates become scarce, i.e. they are actually used at some point. This does not necessarily have to be the case in the current year, but at some point in the future the rights will be used, otherwise the price would not rise. You cannot speculate with economic goods that have no value.
We also prevent this future emission for the end user of the certificate if we buy pollution rights from a financial investor today.
What security does the customer have that the certificates are really purchased?
We issue the customer with a certificate in which we give a legally binding assurance that the certificates have been purchased for a fixed amount.
After the transaction is completed, we settle the account to the cent and provide all receipts from the certificate trader operating on the stock exchange. Evidence is also provided of the transfer of certificates to a foundation.
In addition, compliance with the pledges is verified annually by an independent auditor, whose audit results we make public.
Why aren’t the certificates simply deleted?
In the past, this was indeed the simplest way and would still be technically possible today. However, after the introduction of the Market Stability Reserve (MSR), this would reduce our efficiency.
The reason for this is that if a threshold is exceeded, unused certificates result in the auction volume in the following year being reduced by 24 percent of the surplus. The unauctioned allowances are then placed in the MSR and deleted when (as can be expected in the foreseeable future) the maximum number of allowances in the MSR has already been reached.
Deletion of allowances would constitute utilization and would reduce the efficiency to 76 percent. We want the allowances we buy to continue to be considered „unused“ so as not to diminish next year’s auction quantity reduction and achieve 100 percent efficiency.
Why are the certificates passed on to a foundation?
This way we can guarantee that the certificates will never come back into circulation and be used to emit CO2.
In fact, we could simply hold the certificates ourselves and not use them. But a small risk would remain: Since they have a value, if anything went really wrong, we could be forced by courts or insolvency administrators to sell the certificates. We want to prevent that in any case.
The best way to do this is to pass them on to a foundation dedicated to environmental protection. It is legally prohibited to sell the certificates because this would contradict the foundation’s purpose!
What if the portfolio structure changes and the investor is then responsible for fewer CO₂ emissions – will he get his money back?
No. Let’s explain why using an example. Say an investor becomes carbon neutral through purchasing the equivalent CO2 emissions, for which they are responsible, for a year. If they then wanted to part with some of their shares, they have therefore taken away some of the responsibility for being carbon neutral from the buyer. A recalculation of the responsible CO2 emissions during the year therefore makes no sense.
If we wanted to pay back money, we would have to resell some of the certificates. We can’t do that because the emission rights are passed on to an environmental foundation, preferably the German Federal Environmental Foundation, immediately after they are acquired and we therefore no longer have any access to them at all.
We have chosen this path to ensure sustainable climate protection.
Do environmentally conscious capital investors then need to pay any attention at all to the selection of „environmentally friendly“ shares?
From an environmental point of view, capital investors need not worry. Investors can safely invest in companies with the highest expected returns without excluding certain industries. The responsible CO2 emissions are fully neutralized by CAP2.
On the other hand, this compensation is more expensive for more environmentally damaging companies than for environmentally friendly ones. The optimal portfolio structure therefore also depends on the companies‘ emissions.
What’s wrong with offsetting CO₂ through reforestation or the distribution of energy-efficient stoves?
Nothing at all. In offset projects, when the stoves are really used for as long as was hoped, the emission in Europe is counterbalanced by an emission reduction in another country. With our approach, the emission is reduced directly in Europe. The effect on the climate is identical. However, unlike offset projects, we do not incur any control costs.
With the CAP2 approach, the reduction in CO2 emissions is irreversible. Reforested forests are prone to external forces, such as being burnt down from fire, bark beetle infestation or rotting after many years. This results in the same CO2 that was once protected, being released again into the atmosphere and making the initial reforestation initiative null and void.
For these two reasons, we believe our approach is more efficient.
Isn’t that just green-washing, too?
No. Since the number of emission allowances are directly set by law, we demonstrably reduce the amount of emissions in Europe with every emission allowance purchased and not used.
Unlike green investment, where ownership of greener industrial assets only shifts from one investor to another, we achieve a real reduction in emissions.
This is not green washing, but real climate protection.