- The uneven distribution of greenhouse gas emissions across industries and countries is an added complexity in targeting reductions.
- Emerging economies are some of the largest emitters by volume, but not always in per capita or per GDP terms, raising questions of how emissions are best measured.
- Decarbonization means that carbon dioxide, rather than other greenhouse gasses, will be the focus for emissions reduction.
Achieving net-zero emissions will require huge changes to the global economy in terms of energy mix, consumption, housing and even human diets. Some countries and sectors are more carbon intensive than others and will need to make bigger efforts. Some carbon-intensive industries will be easier to decarbonize than others; power generation is much easier to decarbonize than steel or cement production, for example. The complexity of this problem highlights why it is important for policymakers and investors to precisely map, quantify and analyze global emissions.
Greenhouse gases are not all the same. Some have longer lifetimes, while their ability to absorb infrared radiation (heat) also varies. Carbon dioxide (CO₂) has the lowest global warming potential of the major greenhouse gases but has one of the longest lifetimes in our atmosphere, along with fluorinated gases. This long residence time, combined with the complex response of natural carbon sinks (such as the oceans) to carbon emissions, means that any reduction of CO₂ emissions today will not immediately lead to lower CO₂ concentration in the atmosphere. This explains why policymakers are focused on bold reduction targets to halt emissions as quickly as possible. Other gases like methane and nitrous oxide have a much greater ability to absorb heat, but shorter atmospheric lifetimes.
The rapid increase in emissions over the last three decades has been mainly driven by emerging markets, with greenhouse gas (GHG) emissions from large and rapidly developing countries surging by 300% and 217%, respectively, in China and India, for example. In developed markets, GHG emissions have generally decreased: in the European Union, they are down 20% over the same period. China is now the biggest GHG emitter in the world, and the five largest GHG emitters (China, United States, Europe, India and Russia) together account for more than half of global GHG emissions. Of course, measuring emissions on volume alone may not be a fair comparison; a closer look at GHG emissions per capita, stages of economic development and the effect of “offshoring” manufacturing reveals a more nuanced picture (see Exhibit 1 and Box 1).
Looking at GHG emissions per capita presents a more complete picture than simply measuring emissions on volume
EXHIBIT 1: GLOBAL CO2 EMISSIONS BY COUNTRY
Box 1: What is the right metric to measure emissions?
“Absolute levels of GHG emissions clearly don’t tell the whole story about the relative environmental impact of each country. At a minimum, we need to account for differences in population size by looking at emissions per capita. In addition, we may want to account for the fact that countries are at different stages of economic development. Historically, emerging markets have contributed less to global GHG emissions because their economic output has been lower. To understand the impact that these countries will have in the future, as their economic output continues to increase, we may also want to look at emissions per unit of GDP when comparing developed market and emerging market countries. In addition, some emerging market countries have higher CO₂ emissions because western countries have offshored the production of CO₂-intensive goods: 14% of China’s CO₂ emissions are attributable to goods that are exported and consumed abroad. Accounting for emissions that countries have offshored to other regions is consistent with the increasing focus on companies’ “Scope 3” emissions (as defined by the Greenhouse Gas Protocol), which consider emissions that companies have outsourced in their supply chain. For companies rather than countries, we take a similar approach and would consider greenhouse gases relative to a company’s size.”
Caspar Siegert, Ph.D., Research Analyst, J.P. Morgan Asset Management Sustainable Investing team
From a sector perspective, the energy and industrial sectors have contributed most to the rise of global emissions since 1990, with GHG emissions up 56% and 180%, respectively. The increase in the agriculture sector has been more muted (16.5%), although the types of agriculture emissions are often more environmentally damaging. Power generation, transport and buildings are the sectors that emit the most CO₂ and, accordingly, are where we expect the most innovation and new regulation (Exhibit 2).
Power generation, transport and buildings are the sectors that emit the most CO2
EXHIBIT 2: GLOBAL GREENHOUSE GAS EMISSIONS BY SECTOR
The pattern of a globally disproportionate carbon footprint is even more apparent when looking at sector and country differences together. China’s steel industry alone accounts for 15% of Chinese and 4% of total global emissions, driven largely by its coal dependent energy structure.
An additional challenge for the Asian market is in the recording and collection of the appropriate data. Sustainability reporting continues to evolve, but there is still substantial room for improvement. For example, only 2% of MSCI China constituents reported Scope 3 GHG emissions. Metrics being disclosed are often based on inconsistent methodologies, which limits comparability and increases potential for misuse. Without expansive and transparent disclosures at the micro level, accurately tracking emissions and accountability at the macro level will be arduous.
The first step in overcoming the challenge of net-zero emissions is being able to identify the type of greenhouse gas that is having the greatest negative impact and its source. This implies a greater focus on the production of CO₂ emissions by industry and economy, which will inform technological progress. The issue is clouded by what metric is best used to measure emissions, as well as the reporting and collection of that data, based on individual countries’ stages of economic development and whether emerging economies are being used to “offshore” the emissions from developed ones.