Projected emissions

What Are Projected Emissions?

Projected emissions refer to estimations of future greenhouse gas (GHG) emissions, typically measured in tons of carbon dioxide equivalent (CO2e), over a defined period. These projections are crucial in climate risk management as they help financial institutions, governments, and corporations understand potential future environmental impacts and associated financial risks and opportunities. Understanding projected emissions is a key component of sustainability efforts and informs decisions related to investments, policy, and corporate strategy. For investors engaging in ESG investing, projected emissions offer insight into a company's long-term environmental trajectory and its potential to reduce its carbon footprint.

History and Origin

The concept of projecting future greenhouse gas emissions gained prominence as scientific understanding of anthropogenic climate change developed. Early efforts to model future emissions pathways emerged from intergovernmental scientific bodies, notably the Intergovernmental Panel on Climate Change (IPCC), established in 1988. These projections became fundamental to international climate negotiations and policy development, providing the scientific basis for global agreements like the Kyoto Protocol and the Paris Agreement. The Paris Agreement, adopted in 2015, specifically requests each country to outline and communicate its post-2020 climate actions, known as Nationally Determined Contributions (NDCs), which inherently involve emissions projections. These NDCs detail how each nation plans to reduce greenhouse gas emissions to help meet the global goal of limiting temperature rise.³¹, ³², ³³, ³⁴

The International Energy Agency (IEA) also plays a significant role, regularly publishing its World Energy Outlook, which provides analysis and projections on global energy demand, supply, and their implications for emissions.³⁰ As the financial implications of climate change became clearer, financial institutions began incorporating these projections into their risk assessments and investment strategies. In 2022, for instance, the U.S. Securities and Exchange Commission (SEC) proposed rules that would require public companies to disclose climate-related risks, including greenhouse gas emissions, to standardize climate-related financial disclosures for investors.²⁵, ²⁶, ²⁷, ²⁸, ²⁹

Key Takeaways

Projected emissions are estimates of future greenhouse gas releases, crucial for environmental and financial planning.
They inform decision-making for governments, corporations, and investors regarding climate policy, investment strategies, and risk assessment.
These projections are developed using various models that consider economic growth, technological advancements, and policy interventions.
Accuracy of projected emissions can be influenced by unforeseen economic shifts and the inherent uncertainties of long-term forecasting.
Financial institutions increasingly use projected emissions to assess climate-related financial risks and opportunities within their portfolios.

Formula and Calculation

While there isn't a single universal formula for projected emissions, the process typically involves complex financial modeling and integrates multiple variables within specialized climate-economic models. These models aim to forecast future GHG releases by considering factors such as:

Economic Growth: Gross Domestic Product (GDP) growth rates, industrial output, and consumption patterns.
Population Growth: Anticipated changes in global and regional populations.
Energy Mix: Future trends in energy production and consumption, including the adoption of renewable energy versus fossil fuels.
Technological Advancement: The pace of development and deployment of low-carbon technologies.
Policy and Regulation: The impact of current and anticipated climate policies, carbon pricing, and emissions regulations.
Land Use Changes: Deforestation, reforestation, and agricultural practices.

The general approach often follows a top-down or bottom-up methodology:

Top-down models integrate macroeconomic factors to project overall emissions at national or global levels.
Bottom-up models build projections from specific sectors, technologies, or individual companies.

Emissions are typically expressed in tons of carbon dioxide equivalent (CO2e) to account for the varying global warming potential of different greenhouse gases.

Interpreting the Projected Emissions

Interpreting projected emissions involves understanding the underlying assumptions and the scenarios they represent. These projections are not definitive forecasts but rather "what-if" analyses based on different assumptions about future policies, economic development, and technological changes. For instance, the IPCC uses various "Shared Socioeconomic Pathways" (SSPs) to illustrate different possible futures and their associated emissions levels.²², ²³, ²⁴

Financial professionals use these projections to conduct market analysis and assess potential risks and opportunities for companies and portfolios. A company with high projected emissions, for example, might face greater climate change-related regulatory or reputational risks, potentially impacting its future valuation. Conversely, companies with lower projected emissions or those actively investing in decarbonization technologies might be viewed more favorably.

It is crucial to consider the ambition level embedded in any projection. Projections based on "current policies" often indicate higher warming trajectories compared to "net-zero" or "Paris-aligned" scenarios, which assume significant additional policy action and technological breakthroughs.

Hypothetical Example

Consider a large diversified investment fund analyzing a utility company, "PowerGen Inc.," that primarily relies on coal-fired power plants. To assess PowerGen's climate risk, the fund requests its projected emissions for the next decade.

Baseline Data Collection: PowerGen provides its current annual emissions, its planned capital expenditures, and its energy generation mix (e.g., 80% coal, 20% natural gas).
Scenario Application: The fund's analysts apply different scenarios:
- Business-as-Usual (BAU) Scenario: Assumes no new climate policies and continued reliance on fossil fuels. Under this scenario, PowerGen's projected emissions might remain stable or even increase slightly with expected demand growth.
- Moderate Transition Scenario: Assumes some regulatory pressure and a gradual shift towards renewables. PowerGen's plan to replace one coal plant with a solar farm by 2030 would be factored in, leading to a modest reduction in projected emissions.
- Ambitious Decarbonization Scenario: Aligns with a 1.5°C global warming target, requiring aggressive renewable energy deployment and carbon capture technologies. This scenario would project a substantial decline in PowerGen's emissions, perhaps necessitating significant investments in new infrastructure or even divestment from high-emitting assets.
Financial Impact Assessment: The fund evaluates how each projected emissions pathway might impact PowerGen's profitability, access to capital (e.g., ability to issue green bonds), and long-term viability. For example, under the BAU scenario, PowerGen might face carbon taxes or stranded asset risks, potentially eroding investor returns.

By comparing these different projected emissions, the fund can make a more informed decision about its investment in PowerGen, potentially engaging with the company to encourage a lower-emission pathway or rebalancing its portfolio to reduce overall climate exposure.

Practical Applications

Projected emissions are increasingly integrated into various real-world financial and corporate practices:

Corporate Strategy and Reporting: Companies use projected emissions to set internal decarbonization targets, develop climate transition plans, and report to stakeholders. This is especially true as regulators, like the SEC, push for enhanced climate-related disclosures.
¹⁹, ²⁰, ²¹* Investment Due Diligence: Investors analyze companies' projected emissions to evaluate their exposure to climate-related financial risks, such as transition risk (e.g., policy changes, technological disruption) and physical risk (e.g., extreme weather impacts). This analysis informs portfolio construction and asset allocation decisions.
Lending and Underwriting: Banks and insurers assess the projected emissions of their clients and portfolios to manage "financed emissions," which are the greenhouse gas emissions associated with their financial activities. This helps them understand and mitigate portfolio-wide climate risk.
¹⁷, ¹⁸* Regulatory Compliance: Governments and international bodies use aggregate projected emissions to track progress towards climate goals and identify sectors or regions needing further policy intervention. Organizations like the UNFCCC gather Nationally Determined Contributions (NDCs) that inherently contain these projections.
¹⁵, ¹⁶* Carbon Markets and Pricing: Projections inform the supply and demand dynamics in carbon markets, influencing carbon prices and the viability of emissions trading schemes.
Infrastructure Planning: For sectors like energy and transportation, projected emissions influence long-term infrastructure investment decisions, guiding the shift towards low-carbon alternatives. For instance, the IEA's World Energy Outlook includes projections that show how current policies are unlikely to meet the Paris Agreement goals, indicating the need for accelerated action.
¹³, ¹⁴

Limitations and Criticisms

While vital, projected emissions have several limitations and face criticisms:

Uncertainty and Variability: Long-term projections are inherently uncertain, as they rely on assumptions about future technological breakthroughs, economic growth, and political will, which can be unpredictable. ¹²Unexpected economic booms, for example, have historically led to underestimated emissions intensity in projections.
¹¹* Data Quality and Availability: Accurate projections depend on robust historical data, which may be inconsistent or incomplete, especially for private companies or certain regions. Challenges exist in collecting emissions data, particularly from smaller businesses.
¹⁰* Methodological Complexities: Different models and methodologies can produce varying results, making comparisons challenging. The process of attributing emissions to financial institutions ("financed emissions") is complex, leading to debates over the most effective measurement and disclosure protocols. ⁸, ⁹Some studies indicate that financial institutions' targets based solely on "financed emissions" might not effectively achieve real-world emission reductions, as they can be "reduced" on paper through divestment or financial input fluctuations without actual changes in economic activity.
⁵, ⁶, ⁷* Policy Implementation Gaps: Projections often assume a certain level of policy effectiveness, but actual implementation and enforcement can fall short, leading to a gap between projected reductions and real-world outcomes.
⁴* Focus on Emissions vs. Real Economy Impact: A criticism in finance is that a focus on reducing "financed emissions" (emissions attributed to a portfolio) does not always translate directly into a reduction of "real economy" emissions (actual emissions in the physical world). Investors might divest from high-emitting assets, reducing their own reported financed emissions, but these assets may simply be bought by other investors, leading to no net reduction in global emissions. ¹, ², ³This highlights a debate within corporate governance and risk management regarding the most impactful strategies for financial institutions to drive decarbonization.

Projected Emissions vs. Actual Emissions

The distinction between projected emissions and actual emissions is fundamental in climate and financial analysis.

Feature	Projected Emissions	Actual Emissions
Definition	Forecasts or estimations of future greenhouse gas releases.	Historical, measured, or reported greenhouse gas releases that have already occurred.
Purpose	Planning, target setting, risk assessment, scenario analysis, guiding future action.	Baseline measurement, performance tracking, accountability, regulatory compliance.
Data Source	Models, assumptions about future economic activity, policy, technology.	Direct measurements, corporate disclosures, national inventories, satellite data.
Time Horizon	Future (e.g., next year, next decade, mid-century).	Past (e.g., last quarter, last fiscal year).
Variability/Risk	High uncertainty, sensitive to assumptions and unforeseen events.	Low uncertainty (if accurately measured), reflects historical reality.

While actual emissions provide the factual basis of past performance, projected emissions are forward-looking tools that inform strategic decisions and help anticipate future climate impacts and regulatory landscapes. The gap between actual emissions trends and projected pathways aligned with climate goals highlights the urgency of accelerated action.

FAQs

How are projected emissions used by investors?

Investors use projected emissions to assess a company's or portfolio's exposure to climate-related financial risks, such as potential carbon taxes, stricter regulations, or shifts in consumer preference towards lower-carbon products. These projections also highlight opportunities in green technologies or companies actively pursuing decarbonization, informing ESG investing decisions.

What factors influence the accuracy of projected emissions?

The accuracy of projected emissions is influenced by the reliability of input data, the complexity and sophistication of the financial modeling used, and the validity of socioeconomic and technological assumptions. Unforeseen global events, such as economic downturns or rapid technological breakthroughs, can significantly alter projected pathways, highlighting the need for regular updates and scenario analysis.

Do projected emissions include all greenhouse gases?

Yes, comprehensive projected emissions typically account for all major greenhouse gases covered by international agreements, such as carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), and fluorinated gases. These are usually converted into a common unit, carbon dioxide equivalent (CO2e), based on their global warming potential (GWP) to allow for comparison and aggregation.

What is the role of government policy in projected emissions?

Government policies, such as carbon pricing, emissions standards, renewable energy incentives, and national climate commitments (like Nationally Determined Contributions), are critical inputs for projected emissions. The stringency and effectiveness of these regulatory risk policies directly influence the trajectory of future emissions, guiding the transition towards a lower carbon footprint economy.

Why do different organizations have different projected emissions?

Variations in projected emissions among different organizations stem from differing methodologies, underlying assumptions about economic growth, population, energy mix, and technological progress, as well as the specific scenarios being modeled (e.g., current policies vs. ambitious climate action). These differences underscore the importance of understanding the context and assumptions behind any given projection.