• Klaus Meitinger

We perfect climate protection.

(Reading time: 6 - 11 minutes)

CAP Aufmacher shutterstock 1129744511Innovation. The only effective climate protection is to buy pollution rights and take them off the market for all time. "Because only then will the amount of CO2 emissions actually decrease," explain Hanjo Allinger and Christian Jasperneite. With their company CAP2, they want to give everyone the opportunity to cap their own CO2 footprint more efficiently.

In February 2020, when the pubs are still open and social capital is being produced there, Hanjo Allinger and Christian Jasperneite meet to get angry together. In the coal phase-out law, the German government had not sufficiently ensured that the emission rights that would be released in 2030 would actually be taken off the market. "The worst-case scenario is yes: If we ban all energy companies from burning coal, they will no longer need their emission rights, and these can be bought by others," Allinger explains, "but because we have a quantity limit on these rights in Europe, the climate effect would be zero. Someone else will just use the rights."

Jasperneite and Allinger studied together in Passau. They went to Harvard together. Lost track of each other when one became chief strategist at M.M.Warburg and the other professor of economics. Got back together to launch a disruption fund. And now decide, "If the federal government won't do anything, we'll do it ourselves. The certificates have to go off the market."

"We did a thought experiment," Jasperneite explains. "We know, after all, that from 2018 to 2099, approximately 420 gigatons of CO2 may still be emitted worldwide, so that we comply with the 1.5-degree limit by the end of the century. If there were a global emissions market, all we would have to do is cap emissions allowances at 420 gigatons. Then we'd have it under control."

But - there is no global emissions trading. And there is certainly no consensus on how to distribute these rights.

But there is European emissions trading, which works pretty much as Jasperneite described. Europe's states decide how many CO2 equivalents to allocate each year - some for free, some by auction.Every April, companies must then surrender one of their pollution rights for every tonne of CO2 they actually emit. If they blow more CO2 into the air than they have been allocated, they have to buy more certificates on the market or pay a penalty of 100 euros per tonne and buy the missing certificates additionally in the coming year.

"CO2 emissions in Europe are thus not only given a price, but also a quantity limit. We asked ourselves: can't we use this to do even more for the climate?", says Allinger. A beer later, the two of them sketched out an idea: "We could buy certificates and put them in a foundation that commits itself to climate protection in its statutes. That way, they can never be sold again and can be used for emissions," says Jasperneite. "They would then be safe as in a vault, and all other CO2 emitters would now have to save the emissions for which we have set aside the rights. So we would have effectively done something for the climate."

Couldn't this even be a business model? "There are so many today who care about the environment and the climate. We thought maybe they'd pay us something to make their business verifiably CO2 neutral or compatible with the 1.5 degree target. Mathematically, that wouldn't be a problem. We can calculate exactly how many allowances we'd have to buy and lock away to do that."

As the two ponder potential target groups, the ratification of the Paris climate summit plays into their hands. In it, after all, many nations committed to the 1.5-degree target. "This will be a problem for many companies that have so far offset their carbon footprint via Atmosfair, Climatepartner or Primaklima," Allinger makes clear.

These organizations build more efficient stoves in Africa, plant trees, reforest. But in the future, the scientist suspects, the respective countries will want to credit themselves for the positive effects, at least in part. "President Bolsonaro in Brazil will say: 'Thank you for planting trees in my country. Now I need to save less CO2.' But this does nothing to help the climate. And offset providers can no longer promise their customers that their actions will actually reduce CO2 at all."

Corporate customers, the pair believe, they can now offer a better deal. "We don't have the problem of potential double use. And there's no need to check whether a tree is still standing. Or fallen victim to the bark beetle. When we buy certificates and set them aside, the effect is immediate. With no time wasted, no complex contracts."

This could, the idea goes, interest the tourism industry, cruise giants, the cargo shipping industry or sports organizers. "We could offset the entire travel activities of the participants. Or even make a schnitzel CO2-free. And make this documentable by awarding a seal," says Jasperneite.

CAP2's second potential customer is the financial industry. After all, it is possible to calculate for each fund composition how much CO2 the companies emit with their respective share in the portfolio. And how many certificates would have to be bought each year to neutralize the portfolio completely in terms of CO2, or at least make it compatible with the 1.5-degree target.

"For an average equity fund," Allinger calculates, "management would have to factor in a cost of between 0.05 and 0.1 percent per year to close the gap between the actual emissions path and the one that fits the 1.5-degree target. If fully offset, of course, that would be significantly more."

Ultimately, investors would have to bear this via a corresponding loss in performance. "But the advantages for the fund company more than make up for this," Jasperneite is convinced: "Today - as sustainability counts more and more - they could clearly differentiate themselves from the competition. And at the same time, they would free their fund managers from any eco-restrictions. Because they could now invest solely on the basis of return considerations again. If they invest 1000 euros in Adidas, the complete CO2 exemption costs three cents. At Siemens it's 53 cents, at BMW 92 cents and at RWE 220 euros. If the manager is convinced that an investment is nevertheless worthwhile, he can now do so again without a guilty conscience. Because we take care of the compensation."

In order to earn money themselves, the two entrepreneurs want to charge financial service providers a fee that depends on the assets under management. For companies, the contribution is to be divided into three parts - "calculating the necessary compensation, capping the emissions and using the seal we award," Allinger lists.

In the meantime, the entrepreneurs have come quite far on this path. The company has been founded. It has a catchy name - CAP2. Competent comrades-in-arms have been recruited. Start-up capital has been organised. "We are currently in the second round of financing. And hope to add another one of the shooting stars from the start-up scene to make the company really big in a few years. We want to become the industry standard for this type of service beyond Germany," outlines Jasperneite, who as a passionate capital market strategist will remain loyal to M.M.Warburg & CO and leave the operational activities in the newly founded company to his colleagues.

Talks with the first funds are also underway. CAP2 aims to offset portfolios worth €20 billion by 2025. As early as 2022, the company expects core revenues of three million euros. "That's easily enough to break even," Allinger informs.

Worried that potential customers will implement their idea themselves, the two do not. "It's not that easy to buy the certificates. There would also be problems with accounting and valuation. Above all, a reliable partner has to guarantee that the rights will never come onto the market again. We can convey this credibility thanks to our foundation model," explains Jasperneite.

And they are not afraid of competition either. "There are a lot of legal pitfalls and obstacles. Others have to cope with that first. We could be copied, sure. But not in the foreseeable future," Allinger makes clear.

One question remains, however. Don't the two themselves ensure that their business model will no longer work at some point if they ensure that CO2 neutrality is achieved faster than planned thanks to their initiative? "There will still be CO2 emissions to be priced and compensated for after 2050," Jasperneite reflects, "and even if it were over then, we'd have 30 successful years as entrepreneurs behind us."

"Honestly," Hanjo Allinger laughs, "I could also live with us locking the doors at CAP2 then. And put the chairs up. Because then we would have done a good job for the climate after all." ®


// Investment idea reloaded - CO2 emission certificates.

Since European emissions trading has been working reasonably, the price of CO2 emission rights has been rising rapidly. In issue 04/2017, private wealth pointed out this interesting investment idea. At that time, the certificate cost 7.16 euros. Today it is trading at almost 55 euros - a gain of around 700 percent. Time to sell?

Financial analyst Lawson Steele of Berenberg Bank has been observing the market for some time and has repeatedly pointed out this lucrative investment opportunity in recent years. Today he writes: "We expect the price of CO2 to rise to €110 a tonne next year."

His argument: there will be a significant gap over the next four years between what the EU plans to spend in new rights and what industry, aviation and utilities are likely to emit at the current price. And this will accumulate, he calculates, until the point of maximum scarcity is reached in 2024. If a company actually emits more than it has in pollution rights, it will have to buy them on the secondary market. If it does not have them by the settlement date, it will have to pay a penalty of 110 euros per tonne for each missing allowance and still submit the missing allowances a year later. "No company will risk that. In extreme cases, therefore, prices above 110 euros cannot be ruled out," says Steele.

However, this thesis is controversially discussed among experts. It is true that there is agreement on the future scarcity. But it is also a fact that a considerable stock has built up from the past, when the rights were still issued free of charge. The gap could theoretically be covered from the old stock.

So the key question is: who controls the old rights and at what price are they likely to come to market? "More than 80 percent are owned by industry, airlines and utilities," Steele informs us. "They know things are going to get tighter in the future, so they're more likely to keep their existing holdings." In this context, it is also interesting to note that the EU is now likely to be more ambitious about the CO2 reduction path in the future as part of the Green Deal. "Either Ms von der Leyen will directly tighten the available rights or she will include more industries in the emissions trading scheme, thus ensuring a stronger restriction. Clear statements on this will come in the course of the summer," informs Christian Jasperneite. In addition, a coalition for a significantly higher CO2 price could emerge in Germany after the Bundestag elections.

In view of these political uncertainties, companies are actually more likely to play it safe and not sell their rights. "On balance, it is very likely that emission rights will become even more expensive in the coming months," concludes Christian Jasperneite.

How to invest in CO2 emission rights.

Forward trading in CO2 certificates takes place on the European Climate Exchange. Futures contracts are traded there. However, liquidity is not very high - trading itself is reserved for professionals. Interested investors should contact licensed banks or brokers.

// Private investors can buy unlimited turbo warrants on CO2 emission rights. The largest provider is Société Générale. The price of the security is calculated from the price of the CO2 emission right in euros minus the respective strike price. A small premium is usually added to this. In order to cover the issuer's financing costs, the strike price and knockout barrier of these non-maturity-limited securities are regularly increased - the value of the knockout thus falls while the price of the underlying remains constant.

The closer this strike price is to the current price of the issue right, the greater the leverage of the turbo warrants. At the same time, of course, the risk of the investment increases. To avoid being knocked out by even short movements in the CO2 price, it is advisable to choose securities with a large spread.

CAPS Chart 32


Author: Klaus Meitinger

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