world in transition

The cost of air pollution

The cost of air pollution
Arnaud Langlois - Portfolio Manager

Arnaud Langlois

Portfolio Manager

Governments worldwide have put in place substantial measures aimed at curbing toxic emissions. The ramifications of the matter are not necessarily well understood or properly priced-in, presenting a number of investment opportunities.

In October 2018, the World Health Organisation (WHO) launched a new global campaign to push governments and stakeholders around the world to take action against air pollution. There are 4.2 million deaths every year as a result of exposure to ambient air pollution, and 91% of the world’s population lives in places where air quality falls below WHO guideline limits. In Europe the cost of air pollution was estimated at USD 1.6 trillion every year due to early deaths and disease

Governments of most advanced nations have already put in place considerable regulation and substantial measures aimed at curbing toxic emissions. A regulatory crackdown on the root causes of air pollution will inevitably create winners and losers across a wide variety of sectors

The EU has been leading the world in terms of emission standards for light and heavy duty vehicles

There are three pillars of regulation which will have the most substantial impact on global business: The EU’s emission control legislation for light and heavy duty vehicles; IMO 2020; and the Blue Sky China policy.

The EU has been leading the world in terms of emission standards for light and heavy duty vehicles. The auto and truck catalysts industry in particular likely to continue to benefit from a major tightening of regulation in the years ahead. Diesel cars are losing share to gasoline cars and electric vehicles but the market is attributing close to zero value to the European light-duty diesel business and ignoring much of the hidden value offered by the research and development-driven fuel cell and cathode material operations.

The International Maritime Organization (IMO) decided in 2008 that the sulphur content of ships’ fuel should be reduced from 3.5% to 0.5% from 1 January 2020, onwards. There are implications across a large number of sectors with relatively clear investment implications – many of which have yet to play out.

A regulatory crackdown on the root causes of air pollution will inevitably create winners and losers.

IMO 2020 will be a game changer for refiners. Shipping companies are most likely to switch from High Sulphur Fuel Oil (HSFO) to diesel which will lead to lower HSFO prices and lead to a squeeze in diesel prices, given limited production capacity available. Complex refiners who can handle the switch and have ample diesel capacity should benefit. The heavy oil discount to light oil is also expected to widen as a consequence. 

The shipping industry is likely to experience a substantial increase in operating cost – which will have to be passed on to customers, with some implications for commodity costs. In addition, the jet fuel market is likely to tighten too with negative implications for the airline sector, where cost pass-through is less mechanical. 

In July 2018, China’s State Council released its 2018-20 Blue Sky plan expanding pollution control to 82 cities across China, representing about 37% of population and c40% of China’s GDP. This far reaching plan builds on a number of measures which started being implemented throughout 2017 within a number of industries and cities. The measures include a national pricing system for carbon emission and the contamination of water, and a the development of a green transport system.

Western observers should have no doubt China will lead in the renewable and green technologies space. China is already the world’s largest market for what it refers to as NEVs (new energy vehicles – plug-in hybrids, battery electric vehicles, fuel cell electric vehicles) with the ambitious penetration target of 12% by 2020.

Investors are broadly aware of the issue of air pollution, given the recurring newsflow. However, the risks and opportunities are not necessarily well understood which may be reflected in the pricing.

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