As mentioned last week, the Securities and Exchange Commission (SEC) released regulations for Environmental, Social & Governance (ESG) reporting for public comment. That will go on till late May. However, these proposed regulations will likely become law and the airline industry is gonna need to plan. As mentioned last week there are 3 “scopes” of reporting.

Scope 1 is Green House Gas emissions from production at the company. For the airlines, this would be mainly operating aircraft. Scope 2 emissions are utilities such as heating, cooling, steam, and power. Scope 3…and this is the kicker that is making corporations uncomfortable... is Green House Gas Emissions (GHG emissions) from services and products the company uses in its supply chain. For airlines, this would be franchise agreements with regional airlines, catering, and aircraft servicing companies, and bus companies.

But reporting these isn’t the biggest concern for the airlines. The real concern is banks and customers.

Banks: Aircraft are expensive. After all the list price for a new 777-300 ER is $320 million. How does an airline pay for this…well just like someone pays for their house – the airlines pay with debt. If ESG reporting results in airlines being seen as risky, then the banks will take that into consideration when lending money and airlines lending costs are gonna go up significantly...same if a person's credit rating when down. Of course, it won’t just be lending to buy aircraft that we are talking about, it would also be corporate bonds rates, or the line of credit that the airlines use (these saved so many airlines at the start of the pandemic). The airlines would be looking at tens of millions if not 100s of millions in new added expenses.

Then there is the customer

Corporate Customer: We aren’t talking about the Minnesotan family going on a Disney vacation here. The Nylands from Minnesota are still going to buy their ticket on Sun Country or Spirit (if Spirit is still around). Here, we are talking about the largest corporations – Apple, Amazon, Proctor & Gamble, Exxon, and even Epic Healthcare here in Madison. All of these companies will need to report business travel and commuting patterns of employees…which of course includes travel the airlines....a form of travel with a very negative ESG image right now.

So we could be looking at corporate airline contracts being renegotiated, or corporations pulling back on travel. Or…. corporations demanding the airlines improve their ESG performance. How this looks or will be measured, no one really knows at this point.

What can the airlines do?

Well, the solution so far is Sustainable Aviation Fuel (SAF), but that has such constrained supply that its potential is limited. There is buying a tree to offset your flight, but that has been around for years and really hasn’t gotten very far. So the airlines are left with the only other solution – a more efficient airplane. But that really is just an excuse because newer airplanes are cheaper and more reliable to operate, so the airlines already ordered aircraft but are now claiming it is their sustainability plan.

The truth is the airline industry has a huge problem, with no solid solution.

That is unless we look to California and Cap and Trade.

So when the California High-Speed Rail project was set up, California set a standard for financing using GHG emissions. Companies that exceeded a limit set by the state had to buy carbon credits from companies that were deemed green. This is exactly how California planned to pay for the majority of the building of its high-speed rail system. The California High-Speed Rail Authority would sell carbon credits to other companies, to pay for building high-speed rail. So could this plan be expanded to the rest of the US?…well it already is. In fact, carbon credit exchanges are already being set up across the world (see headlines above).

So carbon credit exchanges are still in their infancy, but there is an airline that has already been planning for this…and that is United.

Not sure if it is strategic, or just by coincidence, but United has been actively investing in electric airplane companies and carbon capture technology companies. Not full buyouts, but enough to have the option to purchase more of the company or control who the company would sell credits to. So that if a carbon credit exchanges become a reality, United is ready to buy carbon credits from the companies it has ownership in to offset its ESG reporting…..making United more attractive to bankers and customers. More importantly, making United the greenest and most profitable airline. Kudos, United!

Of course, we need to bring this back to high-speed rail. Yes, we don’t have it here in the US. However, imagine if a startup high-speed railroad was allowed to sell carbon credits.

We aren’t talking about $1 million in credits, or even a $1 billion. We are talking about $100 billions in carbon offset credits (since California HSR appears to be costing that). The pool of carbon credits would be huge!

By investing in high-speed railroad carbon credits, a company could potentially offset its ESG reporting for decades. The result may be money just flowing in to create high-speed railroads across the country.

Now, this is all speculative, because the SEC has not made any of the proposed regulations laws yet and carbon credit trading is still in its infancy, but it is an interesting thought.

Especially if high-speed rail turns out to be a nearly unlimited pool of carbon credits for not only the airlines but every corporation entangled with ESG reporting that has to figure out what to do about Green House Gas Emissions.

More next week…

Who is Doctor Yellow? - No, Not That One

No, We aren’t talking about the train that All JR Interns know about (and likely ridden).

We are talking about Shinkalion 923 Doctor Yellow from the Shinkansen Ultra Evolution Institute.

According to Shinkalion.fandom.com (and Wikipedia), Appearing from no where, a group of robots attacked Japan. Called Shinkalions, these are robots that are led by the Black Shinkansen. These robots hide as Shinkansen trains then transform to robots to take over the world. To counter, a secret organization is formed called: Shinkansen Ultra Evolution Institute which was established to investigate the creation of bullet trains that transform into giant robots to protect Japan.

A 9-year-old, called Hokuto, gets involved in an attack at the Railway Museum where his father works. During this attack Hokuto stumbles onto the Institutes newest weapon: Shiknalion ALFA-X, and accidentally becomes a driver. He then brings together teams from all across Japan to fight the invaders attacking the planet.

Shinkanlion 923 Doctor Yellow, driven by Hokuto’s father, appears in the final season and has a rail gun and a rifle that can change into a trolley blade for hand to hand (or train to train) combat. This model only has 2 cars and is the second Shinkalion built for adult drivers and is actually the second Doctor Yellow Shinkalion. The first Doctor Yellow is a 5 car train based on the Shinkalion 500’s function and the N700A battle prowess. Both models are the largest Shinkalions created by the institute.

The Faster Badger is produced by students at the University of Wiscosin-Madison to help break through the misconceptions of high speed rail and high speed transportation. This blog is for educational purposes only and all opinions presented are of the students.

Scope 3 and the Shink-a -Lion

Meeting Details:

Next meeting: April 11th: 8:00pm, Zoom:

Agenda:

Faster Headlines

Up in the Air:

Give Us Some Credit

High Speed Rail Alliance

ESG Part 2: How to make money on Scope 3

Then there is the customer

What can the airlines do?

The truth is the airline industry has a huge problem, with no solid solution.

Who is Doctor Yellow? - No, Not That One

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