Carbon Finance E-Book

Sonia Labatt

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch

Seitenzahl: 451

Veröffentlichungsjahr: 2011

Beschreibung

Praise for Carbon Finance "A timely, objective, and informative analysis of the financial opportunities and challenges presented by climate change, including a thorough description of adaptive measures and insurance products for managing risk in a carbon constrained economy." --James R. Evans, M. Eng. P. Geo., Senior Manager, Environmental Risk Management, RBC Financial Group "Climate change will have enormous financial implications in the years to come. How businesses and investors respond to the risks and opportunities from this issue will have an enormous rippling effect in the global economy. Sonia Labatt and Rodney White's insights and thoughtful analysis should be read by all who want to successfully navigate this global business issue." --Andrea Moffat, Director, Corporate Programs, Ceres "In Carbon Finance, Labatt and White present a clear and accessible description of the climate change debate and the carbon market that is developing. Climate change is becoming an important factor for many financial sector participants. The authors illustrate how challenges and opportunities will arise within the carbon market for banking, insurance, and investment activities as well as for the regulated and energy sector of the economy." --Charles E. Kennedy, Director and Portfolio Manager, MacDougall, MacDougall & MacTier Inc. "Climate change is the greatest environmental challenge of our generation. Its impact on the energy sector has implications for productivity and competitiveness. At the same time, environmental risk has emerged as a major challenge for corporations in the age of full disclosure. Carbon Finance explains how these disparate forces have spawned a range of financial products designed to help manage the inherent risk. It is necessary reading for corporate executives facing challenges that are unique in their business experience." --Skip Willis, Managing Director Canadian Operations, ICF International "In this timely publication, Labatt and White succeed in communicating the workings of carbon markets, providing simple examples and invaluable context to the new and changing mechanisms that underpin our transformation to a carbon-constrained world. Carbon Finance will be the definitive guide to this field for years to come." --Susan McGeachie, Director, Innovest Strategic Value Advisors, Graduate Faculty Member, University of Toronto; and Jane Ambachtsheer, Principal, Mercer Investment Consulting, Graduate Faculty Member, University of Toronto

Leseprobe

Contents

Foreword

About the Authors

Acknowledgments

List of Acronyms

CHAPTER 1: Introduction

Introduction

The Changing Climate

Corporate Climate Risk

Climate Policies

Role of the Financial Services Sector

Conclusion

CHAPTER 2: The Energy Chain

Introduction

The Energy Chain and the Value Chain

Carbon Policies

Impacts of Different Users and Uses on Climate Change

Sources of Energy: Fossil Fuels

Sources of Energy: Nuclear Energy

Sources of Energy: Hydroelectric Power

Sources of Energy: Renewables

Key Issues

Financing the Transformation of the Energy Chain: The Role of Venture Capital

Conclusion

CHAPTER 3: Regulated and Energy-Intensive Sectors

Introduction

Power Industry

Integrated Oil and Gas Industry

Transportation

Cement

Competitive Implications of Climate Risk in Regulated and Energy-Intensive Sectors

Conclusion

CHAPTER 4: The Physical Impacts of Climate Change on the Evolution of Carbon Finance

Introduction

Physical Impacts on Unregulated Sectors

Physical Impacts on Carbon-Regulated Sectors

Financial Services

Conclusion

CHAPTER 5: Institutional Investors and Climate Change

Introduction

Institutional Investors: Size and Global Reach

Environmental Reporting

Corporate Environmental Reporting

New ERA of Fiduciary Responsibility for Institutional Investors

Mutual Funds

New Momentum in the Corporate World

Barriers to the Financial Consideration of Climate Change

Institutional Investors and Climate Change

Conclusion

CHAPTER 6: Emissions Trading in Theory and Practice

Introduction

How Carbon is Traded Now

Key Issues

The Carbon Offset Market

The Role of Insurance in Emissions Trading

Issues for Dispute Resolution

Conclusion

CHAPTER 7: Climate Change and Environmental Security: Individuals, Communities, Nations

Introduction

Direct Effect of Extreme Weather Events

Health Effects of Climate Change

Polar Regions

Climate Systems and National Sovereignty

Conclusion

CHAPTER 8: Adapting to Adverse and Severe Weather

Introduction

Adverse Weather: The Role of Weather Derivatives

Severe Weather: The Role of Catastrophe Bonds

Conclusion

CHAPTER 9: Key Players in the Carbon Markets by Martin Whittaker, guest author

Introduction

Basic Elements of the Market

Key Private-Sector Players

Key Players from the Public Sector

Information Services

Professional Services

New Horizons for the Carbon Market

Conclusion

CHAPTER 10: Carbon Finance: Present Status and Future Prospects

Introduction

Trading Volumes in Carbon and Weather Markets

What Can Be Traded Where? (And What Cannot?)

Price Discovery

The Evolution of Products for Carbon Finance

Litigation Over Responsibility for Climate Change

Is Carbon Finance Likely to Help Us Avert Dangerous Levels of Climate Change?

Carbon Finance within the Broader Field of Environmental Finance

Conclusion

Web Sites

References

Index

Copyright © 2007 by Sonia Labatt and Rodney R. White. All rights reserved

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Labatt, Sonia.

Carbon finance: the financial implications of climate change / Sonia Labatt Rodney R. White.

p. cm. —(Wiley finance series)

“Published simultaneouly in Canada.”

Includes bibliographical references and index.

ISBN-13: 978-0-471-79467-7 (cloth)

ISBN-10: 0-471-79467-8 (cloth)

1. Emissions trading. 2. Greenhouse gases—Economic aspects. 3. Environmental economics. I. White, Rodney R. II. Title

HC79.P55L33 2007

363.738′746—dc22

2006033468

ISBN-13 978-0-471-79467-7

Foreword

After decades of debate, there is now a clear scientific consensus that climate change is occurring and that human activities are a major contributory factor.

Furthermore, the groundbreaking report from Sir Nicholas Stern, released in October 2006, shows clearly that it is a serious economic threat, not just a scientific concern. In his comprehensive report for the U.K. government, the former chief economist at the World Bank describes climate change as “the greatest market failure the world has seen.”

Unabated climate change could cost as much as 20 percent of global gross domestic product (GDP), he estimates. By acting promptly to avoid the worst impacts of global warming, however, he says the cost could be limited to around 1 percent of GDP.

A variety of responses are required, including education and awareness raising, improvements in energy efficiency, and measures to stimulate the deployment of low-carbon technologies. But, Stern says, a key policy requirement is carbon pricing—assigning a cost to emissions of greenhouse gases—through taxation, regulation, and/or emissions trading.

Thanks to the Kyoto Protocol, tools for pricing carbon already exist. The 1997 treaty, which eventually came into force in February 2005, created two mechanisms—Joint Implementation (JI) and the Clean Development Mechanism (CDM)—to encourage investments in projects that reduce carbon emissions in industrialized and developing countries, respectively. In addition, it imposed binding emissions limits on industrialized nations and set out the rules for a global market in emission reductions. Such a market should ensure that the cheapest reductions are targeted first, thus minimizing the overall cost of tackling global warming.

To create the foundations for this market, industrialized countries have each been assigned a limited number of emission allowances and those that find it difficult to stay within their limit will be allowed to buy allowances from those with an excess. Also, in return for investing in CDM or JI projects, these countries will receive emission reduction credits or “carbon credits” that can be used to offset their own emissions.

The first international attempt to implement such a system was launched by the European Union in January 2005 and required its 25 member states to impose emissions caps on individual industrial facilities. As a result, greenhouse gas emissions are now a routine risk management issue, and have a direct impact on the bottom line, for some 5,000 companies across Europe.

Within 18 months of the program being set up, prices reached €30 per metric ton of carbon dioxide (the standard trading unit in the carbon market) and the value of the market in 2005 was estimated at around €6.5 billion, even though a majority of the affected companies have neither bought nor sold allowances yet. But the EU Emissions Trading Scheme (ETS) represents a financial exposure even for those companies that have not yet traded since all installations covered by the scheme face substantial financial penalties if their emissions exceed their annual allocation of allowances.

In late 2006, average daily volume in the market was around 4 million allowances, despite an overgenerous allocation process that means, overall, there will be no shortage in the pilot phase of the program, which runs until the end of 2007. The rules will be tightened to ensure that there is a genuine shortage of allowances in Phase II (2008–12).

Other countries and regions, especially in the United States, Australia, and Japan, are keeping a close eye on the European Union (EU) scheme and some have plans for similar initiatives of their own. Several other European countries—notably Norway, Switzerland, and Iceland—have announced firm plans to join the EU ETS.

In line with the Kyoto Protocol, the EU trading program also allows companies to buy carbon credits from CDM and JI projects to supplement their own emission reduction efforts. By mid-2006, more than $6 billion had been assigned to dedicated “carbon funds” that aim to purchase credits from such projects to help companies and countries meet their emissions targets.

According to the World Bank, the overall carbon market—including the EU ETS, CDM and JI transactions, and other smaller emission reduction programs—was worth some $22 billion in the first nine months of 2006. This is more than double the figure for the whole of 2005, and comparable to some established commodity markets, although still very small by comparison with equity, interest rate, and currency markets.

As trading volumes increase, there will naturally be a growing demand for insurance products linked to carbon prices. And, as the market expands, hedge funds and other speculators are showing an interest in trading carbon credits, which represent a new asset class that is uncorrelated with most conventional securities.

Corporate emissions of carbon dioxide, methane, and other greenhouse gases are therefore no longer just the concern of environmental, health, and safety staff, but are increasingly a matter for senior management, as well as equity analysts, project financiers, insurers, and even mainstream institutional investors.

In addition to the major European emitters that are subject to the mandatory requirements of the EU ETS, thousands of other companies around the world are taking voluntary action to reduce their emissions. They are generally motivated either by a desire to gain some kind of first-mover advantage ahead of expected legislation, or to boost their reputation with consumers and shareholders.

The latter are increasingly holding companies to account for their contribution to climate change. A prime example is the Carbon Disclosure Project, an initiative backed in 2006 by more than 200 institutional investors representing some $31 trillion of assets under management—around a third of the world’s investment capital. The investors sent a questionnaire to the chairmen of the world’s largest companies asking them to disclose “investment-relevant information concerning their emissions of greenhouse gases.” Responses are made public and those that fail to respond are named and shamed.

And, while the EU ETS currently targets only large industrial emitters, the responsibility for reducing emissions will not stop there. To complement the trading of emission allowances, carbon taxes are increasingly being introduced to penalize the use of highly emitting goods and services. In some countries vehicles are already taxed according to how much carbon dioxide they emit, and electricity suppliers are obliged to inform consumers how much of the power they sell comes from low-carbon sources.

There is even talk among European politicians of giving individuals their own “carbon allowance” each year, which could be credited and debited according to their purchases, travel choices, and energy consumption.

Sonia Labatt and Rodney White have provided a highly readable overview of the key developments in this fast-evolving area of carbon finance. It should be a valuable guide for anyone wishing to understand the implications of this innovative market-based approach to combating climate change.

Graham Cooper

Publisher

Environmental Finance magazine

December 2006

About the Authors

Sonia Labatt is an associate faculty member at the Centre for Environment, University of Toronto. She has been engaged in the academic world of environmental finance through her graduate-level courses at the university, and in the financial services world as an active investor. Dr. Labatt broadens her environmental concerns, experience, and commitment through her association with World Wildlife Fund Canada.

Rodney R. White, Professor of Geography at the University of Toronto, was director of the university’s Institute for Environmental Studies 1994–1999 and 2000–2005. He is also an Associate Fellow of the Environmental Change Institute at the University of Oxford and a Senior Fellow at Massey College, University of Toronto. His recent books include Building the Ecological City and Planning in Cities (with Roger Zetter).

In 2002 Sonia Labatt and Rodney White published Environmental Finance: A Guide to Environmental Risk Assessment and Financial Products (Wiley Finance).

Martin Whittaker, Carbon Finance guest author, leads the environmental finance strategy at MissionPoint Capital Partners, a Connecticut-based private investment firm. Prior to joining MissionPoint, he was part of the Environmental and Commodity Markets team at Swiss Re Financial Services. Dr. Whittaker holds a PhD in environmental science from the University of Edinburgh and an MBA from the University of London. Prevoiusly, he was an adjunct professor at the Unversity of Toronto, where he taught environmental finance.

Acknowledgments

While writing this book we have benefited from the knowledge of a number of people, many of whom have become experts in the new field of carbon finance. They include: Jane Ambachtsheer (Mercer Investment Counseling), Dominic Barton (McKinsey & Company), Ann-Marie Brinkman (International Energy Agency), Frances Buckingham (SustainAbility), Valerie Cooper (Weather Risk Management Association), Renata Christ (Intergovernmental Panel on Climate Change), Julie Desjardins (CICA consultant), James Evans (RBC Financial Group), Odette Goodall (Endiang Holdings Inc.), Charles Kennedy (MacDougall, MacDougall & MacTier Inc.), Yann Kermode (UBS AG), Ian Hart (Pacific Institute), John Lane (Johns Hopkins University Press), Helen Lup (The Economical Insurance Group), Sue McGeachie (Innovest Strategic Value Advisors), Andrea Moffat (CERES), Sibyl Nelson (Pew Center on Global Climate Change), Brenda Norris (Commissioner, Roosevelt Campobello International Park Commission), Nick Parker (Cleantech Capital Group LLC), Alexander Pohl (HSBC), Jane Rigby (Environment Canada), Dr. Armin Sandhoeval (Allianz Climate Core Group), Elizabeth Sandler (Science magazine), Ashraf Sharkawy (Allianz Global Risks), Gray Taylor (Bennett Jones), William (Bill) Tharp (The Quantum Leap Company Limited), John Turner (Miller Thomson LLP), Angelika Wirtz (Munich Re), Alan Willis (Alan Willis and Associates), Errick Willis (ICF International), and Martin Whittaker (Mission Point Capital Partners).

Once again, we owe special thanks to Graham Cooper, founding publisher of the journals Environmental Finance and Carbon Finance, for his foresight in recognizing the emergence of the field of carbon finance in anticipation of a carbon-constrained world. For a second time, Graham has been kind enough to write the foreword to our book.

Finally we recognize our spouses, Sue White and Arthur Labatt, who offered wise counsel, encouragement, and support, and have shown patience beyond their call of duty.

Even with all this help, no doubt errors do remain, for which the authors alone take all responsibility.

Sonia Labatt and Rodney R. White

List of Acronyms

AAUsassigned amount unitsABIAssociation of British InsurersACEAAssociation des Constructeurs Européen d’Automobiles (Association of European Automobile Manufacturers)AGMannual general meetingAIMAlternative Investment Market (London)AMDAccounts Modernization Directive (U.K.)ARTalternative risk transferCAFECorporate Average Fuel Economy standard (U.S.)CalPERSCalifornia Public Employees’ Retirement SystemCalSTERSCalifornia State Teachers’ Retirement SystemCARBCalifornia Air Resources BoardCBOTChicago Board of TradeCCScarbon capture and storageCCSACarbon Capture and Storage Association (U.K.)CCXChicago Climate ExchangeCDDcooling degree dayCDMClean Development MechanismCDPCarbon Disclosure ProjectCECCommission of the European CommunitiesCEOchief executive officerCERsCertified Emissions Reduction units from the Clean Development Mechanism (CDM)CFIsCarbon Financial Instruments (at the CCX)CFOchief financial officerCHPcombined heat and powerCICACanadian Institute of Chartered AccountantsCMEChicago Mercantile ExchangeCOPConference of the Parties: the United Nations FrameworkConventionon Climate ChangeDefraDepartment for Environment, Food, and Rural Affairs (U.K.)DSRFdeep southerly return flowEBITDAearnings before interest, taxes, depreciation, and amortizationECXEuropean Climate ExchangeEEZExclusive Economic ZoneEFETEuropean Federation of Energy TradersEH&Senvironment, health, and safetyEIBEuropean Investment BankENSOEl Niño/Southern OscillationEORenhanced oil recoveryEPAEnvironmental Protection Agency (U.S.)ERPAEmission Reduction Purchase AgreementERUsemission reduction units from Joint Implementation (JI)ETSemissions trading schemeEUAEuropean Union AllowancesEUETSEuropean Union Emissions Trading SchemeGAAPGeneral Agreement on Accounting PracticesGGCAPGreenhouse Gas Credit Aggregation Pool (Natsource)GHGsgreenhouse gasesGTLgas-to-liquid (refinery process)HDDheating degree dayHEPhydro-electric powerHFCshydrofluorocarbonsHOVhigh occupancy vehicles (road lanes reserved for)IATAInternational Air Transport AssociationICEinternal combustion engineICLEIInternational Council for Local Environmental InitiativesIETinternational emissions tradingIETAInternational Emissions Trading AssociationIFCInternational Finance CorporationIFICInvestment Fund Institute of CanadaIGCCintegrated gasification combined cycle (power station)IIGCCInstitutional Investors’ Group on Climate ChangeINCRInvestor Network on Climate RiskIPCCIntergovernmental Panel on Climate ChangeIPEInternational Petroleum ExchangeIPOinitial public offeringIRRCInvestor Responsibility Research CenterISDAInternational Swaps and Derivatives AssociationJAMAJapan Automobile Manufacturers’ AssociationJIJoint ImplementationKAMAKorea Automobile Manufacturers’ AssociationLEEDLeadership in Energy and Environmental DesignLFGlandfill gasMACmarginal abatement costLIBORLondon Interbank Offered RateLNGliquified natural gasMCCFMultilateral Carbon Credit FundMD&Amanagement’s discussion and analysisMOPmeeting of the Parties to the Kyoto ProtocolMWmegawattNAICNational Association of Insurance Commissioners (U.S.)NGOnon-governmental organizationNOxnitrogen oxidesNAPNational Action Plan (EU ETS)OECDOrganisation for Economic Co-operation and DevelopmentOMERSOntario Municipal Employee Retirement SystemOPECOgranisation of Petroleum-exporting CountriesOTCover the counter (trading)PDIpower dissipation indexRECRenewable Energy CertificateRGGIRegional Greenhouse Gas InitiativeSECSecurities and Exchange Commission (U.S.)SMUDSacramento Municipal Utility DepartmentSO2sulfur dioxideSRIsocially responsible investmentSUVsports utility vehicleTBEtick-borne encephalitisTHCthermohaline circulationTIAA-CREFTeachers’ Insurance and Annuity Association—College Retirement Equities FundUKCIPUnited Kingdom Climate Impact ProgrammeUNEPUnited Nations Environment ProgrammeUNEPFIUnited Nations Environment Programme Financial InitiativeUNFCCCUnited Nations Framework Convention on Climate ChangeUSSUniversities’ Superannuation Scheme (U.K.)VATvalue-added taxWAISWestern Antarctic Ice SheetWBCSDWorld Business Council for Sustainable DevelopmentWMOWorld Meteorological OrganizationWNVWest Nile virusWRIWorld Resources InstituteWRMAWeather Risk Management AssociationZEVzero-emission vehicle (California’s mandate)

CHAPTER 1

Introduction

One thing that we’ve really broadly started to appreciate more is that climate is not an environmental issue. Climate change is a systemic and fundamental issue about the way our economics work and the way we get our energy.

—Robert Bradley, World Resources Institute

INTRODUCTION

Environmental concerns in general, and issues regarding climate change in particular, are moving from the realm of corporate Environment, Health, and Safety (EH&S) personnel, into that of corporate financial strategy, which involves chief executive officers (CEOs) and chief financial officers (CFOs) as well as boards of directors. The pace of this transformation has left few unaffected, from companies and cities managing their greenhouse gas emissions to equity and debt analysts paying close attention to climate liabilities along with physical concerns regarding the potential impacts of climate change patterns.

Carbon finance explores the financial implications of living in a carbon-constrained world—a world in which emissions of carbon dioxide and other greenhouse gases carry a price. Thus, carbon finance: