Carbon Finance

 

CARBON FINANCE

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Carbon Finance Background

Carbon finance has a number of dimensions, briefly explored here with links for further reference. Carbon finance involves the financial implications of living in a carbon-constrained world, a world in which emissions of carbon dioxide and other greenhouse gases (GHGs) carry a price (commonly called a Price on Carbon). Financial risks and opportunities impact corporate balance sheets, and market-based instruments are capable of transferring environmental risk and achieving environmental objectives. Issues regarding climate change and GHG emissions must be addressed as part of strategic risk management decision-making. (Ref: Wikipedia)

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Investors and Climate Change 

CERES is an advocate for sustainability leadership. Ceres mobilizes a network of investors, companies and public interest groups to accelerate and expand the adoption of sustainable business practices and solutions to build a healthy global economy. HERE is one Ceres investor statement by 190 real-money investors with more than US$ 13 trillion of assets: "On 14 January 2010 the world’s largest investors released a statement calling on the U.S. and other governments to quickly adopt strong national climate policies that will establish a stable investment climate and thus spur low-carbon investments to reduce emissions causing climate change." Similar subsequent statements have been made.

HERE is the Ceres director of public policy discussing climate action by corporations:

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HERE is a report by Bloomberg and UNEP (United Nations Environment Programme) entitled: Global Trends in Renewable Energy Investment 2013:

  • World Invests $244 billion in 2012, Geographic Shift to Developing Countries. Installed capacity continues to grow as solar prices drop 30-40%, new wind installations surge

Investors are becoming increasingly interested in projects involving non-fossil fuel energies (solar, wind, geothermal, fusion, advanced biofuels, advanced fission). HERE are descriptions of these energies with links.

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Generally, Socially Responsible Investing (SRI) is any investment strategy which seeks to consider both financial return and social good.

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ESG (Environmental, Social and Governance) ratings are critera for socially responsible investing. There are ESG indices that rate business practices of thousands of companies worldwide, see eg. MSCI ESG research. MSCI Sustainability Indices include companies with high ESG ratings relative to their sector peers, thus integrating sustainability analysis into the index construction process. MSCI calculates Sustainability indices covering both global developed and emerging markets. HERE by Bloomberg LP is the new environment, social, and governance (ESG) data service. It allows investors to search and compare relevant ESG data on 3,000-plus public and private companies. Users have access to a wide range of numerical and qualitative data, ranging from companies' emissions and energy consumption to their human rights policies and the size of their boards of directors.

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Shareholders sometimes engage in corporate action. Shareholder resolutions are filed by a wide variety of institutional investors, including public pension funds, faith-based investors, socially responsible mutual funds, and labor unions. In 2004, faith-based organizations filed 129 resolutions, while socially responsible funds filed 56 resolutions.

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Divestment of shares of a company is another avenue. In the case of fossil fuels, the carbon bubble effect due to stranded assets has motivated some divestment activity, in addition to the ethical/survival concerns over increasingly serious climate impacts due to fossil fuels consumption. 

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The Unitarian Universalist Association passed this resolution on divestment:

Action of Immediate Witness

THEREFORE, BE IT RESOLVED that the 2013 General Assembly of the Unitarian Universalist Association calls upon delegates to begin a denomination-wide conversation within their congregations about divesting from fossil fuels or exercising shareholder influence. Congregations might discuss the following:

1. Stopping any new direct investments in fossil fuel companies, as listed in Carbon Tracker reports;
2. Divesting of all direct securities holdings in fossil fuel companies within the next five years;
3. Investing in diversified, socially responsible, and climate-friendly securities, and securities in the renewable energy and efficiency sector;
4. Investing in making their own facilities more energy efficient, make widespread use of renewable energy, adopt conservation and efficiency measures;
5. Evaluating the effectiveness of shareholder advocacy; and
6. Retaining the option of owning the minimum number of shares necessary to be an activist shareholder.  These shares would be considered “influence payments” and not investments.

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Carbon Fee (Tax) and Dividend

Carbon taxes offer a potentially cost-effective means of reducing greenhouse gas emissions. From an economic perspective, carbon taxes are a type of Pigovian tax. They help to address the problem of emitters of greenhouse gases not facing the full (social) costs of their actions. Carbon taxes can be a regressive tax, in that they may directly or indirectly affect low-income groups disproportionately . The regressive impact of carbon taxes could be addressed by using tax revenues to favour low-income groups. However, there are about USD $550 billion in fossil fuel subsidies annually worldwide. (Ref: Wikipedia)

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Jim Hansen on Energy, Carbon Fee and Dividend. This is a video of Jim Hansen on energy. He also explains his idea of putting a fee on carbon with dividend back to the people in order to cut back our dependence on fossil fuels.

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The Citizens Climate Lobby is a non-partisan organization which advocates for progressive climate legislation. Their goal is to cut greenhouse gas emissions and promote transition to a green energy economy through a revenue neutral ‘carbon fee and dividend’ approach to pricing carbon pollution from fossil fuels.

Florida State Prof. Shi-Ling Hsu’s book is “Getting Past Our Hangups About Effective Climate Policy.” Here is a summary:

HSU Carbon Tax PrecisFinal

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Recently the NYT reported that Large Companies are Prepared to Pay Price on Carbon

...A new report by the environmental data company CDP has found that at least 29 companies, some with close ties to Republicans, including ExxonMobil, Walmart and American Electric Power, are incorporating a price on carbon into their long-term financial plans...

Tom Carnac, North American president of CDP, said that the five big oil companies seemed to have determined that a carbon price was an inevitable part of their financial future. “It’s climate change as a line item,” Mr. Carnac said. “They’re looking at it from a rational perspective, making a profit. It drives internal decision-making.”

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Rep. Henry A. Waxman, Senator Sheldon Whitehouse, Rep. Earl Blumenauer, and Senator Brian Schatz released draft carbon-pricing legislation (March 2013); see HERE. The nation’s largest polluters would have to pay a fee for each ton of pollution they release. EPA’s database of reported emissions would determine the amount of pollution subject to the fee.  The Treasury Department would be responsible for the collection and handling of the fees. “Putting a price on carbon could help solve two of the nation’s biggest challenges at once:  preventing climate change and reducing the budget deficit,” said Rep. Waxman.

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Emissions Trading

Emissions trading (also known as cap and trade) is a market-based approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants.

HERE is a glossary for Emissions Trading from Allianz.

A central authority (usually a governmental body) sets a limit or cap on the amount of a pollutant that can be emitted. The limit or cap is allocated or sold to firms in the form of emissions permits which represent the right to emit or discharge a specific volume of the specified pollutant. Firms are required to hold a number of permits (or credits) equivalent to their emissions. The total number of permits cannot exceed the cap, limiting total emissions to that level. Firms that need to increase their emission permits must buy permits from those who require fewer permits. The transfer of permits is referred to as a trade. In effect, the buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions. Thus, in theory, those who can reduce emissions most cheaply will do so, achieving the pollution reduction at the lowest cost to society. (Ref: Wikipedia)

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There are active trading programs in several air pollutants. For greenhouse gases the largest is the European Union Emission Trading Scheme. In the United States there is a national market to reduce acid rain and several regional markets in nitrogen oxides. Markets for other pollutants tend to be smaller and more localized.

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European Emissions Trading

Most emissions trading is done in Europe. HERE is a carbon market report from the French bank CDC:

Tendances Carbone Cdc Climat Research No59 Eng

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Fee and Dividend vs. Cap/Trade or Regulation

HERE is a discussion with eight contributors from Environment 360 at Yale U.

Any law that places a price on carbon must achieve two basic and interrelated goals: discouraging — with increasingly painful economic consequences — the use of oil, coal, and natural gas, and encouraging the development of renewable sources of energy. Two paths to this end have been proposed. The first is a cap-and-trade system, which would place progressively stricter limits on fossil fuel use; require power plants, industries, and other major sources of greenhouse gases, to purchase permits to discharge carbon dioxide; and establish a market in those permits. The second is an outright tax on fossil fuels. Proponents of both methods say the economic hardship created by higher energy prices could be offset by rebates to taxpayers.

HERE is a poll by the IGM of their Economic Experts Panel on a carbon tax; the question posed was: "A tax on the carbon content of fuels would be a less expensive way to reduce carbon-dioxide emissions than would a collection of policies such as “corporate average fuel economy” requirements for automobiles". The results were overwhelmingly in favor (90% agreed; date 2011).

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Climate Bonds

Climate-themed bonds are corporate bonds that are targeted to low-emission transport, renewable energies, etc. HERE is a report by the Climate Bond Initiative. Facts:

  • The total universe of bonds linked to key climate themes stands at USD 346 bn, double last year’s estimate.
  • The issuance of new climate-themed bonds was USD 74 bn in 2012, up 25% on 2011.
  • China accounts for USD127bn of the total, followed by the UK and France.
  • CO2 transport, notably rail, accounts for 75%, followed by clean energy and climate finance.
  • 89% of the USD 346 bn universe is investment grade.

HERE is their 8-point plan for "Mobilizing Bond Markets for the Low Carbon Transition"

Create deal flow – Bond investors need scale; renewable energy and energy efficiency projects (markets) need to be aggregated into larger offerings suitable for the appetite of the big investors; Engineer investment grade offerings – High demand of low risk investments. Renewable energy investments are seen as a “novelty”, we need to change this perception. In order to do that, a grand pact between governments and institutional investors is needed. Governments engineer a stream of large scale investment opportunities and does everything it can do to make sure they are investment grade; in return institutional investors turn on the taps; Be clever about public sector risk-sharing – Financial leverage (e.g. policy risk insurance and currency risk insurance) and regulatory leverage. Build green enabling institutions – Green Investment Units and Banks are needed; Give tax incentives for climate bonds – very little treasury loss can be a big boost to investment; Build an economic recovery narrative – the transition to a green economy revamps our economy across every sector and addresses the climate change threat; Use Climate Bond Standards as a screening and preferencing tool – a tool that helps investors monitor and verify the climate effectiveness of their investments; Make it easy for politicians – bond investors and business issuers have to get better at packaging politically sellable solutions, help politicians see how they can successfully sell those plans to voters - See more at: http://www.climatebonds.net/#sthash.djXU6k6I.dpuf
Climate Bonds Initiative’s 8 points plan to promote the transition to a low-carbon economy - See more at: http://www.climatebonds.net/#sthash.djXU6k6I.dpuf

Climate Bonds Initiative’s 8 points plan to promote the transition to a low-carbon economy

  1. Create deal flow – Bond investors need scale; renewable energy and energy efficiency projects (markets) need to be aggregated into larger offerings suitable for the appetite of the big investors;
  2. Engineer investment grade offerings – High demand of low risk investments. Renewable energy investments are seen as a “novelty”, we need to change this perception. In order to do that, a grand pact between governments and institutional investors is needed. Governments engineer a stream of large scale investment opportunities and does everything it can do to make sure they are investment grade; in return institutional investors turn on the taps;
  3. Be clever about public sector risk-sharing – Financial leverage (e.g. policy risk insurance and currency risk insurance) and regulatory leverage.
  4. Build green enabling institutions – Green Investment Units and Banks are needed;
  5. Give tax incentives for climate bonds – very little treasury loss can be a big boost to investment;
  6. Build an economic recovery narrative – the transition to a green economy revamps our economy across every sector and addresses the climate change threat;
  7. Use Climate Bond Standards as a screening and preferencing tool – a tool that helps investors monitor and verify the climate effectiveness of their investments;
  8. Make it easy for politicians – bond investors and business issuers have to get better at packaging politically sellable solutions, help politicians see how they can successfully sell those plans to voters
- See more at: http://www.climatebonds.net/#sthash.djXU6k6I.dpuf

The report finds:

  • - The total universe of bonds linked to key climate themes stands at USD346bn, double last year’s estimate.
  • - The issuance of new climate-themed bonds was USD74bn in 2012, up 25% on 2011.
  • - China accounts for USD127bn of the total, followed by the UK and France.
  • - CO2 transport, notably rail, accounts for 75%, followed by clean energy and climate finance.
  • - 89% of the USD346bn universe is investment grade.
- See more at: http://www.climatebonds.net/#sthash.djXU6k6I.dpuf

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PACE Financing

PACE means property-assessed clean energy. See HERE for an introduction. The idea is that PACE programs help home and business owners pay for the upfront costs of green initiatives, such as solar panels or energy efficiency retrofits, which the property owner then pays back through increased property taxes by a set rate over about 20 years. This allows property owners to begin saving on energy costs while they are paying for their solar panels.

In areas with PACE legislation in place municipal governments offer a specific bond to investors and then loan the money to consumers and businesses. The loans are repaid over the assigned term (over the course of somewhere between 5 and 25 years) via an annual assessment on their property tax bill. One of the most notable characteristics of PACE programs is that the loan is attached to the property rather than an individual.

Because PACE puts a lien on the property, an important and controversial point is whether the lien is senior or subordinate to the mortgage itself. 

PACE is enabled in 31 states and the District of Columbia, covering more than 80% of the U.S. population, notably California.

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The UN High-Level Advisory Group on Climate Change Financing

The Secretary-General established a High-Level Advisory Group on Climate Change Financing on 12 February 2010 for the duration of 10 months. The Group will study potential sources of revenue that will enable achievement of the level of climate change financing that was promised during the United Nations Climate Change Conference in Copenhagen in December 2009. The Group is co-chaired by His Excellency Mr. Jens Stoltenberg, Prime Minister of Norway, and His Excellency Mr. Meles Zenawi, Prime Minister of the Federal Democratic Republic of Ethiopia. As part of its work, the Group will develop practical proposals on how to significantly scale-up long-term financing for mitigation and adaptation strategies in developing countries from various public as well as private sources.

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Carbon Funds & Facilities

The World Bank Carbon Finance Unit (CFU) uses money contributed by governments and companies in OECD countries to purchase project-based greenhouse gas emission reductions in developing countries and countries with economies in transition. The emission reductions are purchased through one of the CFU's carbon funds on behalf of the contributor, and within the framework of the Kyoto Protocol's Clean Development Mechanism (CDM) or Joint Implementation (JI).

Here is a chart of the distribution of carbon projects (World Bank):

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The Clean Development Mechanism

HERE is a description of the Clean Development Mechanism CDM.

The CDM allows emission-reduction (or emission removal) projects in developing countries to earn certified emission reduction (CER) credits, each equivalent to one tonne of CO2. These CERs can be traded and sold, and used by industrialized countries to a meet a part of their emission reduction targets under the Kyoto Protocol.

Connie Hedegaard, Europe's climate chief, said that U.N. talks in Cancun, Mexico, later this year should agree to reassure carbon markets that the current CDM mechanism would continue beyond 2012, when the first period of the U.N.'s Kyoto Protocol climate treaty expires.

"We want the CDM mechanism to be modernised, refined," she told reporters in Geneva at the end of 46-nation talks focused on raising new funds to help developing countries curb global warming. "It must be more streamlined, more simple."

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Renewable Portfolio Standards

One policy example is the Renewable Portfolio Standard.  "A Renewable Portfolio Standard (RPS) is a regulation that requires the increased production of energy from renewable energy sources. Other common names for the same concept: Renewable Electricity Standard (RES) at the United States federal level and Renewables Obligation in the UK. The RPS mechanism generally places an obligation on electricity supply companies to produce a specified fraction of their electricity from renewable energy sources." (Ref: Wikipedia)

HERE is a list of US states with RPS. There is no US national RPS.

Here is information on RPS from the DSIRE website. DSIRE is the most comprehensive source of information on incentives and policies that support renewables and energy efficiency in the United States. Established in 1995, DSIRE is currently operated by the N.C. Solar Center at N.C. State University, with support from the Interstate Renewable Energy Council, Inc. DSIRE is funded by the U.S. Department of Energy.

RPS Policies   RPS Policies   RPS Policies (PDF file)
RPS Policies with Solar/DG Provisions   RPS Policies with Solar/DG Provisions   RPS Policies with Solar/DG Provisions (PDF file)

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Renewable Energy Financial Incentives in the US by State

DSIRE's color-coded summary maps provide a geographical overview of certain financial incentives and regulatory policies that promote renewable energy in U.S. states. Click on the symbols below.

3rd_Party_PPA_map   3rd_Party_PPA_map   3rd-Party Solar PPA Policies
EERS_Map   EERS_Map   Energy Efficiency Resource Standards
Grant Programs for Renewables   Grant Programs for Renewables   Grant Programs for Renewables
interconnection   interconnection   Interconnection Policies
Loan Programs for Renewables   Loan Programs for Renewables   Loan Programs for Renewables
net_metering_map   net_metering_map   Net Metering Policies
PACE_Financing_Map   PACE_Financing_Map   PACE Financing Policies
Property Tax Incentives for Renewables   Property Tax Incentives for Renewables   Property Tax Incentives for Renewables
PBF_Map   PBF_Map   Public Benefits Funds for Renewables
Rebate Programs for Renewables   Rebate Programs for Renewables   Rebate Programs for Renewables

 

Sales Tax Incentives for Renewables   Sales Tax Incentives for Renewables   Sales Tax Incentives for Renewables
Tax Credits for Renewables   Tax Credits for Renewables   Tax Credits for Renewables

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Renewable Energy Financing Worldwide

African-EU Renewable Energy Co-operation Programme

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RGGI

RGGI (the Regional Greenhouse Gas Initiative) is a cap-and-trade program now comprised of nine participating New England and Mid-Altlantic States. There are physically deliverable futures contract on RGGI Allowances. There are also options on RGGI Futures. See HERE for details. A document clearly explaining all this is HERE.

A report released in February 2011 shows that, overall, the states that participated in the first RGGI control period are investing 80 percent of CO2 allowance proceeds, which now total more than $952 million, in strategic energy programs. See HERE for more information.

Gov. Christie (NJ) in an executive order, withdrew New Jersey from RGGI at the end of 2011. The reason given was that the price of carbon traded on RGGI was too low to be effective. However pressure from right-wing politics played a dominant role. 

See also:

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Environmental Derivatives

HERE is an overview of the Chicago Climate Futures Exchange® (CCFE®), which says the CCFE "operates the leading U.S. marketplace for environmental derivatives, financial instruments whose underlying values are tradable environmental assets.  CCFE's suite of environmental products provides market participants with the ability to hedge exposure to risk and make informed investment decisions in emissions markets, renewable energy certificate markets, sustainable equity index markets and insurance markets linked to catastrophic weather events."

Here are other CCFE carbon futures and options products links: CCAR-CRT Futures and Options, CER Futures, CFI Futures and Options, CFI-EA Futures, CFI-US Futures and Options, CFI-US-O Futures.

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Carbon Finance Links: 

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Here is the World Bank Climate RSS Feed.

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What's the picture? It's the World Bank's Environment Carbon Finance logo.

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Last edit 13Sep2017

 

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