Yale University EliScholar – A Digital Platform for Scholarly Publishing at Yale Forestry & Environmental Studies Publications School of Forestry and Environmental Studies Series
2008 Carbon Finance: Environmental Market Solutions to Climate Change Bryan Garcia Center for Business and the Environment at Yale
Eric Roberts Center for Business and the Environment at Yale
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Recommended Citation Garcia, Bryan and Roberts, Eric, "Carbon Finance: Environmental Market Solutions to Climate Change" (2008). Forestry & Environmental Studies Publications Series. 37. https://elischolar.library.yale.edu/fes-pubs/37
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Bryan Garcia and Eric Roberts, EDITORS Center for Business and the Environment at Yale
To our family and friends, thank you for your consummate support during this time-intensive effort that often required us to take more than we gave.
B. Garcia and E. Roberts
Table of Contents
Preface 1 Stewart Hudson, President, Emily Hall Tremaine Foundation Foreword 5 Bradford Gentry, Director, Center for Business and the Environment at Yale Introduction 7 Bryan Garcia, Program Director, Center for Business and the Environment at Yale Eric Roberts, Yale SOM/F&ES Joint Master’s Degree Candidate '10 and Researcher, Center for Business and the Environment at Yale Carbon Finance: A Definition 13 Bryan Garcia and Eric Roberts, Center for Business and the Environment at Yale part i: the role of financial innovation in society and investing in climate change
Chapter 1 The History of Financial Innovation 19 William Goetzmann and K. Geert Rouwenhorst, Professors of Finance, Yale School of Management Chapter 2 Investing in Climate Change 45 Win Neuger, Chairman and CEO, AIG Investments part ii: regulation, markets, and investments: the emergence of carbon finance
Chapter 3 A Pot of Gold for Renewable Energy: Funding Renewable Energy 59 with Carbon Finance Peter Sweatman, Managing Director, Climate Change Capital
yale school of forestry & environmental studies carbon finance: environmental market solutions to climate change
Chapter 4 Investment Banks Jump on Board: Mining the Opportunities 85 in Global Carbon Markets Abyd Karmali, Managing Director and Global Head of Carbon Emissions, Merrill Lynch Chapter 5 Climate Change Investment Strategies: How a Universal Bank is 115 Leading Investments in a Low Carbon Economy Mark Fulton, Managing Director and Global Head of Strategic Planning, Climate Change Strategist, Deutsche Bank Chapter 6 Environmental Market Solutions for Global Warming 141 Jon Anda, Executive-in-Residence at the Fuqua School of Business at Duke University and former President of the Environmental Markets Network, Environmental Defense Fund part iii: market makers share their views on clean energy and climate change
Chapter 7 Funding Solutions to Climate Change: A Philanthropy Panel 165 James Gustave Speth (Moderator), Dean, Yale School of Forestry & Environmental Studies Stewart Hudson, President, Emily Hall Tremaine Foundation Michael Northrop, Program Director, Rockefeller Brothers Fund Ted Smith, Executive Director, Henry P. Kendall Foundation Chapter 8 Investing in Climate Change: A Panel on Hedge Funds 191 Bradford Gentry (Moderator), Director, Center for Business and the Environment at Yale Benjamin Block, Senior Analyst, Ardsley Partners Andy Ertel, President and CEO, Evolution Markets Paul Ezekiel, Managing Director and Global Head of Carbon Trading, Credit Suisse Martin Whittaker, Director, MissionPoint Capital Chapter 9 Investing in Clean Energy and Climate Change: A Private Equity Panel 203 Mark Barnett (Moderator), Co-Chair of Energy Technology and Renewables Practice, Foley Hoag Jeff Miller, Partner, The Tremont Group Jeff Possick, Principal, MissionPoint Capital George Sorenson, Chairman, FE Clean Energy Group yale school of forestry & environmental studies table of contents
Chapter 10 Investing in Cleantech: A Conversation between a Venture Capitalist and 227 an Entrepreneur Anastasia O’Rourke (Moderator), PhD Candidate, Yale School of Forestry & Environmental Studies Howard Berke, Senior Advisor, Good Energies and Executive Chairman and Co-Founder, Konarka Technologies Lise Dondy, President, Connecticut Clean Energy Fund and Vice President of Connecticut Innovations part iv: unique perspectives on emerging issues and opportunities
Chapter 11 Insuring the Future in a Changing World: The Impact of Climate Change 257 On Insurance, Financial Products and Services Ralph Mucerino, President, AIG Global Marine & Energy Chapter 12 Winners and Losers in a Low Carbon Economy: A Look at Innovest’s 275 Carbon BetaTM Mario López-Alcalá and Hiroshi Minami, Senior Analysts, Innovest Strategic Value Advisors Chapter 13 For the Love of Timber: A Different Look at a Natural Resource 295 Andrew Aulisi, Director, Markets and Enterprise Program, World Resources Institute part v: advancing solutions to climate change on multiple fronts
Chapter 14 From Understanding to Action: Advancing Solutions to Climate 329 Change on Campus, in Our Community, and Beyond Bryan Garcia and Eric Roberts, Center for Business and the Environment at Yale
Acknowledgements 337 Editor Biographies 340 About the Cover Image 343
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preface 1
Preface
Stewart Hudson, Emily Hall Tremaine Foundation
Climate change is a global problem of unprecedented scope and carbon finance will play a critical role in addressing it. In the mid 1980s, when I first started working on environmental policy issues, one would never have heard such a bold assertion. The prevailing belief in much of the environmental community was that private capital was usually the cause and rarely if ever the solution to environmental problems. And in the world of finance and investment, few individuals understood, or thought it was important enough to know, how markets influenced the environment and vice versa. As is made abundantly clear in Carbon Finance: Environmental Market Solutions to Climate Change, we are in a very different place today than we were 20 years ago. The environmental community is far more willing to add market-based mechanisms to its problem-solving tool box, and the financial world is far more savvy about environmental issues, including climate change. In the opening chapter of this publication, and in their own work on the history of financial innovation, Yale School of Management professors William M. Goetzmann and K. Geert Rouwenhorst document how financial instruments have, throughout history, co-evolved with changes in social purpose and concerns. Carbon finance might therefore be thought of as the latest example of this kind of social financial co-evolution. But first – what exactly do we mean when we use the term “carbon finance”? As the authors illustrate in this work, carbon finance has several different features. The first involves developing a market that trades in two new commodities – carbon allowances and their close cousins, carbon offsets. A second feature of carbon finance relates to investment. Whether venture capital, the relatively short-term financing of clean energy deals, or more traditional long-term investment in clean energy opportunities, investment is a critical element of carbon finance. Finally, carbon finance lends a new thematic focus to due diligence assessments of private firms. Said differently, carbon finance has a research element, one that will lead to a better understanding of how private firms have positioned themselves for success in a clean energy economy or, more troubling, how they have failed to do so. Assessments of carbon risk and reward, and the readiness of corporate firms to profit from the transition to a low carbon future, will in turn affect the trading and investment prospects inherent in what we mean by carbon finance.
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One of the most agreed-upon conclusions about carbon finance is that carbon markets are closely tied to and significantly impacted by governmental policy on climate and energy. Notwithstanding the capacity for imperfection, a corollary to this conclusion is equally important – that government policies are necessary for carbon markets to develop, grow, and mature. The experts showcased in Carbon Finance: Environmental Market Solutions to Climate Change suggest some critical “do’s” and “don’ts” for governments, and provide some examples of inherent dangers in governmental policy-making that would be worthwhile to avoid. A first danger, of course, is that governments will fail to act in a timely enough manner. Failure to act in the face of such an overwhelming and disruptive threat as climate change allows for unregulated markets to develop. These unregulated markets might be well intentioned (or not), but without the proper regulatory framework there is no certainty as to how the markets will behave. Furthermore, when a regulatory regime is in place, the attractiveness of carbon markets and their ability to function effectively may have been dimmed by the manner in which unregulated markets could already have poisoned the well. A second danger is that governments will act alone, neglecting to make common cause with other jurisdictions that share their goals and are willing to work in mutually beneficial ways. An overly diverse array of regulatory regimes, especially one that involves a lot of “reinventing of wheels” prevents markets from scaling up and makes price discovery, when done across jurisdictions, more art than science. A third danger is that governmental action will not be ambitious enough to solve the problem at hand. This scenario, that weak-kneed policies become the best that politics can produce, will also lead to a fourth danger. The fourth danger is that if governments fail to adopt policies virile enough to fully address the climate problem, they will then do something that makes all market makers shudder – they will return again and again to tinker with the rules. Constant tinkering is, as the experts in this publication indicate, the bane of market creation. It makes prices utterly dependent on the shifting sands of domestic politics, rather than the more enduring fundamentals of how mature markets behave. Rather than unleashing the power of private capital, tinkering makes that capital more allegiant to political engagement than the dependable financial guideposts of risk and reward, profit and loss. These are some of the dangers of governmental involvement, necessary though it is to the growth of carbon finance. At the same time, there are a number of steps that governments can and should take to encourage the growth of these new markets. Governments can serve as objective third parties, available not only to establish rules that induce fairness among private firms, but also to govern markets as they evolve. In this particular case, carbon finance will be shaped by the continued discoveries of climate science and what it tells us about climate impacts on social welfare and the environment. Governments can be disseminators of scientific information, and serve to assess the validity and reliability of climate science.
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Governments find it hard to pick winners and losers among private firms, but that doesn’t mean governments should shy away from setting policies that would ensure that winning, in a financial sense, is consistent with the desired social goal of reducing carbon pollution. Governmental policies can set up trading regimes (as in cap-and trade programs) that create a market and produce the desired environmental outcomes. Governments can create incentives so that state and local governments, as well as the federal government, adopt a cost effective portfolio of policies and programs necessary to the formation of carbon markets and the growth of carbon finance. Governments can reduce obstacles to investment in cleantech and, while this is certainly more controversial, there are instances where subsidies can and should encourage investment in new sources of energy like wind, solar, and the like. Governments can also support a new kind of due diligence – the reporting of climate risks and the extent to which firms are positioned for a transition to a low carbon economy. Finally, while governments should not tinker, they must certainly provide for oversight and regulation of carbon finance. It’s possible, as the current financial crisis has demonstrated, for governments to turn too blind an eye to financial innovation. Recognizing the limits to laissez-faire treatment of markets is not, at the same time, a reason to adopt a style of governing that is so over-involved it undermines the power that markets possess. The most effective strategy calls for a balance between policy intervention and an informed belief that markets can, if properly designed, achieve a commonly agreed upon social welfare objective (in this case reducing carbon pollution). Will it come to pass that carbon finance helps, rather than hinders, efforts to address climate change and other related issues? There is reason to be optimistic in this regard, as many of the experts in this publication point out. To begin at the beginning, we know from the opening chapter that financial innovation has always proven capable of evolving to suit the social and economic needs of society. No one should overstate the magic of the markets (keep in mind how King Leopold financed the colonization of the Belgian Congo), but it is important to know that markets can be properly structured to produce socially desirable outcomes. We also know that there is wide agreement on the necessary role of governments in supporting the growth of carbon markets and investment. We are not constrained by a futile choice between private capital OR public policy – in the case of carbon finance they are inextricably linked. To date, we also have evidence that these are robust markets. The European market is already well over $60 billion annually, and experts tell us that cleantech investment, worldwide, has doubled over the past year. Climate change is a global problem of unprecedented scope and carbon finance will play a critical role in addressing it. This publication, based on the extraordinary 2008 Carbon Finance Speaker Series hosted by the Center for Business and the Environment at Yale, tells us how best to do so.
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foreword 5
Foreword
Bradford S. Gentry, Director, Center for Business and the Environment at Yale
I write this Foreword for Carbon Finance: Environmental Market Solutions to Climate Change at a time when this 300-year old university is undergoing a “green renaissance.” Right across the street from my Prospect Street office, the new home of Yale’s School of Forestry & Environmental Studies is nearing completion. Kroon Hall will be one of the world’s greenest buildings, utilizing environmentally sound materials, leading-edge clean energy technologies, a rainwater harvesting system and more. As such, it embodies the values and ideals of the 100-year-old school while exemplifying a new vision of sustainability that is prompting innovation across the university. The Carbon Finance Speaker Series, from which this publication was developed, is a flagship project of the Center for Business and the Environment at Yale (CBEY). The series illustrates our belief that environmental markets can play a major, positive role in providing solutions to environmental issues, including climate change. This publication represents a major advance in our understanding of the interrelation ships among policy, markets, and technology in the climate arena. CBEY, the speaker series, and this publication are just a few of the initiatives that are part of Yale’s green renaissance. I am going to focus my remarks here on what Yale is doing, with the hope that what I describe will connect with, and perhaps even inspire, similar efforts in many other institutions here and abroad, including businesses, government agencies, and community organizations. We all have roles to play in developing the low carbon economy of the future and I speak simply from the perspective of my own institution. In the face of unprecedented growth and a major expansion of campus facilities, Yale has embarked on an applied experiment to reduce its carbon footprint. In October of 2005, through the leadership of President Levin, Dean Gus Speth of the School of Forestry & Environmental Studies, and the officers of the university, Yale committed to reducing its greenhouse gas emissions to 10 percent below 1990 levels 1 1 by 2020 – a 43 percent reduction from 2005 levels, while at the same time planning For an update on Yale’s for 15 percent growth of the university’s physical plant. President Levin’s vision for progress to reduce green house gas emissions, go to Yale leadership on climate change is clear. As he said in a 2007 address in www.yale.edu/sustainability Copenhagen, “Universities have an important role in the effort to curtail global warming . . . We aspire to leadership in all of these dimensions of sustainability, and
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we hope to inculcate in our students a lasting consciousness of what it means to live on a planet with finite resources in full awareness of how human action today affects 2 2 Climate Lectures at the the future of both humanity and the natural environment.” University of Copenhagen. As part of this effort, the university has undertaken a variety of specific initiatives, President Levin’s remarks in Leading by Example: From including competitions for reducing energy use, the development of an experimental Sustainable Campuses to a concept for the Yale Community Carbon Fund, the organization of the Yale Conference Sustainable World. (January 21, of Governors on Climate Change, 3 and the organization of an event on Carbon Finance 2007) – Clean Energy – Climate Change. These initiatives, and many more like them across 3 This event celebrated the campus, will help inspire and prepare students to become the leaders we need to 100th year anniversary of address climate change far into the future. President Roosevelt and Preparing individuals to lead society at crucial junctures has long been Yale’s Gifford Pinchot uniting the nation’s governors and mission and one at which our institution excels. Fulfilling this mission is even more launching the U.S. critical today, when the world is facing such complex environmental and economic conservation movement. The challenges. We are helping to make progress. In a recent article entitled “Can Carbon Yale Conference of Governors 4 on Climate Change brought Credits Slow Global Warming?” , for example, Fast Company magazine highlights the together Dr. Rajendra Pachauri role of Yale graduates who, as investors, analysts, and market makers, are among those (Chairman of the Inter leading the charge in the rapidly developing carbon markets. governmental Panel on As we confront environmental problems such as global warming, uncertain energy Climate Change) and leading state governors including supplies, water shortages, and diminishing biodiversity that are threatening global Arnold Schwarzenegger (CA), economic health and social stability, I wonder whether leading academic institutions Jodi Rell (CT), Kathleen can act even more quickly to make the necessary investments in research and Sebelius (KS), and John Corzine (NJ) to release a education initiatives to advance sustainability. As Gifford Pinchot, Yale alumnus and declaration signed by 18 founder of the Yale School of Forestry & Environmental Studies, once said, “The vast governors that proposes a possibilities of our great future will become realities only if we make ourselves federal-state partnership on climate change. responsible for that future.” www.yale.edu/climateleaders Individuals at Yale are increasingly taking responsibility for shaping a sustainable
4 future. I can see this through my office window, as Kroon Hall takes shape. I can see www.fastcompany.com it in the commitment the university has made to reduce substantially its emissions of greenhouse gasses. And I can see it in this publication, as well as in the words of the experts participating in CBEY’s Carbon Finance Speaker Series. Reflecting on these innovations, I can envision the impact Yale’s green renaissance may have on our students, faculty, staff and community. I can see Yale becoming a campus rich in social networks of students, faculty, and staff engaged in multidisciplinary environmental problem-solving. It will be a leader in using finance in combination with science and policy to accelerate the diffusion of environmentally beneficial technology. It will establish interdepartmental teams able to take a concept for an environmental solution and execute its value proposition. It will truly be training leaders for the sustainable future of tomorrow. Each of the institutions represented in this volume, and many others, are working hard to help build a sustainable future. It is our hope that the insights of the authors in this publication will help us move toward that future ever more rapidly.
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Introduction
Bryan Garcia and Eric Roberts, Center for Business and the Environment at Yale
Over the course of the 2007-2008 academic year, the Center for Business and the Environment at Yale, through the generous support of the Emily Hall Tremaine Foundation, organized a multi-part Carbon Finance Speaker Series in which the world’s leading practitioners in carbon markets and finance were invited to Yale to help us better understand the role of finance in accelerating solutions to environmental problems. This publication, Carbon Finance: Environmental Market Solutions to Climate Change, provides a compilation of presentations given during that series to bring their collective insights to a larger audience. While the chapters within this publication explicitly contain a lot of information and insight into carbon finance and environmental markets, they are also often rich in anecdotes and industry language that, beyond making for an enjoyable read, provide a valuable immersion into these fields. Whether novice or expert, as you read through these chapters, we hope that your understanding grows from the many perspectives represented. A lot has transpired over the period of time in which this speaker series took place – from ever-rising oil prices and an unprecedented U.S. presidential primary election, to the latest in original thinking on the economics of climate change by McKinsey & 1 1 Company. Nonetheless, we made the dual decision as editors to not update such McKinsey and Vattenfall. The material in the earlier talks and to not structure our chapters according to the McKinsey Quarterly 2007 chronological time in which their corresponding presentations were originally Number 1. delivered, which was driven primarily by the availability of speakers who are very much in demand. We believe the first point serves to maintain the contextual integrity of the speakers’ remarks, with the ancillary benefit of reminding us that the past year, like the carbon markets themselves, has been markedly dynamic. In regards to the second point, we structured the chapters by the nature of their content, in the interest of building the readers’ understanding of carbon finance and environmental markets in a logical way. This was always our intention and, in fact, after each of the talks, we would often discuss where it would be best placed relative to the other chapters. Sometime before the end of the series, we had organized this publication into five discrete parts, beginning with the role of financial innovation in society and ending with recommendations for the broader world, starting with our own university. We will use this introduction to give you a quick view of the content of the publication.
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Part I opens with a chapter called The History of Financial Innovation by Yale School of Management Finance Professors William Goetzmann and K. Geert Rouwenhorst. Professors Goetzmann and Rouwenhorst take a classical look at the “incredible ingenuity” that financial innovation has historically demonstrated for solving a wide range of societal problems, from dealing with large scale urbanization in Mesopotamia to addressing the illiquidity of international debt instruments in the 18th and 19th centuries. In so doing, they provide context for the problem-solving role of finance in society and frame the reader’s understanding of finance as a tool to confront climate change. In the next chapter, Investing in Climate Change, Win Neuger, Chairman and CEO of AIG Investments, builds on the understanding developed in Chapter 1 by beginning to show how the climate issue can influence the investment strategy of a trillion dollar asset management company and insurer. Working from this vantage point, he emphasizes the need for all investors to keep climate change “top of mind” in their investment strategies so as to anticipate and to mitigate the risks that this game-changing problem poses, while also realizing the emerging opportunities for adding lasting value. Moving into Part II, we delve more deeply into the underlying regulations and market drivers that create the foundation for the emergence of a multi-billion dollar industry in carbon finance. This starts with Chapter 3, A Pot of Gold for Renewable Energy: Funding Renewable Energy with Carbon Finance, where Peter Sweatman, a Managing Director with Climate Change Capital, takes the reader through the “fundamentals of carbon finance.” Framing the value of carbon and renewable energy, he includes a review of carbon policy from 1988 to the present, an explanation of the value of carbon as a form of currency, and an overview of the Clean Development Mechanism. In Chapter 4, Abyd Karmali, Managing Director and Global Head of Carbon Emissions for Merrill Lynch, provides a detailed perspective on carbon markets, policy, finance, and technology in Investment Banks Jump On Board: Mining the Opportunities in Global Carbon Markets. Mr. Karmali’s prior experience in government and new-found passion for investment banking come to a unique crossroads as he discusses the role of regulation and carbon markets in realizing the goal of “getting the highest level of environmental emission reductions at the lowest possible cost to society overall.” Mark Fulton, Managing Director and Climate Change Strategist for Deutsche Bank, furthers the discussion from an asset management point of view in Chapter 5, Climate Change Investment Strategies: How a Universal Bank is Leading Investments in a Low Carbon Economy. Going through both mitigation and adaptation investments, he is clear about the focus of banks to make money first and reduce environmental impact second, while still emphasizing the abundance of win-win plays and the importance of increasing capital investment to enable environmental market solutions. Part II closes with Jon Anda, Executive-in-Residence at the Fuqua School of Business at Duke University and formerly President of the Environmental Markets Network at Environmental Defense Fund. In Chapter 6, Environmental Market
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Solutions for Global Warming, Mr. Anda makes the case that finance is fundamental to the creation and operation of any well-functioning environmental market. Perhaps more of a “501” talk than a “101,” his presentation expounds on some of the major themes presented during Part II at a level that we might expect our readers to be at this point in the publication. Having established a good foundation for understanding regulations and market drivers through these individuals’ presentations, we then transition to Part III,where market makers participate in moderated panel discussions to offer varying views and insights on climate change funding and investment, and on clean energy. In Chapter 7, Funding Solutions to Climate Change: A Philanthropy Panel, venture philanthropists Stewart Hudson (President of the Emily Hall Tremaine Foundation), Michael Northrop (Program Director of the Rockefeller Brothers Fund), and Ted Smith (Executive Director of the Henry P. Kendall Foundation), give an inside look at the funding strategies of three of the leading U.S. foundations. Although issuing the caveat that “if you’ve met one foundation, you’ve met one foundation,” they do reveal some of the common inner workings of the foundation world and deliver a candid and impassioned discussion that expresses a shared sense of urgency for the need to confront climate change. In Chapter 8, Investing in Climate Change: A Panel on Hedge Funds, environmental market and finance specialists Benjamin Block (Senior Analyst with Ardsley Partners), Andy Ertel (President and CEO of Evolution Markets), Paul Ezekiel (Managing Director and Global Head of Carbon Trading with Credit Suisse), and Martin Whittaker (Director at MissionPoint Capital), address issues surrounding the carbon markets, such as the need for regulatory certainty and increased market liquidity, with the hedge fund industry in mind. Beginning with an overview of the newly launched NYMEX green exchange, this conversation concludes with a question and answer session with an audience consisting mostly of hedge fund professionals. Chapter 9, Investing in Clean Energy and Climate Change: A Private Equity Panel, features private equity professionals Jeff Miller (Partner with the Tremont Group), Jeff Possick (Principal with MissionPoint Capital), and George Sorenson (Chairman of the FE Clean Energy Group), openly sharing their lessons learned and forward- looking thoughts on clean energy and environmental market plays, including a good bit on energy efficiency. Given the diverse experiences of this panel, the scope of this chapter is somewhat large, but the messages are clear. The expert panel discussions of Part III conclude with a look at the future of technology and venture capital investing in Chapter 10, Investing in Cleantech: A Conversation Between a Venture Capitalist and an Entrepreneur. After an overview of the trends and essential components of cleantech venture capital derived from original research by Moderator Anastasia O’Rourke (PhD candidate at the Yale School of Forestry & Environmental Studies), Howard Berke (Senior Advisor to Good Energies and Executive Chairman and Co-Founder of Konarka Technologies) and Lise Dondy (President of the Connecticut Clean Energy Fund) engage in a dynamic conversation highlighting their career pathways to cleantech, the challenges of funding new technologies and bringing university and lab technologies to market, and the need for interdisciplinary skill sets in the cleantech sector.
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Part IV aims to enrich the information, lessons, and ideas put forth during the first three parts of the book by offering some additional, and unique, perspectives on emerging issues and opportunities in carbon finance and environmental markets. In Chapter 11, Insuring the Future in a Changing World: The Impact of Climate Change on Insurance and Financial Products and Services, Ralph Mucerino, President of AIG Global Marine & Energy, speaks to the critical link between the insurance industry and climate change. Representing the largest commercial insurance company in the world, Mr. Mucerino goes through the risks and opportunities presented by climate change sector-by-sector. In Chapter 12, Winners and Losers in a Low Carbon Economy: A Look at Innovest’s Carbon Beta, Mario López-Alcalá and Hiroshi Minami, Senior Analysts with Innovest Strategic Value Advisors, take the reader into the world of intangible asset valuation. Here, they consider and report on the impacts of carbon regulation and carbon positioning on material corporate performance through financial analysis techniques stemming from their proprietary Carbon Beta platform. Part IV of the publication ends at the place where we intend to begin the next Carbon Finance Speaker Series for the 2009 academic year – with a look at forest carbon and forest markets. To confront climate change, both deforestation and land management must be addressed. In Chapter 13, For the Love of Timber: A Different Look at a Natural Resource, Andrew Aulisi, Director of the Markets and Enterprise Program of the World Resources Institute, does this by embarking on a full value chain analysis of the forest products sector. Without ignoring the uncertainties surrounding the science of forest carbon and the rapidly evolving policies and market dynamics, this chapter comprehensively highlights the complexities and opportunities facing the forest products business. The publication concludes with Part V, Chapter 14: From Understanding to Action – Advancing Solutions to Climate Change on Campus, in our Communities, and Beyond, our own contribution as editors of this volume. In this chapter, we aim to apply some of the knowledge we gained from these leading practitioners over the course of the past year. There are a myriad opportunities that can be pursued in order to advance local and global solutions to climate change, and starting with our most immediate spheres of influence, we hope to utilize Carbon Finance: Environmental Market Solutions to Climate Change as a platform for Yale University to elevate its commitment to promoting climate change solutions through its investments in research and education on and off campus. additional context and information
As will be quickly discerned, each chapter is prefaced by a page we call Editors’ Remarks. While our introduction here aims to provide some sense of the content and context of each chapter as well as the connections between chapters, the Editors’ Remarks are designed to convey these notions in more detail, and may also be used as a filter to help the non-continuous reader find a chapter best suited for his or her particular interests. As also noted in the Editors’ Remarks, additional resources to accompany all chapters of Carbon Finance: Environmental Market Solutions to Climate Change can
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be found by following links through the Center for Business and the Environment at Yale website or more directly through the following web address: http://www. yale.edu/cbey/carbonfinance2008. From this site, you can read additional articles related to each chapter, download the original recordings for each presentation, obtain pdf versions of all chapters, and order a bound copy of the entire publication (produced using a print-on-demand system, printed on 100 percent recycled paper and with carbon emission offsets). To date, the recorded versions of this speaker series have been some of the most downloaded content at Yale University, and have had the good fortune of successfully reaching a global audience. These additional educational resources are intended to grow this momentum and to complement this publication by adding to everyone’s understanding of the important role finance has in advancing solutions to environmental problems. If you should desire information not found on this website, or if you have questions or comments, we would be happy to receive them via email at [email protected] or [email protected]. As a final comment on context, every chapter, with the exception of Chapter 2, contains a question and answer session. These questions were in all cases generated by the audience, which typically was directly affiliated with Yale University, particularly the Yale School of Forestry & Environmental Studies and the Yale School of Management, or the greater New Haven and Connecticut community. Chapters 2 and 8, however, come from presentations held in Greenwich, CT, and were delivered to an audience mostly, though not exclusively, composed of hedge fund practitioners. Finally, it is our hope that Carbon Finance: Environmental Market Solutions to Climate Change will serve in a number of capacities – to educate students, faculty, policy-makers, NGOs, market markers, entrepreneurs, investors, and business professionals across the board about the important role the finance sector plays in advancing environmental market solutions to climate change. For example, we hope that these remarks by leading practitioners will become a part of syllabi for university coursework on environmental markets, background information for policy-makers and philanthropic and non-profit organizations considering market-based approaches to environmental problem solving, and as a primer for institutional investors, including endowment managers and pension funds that are in the process of developing portfolio strategies on mitigation and adaptation solutions to climate change. Lastly, we hope that Carbon Finance: Environmental Market Solutions to Climate Change will become a resource for you to support your personal actions to combat climate change and realize the many opportunities that climate change investing presents.
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carbon finance: a definition 13
Carbon Finance: A Definition
Bryan Garcia and Eric Roberts Center for Business and the Environment at Yale
What is carbon finance? Since this is a question we received, in one form or another, so frequently over the past year, it seemed appropriate to address it upfront. Surprisingly, there are a lot of answers to this question, and although we haven’t found inconsistency among these answers, we also haven’t found precise uniformity. This brief treatment here is not intended to establish this uniformity, but rather just to give a sense as to the scope, as well as content, of the possible answers. Indeed, we believe that pinning down the definition of carbon finance at this point in time fails to recognize how much the term stands to evolve over the coming years. Also, because of the many voices contained within this publication, we do not wish to retrospectively coin a phrase that might disagree, albeit in subtle shades, with the way the phrase was originally wielded during the Carbon Finance Speaker Series over the past year. We do point out the diversity of usage, but we do not try to second-guess it. As a final point, we acknowledge that there have already been some excellent working definitions supplied from other sources. We note a few of these, but our list is not designed to be complete. First, in the spirit of the carbon markets themselves, we start with the results from a diverse and collaborative effort. According to Wikipedia1:
1 Carbon finance is a new branch of environmental finance. Carbon finance http://en.wikipedia.org/wiki/ explores the financial implications of living in a carbon-constrained world, a Carbon_finance world in which emissions of carbon dioxide and other greenhouse gases (GHG) carry a price. 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 management decision- making.
The general term is applied to investments in GHG emission reduction projects 2 See: http://carbonfinance.org/ and the creation (origination) of financial instruments that are tradeable on the Router.cfm?Page=Glossary& carbon market. ItemID=24686 and http:// carbonfinance.org/Router.cfm 2 The World Bank Carbon Finance Unit gives a less broad and more traditional and ?Page=FAQ&ItemID=24677 transaction-based definition:
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Carbon finance is the general term applied to resources provided to a project to purchase greenhouse gas (GHG) emission reductions (“carbon” for short). Carbon Finance: Resources provided to projects generating (or expected to generate) greenhouse gas (or carbon) emission reductions in the form of the purchase of such emission reductions. In a definition that spans the essence of the previous two, Sonia Labatt and 3 3 Carbon Finance: The Financial Rodney R. White, in their book on carbon finance , submit the following: Implications of Climate Change, Wiley Finance, ISBN: Carbon finance explores the financial implications of living in a carbon- 978-0-471-79467-7, April 2007. constrained world – a world in which emissions of carbon dioxide and other greenhouse gases carry a price. Thus, carbon finance: