Links for Feb 23, 2010

Fate and viability of carbon markets does not lie in UK hands alone - PwC

PwC comment on Environmental Audit Committee Report on Carbon Markets

* Uncertainty over EU and international targets impacting market confidence
* Traders and market theorists will argue against price floors
* Reserve prices would be needed across Europe, not just UK
* London markets and skills are dominant in £75bn EU and Global emissions trading

A new look at carbon offsets - McKinsey Quarterly

Carbon markets will continue to play a role in pricing—and limiting—emissions, but the opportunity in developing markets may be less promising than once expected.

The article identifies the combination of reasons that sound like people are still figuring out the parameters of the market

Two factors hamper price equalization among the offset market, domestic carbon markets, and the global market as envisioned by the assigned amount units (AAU) established in the 1997 Kyoto Protocol on climate change.

* On the one hand, countries have limited the amount of offsets that can be imported into domestic carbon markets. For instance, the European Union will allow only 1.6 metric gigatons2 (GT) of offset credits to be imported into its market from 2008 to 2020, or on average 0.1–0.2 GT per annum. As this quota will probably be exhausted by 2015, prices on the European carbon market might start to deviate from offset market prices.
* On the other hand, the demand for offsets from Annex I countries is less certain, as the global market is oversupplied with “hot air,”3 which limits the need to buy offset credits. Therefore, national demand for offset credits is typically seen as “soft.”

Time to clean up: UN study reveals environmental cost of world trade - The Guardian

Political pressure is mounting to make businesses pay for the damage they cause to the environment, and the latest UN study assessing the impact of the world's biggest companies is almost certainly the first stage in a concerted campaign to calculate how much damage is caused, what it is worth and ultimately how it can be stopped.

Another report due later this year, The Economics of Ecosystems and Biodiversity, led by the economist and UN special adviser Pavan Sukhdev, will be another significant step towards this goal.

Sukhdev has already warned that damage to the environment will cause the global economy to decline by 7% by the middle of the century if it is not stopped.
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By far the most "damaging" were the utilities, where the $400bn total "cost" was dominated by carbon dioxide and other greenhouse gases blamed for global warming, nuclear waste, acid rain and smog precursors, and metal pollution in water.

The four sectors with the lowest impact – telecommunications, healthcare, technology and financial services – all caused environmental damage totalling less than $25bn each.

After the utilities, the two sectors with the biggest impacts were "basic materials" such as mining, forestry and chemical companies, with costs put at just over $300bn, and consumer goods such as cars, food, drink and toys, at just under $300bn. The breakdown of their activities is very different however.
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Look for the report that Mercer is going to deliver in Oct 2010.

Excluding climate change breaches fiduciary care - Natixis

The integration of climate change into portfolio management remains a difficult task but not doing so is a failure of fiduciary care by asset managers, an institutional investor has claimed.

Carlos Joly, chairman of the Climate Change Scientific Committee of Natixis Asset Management, told IPE the integration of climate change into portfolio management is still in its early stages.

“One way is to take the narrow thematic approach such as investing in alternative energy funds,” he said. “However, that is unsatisfactory for us because it does not address the breadth of climate change impacts throughout the economy. It is also a niche approach, which all investors tend to enter and exit at the same time. Carbon footprinting on an index is a step forward from the thematic approach, but ultimately does not reflect the solutions to the problems,” argued Joly.
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global consultancy Mercer has launched a research project to assess the implications of climate change on strategic asset allocation decisions made last October.

The two-part report– expected to be published in October this year – will consist of a public report in which the broad findings will be shared with the industry, as well as a tailored report for each asset owner that commits to the project, and they in turn will be benchmarked against other project partners.

The study will produce a qualitative framework to outline risks and opportunities by region and asset class, as well as considering the sector effects, which can then be used as an overlay to strategic asset allocation decisions.

Global Investments in Clean Energy Fell Less than Expected in 2009

Climate change: Agri experts paint grim future

India is confronted by a confluence of crises,” he explained. “Increasing energy demand, drought, deforestation, skyrocketing food prices and a population explosion threaten the very fabric of Indian society.” The dry tropics are home to over two billion people, 675 million of which comprise the poorest of the poor. According to Dar, the importance of rain-fed agriculture cannot be overstated. Rain-fed areas contribute over 40 per cent of all food grains and a majority of pulses and vegetables. Dar also accused the Indian government of showing “bias in grain price support and research subsides.” He claimed that “rain-fed agriculture is struggling against policies biased towards more favoured, generally irrigated land”.

Google gets go-ahead to buy, sell energy

Google has expressed a desire for access to larger amounts of renewable energy to help produce the electricity it consumes as part of its vast search-engine empire. Google has long maintained that its goal is to become a carbon-neutral company. As a side note, it's not unusual for large companies to be granted the authority to trade in the wholesale electricity market for the purpose of managing their own energy costs.

As recently as January--after Google Energy made its request to FERC--the company maintained that its expressed immediate wish was for more control over electricity pricing to more effectively gain access to affordable renewable energy.

"Right now, we can't buy affordable, utility-scale, renewable energy in our markets. We want to buy the highest quality, most affordable renewable energy wherever we can and use the green credits," Google representative Niki Fenwick told CNET News at the time.

But it seems that Google may actually enter the energy business. The search giant formed the Delaware-based subsidiary called Google Energy in December and when asked about it, hinted at a future in energy.

"We don't have any concrete plans. We want the ability to buy and sell electricity in case it becomes part of our portfolio," Fenwick told CNET News in January.

CDP Backing Continues to Grow

Climate Risk Disclosure is starting to look inevitable with this level of SEC and institutional backing.

Record number of investors support CDP’s 2010 request for climate change information

The Carbon Disclosure Project (CDP) today announced its eighth annual request for information on greenhouse gas emissions and climate change strategies to over 4,500 companies globally. Companies this year will report to CDP through an upgraded system, developed with Accenture, Microsoft and SAP, that will for the first time utilize the full power of online analysis tools to drive improved carbon management.

A global, independent, not-for-profit organization, CDP is the world’s largest institutional investor collaboration working to inform the global market place on investment risk and commercial opportunity. The number of institutional investors that signed CDP’s annual request for climate change information this year has risen from 475 in 2009, to a record 534 with a combined US$64 trillion of assets under management. New signatory investors include Wells Fargo, BNY Mellon, Generali and the Industrial Bank of Korea.

CDP continues to act on investor interest in emerging markets with requests for information going to companies in the S&P/IFCI Carbon Efficient Index. This year CDP is, for the first time, writing to companies in Turkey, Peru, Morocco, Egypt and Israel as well as continuing to expand its coverage in areas such as Asia, Poland, Chile and Mexico.

CDP gives companies the tools they need to identify and report material risk and opportunity to their business from climate change. This is an increasingly important skill for US corporations to master, following the recent publication of climate change risk disclosure guidance by the Securities and Exchange Commission (SEC).

Catholic Green Initiative

This came through my Google Alerts. There are many reasons to go green including those based on religion. One of the first investors in Chicago Climate Exchange was a church. I wrote earlier about Islam's Green Initiative. Turns out that Vatican was going green as well. I wish it was publicized more.

Perpetual Energy Systems and the Diocese of San Jose Activate Six Solar Energy Installations

erpetual Energy Systems (PES), a national power purchase agreement (PPA) provider/financier of solar powered renewable energy systems, and the Diocese of San Jose (Diocese), in conjunction with MBL-Energy (MBL) and Photon Energy Services (Photon), today announce the activation of six distributed solar energy installations, consisting of an aggregate nameplate capacity of 886 kW DC. The systems are projected to generate an estimated 1.4 million kilowatt hours of clean energy in its first full year of operation, representing 70 percent of each site’s individual energy needs.

The systems are hosted by the Diocese on five parish/school combinations, including Holy Spirit, Holy Family, Saint Christopher, Queen of Apostles, Saint Lucy as well as Gate of Heaven Cemetery. As part of the Catholic Green Initiative of Santa Clara County, the Diocese entered into a 25-year power purchase agreement (PPA) with PES to host the solar installations requiring no capital outlay from the Diocese or its parishes. Under the PPA, the Diocese will purchase clean solar energy produced by each installation at a predetermined, fixed rate. All operations of the system will be assumed by PES.

Catholic Green Initiative of Santa Clara County Announcement

Everywhere we turn these days, we are reminded of the need and desire to be "green." Cities, counties, states and nations are calling us to better care for our planet. Almost 15 years ago, the United States Catholic Bishops issued a statement entitled Renewing the Earth: A Invitation to Reflection and Action on Environment in Light of Catholic Social Teaching, calling all people of faith "to examine how we use and share the goods of the earth, what we pass on to future generations, and how we live in harmony with God's creation."

Catholics around the world have already initiated many innovative ecological projects that have highlighted the need for all of us to live more sustainably and to leave a lighter "ecological footprint." In response to this call to ecological stewardship, I have formed The Catholic Green Initiative of Santa Clara County under the direction of Father Brendan McGuire, Vicar General, Special Projects.

This team includes the Presentation Retreat and Conference Center, Santa Clara University, Catholic Charities of Santa Clara County, and the Diocese of San Jose. We will work collaboratively to bring all Catholics of our local Church together with a single "green" vision. This team will identify and encourage "green initiatives" here in our own Valley of Saint Clare and they will ask all Catholics of Santa Clara County to make a difference in an organized and sustainable way.

This initiative will start with a Town Hall Meeting on February 7, 2009 with our guest speaker - Mr. Dan Misleh, Executive Director of the Catholic Coalition on Climate Change. The gathering will focus on the theology of stewardship, how stewardship is central to our Christian heritage, and why it must be a Catholic concern. It will include breakout sessions discussing how we can act in environmentally-conscious ways. All attendees will be asked to commit to action determined by the collective voice of this group. This event is by invitation-only and will be limited to a maximum of 100 attendees. Formal invitations will be coming shortly via another email.

Investors Push for Rapid Action

This is from the Investor Summit on Low Carbon Economy .


Investors Representing $13 Trillion Call on U.S. and Other Countries to Move Quickly to Adopt Strong Climate Change Policies
“Cannot Wait for a Global Treaty,” Investors Tell Congress and other Government Policymakers at United Nations Investors Climate Summit

Saying “we cannot wait for a global treaty,” U.S., European and Australian investor groups representing $13 trillion in assets called on U.S. Congress and other global decision-makers “to take rapid action” on carbon emission limits, energy efficiency, renewable energy, financing mechanisms and other policies that will accelerate clean energy investment and job creation. Investors made clear today that there are competitive advantages for countries with comprehensive climate and energy policies.

I have written in the past about this coalition (INCR) which is pushing for systemic changes to get the low carbon economy. It represented 7T$ of assets when I last wrote. Now it looks like the coalition has expanded to represent about 13T$ of investment including CalPERS.


The investor statement suggests a great opportunity to make money.

While leading studies indicate that the costs of action to reduce GHG emissions are both affordable and significantly lower than the costs of inaction,2 developing a global low-carbon economy will nonetheless require substantially increased levels of investment from the private sector. For example, the UNFCCC Secretariat estimates that more than $200 billion in total additional investment capital for mitigation is required each year by 2030 just to return GHGs to their current levels by then,3 while the International Energy Agency estimates that additional investment of $10.5 trillion is needed globally in just the energy sector from 2010–2030 to stabilize GHG emissions at around 450ppm.4 This equates to roughly 0.1% of the total value of world financial assets and approximately 0.23% of the total value of debt and equity securities,5 so this is certainly an achievable level of investment – and one that would yield returns in terms of energy savings, energy security, reduced capital expenditures for pollution control, and avoided climate damages. But it is also well above current investment levels. Although public spending in this arena has increased recently to hasten recovery from the global recession, more than 85% of the total investments needed to meet the climate challenge will likely have to come from private capital.

Investors will seek every sound investment opportunity, but until governments establish policies and rules that make low-carbon strategies the clear strategic choice for all businesses, we will not be able to deploy capital into low-carbon investments at the scale required. Until then, our billions of dollars in investments will remain a ‘drop in the bucket’
compared to the trillions of dollars needed. To enable the necessary flows of private capital and allow us to fully assist in achieving a low-carbon and sustainable global economy, policymakers around the world must act swiftly. National policies are needed that provide greater certainty about the direction of climate and energy regulation, ensure transparent markets, facilitate wider and more open capital flows for carbon trading and investment, and benefit consumers and workers as they transition to a low-carbon economy. Accordingly, we see the following measures as being critical for unleashing the volumes of private capital urgently needed to meet the challenges of climate change:

Changing Business Attitudes towards Climate Change

I have been studying the changing business attitude towards climate change. Initially there was resistance, then acceptance, cooperation, and now increasing excitement. It is discussed in U.S. Business Strategies and Climate Change paper from Wilson Center. The paper talks about the role of science, concerns about reputation, and the potential of new markets. I would add shareholders have become sensitive of all these as well. In Risking Shareholder Value? ExxonMobil and Climate Change, the shareholders of Exxon accuse the company of risking reputation and missing opportunities. Organizations such as Investor Network on Climate Risk are driving changes at the systemic level.

McKinsey Quarterly report from 2008:

First, there will be efforts to optimize the carbon efficiency of existing
assets and products: infrastructure (buildings, power stations, data centers,
factories), supply chains, and finished goods (automobiles, flat-screen
TVs, PCs). This optimization will involve measures to improve energy effi-
ciency, as well as a shift to less carbon-intensive sources of power, such
as nuclear, wind, solar, and geothermal.
Second, demand is growing for new low-carbon solutions that can meet
the need for sustained, drastic emission reductions. Value chains that disrupt
existing industries and create new ones will spring up—industries based,
for instance, on the large-scale supply of biomass to power plants and on
second-generation biofuels. New business models that reward suppliers
and end users in the power and transport sectors for consuming less energy
will be as important as new technologies.
Third, public policy and the widespread belief that higher energy prices
are here to stay are driving both of these developments. The coming economy-
wide discontinuity may be the first one driven largely by regulation.

Larry Summers: Shaping the Next Economic Expansion

This is a recent talk by Larry Summers, National Economic Council Chair. There is not a whole lot of new information but tells you where the administration is in terms of thought process.

He is mulling about what would be the source of growth. He talks about three things - energy, internet, and health. Having spent many years in the Internet space, it is not clear to me what substantial gain Internet investment in new bandwidth can bring. It is not clear that increased bandwidth is necessary or sufficient for creation of new value. I can see new value being created in mobility. If the mobile carriers free up handsets and applications, I can see lots of new applications being built. Healthcare is a harder problem. The current approach which involves backroom no-pain deals with HMOs and PHARMA is pretty much status quo or worse. The incentives are pretty much the same as before (Hear these great reports from the trenches in This American Life - More is Less Somebody Else's Money. They tell you why the health care reform may be non-trivial). That leaves energy and environment. There are major challenges in energy including the fact that the politics is broken and the product cannot be easily measured in many cases. He talks about the need to reduce uncertainty. A floor on the carbon or gas price will be necessary for anybody to consider investing.

“Shaping the Next Economic Expansion”
Lawrence H. Summers
New York Economic Club
October 29, 2009

How, then, to think about economic recovery that is not driven by unsustainable consumer borrowing and spending or by the public sector?

By the logic of national income accounting, it depends on three things. It depends on private sector investment, it depends on exports, and it depends on income growth that can support consumer spending increases. Let me say a little bit about each of those three things.
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Given that capacity utilization is at very low levels, it is inevitable that private investment will lag for some time to come in some parts of the economy. But in a variety of other spheres, private investment will be profoundly important for the next economic expansion. That is why the President has emphasized measures that support the availability of credit for small businesses. That is why the public sector is playing a crucial role during this period in the financing of new houses.
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Two cutting-edge sectors for the American economy at this juncture are, first, energy and the environment and, second, information technology.

We are currently working with Congress on major cap-and-trade and energy legislation to build on the substantial steps contained in the Recovery Act to support both energy efficiency and renewable energy as well as more efficient and effective exploitation of our traditional energy resources.

Turning over the capital stock more rapidly to meet environmental and energy independence objectives can be a significant contributor to aggregate demand in the short and medium term, even in the presence of significant unused capacity.

Certainty as to the likely price tag for energy can also be a spur to investment. It has been demonstrated again and again that the greatest barrier to long-term investment decisions is residual uncertainty. If we are able to resolve uncertainties in the investment area, there is substantial scope for increased demand in this key sector.