Environmental finance

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Environmental finance is a field within finance that employs market-based environmental policy instruments to improve the ecological impact of investment strategies. [1] The primary objective of environmental finance is to regress the negative impacts of climate change through pricing and trading schemes. [2] The field of environmental finance was established in response to the poor management of economic crises by government bodies globally. [3] Environmental finance aims to reallocate a businesses resources to improve the sustainability of investments whilst also retaining profit margins. [2]

Contents

History

In 1992, Richard L. Sandor proposed a new course outlining emission markets at the University of Chicago Booth School of Business, that would later be known as the course, Environmental Finance. Sandor anticipated a social shift in perspectives on the effects of global warming and wanted to be on the frontier of new research. [2]

Prior to this in 1990, Sandor had been involved with the passing of the Clean Air Act Amendment for the Chicago Board of Trade, which aimed to reduce high sulfur dioxide levels following WW2. Inspired by the theory of social cost, Sandor focused on cap-and-trade strategies such as emission trading schemes and more flexible mechanisms including taxes and subsidies to manage environmental crises. The implementation of cap-and-trade mechanisms was a contributing factor to the success of the Clean Air Act Amendment. [2]

Dr Richard L. Sandor Richard Sandor Head Shot.jpg
Dr Richard L. Sandor

Following the Clean Air Act in 1990, the United Nations Conference on Trade and Development approached the Chicago Board of Trade in 1991, to enquire about how the market-based instruments used to combat high atmospheric sulfur dioxide concentrations could be applied to the increasing levels of atmospheric carbon dioxide. Sandor created a framework consisting of four characteristics which could be used to describe the carbon market: [2]

In 1997 the Kyoto Protocol was enacted and later enforced in 2005 by the United Nations Framework Convention on Climate Change. Included nations agreed to focus on reducing global greenhouse gas emissions through the market-based mechanism of emissions trading. Reductions averaged approximately 5% by 2012 which equates to almost 30% in reduction of total emissions. Some nations made significant progress under the Kyoto protocol, however as it only became law in 2005, nations such as the United States and China reported increased emissions, substantially offsetting progress made by other regions. [4]

Nations involved in the 2005 Kyoto Protocol Kyoto Protocol ratification map 2005.png
Nations involved in the 2005 Kyoto Protocol

In 1999, the Dow Jones Sustainability Index was introduced to evaluate the ecological and social impact of stocks so shareholders could invest more ethically. The index acts as an incentive for firms to improve their environmental footprint to attract more shareholders. [5]

Later in 2000, the United Nations introduced the Millennium Development Goal scheme which sought to promote a sustainable framework for large multinational corporations and countries to follow to improve the environmental impact of financial investments. This framework facilitated the development of the United Nations Sustainable Development Goal scheme in 2015, which aimed to increase funding environmentally responsible investments in developing nations. [6] Funding was targeted to improve areas such as primary education, gender equality, maternal health, and nutrition, with the overall goal of creating beneficial national relationships to decrease the ecological footprint of developing economies [7] . Implementation of these frameworks has promoted greater participation and accountability of corporate environmental sustainability, with over 230 of the largest global firms reporting their sustainability metrics to the United Nations. [6]

The United Nations Environment Program (UNEP) has had a detailed history in providing infrastructure to improve the environmental effects of financial investments. In 2004, the institute provided training on responsible environmental credit budgeting and management for Eastern European nations. Following the Global Financial Crisis beginning in 2007, the UNEP provided substantial support for future sustainable investment choices for economies such as Greece which were impacted severely. [7] The Portfolio Decarbonisation Coalition established in 2014 is a significantly notable initiative in the history of environmental finance as it aims to establish an economy that is not dependent on investments with large carbon footprints. This goal is achieved through large-scale stakeholder reinvestment and securing long-term, responsible, investment commitments. [8] Most recently, the UNEP has recommended OECD nations to align investment strategies alongside the objectives of the Paris Agreement, to improve long-term investments with significant ecological effects. [7]

In 2008 the Climate Change Act enacted by the UK Government established a framework to limit greenhouse gasses and carbon emissions through a budgeting scheme, which motivated firms and businesses to reduce their carbon output for a financial reward. [9] Specifically, by 2050 it seeks to reduce carbon emissions by 80% compared to levels in 1980. The Act seeks to achieve this goal by reviewing carbon budgeting schemes such emission trading credits, every 5 years to continually reassess and recalibrate relevant policies. The cost of reaching the 2050 goal has been estimated at approximately 1.5% of GDP, although the positive environmental impact of reducing carbon footprint and increased in investment into the renewable energy sector will offset this cost. [10] A further implicated cost in the pursuit of the Act is a predicted £100 increase in annual household energy costs, however this price increase is set to be outweighed by an improved energy efficiency which will decrease fuel costs. [11]    

The 2010 cap and trade scheme introduced in the metropolitan regions of Tokyo was mandatory for businesses heavily dependent on fuel and electricity, who accounted for almost 20% of total carbon emissions in the area.  The scheme aimed to reduce emissions by 17% by the end of 2019. [12]  

In 2011 the Clean Energy Act was enacted by the Australian Government. The act introduced the Carbon Tax which aimed to reduce greenhouse gas emission by charging large firms for their carbon tonnage. The Clean Energy Act facilitated the transition to an emissions trading scheme in 2014 [13] . The scheme also aims to fulfill the Australian Government's obligations in respect to the Kyoto Protocol and the Climate Change Convention. Additionally, the Act seeks to reduce emissions in a manner that will foster economic growth through increased market competition and investment into renewable energy sources. [12] The Australian National Registry of Emissions Units regulates and monitors the use of emission credits utilised by the Act. Firms must enroll in the registry to buy and sell credits to compensate for their relevant reduction or over-consumption of carbon emissions. [14]

The Republic of Korea's 2015 emission trading scheme aims to reduce carbon emissions by 37% by 2030. It strives to achieve this through allocating a quota of carbon emission to the largest carbon emitting businesses, resetting at the beginning of the schemes 3 separate phases. [15]

In 2017 the National Mitigation Plan was passed by the Irish Government which aimed to regress climate change by decreasing emission levels through revised investment strategies and frameworks for power generation, agriculture, and transport The plan involves 106 separate guidelines for short and long term climate change mitigation. [16]

The European Union Emission Trading Scheme concluding at the end of 2020 is the longest single global carbon pricing scheme, which has been improved over its three 5-year phases. [17] Current improvements include a centralised emission credit trading system, auctioning of credits, addressing a broader range of green house gasses and the introduction of a European-wide credit cap instead of national caps.

Strategies

Renewable Energy Schematic Logo Renewable Energy by Melanie Maecker-Tursun V1 4c.jpg
Renewable Energy Schematic

Societal shifts from fossil fuels to renewable energy caused by an increased awareness of climate change has made government bodies and firms re-evaluate investment strategies to avoid irreparable ecological damage. [18] Shifts away from fossil fuels also increase demand into alternate energy sources which requires revised investment strategies. [18]

The initial stage to mitigate climate change through financial tools involves ecological and economic forecasting to model future impacts of current investment methodologies on the environment. [19] This allows for an approximate estimation of future environments; however, the impacts of continued harmful business trends need to be observed under a non-linear perspective. [3]

Cap-and-trade mechanisms limit the total amount of emissions a particular region or country can emit. Firms are issued with tradeable permits which they can buy or sell. This acts as a financial incentive to reduce emissions and as a disincentive to exceed emission caps. [1]

In 2005, the European Union Emission Trading Scheme was established and is now the largest emission trading scheme globally. [1]

Solar Panel Infrastructure Foto aere de solnovas y torre junio 2010.jpg
Solar Panel Infrastructure

In 2013, the Québec Cap-and-trade scheme was established and is currently the primary mitigation strategy for the area. [20]

Direct foreign investment into developing nations provide more efficient and sustainable energy sources. [1]

In 2006, the Clean Development Mechanism was formed under the Kyoto Protocol, providing solar power and new technologies to developing nations. Countries who invest into developing nations can receive emission reduction credits as a reward. [21]  

Removal of atmospheric carbon dioxide has been proposed as a solution to mitigate climate change, by increasing tree densities to absorb carbon dioxide. Other methods involve new technologies which are still in research development stages. [22]

Research in environmental finance has sought how to strategically invest in clean technologies. When paired with international legislation, such as the case of the Montreal Protocol on Substances that Deplete the Ozone Layer, environmentally based investments have stimulated emerging industries and reduced the consequences of climate change. The international collaboration would ultimately lead to the changes that repaired the hole in the ozone layer. [23]

Climate finance

Top 10 clean energy financing institutions 2014 Top 10 clean energy financing institutions 2014.png
Top 10 clean energy financing institutions 2014

Climate finance is "finance that aims at reducing emissions, and enhancing sinks of greenhouse gases and aims at reducing vulnerability of, and maintaining and increasing the resilience of, human and ecological systems to negative climate change impacts", as defined by the United Nations Framework Convention on Climate Change (UNFCCC) Standing Committee on Finance. [24] The term has been used in a narrow sense to refer to transfers of public resources from developed to developing countries, in light of their UN Climate Convention obligations to provide "new and additional financial resources", and in a wider sense to refer to all financial flows relating to climate change mitigation and adaptation. [25] [26]

The 21st session of the Conference of Parties (COP) to the UNFCCC (Paris 2015) introduced a new era for climate finance, policies, and markets. The Paris Agreement adopted there defined a global action plan to put the world on track to avoid dangerous climate change by limiting global warming to well below 2 °C above preindustrial levels. It includes climate financing channeled by national, regional and international entities for climate change mitigation and adaptation projects and programs. They include climate specific support mechanisms and financial aid for mitigation and adaptation activities to spur and enable the transition towards low-carbon, climate-resilient growth and development through capacity building, R&D and economic development. [27]

This 2021 survey found that EU firms are more likely to make climate investments than US firms. EU firms are more engaged in climate action than their US peers.jpg
This 2021 survey found that EU firms are more likely to make climate investments than US firms.

As of November 2020, development banks and private finance had not reached the US$100 billion per year investment stipulated in the UN climate negotiations for 2020. [28] However, in the face of the COVID-19 pandemic's economic downturn, 450 development banks pledged to fund a "Green recovery" in developing countries. [28]

During the COVID-19 pandemic, climate change was addressed by 43% of EU enterprises. Despite the pandemic's effect on businesses, the percentage of firms planning climate-related investment rose to 47%. This was a rise from 2020, when the percentage of climate related investment was at 41%. [29] [30]

Impact

European Union Map European Union as a single entity.png
European Union Map

The European Union Emission Trading Scheme from 2008-2012 was responsible for a 7% reduction in emissions for the states within the scheme. In 2013, allowances were reviewed to accommodate for new emission reduction targets. The new annual recommended target was a reduction of 1.72%. [1] It is estimated that reducing the amount of quoted credits was restricted more tightly, emissions could have been reduced by a total of 25%. [17] Nations such as Romania, Poland and Sweden experienced significant revenue, benefiting from selling credits.  Despite successfully reducing emissions, the European Union Emission Trading Scheme has been critiqued for its lack of flexibility to accommodate to major shifts in the economic landscape and reassess currents contexts to provide a revised cap on trading credits, potentially undermining the original objective of the scheme [31] .

The New Zealand Emissions Trading Scheme of 2008 was modelled to increase annual household energy expenditure to 0.8% and increase fuel prices by approximately 6%. The price of agricultural products such as beef and dairy were modelled to decrease by almost 1%. Price increases in carbon intensive sectors such as foresting and mining were also expected, incentivising a shift towards renewable energy system and improved investment strategies with a less harmful environmental impact. [32]

In 2016, the Québec Cap-and-trade scheme was responsible for an 11% reduction in emissions compared to 1990 emission levels [20] . Due to the associated increased energy costs, fuel prices rose 2-3 cents per litre over the duration of the cap and trade scheme. [20]

In 2014, the Clean Development Mechanism was responsible for a 1% reduction in global greenhouse gas emissions. [33]  The Clean Development Mechanism has been responsible for removing 7 billion tons of greenhouse gasses from the atmosphere through the efforts of almost 8000 individual projects. Despite this success, as the economies of developing nations participating in Clean Development Mechanisms improves, the financial payout to the country supplying such infrastructure increases at a greater rate than economic growth, thus leading to an unoptimised and counterproductive system. [34]

Related Research Articles

Kyoto Protocol 1997 international treaty to reduce greenhouse gas emissions

The Kyoto Protocol was an international treaty which extended the 1992 United Nations Framework Convention on Climate Change (UNFCCC) that commits state parties to reduce greenhouse gas emissions, based on the scientific consensus that (part one) global warming is occurring and (part two) that human-made CO2 emissions are driving it. The Kyoto Protocol was adopted in Kyoto, Japan, on 11 December 1997 and entered into force on 16 February 2005. There were 192 parties (Canada withdrew from the protocol, effective December 2012) to the Protocol in 2020.

The United Nations Framework Convention on Climate Change (UNFCCC) established an international environmental treaty to combat "dangerous human interference with the climate system", in part by stabilizing greenhouse gas concentrations in the atmosphere. It was signed by 154 states at the United Nations Conference on Environment and Development (UNCED), informally known as the Earth Summit, held in Rio de Janeiro from 3 to 14 June 1992. It established a Secretariat headquartered in Bonn and entered into force on 21 March 1994. The treaty called for ongoing scientific research and regular meetings, negotiations, and future policy agreements designed to allow ecosystems to adapt naturally to climate change, to ensure that food production is not threatened and to enable economic development to proceed in a sustainable manner.

A carbon credit is a generic term for any tradable certificate or permit representing the right to emit a set amount of carbon dioxide or the equivalent amount of a different greenhouse gas (tCO2e).

The Clean Development Mechanism (CDM) is a United Nations-run carbon offset scheme allowing countries to fund greenhouse gas emissions-reducing projects in other countries and claim the saved emissions as part of their own efforts to meet international emissions targets. It is one of the three Flexible Mechanisms defined in the Kyoto Protocol. The CDM, defined in Article 12 of the Protocol, was intended to meet two objectives: (1) to assist non-Annex I countries achieve sustainable development and reduce their carbon footprints; and (2) to assist Annex I countries in achieving compliance with their emissions reduction commitments.

Carbon offset Carbon dioxide reduction scheme

A carbon offset is a reduction or removal of emissions of carbon dioxide or other greenhouse gases made in order to compensate for emissions made elsewhere. Offsets are measured in tonnes of carbon dioxide-equivalent (CO2e). One ton of carbon offset represents the reduction or removal of one ton of carbon dioxide or its equivalent in other greenhouse gases. Offsets are viewed as an important policy tool to maintain stable economies and to improve sustainability. One of the hidden dangers of climate change policy is unequal prices of carbon in the economy, which can cause economic collateral damage if production flows to regions or industries that have a lower price of carbon—unless carbon can be purchased from that area, which offsets effectively permit, equalizing the price.

Flexible mechanisms, also sometimes known as Flexibility Mechanisms or Kyoto Mechanisms, refers to emissions trading, the Clean Development Mechanism and Joint Implementation. These are mechanisms defined under the Kyoto Protocol intended to lower the overall costs of achieving its emissions targets. These mechanisms enable Parties to achieve emission reductions or to remove carbon from the atmosphere cost-effectively in other countries. While the cost of limiting emissions varies considerably from region to region, the benefit for the atmosphere is in principle the same, wherever the action is taken.

Carbon finance is a branch of environmental finance that covers financial tools such as carbon emission trading to reduce the impact of greenhouse gases (GHG) on the environment by giving carbon emissions a price.

After the 2007 United Nations Climate Change Conference held on the island of Bali in Indonesia in December 2007, the participating nations adopted the Bali Road Map as a two-year process working towards finalizing a binding agreement at the 2009 United Nations Climate Change Conference in Copenhagen, Denmark. The conference encompassed meetings of several bodies, including the 13th session of the Conference of the Parties to the United Nations Framework Convention on Climate Change and the third session of the Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol.

Carbon emission trading An approach to limit climate change by creating a market with limited allowances for CO2 emissions

Emission trading (ETS) for carbon dioxide (CO2) and other greenhouse gases (GHG) is a form of carbon pricing; also known as cap and trade (CAT) or carbon pricing. It is an approach to limit climate change by creating a market with limited allowances for emissions. This can lower competitiveness of fossil fuels and accelerate investments into low carbon sources of energy such as wind power and photovoltaics. Fossil fuels are the main driver for climate change. They account for 89% of all CO2 emissions and 68% of all GHG emissions.

EcoSecurities is a company specialised in carbon markets and greenhouse gas (GHG) mitigation projects worldwide. EcoSecurities specialises in sourcing, developing and financing projects on renewable energy, energy efficiency, forestry and waste management with a positive environmental impact.

Although it is a worldwide treaty, the Kyoto Protocol has received criticism.

In political ecology and environmental policy, climate governance is the diplomacy, mechanisms and response measures "aimed at steering social systems towards preventing, mitigating or adapting to the risks posed by climate change". A definitive interpretation is complicated by the wide range of political and social science traditions that are engaged in conceiving and analysing climate governance at different levels and across different arenas. In academia, climate governance has become the concern of geographers, anthropologists, economists and business studies scholars.

Economics of climate change mitigation Part of the economics of climate change related to climate change mitigation

The economics of climate change mitigation is the part of the economics of climate change related to climate change mitigation, that is actions that are designed to limit the amount of long-term climate change. Mitigation may be achieved through the reduction of greenhouse gas (GHG) emissions and the enhancement of sinks that absorb GHGs, for example forests.

This article is about the Kyoto Protocol and government action in relation to that treaty.

Paris Agreement 2015 international agreement about climate change

The Paris Agreement, often referred to as the Paris Accords or the Paris Climate Accords, is an international treaty on climate change, adopted in 2015. It covers climate change mitigation, adaptation, and finance. The Agreement was negotiated by 196 parties at the 2015 United Nations Climate Change Conference near Paris, France.

Climate finance

Climate finance is "finance that aims at reducing emissions, and enhancing sinks of greenhouse gases and aims at reducing vulnerability of, and maintaining and increasing the resilience of, human and ecological systems to negative climate change impacts", as defined by the United Nations Framework Convention on Climate Change (UNFCCC) Standing Committee on Finance. The term has been used in a narrow sense to refer to transfers of public resources from developed to developing countries, in light of their UN Climate Convention obligations to provide "new and additional financial resources", and in a wider sense to refer to all financial flows relating to climate change mitigation and adaptation.

2013 United Nations Climate Change Conference Diplomatic summit concerning greenhouse gas emissions effects; COP19

The United Nations Climate Change Conference, COP19 or CMP9 was held in Warsaw, Poland from 11 to 23 November 2013. This is the 19th yearly session of the Conference of the Parties to the 1992 United Nations Framework Convention on Climate Change (UNFCCC) and the 9th session of the Meeting of the Parties to the 1997 Kyoto Protocol. The conference delegates continue the negotiations towards a global climate agreement. UNFCCC's Executive Secretary Christiana Figueres and Poland's Minister of the Environment Marcin Korolec led the negotiations.

United Nations Climate Change conference Yearly conference held for climate change treaty negotiations

The United Nations Climate Change Conferences are yearly conferences held in the framework of the United Nations Framework Convention on Climate Change (UNFCCC). They serve as the formal meeting of the UNFCCC parties to assess progress in dealing with climate change, and beginning in the mid-1990s, to negotiate the Kyoto Protocol to establish legally binding obligations for developed countries to reduce their greenhouse gas emissions. Starting in 2005 the conferences have also served as the "Conference of the Parties Serving as the Meeting of Parties to the Kyoto Protocol" (CMP); also parties to the convention that are not parties to the protocol can participate in protocol-related meetings as observers. From 2011 to 2015 the meetings were used to negotiate the Paris Agreement as part of the Durban platform, which created a general path towards climate action. Any final text of a COP must be agreed by consensus.

2016 United Nations Climate Change Conference Diplomatic summit concerning greenhouse gas emissions effects

The 2016 United Nations Climate Change Conference was an international meeting of political leaders and activists to discuss environmental issues. It was held in Marrakech, Morocco, on 7–18 November 2016. The conference incorporated the twenty-second Conference of the Parties (COP22), the twelfth meeting of the parties to the Kyoto Protocol (CMP12), and the first meeting of the parties to the Paris Agreement (CMA1). The purpose of the conference was to discuss and implement plans about combatting climate change and to "[demonstrate] to the world that the implementation of the Paris Agreement is underway". Participants work together to come up with global solutions to climate change.

The history of climate change policy and politics refers to the continuing history of political actions, policies, trends, controversies and activist efforts as they pertain to the issue of global warming and other environmental anomalies. Dryzek, Norgaard, and Schlosberg suggest that critical reflection on the history of climate policy is necessary because it provides 'ways to think about one of the most difficult issues we human beings have brought upon ourselves in our short life on the planet’.

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