Chapter 4 Flashcards
Big debate between academia and policymakers
optimal level of emission reductions - DICE model
DICE model
Dynamic Integrated Climate Economy - economist developed model to assess costs and benefits of mitigating climate change through emissions reductions vs. physical impacts of climate change
Important questions to consider
- allocation of moral responsibility
- inherent difficulties of climate action
Allocation of moral responsibility
relationship between: 1. country’s wealth
2. country’s historic emissions
– potential trade off between emissions and economic development
Countries who have greatest share of cumulative emissions
US, EU, Russia, Japan
Countries who have sharply increased emissions in past 2 decades
China, India
Countries expected to drive future emissions reductions
Saudi Arabia, Indonesia, Brazil
Current Emissions
Asia: 53%
North America: 18%
Europe: 17%
Cumulative Emissions
Asia: 29%
North America: 29%
Europe: 33%
History of Climate summits
- 1979: First World Climate Summit (organized by world meteorological organization)
-1988: IPCC created (WMO co-creator) - 1992: Earth summit in Rio
-UNFCCC creation (subsequent summits known as COP) - COP 1: 1995 - Berlin
- COP 3: 1997 - Kyoto
-Kyoto protocol - Cop 15: 2009 - Copenhagen
-failure
6.Cop 21: 2015 - Paris Agreement
- (in advance of COP 26): Glasgow Financial Alliance for Net Zero - Cop 26: 2021 - Glasgow
-establishment of ratchet mechanism
Kyoto Protocol
Annex I (high income) countries attain 5% emissions reduction compared to 1990 level by 2008-2012
Between AI countries:
1. emission trading
2. join-implementation
3. clean development mechanism
Emissions Trading
AI countries with deeper emissions cuts could sell surplus emissions allowances to other AI countries
Joint Implementation
Between AI countries - one country could invest in emission reduction projects in another country to help meet its own emissions reduction targets
Clean Development Mechanism (CDM)
Way for emissions cuts to be spread to developing countries - AI country could get credit for conducting emissions reduction project in non-AI country
Cop 15
Copenhagen- failure because no new binding treaty was made (after failure of Kyoto protocol)
-laid groundwork for P.A. - 2 degree limit
Paris Agreement
- Nationally Determined Contributions (NDC): submitted by each country to UNFCCC and periodically re-evaluated
- Keep well below 2 and aim for 1.5
- Recognition of all stakeholders
-UN Race to Net Zero
Ratcheting System
Cop 26 - Glasgow: countries are expected to tighten their NDCs every 5 years which will then be evaluated at COP meetings (NDCs at P.A were not aligned to 2 C - 2020 NDCs were more so aligned)
Carbon Pricing
- Carbon Tax
- Cap and Trade schemes
Carbon Tax
price / ton of CO2 emitted (favored by economists)
pros: raise revenue for government
cons: level of taxes are frequently tweaked which can be detrimental to investors and businesses that need certainty over multiple years to make investment decisions
Cap-and-trade scheme
(more flexible) Total amount of emissions is capped (and gradually decreased) but emission permits can be traded between parties
Pros:
1. Allow industries/sectors that are more succesful in reducing emissions to sell excess permits to those in sectors where emissions reductions are more expensive or technologically infeasible
2. Can create credible cash flows that can facilitate larger and longer-term investment decisions
Cons:
1. Can cause volatile Carbon pricing or shock (like Financial crisis) can lead to oversupply of permits and therefore decrease incentive to reduce emissions
Current amount of Carbon Pricing Initiatives
Currently 64 Carbon pricing initiatives that cover 46 countries
However, for many of them, the price / ton of CO2 emitted is <$100 (which is the assumed amount needed in order to have a significant impact)
Power Generation Sector
- Renewable Portfolio Standards (RPS): A range of quota-based regulations that aim to increase the supply of renewable electricity by requirement commercial power producers to source a specific portion of supply from renewable E sources (has been deployed in 173 countries)
- Feed-in tarrifs: Offer guaranteed price/unit of electricity generated at which producers can sell their electricity for a fixed period of time (between 15-25 years) (incentive for people to invest and produce renewable E)
Transportation Sector
Fuel efficiency standards for cars
1. EU implemented CO2 emissions standards for cars and automobile manufacturers at fleet level
2. EV purchase subsidies (similar to feed-in tariffs) encourage uptake of EVs
C40
Global coalition of cities dedicated to combat climate change (helped contribute internal pressure to bring about P.A.)
America’s Pledge
After US pulled out of P.A. state governors, cities, counties, higher education, healthcare systems, corporations and firms all pledged to uphold P.A
NSA Climate Commitments
NSA: Non-state and Subnational Actor
ex: C40, America’s Pledge
- NSAs decrease emissions by 3.8-5.5% more by 2030 than national pledges in a 10 high-emission country study
Corporate Accounting and Reporting Standard enables GHG emissions accounting at corporation level
Standardized through GHG Protocol
GHG Protocol
established late 1990’s by World Resource Institute (WRI) and World Business Council for Sustainable Development (WBCSD)
GHG protocol standards and sub-protocols
- Project protocol
- Corporate Value Chain (Scope 3) Standard
- Product Standard
- Policy Action Standard
- Mitigation Goal Standard
Project Protocol
Quantifies GHG emissions reduction benefits of climate change mitigation projects
Corporate Value Chain Standard
Companies can assess entire value chain emissions impact and identify where to focus reduction activities
Product Standard
Understand full life cycle emissions of a product and focus efforts on greatest GHG emissions reduction opportunities
Policy Action Standard
Standardized approach for estimating GHG effect of policies and actions
Mitigation Goal Standard
Guidance for designing national and subnational mitigation goals and standardized approach for assessing and reporting progress towards goal achievement
Heart of GHG protocol
Direct and Indirect emissions (Scope 1,2,3)
Scope 1,2,3
Scope 1: Direct emissions from owned or controlled sources
Scope 2: Indirect emissions from generation of purchased Energy
Scope 3: Indirect emissions that occur in the value chain of reporting company (including upstream and downstream emissions)
Upstream emissions examples
transportation and distribution; business travel; purchased goods and services
Downstream emissions examples
Use of sold products; transportation and distribution; investments
Risk of Double counting
Counting scope 3 can lead to risk of double counting
ex: Scope 1 emissions of a power generator = scope 2 emissions of electric appliance user = scope 3 emissions of appliance manufacturer AND retailer
-2 or more companies do not account for the same emissions within the same scope
Multi development Banks (MDBs)
Tasked with supporting public-sector investment in physical and human capital projects conducive to socio-economic development
Public policy to promote green finance
mostly involves setting up green finance hubs or taskforces
Green Taxonomies
Intended to inform policy, regulatory and market decisions.
EU taxonomy: sets performance thresholds for economic activities by sector and sub-sector
To count as green, activities must:
a. make a substantive contribution to 1/6 environmental objectives
b. do no significant harm to the other 5/6
c. meet minimum safeguards
overtime: green taxonomies could help determine what companies can access green subsidies/incentives from governments and what tax or incentives investors could receive based on their investments in green companies and assets
Green taxonomies pros
pros:
1. facilitate comparibility across investments
2. reduce burden to determine whether investment is green
3. help tackle greenwashing
4. improve understanding of company activities on the environment therefore helping green portfolios and loan books
Green Taxonomy cons
cons:
extremely challenging to assess every type of economic activity, determine if green and then apply consistently to every company
- Binary “green” assessment: different companeis could have different shades of being green - which taxonomy could make indistinguishible
- Lobbying: administrative process required to develop a green taxonomy may be open to lobbying and political influence
- Asset Bubbles: over time, green taxonomy could artificially inflate value of assets labeled “green” - potentially creating F stability risk
- Sub-optimal targeting: incentives based on green taxonomies could benefit owners of green assets that have already been created - rather than investors of new green assets
- Decreased quality: labels encourage institutions to “buy the label” without properly assessing the economic activities / cash flows of the investment (Green finance may have a role in public policy and fiscal decisions (ex: allocate subsidies) but NOT play a central role in tackling greenwashing.
NGFS
Network for Greening the Financial System: initiative that brings central banks and regulators together to work on climate integration - promotes collaboration and sharing of expertise on climate risk among supervisory institutions (founded by 3 EU central banks: France, UK, Netherlands)
Central banks and Financial Supervisors have integrated climate change into
- Microprudential supervision
- Macroprudential supervision
Microprudential Supervision
oversight of specific FIs (banks, insurers) for Financial soundness - ex: BoE: climate risk integration (governance, risk management, scenario analysis, disclosures)
Macroprudential supervision
examines the stability of broader Financial system
Climate integration in governance
FI have structures to ensure climate risks are actively managed at highest level by senior managers and board of directors
Climate integration into risk management
firms are often asked to use some combination of scenario analysis and stress testingc
limate integration into disclosures
recommendations of TCFD are seen sas best practice, and mandatory by UK and NZ
Stress-tests
a micro¯o prudential tool at disposal of central banks : model the reaction of an individual FI (or whole F system) to a hypothetical shock
Climate Counter-cyclical Capital Buffer
macroprudential measure : capital requirement that would require banks to build up a higher equity capital base during period of Carbon intensive credit
Large exposure limits
macroprudential measure: limit banks’ exposure to Carbon intensive assets that are considered high risk of stranding
Race to Net Zero
(private secotor) founded by chile and uk high level climate champions to bring business, investors, cities & regions together to accelerate economic transition towards achieving P.A. goals
Glasgow Financial Alliance for Net zero
consolidation of many net zero groupings therefore bringin together entire Financial systemt
Nature and Bio-diversity
More than 1/2 world’s economic output is moderately/highly dependon on nature
TNFD
Taskforce on Nature related F Disclosures
Four pillars of TNFD (same as four pillars of TCFD)
1. Governance
2. Strategy
3. Risk-Management
4. Metrics and targets
NGFS 6 recommendations
- integrating climate related risks into F stability monitoring and micro-supervision (mapping physical and transition risk transmission channels within F syst. and adopting key risk indicators to monitor these risks)
- integrating S factors into own portfolio management
- bridging the data gap (share and publicize data)
- building awareness and intellectual capacity and encouraging technical assistance and knowledge sharing
- achieving robust and internationally consistent climate and env. related disclosures
- supporting the development of a taxonomy of economic activities
Examples of microprudential policies
- requirement to disclose climate risks
- ensuring senior executives have oversight of climate risks
- expectation that banks conduct scenario analysis
Common climate related macroprudential policy
climate stress tests