Praise for Carbon Finance "A timely, objective, and informative analysis of the financial opportunities and challenges presented by climate change, including a thorough description of adaptive measures and insurance products for managing risk in a carbon constrained economy." —James R. Evans, M. Eng. P. Geo., Senior Manager, Environmental Risk Management, RBC Financial Group "Climate change will have enormous financial implications in the years to come. How businesses and investors respond to the risks and opportunities from this issue will have an enormous rippling effect in the global economy. Sonia Labatt and Rodney White's insights and thoughtful analysis should be read by all who want to successfully navigate this global business issue." —Andrea Moffat, Director, Corporate Programs, Ceres "In Carbon Finance, Labatt and White present a clear and accessible description of the climate change debate and the carbon market that is developing. Climate change is becoming an important factor for many financial sector participants. The authors illustrate how challenges and opportunities will arise within the carbon market for banking, insurance, and investment activities as well as for the regulated and energy sector of the economy." —Charles E. Kennedy, Director and Portfolio Manager, MacDougall, MacDougall & MacTier Inc. "Climate change is the greatest environmental challenge of our generation. Its impact on the energy sector has implications for productivity and competitiveness. At the same time, environmental risk has emerged as a major challenge for corporations in the age of full disclosure. Carbon Finance explains how these disparate forces have spawned a range of financial products designed to help manage the inherent risk. It is necessary reading for corporate executives facing challenges that are unique in their business experience." —Skip Willis, Managing Director Canadian Operations, ICF International "In this timely publication, Labatt and White succeed in communicating the workings of carbon markets, providing simple examples and invaluable context to the new and changing mechanisms that underpin our transformation to a carbon-constrained world. Carbon Finance will be the definitive guide to this field for years to come." —Susan McGeachie, Director, Innovest Strategic Value Advisors, Graduate Faculty Member, University of Toronto; and Jane Ambachtsheer, Principal, Mercer Investment Consulting, Graduate Faculty Member, University of Toronto

Table of Contents:
Foreword iii About the Authors xiii Acknowledgments xv List of Acronyms xvii Chapter 1 Introduction 1 Introduction 1 The Changing Climate 3 The Scientific Context of Climate Change 5 The Political Context of Climate Change 8 Corporate Climate Risk 11 Regulatory Risk 11 Physical Risks 13 Business Risks 14 Climate Policies 15 Mitigation Policies 15 Adaptation Measures 19 Role of the Financial Services Sector 21 Conclusion 23 Chapter 2 The Energy Chain 27 Introduction 27 The Energy Chain and the Value Chain 28 Carbon Policies 32 Policy Approaches 32 The Broader Policy Context 33 National and Local Self-Sufficiency 33 Impacts of Different Users and Uses on Climate Change 34 Users: Business, Households, and Government 34 Uses: Manufacturing, Transportation, Heating, Water, and Solid Waste 34 Sources of Energy: Fossil Fuels 36 Coal 36 Oil 37 Gas 38 Sources of Energy: Nuclear Energy 39 Sources of Energy: Hydroelectric Power 41 Sources of Energy: Renewables 42 Traditional Biomass 44 Wind Energy 44 Solar Energy 46 Tidal Energy and Wave Energy 47 Modern Biomass and Biofuels 48 Geothermal Energy 50 Key Issues 50 A Hydrogen Economy Based on Fuel Cells? 51 Carbon Sequestration 52 Unintended Discharges 53 Financing the Transformation of the Energy Chain: The Role of Venture Capital 53 Conclusion 55 Chapter 3 Regulated and Energy-Intensive Sectors 57 Introduction 57 Power Industry 57 Integrated Oil and Gas Industry 65 Government Mandates 65 Physical Capital 66 Restricted Access to Oil and Gas Reserves 66 The Coming Age of Gas, and Beyond 68 Global Concerns Regarding Energy Security 70 Transportation 71 Automotive Industry 72 Factors Affecting Auto Manufacturers’ Carbon Profile 76 Aviation 80 Cement 82 Competitive Implications of Climate Risk in Regulated and Energy-Intensive Sectors 84 Conclusion 87 Chapter 4 The Physical Impacts of Climate Change on the Evolution of Carbon Finance 89 Introduction 89 Physical Impacts on Unregulated Sectors 90 Water Supply and Treatment 90 Agriculture 92 Forestry 94 Fisheries 96 Real Property and Production Facilities 96 Transportation 97 Tourism 97 Municipalities 98 The Built Environment 100 Physical Impacts on Carbon-Regulated Sectors 103 Electric Power 103 Oil and Gas Producers 104 Financial Services 105 Banking 105 Investment 106 Insurance 106 Conclusion 108 Chapter 5 Institutional Investors and Climate Change 111 Introduction 111 Institutional Investors: Size and Global Reach 112 Environmental Reporting 112 Corporations 112 Institutional Investors 113 Corporate Environmental Reporting 113 New Era of Fiduciary Responsibility for Institutional Investors 116 Investment Decision Making 117 Active Engagement 118 Shareholder Resolutions and Proxy Voting 120 Mutual Funds 122 New Momentum in the Corporate World 125 Barriers to the Financial Consideration of Climate Change 127 Institutional Investors and Climate Change 130 Institutional Investors’ Group on Climate Change (IIGCC) 131 Carbon Disclosure Project (CDP) 131 The Equator Principles 134 Investor Network on Climate Risk (INCR) 135 Conclusion 135 Chapter 6 Emissions Trading in Theory and Practice 137 Introduction 137 How Carbon Is Traded Now 140 The Kyoto Protocol 140 The Chicago Climate Exchange 143 The European Union Emission Trading Scheme 143 The Price of Carbon in the EU ETS 148 Countries outside Europe with Kyoto Caps 150 Carbon Markets in the United States and Australia 151 Setting up the Clean Development Mechanism and Joint Implementation 153 The Role of Carbon Funds, Carbon Brokers, and Exchanges 156 Key Issues 159 Verification—Protocols for Measuring Emission Reductions 159 Controlling the Sale of ‘‘Hot Air’’ 160 The Quality and Price of Carbon Credits 161 Enforcing Compliance 161 Integrating the Various Trading Platforms 162 The CDM Bottleneck 162 Extending the Time Horizon beyond 2012 163 Extending Carbon Caps to Uncapped Parties 163 The Carbon Offset Market 164 The Role of Insurance in Emissions Trading 165 Issues for Dispute Resolution 166 Conclusion 166 Chapter 7 Climate Change and Environmental Security: Individuals, Communities, Nations 169 Introduction 169 Direct Effect of Extreme Weather Events 170 Health Effects of Climate Change 173 Direct Effects of Temperature Extremes: Heat Waves and Cold Spells 174 Indirect Effects of Climate Change: Vector-Borne Infectious Diseases 175 Polar Regions 179 Climate Systems and National Sovereignty 181 The Gulf Stream and the Thermohaline Current 181 The El Niño/Southern Oscillation (ENSO) 183 Conclusion 185 Chapter 8 Adapting to Adverse and Severe Weather 187 Introduction 187 Adverse Weather: The Role of Weather Derivatives 188 Weather Derivative Instruments 191 Examples of Weather Derivative Contracts 192 Current Status of Weather Markets 193 Constraints on the Weather Derivatives Market 196 Severe Weather: The Role of Catastrophe Bonds 198 The Structure of a Catastrophe Bond 199 Catastrophe Bonds and Carbon Finance 200 Conclusion 201 Chapter 9 Key Players in the Carbon Markets by Martin Whittaker, guest author 205 Introduction 205 Basic Elements of the Market 206 EU ETS Trading 206 Clean Development Mechanism (CDM) and Joint Implementation (JI) Projects 207 Intermediaries, Speculators, and Professional Services 208 Key Private-Sector Players 210 Compliance Participants 210 Commercial Banks 210 Carbon Funds 211 Speculative Investors 211 Project Developers and Aggregators, Consultants 213 Equity Research 213 Carbon Brokers 215 Exchanges 216 Credit Rating Agencies 217 Insurers 217 Key Players from the Public Sector 218 National Governments 218 National Business Associations 219 Multilateral Banks 219 Information Services 220 Professional Services 221 Accounting 221 Legal 221 New Horizons for the Carbon Market 222 Carbon as an Asset Class 222 Mainstreaming into Project Finance 222 Conclusion 223 Chapter 10 Carbon Finance: Present Status and Future Prospects 225 Introduction 225 Trading Volumes in Carbon and Weather Markets 227 Carbon Markets 227 Weather Derivatives 228 What Can Be Traded Where? (and What Cannot?) 229 Price Discovery 230 The Evolution of Products for Carbon Finance 231 Litigation over Responsibility for Climate Change 232 Is Carbon Finance Likely to Help Us Avert Dangerous Levels of Climate Change? 234 Carbon Finance within the Broader Field of Environmental Finance 235 Conclusion 237 Endnotes 241 Web Sites 245 References 247 Index 263