Climate change and the global response to it are vital issues for the financial markets today, and the many uncertainties about current developments present both risks and opportunities for the sector.
Understanding other industries’ opportunities and risks
In their lending, investing and insurance activities, financial services companies must take account of the opportunities and risks in all industries. It is therefore important for them to understand who will be the winners and losers in adjusting to climate change as well as the new regulations that are implemented. Certain industries will be directly affected by climate change; agriculture and construction, for example, will be affected by an increase in storms and flooding. Energy-intensive companies will be affected by carbon allowances and duties as well as rising energy prices. Other companies, on the other hand, will be able to take advantage of opportunities by adjusting to a less carbon-intensive economy. They will have a good platform to promote projects such as insulation, wind turbines, solar energy and environmentally friendly cars.
A financial infrastructure for trading in greenhouse gasses
The Stern review (2006) calls climate change “the greatest and widest-ranging market failure ever seen”. One part of the solution is therefore to promote sound market signals on the price of fossil fuels and greenhouse gasses (GHG) in a trading system for GHG, and the financial sector can play a role in this area.
What has blocked the development of an efficient carbon market thus far is the lack of a long-term international agreement on reducing CO2 emissions. The EU's adoption of new climate targets, however, opens the possibility for developing a European market for energy-efficient initiatives. The EU has made a commitment to reduce its overall CO2 emissions by 20% from the 1990 level and to increase the percentage of renewable energy to 20% by the year 2020. It is also prepared to increase the target for emissions reductions to 30% if other countries are willing to match this target at the UN's Climate Change Conference in Copenhagen in December 2009. But if there is to be an effective carbon market, countries such as the US and China must also be part of the new climate agreement as well.
Last updated on December 4, 2009