WRI Stories

How the World Bank Group Gauges "Broad Community Support"

Isabel Munilla — Fri, 21 Nov 2008 16:01:37 -0500

On October 9th, the World Resources Institute’s International Financial Flows and Environment (IFFE) team co-sponsored a panel discussion with Oxfam America and Center for International Environmental Law on How the World Bank Group Gauges ‘Broad Community Support’ for Projects. The discussion came during the Civil Society Policy Forum of the 2008 Fall Annual Meetings of the World Bank and the International Monetary Fund (IMF) in Washington, D.C. Read the summary report (PDF, 416 Kb).

The World Bank and International Financial Corporation (IFC) require clients to obtain “broad community support” before beginning high impact projects. WRI believes that the broad community support standard is increasingly relevant, given the significant growth of World Bank investments in sectors—especially in extractive industries—that can have significant impacts on local communities. In 2004, IFC’s Extractive Industries Review recommended that “broad community support” be included in the Bank’s suite of standards. Since then, it has been incorporated into the WBG’s Operational Policy on Indigenous People’s, as well as IFC’s policy on Social and Environmental Sustainability. As of August 2008, IFC has applied free, prior and informed consultation and broad community support to 18 projects.

However, increased instances of conflict around natural resources, and/or fundamental weaknesses in sector governance in areas where extractive projects are underway or envisioned highlight need for closer examination of the BCS standard and its application.

The panel examined and discussed practical experiences and challenges of implementing the broad community support standard in a selection of World Bank Group projects. Based on experiences to date, the session participants identified several key challenges and concerns related to BCS standard implementation.

This conference report (PDF, 416 Kb) provides a summary of the panel presentation, the challenges and concerns identified by the panel participants, and proposes next steps to continue this important discussion.

Should Obama Follow Ambitious Recommendations?

Jonathan Pershing — Thu, 20 Nov 2008 12:44:50 -0500

The Clean Air Act and new cap-and-trade legislation are both good policy options to address global warming; they can and should be developed simultaneously.

Note: this response was originally posted on the National Journal’s Energy & Environment Blog. You can read the entire post here, including the contributions of other experts.

The Obama Administration absolutely must pursue immediate action on global warming. From both an environmental and an economic perspective, we simply cannot afford to wait any longer; over the last eight years, we have squandered too much of our very limited time. As each successive report emerges from the scientific community, we find ourselves ever closer to irreversible and extremely costly global damages. To take just one example, this last year witnessed the lowest annual Arctic sea ice levels on record. For the first time in recorded history, it is possible to sail around the entire polar ice cap in open ocean—and the entire Arctic may have ice free summers by 2030—with incalculable consequences for global weather patterns.

The cornerstone of action on global warming—as President-elect Obama reaffirmed Tuesday—should be an economy-wide cap-and-trade system, with a long-term target to reduce emissions 80% below 1990 levels over the next four decades. Cap-and-trade will create the price signal that allows markets to respond, and creates critical incentives for clean energy investment, job creation, and entrepreneurship throughout the economy.

However, cap-and-trade alone will probably not be sufficient. We will also need explicit government support for R&D on critical technology and infrastructure, such as carbon capture & sequestration as well as renewable energy. Carbon capture technology in particular faces a daunting array of technical, financial, and regulatory hurdles, putting it decades away from commercial-scale use. But we need solutions to the coal dilemma today. The United States should immediately fund large-scale demonstration projects to accelerate the deployment of carbon capture technology, as well as next-generation renewables such as advanced solar power.

Using the Clean Air Act (CAA) to help control CO₂ pollution is also a sound approach that can work alongside—or in the absence of, should Congress be slow in adopting legislation—a strong cap-and-trade regime. The CAA has a proven record of success (including the SO₂ emissions trading program, which pioneered cap-and-trade) and is already familiar to industry. But it would be only a partial substitute for economy-wide policies, which would create incentives for greater efficiency, and provide R&D funding to lower new technology costs.

Some have suggested that advancing global warming policy under both the Clean Air Act and as separate cap-and-trade legislation will create a so-called regulatory “patchwork,” with multiple policies working at cross-purposes. It is indeed important that policymakers work to harmonize new and existing policies, and streamline requirements where possible. However, this concern can—and often is—managed in both environmental and other arenas. Agriculture, transportation, workplace safety and health policies, to name a few examples, are often subject to the regulations of multiple regulatory agencies at the state and federal levels. In fact, the Clean Air Act itself may contribute to harmonization—in the current system, federal and state partnerships work in tandem to address criteria pollutants, reducing conflicts. While an economy-wide program may result in some degree of regulatory overlap, it need not be problematic, and a new Administration, committed to effective and streamlined climate policy, will be in a position to minimize any such conflicts and take advantage of synergies in multiple policy arenas.

Given the urgency of acting, and the overall scale of the effort required, it seems foolish to waste any policy tool—within the remit of current executive authority or through new legislation—that could usefully contribute to the larger solution we seek.

Measuring GHG Emissions Up and Down the Supply Chain

Laura Pocknell — Mon, 17 Nov 2008 12:43:41 -0500

A new collaboration launches to develop guidelines for measuring and managing corporate GHG emissions throughout the product life cycle and across the entire value chain.

The group is the GHG Protocol’s Product and Supply Chain Initiative, convened under the GHG Protocol. The project’s Steering Committee and technical working groups launched in September, in a series of meetings in Washington, DC and London, involving over 100 participants. The meetings signal the kickoff of a two-year process that ultimately will produce two new GHG Protocol publications that are expected to become international standards—product life cycle accounting guidelines and corporate value chain accounting guidelines.

The two new guidelines will allow organizations to understand and manage the life cycle GHG emissions associated with individual products, as well as emissions across the entire value chain. Like the previous standards, the new guidelines are being developed through an inclusive multi-stakeholder process—involving industry, government, NGOs and academia—to develop consensus GHG accounting and reporting methods.

GHG Protocol Steering Committee members in Washington, DCThe Steering Committee meeting included organizations such as the US Environmental Protection Agency, Wal-Mart, the European Commission, UNEP/SETAC, General Electric, and the Carbon Trust. The committee unanimously emphasized the urgent need to develop accounting methods that can lead to significant GHG reductions, support multiple business strategies, produce robust results, and encourage broad adoption by companies around the world.

Participants left the meeting enthusiastic about the evolving process. “The GHG Protocol has provided important guidance to companies, investors and individuals in a standardized method of GHG accounting” said Miranda Anderson, Director of Corporate Affairs for Sustainability at Wal-Mart. “This new effort to provide agreed-upon standards for measuring GHG emissions up and down the supply chain is needed as more and more companies seek to understand the full impact of the products they make, ship, and sell.”

The kick-off meeting for the technical working groups came two weeks later, and further established the need for robust and practical global guidelines.

“Businesses have been calling for a robust, consistent standard for measuring the carbon footprint of their goods and services,” explained Kay Williams, the representative from Defra, the UK’s environmental agency. “Defra along with the Carbon Trust have responded by sponsoring the British Standards Institute to develop PAS 2050. However, products and supply chains are global and we need an agreed international standard to assess these embedded emissions. By working with the GHG Protocol we hope to share our knowledge to develop a credible, practical and internationally acceptable method.”

“The Carbon Trust is delighted to be working with WRI and WBCSD in their work on carbon footprinting in product supply chains,” added Graham Sinden from Carbon Trust. “We see a strong relationship between this new initiative and the recent work of the Carbon Trust in developing PAS 2050 for product carbon footprinting, and we are keen to share the knowledge we have gained in this project to support further international development and harmonization of product carbon footprinting approaches.”

Opportunities and Challenges

There is a clear need for additional guidance on scope 3 (value chain) accounting and reporting at the corporate level, including recommendations for which scope 3 emissions sources a company should include in their inventory and how to calculate them. Participants said that the most significant opportunities for reducing emissions often reside with a company’s suppliers. The new guidelines will enable companies to determine where the greatest GHG reduction activities are in the value chain.

But experience so far with product-level GHG accounting has raised some interesting challenges, as shown by case studies presented in the working groups. One particular problem concerns how information is communicated publicly. Reflecting on PepsiCo’s experience, Robert ter Kuile, Senior Manager for Energy and Climate Change, asked “how can you ensure that consumers properly interpret the results from these studies when there might be 75 grams of carbon associated with a given product, when the product’s mass is only 30 grams? Communicating this information is very challenging.”

Nonetheless, several representatives declared that public communication may be what drives companies to make the needed GHG reductions to mitigate climate change, and they looked forward to making progress on this and other challenges.

The technical working groups will soon begin producing white papers and draft guidelines. Complete draft guidelines are expected within a year and final guidelines will be published by mid-to-late 2010.

Please visit GHG Protocol for more information. If you wish to participate in the process as a member of the stakeholder advisory group, please contact Anthony D’Agostino.

Poznan Prognosis: Key Questions and Answers

Jonathan Pershing — Mon, 17 Nov 2008 00:00:00 -0500

WRI’s Climate Program Director Jonathan Pershing discusses the likely outcomes of the upcoming UNFCCC Convention in Poznan, Poland.

More information about COP-14
Key Publications
PDF of this post (PDF, 314 Kb)
Listen to podcast of this post (MP3, 22.6 Mb)

Q: Why should the American people care about a global climate treaty?
A: Our financial wealth will not exempt us from the consequences of climate change. Lake Meade, which provides nearly all of Las Vegas’ water, and a significant percentage both for Phoenix and L.A., has a 10% chance of running dry as soon as 2014, and more than a 50% chance of running dry by 2025. Sea levels could rise three feet over the next century, displacing populations all along the Eastern seaboard. Linked to volatile and rising energy prices and increasing global concerns with energy security as well as to potential economic stimulus packages for advanced new energy technology, climate change is the pre-eminent cross-cutting issue facing the incoming president. A global agreement, backed by action from all nations, is the best hope for constraining greenhouse gas emissions within the limits to which humans can adapt.

Q: What is on the agenda at Poznan?
A: The Poznan Conference of Parties is a stepping stone to a critical international climate meeting in Copenhagen, Denmark, in December 2009 which is supposed to deliver a successor agreement to the Kyoto Protocol. There should be progress in areas such as technology support, adaptation and deforestation, and continued financing for the UNFCCC Secretariat. But the big political question – ‘what will the new U.S. administration do and how will the world respond?’ – will not be answered. A good outcome, given this holding position, would be for other countries to set the bar high, and commit to a concerted global effort to make a robust new agreement happen over the next year.

WRI At Poznan

WRI’s objective is to see an effective international climate agreement in place by 2012, supported by effective national implementation by major countries, including the U.S. We will have a dozen experts at Poznan who will hold briefings and workshops for negotiators and observers. We will seek to influence the discussions on critical issues including climate adaptation funding, technology transfer and reducing deforestation.

Key Contacts

Policy: Rob Bradley
Director of International Climate Policy

General/media: Stephanie Hanson
Communications Associate

Q: What role will the U.S. play? Will the president-elect be represented?
A: The Bush administration has avoided significant climate change policy, leaving the U.S. so far a largely ignored observer at these international negotiations. In the final weeks of the Presidency, it would be surprising to see any change in this position at Poznan. President-elect Obama takes an entirely different view of the urgency of climate change, indicating that his Administration will actively participate in ongoing international discussions and negotiations. In the context of the financial crisis, he has stated that he will not interfere with the current Administration’s efforts, and the same will be true in Poznan. However, considerable emphasis will be placed on any informal discussions with members of his transition team, several of whom are expected to attend.

Q: U.S. reluctance to act on reducing greenhouse gas emissions is partly driven by concerns that China and India will not take similar action. What will they offer at Poznan?
A: China has recently set aggressive domestic targets on energy efficiency, renewable energy and reforestation. With China recently taking over (from the U.S.) as the world’s biggest emitter of greenhouse gases, many nations will be looking to Beijing to make a public commitment to taking a leadership role internationally. While India too has very large national emissions, its share, on a per person basis, is much lower than China’s – and less than one tenth of those in the U.S. India is expected to continue to seek financial assistance from developed countries to undertake new policies and measures, although, given the current financial climate, it is unlikely that the scale of such contributions will meet their expectations. Developing countries are not expected to commit to mandatory emissions cuts and target dates as part of these ongoing negotiations; however, they are expected to further elaborate how they will undertake (and subsequently monitor, report on and have verified) national greenhouse gas reduction actions.

Q: Do you see the U.S. taking a leadership role in negotiating a new global climate agreement in 2009? What role would Congress play?
A: The U.S. holds the key to a successful global climate treaty. Without aggressive domestic action by the world’s second largest greenhouse gas emitter, other nations will not respond in kind and there will be no agreement in Copenhagen. Over the next 12 months, expect to see a joint exercise by the White House and Congress to enact substantial legislation to address climate change. This will likely include both funding for energy efficiency, renewables, and carbon capture and storage (CCS) technology development as part of an economic stimulus package, and separate climate legislation including a federal cap and trade bill. In parallel, I expect to see a re-engagement and reinvigoration of the U.S. role in the international negotiations. Whether the domestic U.S. legislation can be completed in time for the December 2009 deadline for a new global climate treaty is uncertain, particularly in light of the global economic downturn. But with a Democratic president and sizable Congressional majority, the prospect of a U.S. president signing, and Congress ratifying, such a treaty in 2010 is a real possibility.

High-Value Assets: Belize's Coral Reefs and Mangroves

Emily Cooper — Fri, 14 Nov 2008 09:29:14 -0500

A new WRI/WWF Central America analysis finds that the coral reefs and mangroves of Belize make a substantial contribution to the country’s economy. Learn more about WRI’s work on Belize coastal ecosystems.

Belize’s coral reefs and mangrove-lined coasts provide critical protection against erosion and wave-induced damages from tropical storms. They have supported artisanal fishing communities for generations and they stand at the center of a vibrant tourism industry, drawing snorkelers, divers and sport fishermen from all over the world.

Despite these benefits, coral reefs and mangroves are frequently overlooked and underappreciated in coastal investment and policy decisions.

Indeed, unchecked coastal development, over-fishing and pressures from tourism threaten the country’s reefs and mangroves. Climate-related changes—such as warming seas, ocean acidification and fiercer storms—could mean that more destruction of coastline ecosystems looms on the horizon.

In a study released today, WRI and WWF Central America evaluate and quantify the economic benefits reefs and mangroves provide to tourism, fisheries and shoreline protection in Belize.

The study looks at only three of the many culturally and economically valuable services provided by these ecosystems in Belize. Nonetheless, even within this narrow scope, these coastal ecosystems clearly provide Belize’s economy with vitally important goods and services.

Valuation Results

Annual Economic Contribution of Coral Reefs and Mangroves in Belize

Coral reef- and mangrove-associated tourism contributed an estimated US$150-196 million to Belize’s economy in 2007, or 12-15 percent of GDP (see chart).

Reefs and mangroves also protect coastal properties from erosion and wave-induced damage, providing an estimated US$231-347 million in avoided damages per year. Additionally, reefs and mangroves provide substantial benefits to the culturally and economically important fishing community, at another US$14-16 million per year.

The full technical report and methodology are coming soon.

Action Needed to Save Belize’s Coastal Ecosystems

Belize’s government, NGOs and private sector are now beginning to recognize the importance of coastal ecosystems to the economy. Nevertheless, the amount currently invested in protecting Belize’s coral reefs and mangroves is very small when compared to the contribution of these resources to the national economy.

Belize’s Marine Protected Area (MPA) system, consisting of 18 protected areas managed primarily by the Fisheries and Forestry Departments along with local NGOs, is widely hailed as an example of forward thinking in marine conservation. The MPAs are an important draw for divers, snorkelers, and sport fishermen, and contain no-fishing areas that help to maintain stocks of key commercial species.

The MPA system is a good first step. However, the system is under-funded, and staff, fuel, and equipment limitations make it difficult to curb illegal fishing and monitor visitation in most of the reserves.

As these coastal and marine resources become increasingly threatened, it is critical to recognize the value they provide and to incorporate this value into policy decision-making.

The Coastal Capital study of Belize finds it is in the long-term economic interest of Belize to:

1) Invest in management, monitoring, and compliance. Greater investments in oversight and management are necessary to protect and preserve Belize’s reefs and mangroves, together with the material benefits they bestow. For instance:

Reinvigorate the Coastal Zone Management Authority and Institute, whose mission is to support the sustainable use of Belize’s coastal ecosystems, and build capacity for monitoring the state and use of coastal resources.
Tighten fishing regulations and invest greater resources in enforcement.
Increase overall investment in MPAs and improve fee collection and monitoring of visitors.
Build efforts to reduce coral bleaching into the management and expansion of the MPA network.

2) Plan and implement development sensibly. The value of coastal ecosystems must be taken into account when making development policy and management decisions that may adversely affect their health. Here is how they could do so:

Enforce land-use and development regulations in the coastal zone.
Minimize the loss of mangroves along the shoreline.
Conduct and thoroughly evaluate Environmental Impact Assessments and subsequent compliance plans for development in sensitive coastal areas, such as the cayes.

Read more about the economic contributions Belize’s Coastal Capital provides.

Keeping the Promise of Transparency

Remi Moncel — Wed, 12 Nov 2008 16:39:12 -0500

WRI has joined with 70 organizations to issue the 21st Century Right to Know Agenda Report in support of government transparency and accountability in the incoming Obama administration.

In honor of Constitution Day last month, WRI called for the presidential candidates to reaffirm their commitment to the Constitution and the fundamental legal frameworks that makes environmental protection possible.

Today, candidate Obama is now President-elect Obama, and WRI has joined a transpartisan coalition to call on the new administration to improve governance and increase transparency in the executive branch.

John Podesta, President-Elect Obama’s White House Transition team co-chair, has promised to oversee the “most open” and “most transparent” transition possible. WRI and many other organizations want to see these pledges carried through—not only during the next few months, but also once Inauguration Day has come and gone.

The coalition is pushing for a practical set of reforms that the transition team and the new administration should adopt. Here are a few of the principles and recommendations we support:

Government should commit to openness as a principle, complying not merely with the letter of openness laws but with the spirit of transparency.
Information should be made available in a timely manner and should be accurate, complete, and authentic.
Exemptions to disclosure should be as narrow and specific as possible – and the burden of proof should lie with the government when exemptions are used.
The president should actively cooperate with congressional oversight and recognize that oversight is a healthy component of American government.

Read the full list of recommendations in the full 21st Century Right to Know Project Report (PDF).

WRI has previously released the policy note, Presiding With Principle, which examined the link between poor governance–such as the distortion of scientific findings–and poor policy. Read more about WRI’s efforts to promote transparency, inclusiveness, accountability and scientific integrity here.

New Ventures India Forum a Boon for Sustainable Enterprise

Chandan Singh — Tue, 11 Nov 2008 10:13:55 -0500

At the third annual New Ventures India Investor Forum in Mumbai, sustainable entrepreneurs connected with investors to network, build partnerships and find opportunities for growth. Participants in the two-day forum found that sustainable businesses can still flourish, even in today’s uncertain economic times.

New Ventures India helps sustainable business entrepreneurs overcome business challenges and spark economic development–as well as environmental improvement–in India. The program is a joint partnership between the Confederation of Indian Industries, Godrej Green Business Centre and the World Resources Institute. The Investor Forum is meant to facilitate investment into businesses that have a high potential to grow and the ability to change the environmental and social landscape. And India’s entrepreneurs proved just how innovative they have become with green technology.

A wide range of interesting businesses were showcased, including Eco Recycling Ltd., India’s leading organization involved in recycling hazardous electronic waste. Another innovative start-up company, Autoboxx Automation, provides energy management services that can help 900,000 small area sites–such as ATMs–dramatically reduce their energy consumption and costs costs by 20-30% through automation and monitoring software.

The Investor Forum comes on the heels of India’s acknowledgment of the need for sustainable development. Recently, Prime Minister Manmohan Singh released India’s first National Action Plan on Climate Change (NAPCC), which laid the foundation for future development of the country’s green economy.

All the participants at the New Ventures India Forum made strong cases for creating environmental and social change through sustainable business. Representatives from several countries acknowledged the need for all countries to share responsibility on the climate change challenges the world will face in the next century.

As the Investor Forum began, the audience seemed overwhelmed with concern about the current economic situation. Participants were particularly worried about how receptive financiers would be to sustainable enterprises given the current financial crisis.

But one moment seemed to turn everyone’s views around. Two entrepreneurs—Mr. Jadhav from Nandan Biomatrix and Mr. Sharma from SBA Hydro Systems—achieve major milestones over the past year with assistance from the New Ventures India Team. SBA Hydro received investment funding from Acumen Fund, while Nandan Biomatrix secured a major strategic partnership. In 2007, they were selected as front-runners in the Investor Forum, and their businesses are now tremendous examples of success. The two told their stories to those in attendance, and they beamed with excitement and gratitude about how they had realized their dreams.

Their story heightened the audience’s enthusiasm, and I could clearly see those in attendance, including the ten selected entrepreneurs for 2008, thinking about the possibilities and opportunities that might await them. In addition, Dr. Saurabh Srivastava, Chairman of the Indian Venture Capital Association (IVCA), reminded participants that investors were not there for philanthropic reasons—rather, they were there to provide funding for future success stories.

The distinguished Tessa Tennant, Board Member of the Calvert Social Investment Fund and co-founder of the UK’s first equity fund focused on sustainable development, eloquently said that if you look back at a list of the top twenty companies from twenty years ago, the list would be completely different from what it is today. The reminder rejuvenated the hope that two decades from now, an entrepreneur at the forum could be running one of the top companies in India.

With that inspirational notion in mind, entrepreneurs shared ideas and presented their business cases to investors. Investments that happen as a result the enterprise development and investment facilitation support of New Ventures India will allow the capital markets to actively participate in the change that is happening in India’s environmental and social frameworks.

In the end, a recurring theme of the event was that a green economy can provide innumerable growth opportunities. Each entrepreneur shared his or her story of beginning a business, facing challenges, achieving growth, and looking to the future.

These types of green enterprises, which would pique the curiosity of even conventional investors, will one day supply the social and environmental returns that only sustainable businesses can provide.

Seizing the Moment: WRI's Strategic Plan

Tue, 04 Nov 2008 10:41:46 -0500

WRI is moving forward with a new five-year Strategic Plan to achieve our long-term goals more effectively.

Download the full five-year Strategic Plan here (PDF, 1.6 Mb).

WRI was created just over 25 years ago with the goal of putting environmental issues on the international agenda. That foresight was informed by an understanding that the very nature of such emerging global issues required time…time to be understood by world leaders; time for the public to become engaged; time for science and technology to respond; time for policies to be changed and adopted; and time for change.

Time now seems an impossible luxury. The relentless demands of a $60 trillion global economy are consuming and degrading ecosystems at an accelerating rate. The pace of global warming is creating a growing risk of catastrophic consequences. The issues on which we work—climate policy, ecosystem services, environmental governance, green markets, and sustainable transport—have moved center stage and into mainstream political, social, and business discourse. But in much of the world, and particularly in the United States, neither focus nor urgency has yet materialized much less catalyzed real changes in policy or behavior.

WRI’s five-year strategic plan is a response to this crucial moment. We recognize the need to be clear and ambitious about our ‘strategic intent’ in order to more effectively pursue our mission. We seek to build on the core strengths cultivated within our institution for over 25 years.

Our mission—“to move human society to live in ways that protect Earth’s environment and its capacity to provide for the needs and aspirations of current and future generations”—remains as vital. Our vision is still global and long term.

Our belief in and commitment to analytical excellence is undiminished. We are passionate about achieving and measuring results. We know from experience that by engaging with partners around ideas, analysis, and information we can create change. We work with organizations in every part of the world, and from every part of society—NGOs, governments, businesses, and academic institutions—whoever can create the change that is needed.

Our impact depends on our credibility, and our credibility is rooted in our independence, our integrity, our pragmatism, and the quality of our work.

This plan also signals changes. Sharpened focus will translate into more rigorous criteria for our work, increased synergies among our program areas, and tighter geographic concentration. Enhanced engagement will mean a more active in-country presence in key emerging countries and greater flexibility to adapt to rapidly changing systems and cultures. An increased emphasis on the tools and culture of communication will expand our reach and understanding.

With the support of our talented and committed staff and Board, we confidently predict that WRI will emerge from this process, by 2012, a stronger and more effective institution.

Will Climate Policy Take A Back Seat During the Economic Slowdown?

Jonathan Pershing — Fri, 31 Oct 2008 11:03:35 -0400

The financial crisis is currently at the front and center of the national debate, but if we limit our focus to near-term fixes on the economy, we will just defer requisite action on climate.

Note: this response was originally posted on the National Journal’s Energy & Environment Blog. You can read the entire post here, including the contributions of other experts.

It makes sense to frame this issue around risk. The current economic downturn occurred because we misunderstood the risk and regulatory needs of the financial sector. Similarly, we are willfully ignoring risk of climate, and refusing to regulate performance. If we do not do something to regulate greenhouse gas emissions more effectively, in 20 years we will see the negative effects of climate change on a grand scale. Now is the time to take these risks into account.

It’s also important not to view this situation as an either/or proposition between a healthy economy and a healthy environment. If done right, climate legislation can help spur a recovery and reduce greenhouse gas emissions. We can do so by incentivizing a transition towards a new green energy system with massive investments in energy efficiency and cleaner technologies.

New research is emerging that calls for climate-friendly green investments to spur economic recovery. A recent Deutsche Bank study found that governments have a “historic opportunity” to stimulate growth through investments in green energy. And as Professor Robert Pollin of the University of Massachusetts-Amherst recently told Congress: “There is no reason at all to delay taking action now to fight global warming. A green investment agenda–focused primarily on measures to dramatically improve energy efficiency but on advancing renewable energy commercialization as well–can itself serve as a powerful engine of job creation in the short run.”

In addition, we can structure policy in a way that has minimal impact on consumers. Lawmakers have discussed several ways to do this, such as a carbon tax and direct rebate to consumers, or efficiency allowance allocations meant to encourage the electric sector to reduce ratepayer costs.

Regardless of the path we choose, we shouldn’t be afraid that climate policy will stymie the economy’s recovery. Rather, we can use climate policy to help to assist our recovery and put us on the path toward a more climate-friendly energy system.

Ultimately, it is not a question of whether we pay to limit the climate risk, but how. We either pay today with increases in electric costs offset by gains in efficiency and long term energy security. Or we pay later with reduced competitiveness of US industry in the global clean tech market; we pay later with huge adaptation costs; and we pay later with a less stable world.

Subprime Carbon: Preparing for the Dangers of Hidden Carbon Risk

Hiranya Fernando — Thu, 30 Oct 2008 09:07:02 -0400

WRI is drawing lessons from the subprime mortgage crisis to prepare the financial community for another potentially paradigm-shifting market change: the advent of carbon regulation.

With the Wall Street financial meltdown on everyone’s mind, the dangers of hidden risks are a timely topic. At a minimum, there are two key lessons here with respect to climate change and carbon risk.

First, markets may operate in a way that routinely ignores or misprices an important risk. Many things can contribute to this, including short-term, deal-driven incentives, poor risk analysis by internal auditors and external agencies, and lack of government oversight. These problems can be exacerbated by financial sophistication that adds complex layers to financial products. Products such as mortgage-backed securities may have helped to fuel easy credit and an avenue to pass on bad debt.

“If you really take a fine-tooth comb and go through your portfolios, many of you are going to find them chock-full of subprime carbon assets.”

- Former Vice President, Al Gore

When information is unclear or muddied, risk can get dangerously mispriced. And that’s also true with carbon assets. With future carbon-related legislation as a constant moving target, added to the complexity in compiling GHG inventories, no one knows exactly what the real carbon risks are today. Put simply, they are difficult to decode.

Second, new financial players who hold significant positions in diverse industries along complex supply chains create an environment in which market turmoil in one sector can ripple through to other, sometimes seemingly unrelated, sectors. Likewise, the introduction of a carbon price impacts costs, revenues, profitability, cash flow, and market share of companies. Certain businesses may be unable to perform under carbon price constraints.

In the forthcoming Issue Brief on “Subprime Carbon,” we look at how carbon risk creates significant credit risks across diverse industries, for businesses and investors alike. These risks include:

Supply Chain Risks: Increased input costs and price pressures are likely to affect company cash flows and bottom lines.
Product and Technology Risks: Operating efficiency and competitive advantage may be compromised as competitive products, technologies and processes that limit carbon emerge.
Regulatory Risk: As policymakers set emissions cap, develop inventory methods and apply rules to different industries, companies face rising and uncertain compliance costs.

Here are some of the questions we consider and attempt to answer in our Issue Brief:

Are financial markets and businesses doing something to mitigate these risks?
Are businesses creating alternative strategies to respond to potential cost increases in their supply chain?
Are rating agencies weighting the full range of credit risks associated with the introduction and volatility of a carbon price?
Are portfolio managers fully aware that associated regulations and subsequent market movements could have significant effects on fixed income fund performance even with a diversified portfolio?

Debt markets are in the beginning stages of considering carbon risks as part of their decision making process. Much of their efforts to date focus on carbon risks related to relatively obvious sectors such as energy and utilities. But less direct risks from carbon costs are rippling through the supply chain and across various industries—these types of risks are harder to capture, but no less significant.

It is time for portfolio managers to scrub their portfolio, for rating agencies to reevaluate their rating, and for stakeholders to create tools that identify, “subprime carbon”-backed debt and the credit risks of underlying counterparties. No one denies that it is a challenge to assess and quantify carbon/climate risks accurately. But by ignoring them, we run the bigger risk of repeating some of the same mistakes that contributed to our current financial woes.