Q&A: How Will We Pay?…
Our decision about energy will test the character of the American people and the ability of the president and the Congress to govern this nation. This difficult effort will be the “moral equivalent of war,” except that we will be uniting our efforts to build and not to destroy. —Jimmy Carter, President, United States, 1977 The Kyoto treaty would have wrecked our economy, if I can be blunt. —George W. Bush, President, United States, 2005 While the Kyoto Protocol is a crucial step forward, that step is far too small. And as we consider how to go further still, there remains a frightening lack of leadership. —Kofi Annan, UN Secretary-General, 2006 The higher relative prices of energy will create incentives for businesses to create new, energy-saving technologies and for energy consumers to adopt them. The market for alternative fuels is growing rapidly and will help to shift consumption away from petroleum-based fuels. —Ben Bernanke, Chairman, US Federal Reserve Bank, 2006
The 2008 NCSE conference symposium on this chapter’s topic—business and finance, and opportunities and challenges from climate change—included a lively question-and-answer session, some of which is summarized below. This business and finance symposium came at the end of two and half days of presentations, workshops, and discussions featuring the science and global consequences of climate change. The conference was thorough, and session attendees’ questions were propelled by an urgent tone with a sense that climate change touches every aspect of life, both now and into the foreseeable future.
How Will We Pay?
Question: Our experience is that the federal government now constrains its fiscal stimulus and societal role when addressing climate change. For example, there is the limited ability at EPA to commercialize its promising technology candidates through lack of links to venture capital, with the program further restricted to a small-scale effort to remedy this; and, while the federal government does offer short-term credits for good programs, it does not extend its support long enough for public entities, such as universities, to create independent, long-term sustainability. What we need for wholesale climate change mitigation, that is, 80% reduction by 2015, is on the order of the stimulus package being put together today (in late 2008) to head off a US recessionary economy. Where will that massive, vitally needed infusion of capital on that scale in that kind of time frame come from? Finally, attendees noted, cap and trade doesn’t fund R&D very well; are there other sources?
Answer: It was noted that the venture capital market is very active right now and that carbon cap and sequestration technologies are major application areas. However, sequestration technologies are early-stage investment, which is a very risky place to be. It was suggested that for climate change, government’s role should include financing long-term R&D, which could then be handed off to the private sector. In a case where futures prices could be going down, long-term technology development opportunities are suppressed, and without some price supports, even well-run companies can get trapped in declines. We recognize that cap and trade is limited in generating research dollars, and the urgency of finding and applying climate change solutions cannot tolerate this delay.
The magnitude of investment for an issue that reaches into every facet of our lives would require a coordinated and sustained effort of government, business, and society. While we have experience with recessionary economies and long practice in scaling up for war, mitigating climate is something entirely new.
First up would be governmental leadership determining climate change policy and the types of economic instruments (taxes, commodities trades, and auctions/rebates/price supports, etc.) that should be considered. This type of mixed portfolio is necessary in order to spread risk and create the types of benefits that provide a more equitable cost impact.
We agree with the US Climate Action Partnership Call to Action, which has called for “flexible approaches to establish a price signal for carbon that may vary by economic sector and could include, depending on the sector: market-based incentives; performance standards; cap-and-trade; tax reform; incentives for technology research, development, and deployment; or other appropriate policy tools; and approaches that create incentives and encourage actions by other countries.” [28: p. 2]
Financial markets (investment banks, commercial banks, insurance companies, private equity firms, etc.), long coupled to environmental regulation and sustainability issues, would drive those policy changes through our economic system, as the need to remain globally competitive has impelled the transportation and chemical sectors to respond to the regulatory measures (such as ELV and REACH) made legally binding by the European Union. Environmental organizations can assist by pressuring companies to push their suppliers to achieve increased energy efficiency. And business needs to start now to educate consumers about the inevitability of price rises, perhaps partnering with community organizations to translate that to lifestyle changes. Eventually, energy infrastructure must be changed.
Question: The newspaper headlines are constantly declaring that this undertaking is too expensive and too challenging to conquer. Is that true or valid?
Answer: Helen Howes, the Vice President of Environment and Health and Safety for the Exelon Corporation, an energy company, responded, "As a company we don't think it will be easy or cheap but it's critical. We joined because of the like-minded companies involved." Exelon is constantly asked by prospective employees about their climate change position and has begun to introduce recycling programs in all of its buildings. They also have LEED Green Building Certification in several buildings. “We're saving money,” Howes said. “Our energy savings are 50%.”
What Will Our Investment Priorities Be?
Question: Session attendees recognized that the country faces a number of major financial issues competing with climate change—rebuilding deteriorating infrastructure such as bridges and roads, and recovering from the repercussions of subprime mortgage lending—and also recognized the tension between financing adaptation versus mitigation measures. What will Wall Street do? How can we be assured the money is going to the right place?
Answer: We understand that federal tax reductions and privatization of formerly governmentally managed programs are cutting into the kind of infrastructure maintenance that needs to be done. It may be that the shrinking of federal government is a problem. For the future welfare of the country, the government may need to play a bigger role, one that recognizes the importance of long-term planning and coordinated and integrated agency action as essential to infrastructure upkeep.
The subprime mortgage problem is pulling attention away from climate change; however, it is being dealt with, using a number of economic stimuli available to both government and Wall Street. Major financial organizations such as Goldman Sachs and Citigroup have enough staff to focus uninterruptedly on both financial market issues and climate change, despite this distraction.
Evaluating whether to develop financing for adaptation projects or mitigation efforts will be tough to do. Clearly, it can’t be an either-or choice but rather a balance. Carbon already in the atmosphere will be there longer than the life of most financial instruments. Both insurance and reinsurance companies are already feeling the bottom-line impact of extreme weather events. What is likely to happen is that Wall Street will respond as the crisis demands. Financing the hunt for new renewable energy technologies remains the best route to mitigation, and perhaps one that should be pursued through a coordinated global financing initiative, independent of cap and trade and permit auctioning.
It is estimated that half the world’s carbon dioxide comes from 700 million people, or about 10% of the world’s population. This disparity leads to opposition to trading schemes, which, while creating an incentive to mitigate, also maintain the ability of a few in the industrialized world to profit. Some observers view an emission-trading system as a form of hedged and derivative capital that mainly feeds off itself to enrich a narrow portion of humanity. Whether or not these financial gains can be directed to research and long-term investment remains a challenging question for the capital markets. 
Finally, verification systems, monitoring devices, measurement standards, and transparent reporting for nearly all types of carbon sequestration need development and, in the case of forests and other ecosystems as sinks, refinement. The global scientific community—such as Woods Hole, NOAA, USGS, the IPCC, and others—can contribute immensely. But this will only happen on the scale we need if we get started today. Having a US climate policy and regulations will drive this forward. It will be messy, but we must get going—Europe is ahead of us, and that works to our disadvantage. We have done it in the past. One can examine the success of the Clean Water Act to see that a mixed policy-market response combining legal limits with realistic pricing works. Overuse and pollution became expensive; water became a valuable commodity, and then water quality improved, and usage declined. Already, many states, including California, Maryland, New York, and Colorado, are advancing and enacting their own climate protection programs.
What Will It Take?
Question: Can young environmental professionals not trained in business inform and influence the financial sector?
Answer: The nature of climate change requires that each of us shake up the system at every point. The magnitude of the problem means we all must do something—think about it. Whether you buy a plane ticket, an overcoat, a Happy Meal, a bottle of wine imported from Argentina, or a cell phone, when you use a computer, a microwave, a lawn mower or get on the bus, train, or Metro, the value of the carbon inherent in making, using, disposing, and even recycling is not part of the price. 
Both Mark Tercek and Jeff Leonard confirmed that financial organizations highly value and seek out the best young environmental professionals with diverse expertise. However, the languages of business and natural resource management are different. Experience with both is the ideal for making the kinds of rapid strides we need, to bring climate change under control.
Question: Is business prepared to take on climate change? And are all the various types of business able to respond in the right way and as quickly as needed?
Answer: Companies with big carbon exposure have teams of people who can act. And with most companies, environmental issues are addressed throughout the company, to comply with regulations, stay ahead of the curve on global competitiveness, or reap the benefits of producing innovation through thorough attention to an environmental footprint. Increasingly, large companies are driving environmental impact down the supply chain to mid- and small-sized businesses to produce clean components to achieve a clean consumer product.
Collaborative, market-based innovation will always draw attention. In many cases, initial product design is being examined for modification that can use fewer resources—energy, water, biological entities. For example, an algae farm financed by investors to the tune of $20 million is being built next to an Arizona Public Service power plant to capture emissions and then turn the algae into fuel. 
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- Climate change impacts on non-market activities
- Limitations of markets
- Market failure
- Market impacts of climate change
- Market-based instrument
- European Commission: Environment
- Pew Center on Global Climate Change
- Ceres: Investors and Environmentalists for Sustainable Prosperity
- Chicago Climate Exchange
- [http"//www.eia.doe.gov U.S. Department of Energy: Energy Information Administration]
- Global Reporting Initiative
- Regional Greenhouse Gas Initiative
- United States Climate Action Partnership
- Western Climate Initiative
- Action 6: Energy Efficiency and Conservation
- Action 7: Biofuel Industry and CO2 Emissions?— Implications for Policy Development
- Action 8: Solar Energy:Scaling Up?— Science and Policy Needs
- Action 9: How to Ensure Wind Energy Is Green Energy
- Action 10: Nuclear Energy?— Using Science to Make Hard Choices
- Action 21: The US Global Change Research Program (USGCRP)?— What Do We Want from the Next Administration?
This is a chapter from Climate Solutions Consensus.
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