Carbon Finance

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Financial Dimensions in Green Management – Understanding Carbon Finance


Environmental consciousness is taking its shape in various dimensions in today’s complex business world. The five mega issues which are impacting the behaviour of companies and in turn their strategies are the Climate Change, Polution/Health Consciousness, Globalization backlash, Energy Crunch and Erosion of Trust.[1] The finance sector is impacted because the world commands a hefty price for Carbon dioxide emissions and greenhouse gases (GHGs). This is the major reason why today’s environmental issues elate to the level of corporate financial strategy and policy involving CEOs, CFOs and BOD of companies. Hence, an understanding of carbon finance (a specific dimension of environmental finance), role of the financial services sector (banking, insurance & investments) and carbon trading (as other commodity trading) in climate/commodity exchanges by environment-conscious stakeholders in various industry value chains assumes significance in the context of environmental risk mitigation and adherence to climate change policies.

Climate Change and Industry

Industries directly affected by climate change include Agriculture, Fisheries, Forestry, Health Care, Tourism, Water, Real Estate and Insurance[2]. GHG emissions from agricultural activities account for about 15% of global GHG emissions. Weather developments may also have negative consequences for carbon-regulated industries such as electric power, Oil and gas producers. The power industry contributes a major portion of the global CO2 production (Fig. 1.1).

Fig 1.1 Global CO2 production

Source : World Business Council for Sustainable Development (

Climate Change – A Global political Overview

The United Nations Framework Convention on Climate Change (UNFCCC) Conference in 1997 produced the ‘Kyoto Protocol’(KP), under which 39 of the industrialized “annex 1” countries agreed to mandatory reductions of GHG emissions, totaling 5.2% from 1990 levels by the end of the First Commitment Period of 2008 to 2012. India and China have joined the Protocol but without binding targets. The Protocol was ratified in February 2005 to curb GHG emissions in the environment. The three mechanisms that are designed to help countries meet their emission reduction targets are the Emissions Trading Scheme(ETS), Joint Implementation (JI) and the Clean Development Mechanism(CDM). ETS, JI and CDM

Under the European Union ETS(EU-ETS), emission caps are fixed for each country, followed by GHG caps and tradeable permits are allocated for key industrial sectors: Energy generation, Ferrous metals, minerals as well as pulp and paper. The respective industries are expected to deliver the majority of emission savings. If emissions from companies within these industries exceed their allocations, operators must either purchase permits (credits) or pay a fine. They may trade credits for any emission reductions they achieved beyond their targeted goals. These are called Assigned Amount units (AAUs). ETS have created new market in Carbon dioxide allowances that are valued around 50 billion Euros per year. JI mechanisms are project-based instruments, whereby an Annex 1 country can invest in a project in another industrialized nation and receive emission reduction units (ERUs) for its achievements in emission reductions. The CDM allows industrialized countries to invest in a project in a developing country and obtain Certified Emission Reductions(CER) credits for having reduced emissions(refer Box B1).

Carbon Finance

“Carbon Finance is the term applied to the resources provided to a project to purchase greenhouse gas emissions reductions” (World Bank 2006). Carbon finance covers “market solutions to climate change” (Carbon finance Journal). Carbon finance is influenced by national and international regulations which require producers and consumers to emit...
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