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

CHAPTER7

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

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