Tag Archives: cap and trade

Word Resources Institute Report: Financial Institutions Should Improve Environmental Risk Identification and Mitigation Efforts

Word Resources Institute (WRI) recently published a new issue brief titled Accounting for Risk.

This publication focused on the myriad issues confronting financial institutions (FIs) when determining and evaluating greenhouse gas (GHG) emission inventories and related risks.  The study concludes that there are a number of benefits to FIs for implementing well-thought out processes for assessing GHGs beyond their direct emissions.

Key risks discussed include:

  • GHG risk impact on new investment opportunities.  This risk may be most prevalent in the power generation sector.  WRI noted

Investments in carbon-intensive projects are no longer a safe bet. Companies, under pressure from shareholders, have been pulling support and cancelling plans to construct new coal plants.

  • Appropriate scope for emissions measurement. WRI contrasts two different scoping approaches – the Operational Control approach and the Equity Share approach.  To illustrate the potential differing results between the two, WRI provided an example.

In 2007, Citi reported its total environmental footprint (scope 1 and 2) at about 1.4 million metric tons of CO2, but estimated its share of CO2 emissions from financing just two thermal power plants to be almost 200 million metric tons of CO2 (~3.3 million metric tons on an annual basis based on a 60 year life). That’s a big difference, and, like Citigroup, most other financial institutions’ traditionally reported scope 1 and 2 emissions will be tiny when compared to their share of emissions from investments.

  • Comparability and reliability of emissions calculation methodologies.  Elm has commented several times on the issues of emissions calculation risks here, here and here.  In its report, WRI echoed our earlier comments and quoted Eliza Eubank, Assistant Vice President of Environmental and Social Risk at Citi:

“If everyone is finding their own way and designing their own methodology, then you really don’t know how to compare different numbers that different people are putting out there.” Without guidelines, deciding what and how to report, “can be a very dicey issue.”

In its summation, WRI stated:

To satisfy internal users (i.e., financial institutions) and external users (e.g., investors, clients, NGOs, regulators), more definitive and standardized [GHG inventory] guidance is needed.

Tiny Bug – Giant Financial Risk

Recently, we published discussions related to various risks associated with certain aspects of corporate carbon management programs – planning, calculations and reporting.  But we have had discussions with clients about other risks specifically posed by sequestration techniques.

Today, a Reuters report provides stark evidence of the reality of a disastrous threat to forestry sequestration: the tiny pine beetle. Infestations of the insect cause huge impacts:

In Colorado, aerial surveys show that from 1996 to 2008 Colorado lost almost 2.5 million acres (1 million hectares) of pine forest to the beetle outbreak, Wyoming 677,000 acres and South Dakota 354,000 acres.

Over the same period of time, the spruce beetle, which has also ravaged forests as far north as Alaska, took out 374,000 acres of spruce trees in Colorado and 340,000 in Wyoming.

That cumulative total of over 6 million acres (2.5 million hectares) is an area larger than Israel or South Africa’s Kruger National Park.

As the excerpt states, this is the impact over 12 years.  Commercially-viable forestry sequestion projects typically span 15 to 30 years.  The article stated that Colorado-based U.S. Forest Service scientist Mike Ryan is concerned that pine beetle destruction may lead to forests changing from carbon sinks to net emitters due to carbon releases from the increase in dead timber.

This would mean big problems for companies who have made investments or developed strategies that include forestry sequestration.

Geologic or subsurface seuqestration has also garnered attention.  But this brings an even wider range of exposures – third party damages.  Two scenarios include:

  • Equipment failures or human errors related to the technology for capturing, preparing and injecting CO2 emissions into the subsurface receptor
  • Releases from the receptor itself.

There are many instances of process equipment failures or human errors in industrial settings that have lead to catastrophic events.  Just earlier this week an unidentified chemical release at a household waste transfer station sent more than 100 people to the hospital and triggered a full HAZMAT response by emergency authorities.

What may be less known are instances and impacts of massive CO2 releases from natural “storage”.  Perhaps the most dramatic and relevant is the 1986 Lake Nyos disaster in Cameroon where 1700 people lost their lives.

As CO2 regulation moves forward in the US, thorough identification of risks and solutions becomes imperative.

AIG Shutters Climate Program, Creates Further Uncertainty for EHS and Risk Managers

Articles from the New York Times and Environmental News Network reported that last month, the world’s largest insurer – American International Group (AIG) – closed its climate change program.  AIG was until recently lauded as a leader in the financial services and insurance industry for its GHG activities.  According to NYT, AIG had

established new goals by inventorying its greenhouse gases and was collecting offsets for a year’s worth of emissions, developing insurance policies for renewable energy providers, and brainstorming for financial instruments that would assist innovators in the green movement.

With the closing of their climate program, the company is no longer calculating its emissions,  ceased efforts to reduce them and canceled its Be Green program,  NYT reported.

“Some people were concerned that if you took an advocacy position [on climate change], that might annoy — that’s a good word — clients,” the articles quoted Joseph Boren, the former CEO of AIG Environmental.

Both articles quoted Richard Thomas, former senior vice president of AIG, as saying that AIG’s decision about its climate change program  “will retard the development of some of the financial instruments to address some of the issues in climate change.” He pointed out that “AIG was a leader in that area, and now because of so much of what AIG did is in disrepute on the financial product side, I think that sends a chill through everyone.”

What does this mean?

Fundamentally, this demonstrates the unrelenting uncertainty of business risk related to climate management issues in the United States.  AIG’s actions are concurrent with federal GHG legislation having passed the House and awaiting Senate action, a President publicly committed to climate action, growing participation in the Climate Disclosure Project (CDP), successful completion of the first phase of RGGI and now Walmart’s supplier sustainability initiative.

Thomas’ statement and the NYT article indicate that some of AIG’s climate solutions were based on complex financial instruments rather than traditional insurance policy structures.  This itself presents an array of questions and possible concerns.  Certainly, the past year has shown the stark downside of AIG’s management of financial products; public and client concerns about the validity of such mechanisms may be justified.

Companies who had hoped to obtain insurance for various climate-related risks may not be able to do so, at least possibly not to the extent originally envisioned.  This places additional burden on companies to identify and assess their climate-related exposures themselves, develop internal management strategies on their own, and reduce reliance on potential insurance policies for financial risk mitigation.

Making plans for greenhouse gas emissions (GHG) trading?

Two articles in the June 26, 2009 edition of the Wall Street Journal highlighted two interesting items of potential concern to US companies who are planning their carbon or GHG strategies.   The articles (links posted below) discuss

-       new regulatory uncertainties of an emerging US GHG cap and trade mechanism.  A new round of technical backlash is arising from respected scientists around the world concerning the previously-touted scientific consensus on GHG emissions contribution to global climate change.

-       Financial institution concerns about the trading controls included in the current version of the American Clean Energy and Security Act.

There continues to be the need for US-companies to conduct a thorough business risk assessment of potential GHG trading plans and strategies.