A white paper on behalf of Thinking Ahead, the thought leadership platform of CPP Investments, a Canadian pension fund.
Challenge: Introduce experts to the fast evolving market trends around green bonds and related climate-focused financing mechanisms.
Solution: Contextualize and explain market growth, challenges and the outlook for green bonds as both a tool to raise climate-focused funds and as a investment opportunity.
My roles: Research, SME interview and review, data composition, chart design/recommendation, writing and editing, design/visual editing.
Dealing with climate change can seem impossibly costly. By all accounts, the toll will be many trillions of dollars annually for many years to come.
So far, efforts have been patchy and painful. Washington is momentarily engaged in a high-wire act to fund a multitrillion-dollar, climate-focused package that could make or break Uncle Sam’s decarbonization effort.
Even more modest sums are tough. To date, rich-world pledges to subsidize poor countries’ climate costs — to the tune of just $100 billion per year — remain unmet after a decade. Far tougher challenges and much higher costs lay ahead, so the prospects look grim.
What if there was a way we could fund the climate transition by creating a new global currency, off the books of national and corporate accounts?
The currency could be used to reward each ton of carbon abated, whether via cleaner energy, cleaner business or direct carbon removal and sequestration. Such a regime could not only turbocharge public and private climate investment. It could also pay to protect ecosystems, which today struggle to find funding. This regime would also be politically transformative. Corporate boards and policy makers could shift from fighting over funding to planning action.
What if there was a way to fund the climate transition by creating a new global currency, off the books of national and corporate accounts?
From today’s system based mostly on sticks — taxes and rules — a reward would incentivize decarbonization (carrots). Just like people, global economic systems change faster with a mix of carrots and sticks.
If any of this is sounding familiar, a similar system plays a central role in Kim Stanley Robinson’s latest work of climate fiction, The Ministry for the Future, a novel tipped as a top read by Barack Obama and Ezra Klein, among others.
In the story, as the climate crisis worsens, the world’s top central banks go from cautious recalcitrance to urgent collaboration to create a global “carbon coin” to fund decarbonization. Robinson name checks the inspiration for this financial solution as “the Chen paper.”
Carbon rewards
Turns out, Delton Chen is a real person, who co-authored the real academic paper that inspired Robinson and that informs an increasingly ambitious vision to overhaul the world’s economy: the Global Carbon Reward.
Chen’s academic roots start in Australia with a Ph.D. in engineering. Around 2013, he shifted his focus to explore the barriers to addressing climate change. Clear as the science seemed, economics emerged as the key problem. Something was not working.
At a high level, he describes the global economy as an incomplete system, missing a key price — for risk — that could help resolve the climate problem. Activists like Greta Thunberg, says Chen, argue that we already have all the facts and solutions to solve the climate crisis: “I’m saying that’s not true. We don’t have all the answers because the fundamental economics of carbon pricing appear to be incomplete.”
To fill this gap, Chen proposes a new digital global currency, created by central banks to fund a wave of global monetary policy that he calls Carbon Quantitative Easing, or CQE. That new currency is used to pay out Global Carbon Rewards, a flow of incentive payments to permanently fund the mitigation of greenhouse gases.
Chen’s theory is complex, and much of it exceeds my financial fluency — for deeper details, see links at the end of this note. That said, its high-level features are accessible and link to real world developments.
They include:
Carbon currency. One wouldn’t use Chen’s carbon coin day to day to buy groceries or gas. Rather, each virtual coin is “struck” based on the value of one metric ton of CO2 equivalent mitigated for a century. Central banks will manage the rate of conversion — into dollars, Euros, renminbi, etc. — to appreciate annually.
Because its value rises, the coin creates a reliable price signal to help companies finance costly transition plans — such as the shift from oil to green hydrogen — that are hard to finance today absent a known future value of carbon removal.
Governance and knowledge base. This system would require the transformation of existing institutions and the development of new ones too. Longer term decisions about setting the target value of the coin would be set by an authority, guided by a cost abatement curve for the planet. As the value of the coin goes up, year after year, markets would have a rising incentive to tackle increasingly gnarly decarbonization challenges.
To manage the award of coins, this system would include a registry of registries, tracking worldwide claims on carbon abatement to avoid double counting and related abuses. Such a library of methods and successes promises other benefits, too: a global, open-source repository of best practices to accelerate mitigation.
Social benefits. Today’s carbon frameworks fail profoundly to price in harder-to-quantify damage to people, culture, and ecosystems — from the extinction of a species to the desertification of rain forest. As part of the coin’s governance system, stakeholders — from indigenous peoples to environmentalists — would have input into the valuation of reward allotments.
Precursors
As Chen’s plans gain attention, real-world financial trends that are moving in a similar direction:
Central banking. Chen’s CQE stems in part from the emergence of quantitative easing (QE) around 2008. In response to the mortgage-backed securities crisis, the Federal Reserve deployed a then new approach, which — at the risk of oversimplification — let central banks issue new debt with one hand while buying it back with the other, thereby creating new assets, and keeping credit flowing into an economy at risk of freezing up.
Skeptics howled the tactic would unleash a tsunami of inflation. They were wrong. And since then, QE has become a favorite of the world’s central banks. To date, they have funneled over $25 trillion in QE funds into the global economy, including some $9 trillion in response to COVID-19 economic disruptions, per an Atlantic Council tracker.
At a few trillion dollars per year, the river of money already created through QE is in the ballpark of the anticipated price tag for climate adjustment. And as central banks adopt the technique, they are beginning to harmonize efforts.
Chartered to maintain financial stability, sometimes measured by unemployment and inflation, central bankers are beginning to regard climate in the same frame, Chen contends. From implicitly defending housing lenders in 2008, it’s not a far leap to imagine bankers recognizing climate collapse as a fundamental systemic risk.
There are early signs of such a shift. The Network of Central Banks and Supervisors for Greening the Financial System (NGFS), launched in 2017, is a group of 80-plus central banks and supervisors, including the Federal Reserve. Besides advancing finance sector practices around climate risk management, NGFS members are working “to mobilize mainstream finance to support the transition toward a sustainable economy.”
Verification. The elements necessary to validate a global carbon currency are also coming together. Such a regime would require a platform of trusted technologies to assess and track carbon remotely in order to allocate payments.
Verification technologies are multiplying quickly. Startups such as NCX today use satellite imaging and AI processing to better monetize forestry carbon credits. A new generation of satellites able to remotely assess methane emissions is already outing previously unidentified mega-sources of GHGs. And these same systems can likewise pinpoint the growth of CO2-sequestering greenery.
Precedents for a coordinated global currency action exist.
Meanwhile, the technical and regulatory infrastructure of carbon offset tracking — however imperfect — is improving. In North America alone, a half dozen or more have emerged, including the Alberta Emission Offset System Registry and the California Air Resources Board.
Precedents for a coordinated global currency action exist, points out Frank Van Gansbeke, professor of the practice at Middlebury College, where he focuses on finance and capital markets. Though he developed his work independently from Chen’s, the two now regularly review and discuss developments.
Where Chen approaches the financial problem as a science-based outsider, Van Gansbeke comes to it as an former investment banker, focused more on working with existing financial institutions. He considers the planet’s finite carbon reserve the ultimate monetary policy target, from which all other debt instruments should be priced.
Van Gansbeke points to Special Drawing Rights as a possible precursor. Created in 1969 by the International Monetary Fund, as a kind of meta-currency, the IMF uses SDRs today to support national economies suffering balance of trade or other economic crises.
Used together with other reserves on the IMF balance sheet, SDRs could be used as collateral to create a climate coin. Designed as an anchor currency, the IMF unit would be a “stablecoin”: a blockchain-supported currency backed by a share of real assets in land and forestry, new climate technology ventures and the top 150 ESG compliant companies.
With a modified remit, says Van Gansbeke, the IMF has the operational capacity and expertise to take such a step. For their third-party verified GHG reductions, emerging market countries would receive a settlement in IMF climate coins.
The proceeds could then be used either as collateral, as means to repay debt or as a tool to undertake debt restructurings or foreign exchange intervention. The IMF climate coin would not only impart strong pricing signals across all market segments, but also facilitate capital allocation in a carbon adjusted manner.
For more Van Ganspeke’s plan, check out his detailed post at Forbes.com,
What next?
Could a carbon currency make the leap from science fiction to reality? When Chen’s seminal paper was published a few years ago, it might’ve been easy to wave it away as deeply researched wishful thinking.
But in the years since, much has changed: climate urgency is rising and the financial zeitgeist is shifting, as economists and financiers ponder the once-imponderable, such as minting a trillion-dollar coin.
Rewriting the rules of the global economy to manage a risky transition isn’t all that rare, either. In the 20th century, it happened twice: once, with the 44-nation agreement at Bretton Woods to reboot the world’s economies after World War II; and again, in the 1970s, with a shift away from the gold standard. Today, the rise of digital currencies and growing risks of climate change are so disruptive that another transformative moment seems likely.
Both Chen and Van Gansbeke are moving forward with implementation plans:
At the upcoming COP26 in Glasgow, Van Gansbeke and a team of finance experts will announce the Rethinking Bretton Woods initiative, in which a climate coin will be a track.
For his part, Chen is focusing on testing. His nonprofit is seeking sponsorship and grants to create a proof-of-concept demonstration in California. The demo will include a few other countries and will last a few years to showcase a variety of technological innovations. Central banks are not essential to this trial, says Chen, because their monetary role will be simulated.
In the realm of carbon currency, reality is beginning to overtake the hypothetical, as Kim Stanley Robinson put it in an interview with Bill McKibben:
It's one of several things that’s happened since my novel came out that made me realize that in some ways, I was behind the curve in Ministry for the Future.... I found it very encouraging because we need these things. And there’s a general tendency over social media to doom and despair. We cannot get into doom. We have to actually look at all of the good work that's already being done.
This white paper surveys changes sweeping the global energy industry as net-zero carbon policy and alternative technologies begin to displace fossil fuels.
Researched and wrote 5,000-word report, drawing on primary research, press coverage and subject matter interviews; researched and designed data visualizations.
Target audience: Finance, traders and risk professionals in the finance, oil/gas, utility and renewables sectors.
On behalf of the Global Assn of Risk Professionals. Published February 2021.
The tangle of troubles California is struggling with has no precedent. Against a backdrop of rising environmental anxiety, with wildfires lasting longer, spreading further and damaging more acreage and communities than ever before, the pandemic triggered a sharp recession and spike in unemployment. With COVID-19 and joblessness hitting low-income and minority communities especially hard, police killings sparked months of protests against systemic racism and economic inequity. And just as the need for public safety-net programs couldn’t be higher, California faces a crippling collapse in tax revenue.
For Mary Nichols, chair of the California Air Resources Board — the state’s key architect of climate and environmental policy — these near-term problems may be worse than we’ve seen, but they are not new, and the fix will come from commitment:
We’ve been shouting it from the rooftops for a long time that we were headed in this direction, although we hoped we wouldn’t get here quite so quickly, or quite so drastically. I have seen that people can think their way out of amazingly difficult traps if they decide to. We have the human capital and intelligence, if we have the will… You can’t fix one thing without the other. If we don’t come up with solutions that are multi-factored, we won’t get very far.
To explore how California can solve these interlinked problems, Nichols was joined by Southern California Edison’s Carla Peterman in a dialogue moderated by Sarah Golden, GreenBiz’s senior energy analyst, during a breakout session at last week’s VERGE 20 conference.
Nichols, a veteran of state and federal environmental and energy policy since the 1970s, is retiring from CARB soon and is a contender for a top environmental role in a Biden administration, as GreenBiz Senior Writer Katie Fehrenbacher recently reported.
As senior vice president of strategies and regulatory affairs at Southern California Edison (SCE), Peterman manages a business that serves more than 15 million Californians and more than 280,000 businesses across 15 counties, including much of Los Angeles and a swath of the state that stretches to the Nevada border.
Double duty
For Peterman, who also served as a commissioner at the California Public Utilities Commission, which regulates the state’s electricity, water and natural gas services, the economic crisis has exacerbated troubles stemming from the wildfires. Utilities have been pushed not just to stabilize a damaged grid but also to maintain energy services to some customers who are suddenly less able to pay. As Peterman said:
To give you an example of how these things all collide, we’re seeing the impact of climate change from severe heat on grid reliability. Dealing with these issues is complicated by the pandemic. It’s more difficult to help people in emergency situations. We’ve seen an increase in electricity usage during COVID of 8 percent because people are at home. We also saw an increase in use during the heatwave a couple of months ago. And we’ve seen an increase in need for our customer assistance programs of 18 percent. Utilities have stopped disconnecting anyone who’s not able to pay. It’s so important to be in a state that has those safety nets for individuals.
Funding the recovery will be a challenge. “The pandemic has had an impact on our ability to roll out any kind of new programs until we can get the state budget back in shape,” Nichols said. Yet much of the investment necessary to transition California away from fossil fuels can do double duty, helping hard-hit communities restore jobs while also improving energy services.
SCE is seeing wildfire mitigation and grid investment as opportunities to invest in local businesses, and to cultivate more diverse partners, including a scholarship program to bring more Blacks into the skilled energy workforce, Peterman said.
The shift to electric vehicles (EVs), accelerated by a recent state order curtailing sales of fossil fuel-powered vehicles by 2035, creates a need for investment that can rebuild and upgrade the grid in underserved communities, Peterman explained:
We believe that a significant amount of electrification ultimately is the lowest-cost way to reach California’s climate targets. But it’s important to make sure that everyone can access all of those EVs, having access to renewable energy and building electrification. It can oftentimes be those in disadvantaged communities who don’t make that transition as quickly and then end up paying more. Ultimately, we want to make sure electricity stays affordable because we want people to use it more.
Towards this goal, SCE recently got the OK to launch a $436 million buildout of EV charging infrastructure, the most ambitious of any U.S. utility, Peterman said. The plan calls for half of chargers to be installed in disadvantaged communities. It’s our job to set the bar high and to show the fortitude.
If all goes to plan, SCE will be able to both improve electrical service to those communities while also improving its business. This kind of synergy — with private companies innovating pragmatic strategies that help advance climate policy and benefit the public — are crucial to recovering and moving towards net-zero emissions. And the scale of the crisis demands more collaboration, faster. But not all businesses are there yet, Nichols said:
What I see as a major impediment is the lack of willingness on the part of at least some of our business ecosystem to come to the table with their most constructive contribution. I am going to call out — because I think I have to — the debate over what we mean by zero, whether we’re going to zero or “near zero.” It boils down to: Are we going to continue to subsidize somewhat cleaner technologies versus setting our sights out on the ultimate goal and doing everything we can to get there?
Promising precedents
By this measure, California’s track record of pioneering climate technologies offers promising precedents. From solar panel materials to EVs and grid management software, homegrown technologies are rapidly remaking California’s energy, transportation and economic systems. Yet in the next phase of recovery and decarbonization, affordability and accessibility will be a higher priority. Peterman is hopeful that innovation can help drive down costs. She said:
I’m starting to geek out thinking about things like sensors and technologies that help to reduce latency. How do we allow devices to communicate with each other? And how do we really bring customers’ distributed resources forward to support grid resiliency? … With technology advancements and the need for affordability, it’s important to keep pushing the envelope. That’s my shout-out to all the techie people out there: We still need your ingenuity!
From a policy perspective, Nichols is adamant the state will continue to lead. “It’s our job to set the bar high and to show the fortitude that says we’re going to stick with these goals even if somebody gets a little bent out of shape along the way, and we have to figure out how to accommodate them,” Nichols said. “Maybe we need to be flexible about the means for getting there. But we got to be willing to say, ‘We know we can get there.’ We’ve got to set that goal.”
After all, the Golden State is already home to the largest cap-and-trade program in the United States. More recently, Sacramento has unveiled ambitious goals to be carbon-neutral by 2045, to shift the grid and its nation’s largest fleet of cars to be zero-emission by 2035. Along the way, the state has emerged as a hothouse of climate-focused businesses, from innovative manufacturers such as Tesla to renewable energy giants such as Sunrun to efficiency standard-setters such as Google.
No state can match California’s challenges, or the scale of its possibilities, in untangling this knot of problems. “But if anyone can do it, it’s California,” GreenBiz’s Golden said.
Improved climate model narrows prediction uncertainty and raises the odds of serious climate impacts from global warming
Risk managers and climate scientists share a fundamental challenge: How to identify, weigh, and process a dizzying mix of signals to better model a range of possible future outcomes. Accordingly, the complex mathematical methods underlying both disciplines tend to advance slowly. It’s rare to see big improvements in the precision of their forecasts.
Yet this past July, climate scientists achieved just such a leap, with the publication of an outlook — conducted under the World Climate Research Programme (WCRP) and published in the Review of Geophysics — for global warming that, for the first time, merges three disparate data sets and methodologies. Important as the technical improvements are, however, the conclusions have broader bearing for both climate science and risk managers.
The improved model predicts more warming in a world where CO2 levels hit twice their pre-industrial level, a threshold anticipated to hit mid-century, rather than closer to 2100. The findings thus boost the probability of serious climate impacts to energy operations, financial markets, human health, and the environment.
How much more warming by when?
To better understand the recalibration of this forecast, it’s helpful to revisit its predecessor. Since a landmark study published in 1979, scientists have expressed their outlook for temperature increase as a range — given a doubling of CO2 to pre-industrial levels — from a lower bound of 1.5°C to an upper limit of 4.5°C. From regulators to boardroom executives, planners have used this range as a reference for policy and business strategy over the past 40-odd years.
The new study narrows the bounds of this forecast range. It raises the lower limit of the estimate to 2.6°C while slightly reducing the upper bound, to 3.9°C by 2100. (See chart, via Science.)
“Narrowing the uncertainty is relevant not only for climate science but also for society that is responsible for solid decision making,” said Masahiro Watanabe, a professor at the University of Tokyo’s atmosphere and ocean research institute and one of the report’s authors, in an interview with The New York Times.
The study underscores a rising sense of certainty that the rate of warming is increasing. Today, global temperatures are already 1.2°C higher than their pre-industrial average.
The goal of the 1.5°C target was enshrined in the 2015 Paris climate accords, and has galvanized policy, business and public attention in part because it also represents what many scientists believe may be a critical threshold, a temperature gain beyond which the destabilizing effects of warming could accelerate sharply.
How is this study different?
For the first time, the new assessment unifies findings from three previously independent fields of climate research and analysis spanning vastly different eras.
The oldest numbers were taken from records of prehistoric temperatures preserved in sediment layers and tree rings. The next youngest come from direct measurement of temperatures taken since the start of the industrial revolution in the 1800s. And the most recent set of inputs was drawn from satellite measurements and computer models beginning in the 1980s.
On their own, none of these data sets could help refine the range of the temperature outlook. Simply synthesizing the disparate data sets was a challenge without precedent. The researchers were also able to enhance the precision of how feedback loops shape the outlook — for instance, how the loss of highly reflective white sea ice accelerates how quickly polar waters absorb heat. By merging and refining each vintage of findings, the meta-analysis delivered precision greater than the sum of its parts.
What’s more, the data proved to be more convergent than researchers anticipated. Co-author Gabriele Hegerl, a professor of climate system science at the University of Edinburgh, told The New York Times that she was surprised by the way the models converged. “We don’t expect these three lines of evidence to agree completely,” she said, but they did.
Data from the refined forecast will be used by the U.N.’s Intergovernmental Panel on Climate Change (IPCC) for its next major assessment in 2021 or 2022, Science magazine reports. From there, the data is likely to ripple into other national, academic, and private-sector models and inform projections for sea-level rise, economic damage, and other climate impacts.
Implications for risk managers
When offered equally probable good and bad outcomes, most folks tend to be too optimistic. Human nature is biased to think the good outcome is more likely; conversely, people tend to spend too little time thinking through the implications of the bad outcome. Put plainly, a lot of us tend to translate uncertainty as things should be okay.
Yet as risk professionals know all too well, uncertainty is always a double-edged sword. In the realm of climate change the risks vary from less severe and arriving more slowly to more intense and happening faster. To date, evidence is mounting that the outlook is tilted towards the bad, with disruptive changes happening faster and sooner than prior models anticipated. This has much to do with the complexity of the science behind modeling planet-sized physical systems. It also stems from science’s conservative culture: scientists tend to err on the side of caution when forecasting.
In the here and now, energy risk planners are already reckoning with climate phenomenon that are hitting energy markets and operations harder and faster than anticipated:
Wildfires are happening earlier, growing larger and impacting wider areas, in Australia, Russia, and the western U.S., damaging facilities and disrupting the extraction, processing, generation, and distribution of energy.
The intensity of hurricanes and tropical storms is rising at unseen speeds in the warming waters of the Atlantic Ocean and Gulf of Mexico, imperiling petrochemical plants.
Heat and heat-related illnesses kill more Americans each year than any other form of severe weather, according to the National Weather Service. Worldwide, similar patterns are likely, as heat stress raises physical and liability risks for workers and customers.
For business leaders, the challenge is growing more urgent. While the new scientific study shifts up the long-term temperature forecast, it remains in many ways a pure abstraction — an estimate off in the future.
And for risk managers, the challenge is to take these multi-decadal temperature forecasts and translate them into material risk recommendations. How will another degree — or more — of warming change business conditions? Over the next five years, the next decade, or by mid-century? Where and in what ways could the increase manifest?
