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Carbon Finance as a Solution of The Protection of Environment

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Climate change is a much debated issue at the highest political level as evidenced by the COP-23 and the world’s first comprehensive climate agreement drafted in 2015 called Paris Climate Agreement summit. Bhutan’s national assembly unanimously ratified the Paris climate agreement in 2016 being the 175th country reinforcing the nation’s continued leadership in climate action. In addition, Bhutan has been very fortunate to receive funds from United Nations Framework Convention on climate change (UNFCCC), World Bank, EU and few other renowned financial institutions.

When we talk about the finance and the funds catered to fight climate change then the term “carbon finance” comes into existence. In other words it basically means putting a price on greenhouse gas emissions. The new evolving market known as carbon market is thought to be one of many innovative, market based solutions to global climate change. These markets allow carbon emitters to purchase carbon credits in order to keep the emissions based on the government set “cap”. The emitters could either reduce emission or purchase credits from a seller who is taking some action to reduce carbon emission. If a producer exceeds its emissions limit, it must purchase credits either from another entity that has it emissions below the cap or from a carbon sequestration project (forest, in grassland).

The reason for the rise in temperature goes back to Industrial Revolution. 50% of the drastic rise in emission had been released in the last 40 years from 1974 to 2014. 10 of the warmest global temperature had been experienced since 1990. According to World Meteorological Organization (WMO) in 1988, their research proved that unchecked rise in temperature would result in increase of atmospheric temperature by 1.4°C to 5.8°C by the end of 21st century. Also the risk of altered food productivity, disturbances of ecosystem, spread of vector-borne diseases and scarce water resources. Along with this substantial changes in energy use, conservation, alternative energy sources, technological advancement, will be required to reduce emissions. A renowned economist has warned that climate change will cost world economies to spend $7 trillion due to economic depression on the effect of climate change and create 200 million environmental refugees unless prompt actions are taken by governments worldwide.

There is 3 flexible mechanisms that are designed to help Annex 1 (developed) countries to meet their emission reduction obligations, i.e., emissions trading schemes (ETS), Joint Implementation (JI), and the Clean Development Mechanism (CDM). These schemes are to meet environmental objectives by achieving at lowest cost and invest in developing nations in order to receive emission reduction units and credits (ERUsc). However there are 3 ways by which climate change can affect industries and investors. Firstly, regulatory risk where the companies have to comply by the carbon policies which in turn will affect the earnings, profitability & return on capital invested. Secondly, physical risks that arise directly from natural calamities. Industries such as agriculture, fisheries, forestry, health care, tourism, water, real estate, and insurance. Temperature related deaths like reduced winter death and increased heat stress deaths. For e.g. a recent study by the Association of British Insurers states that rise in C02 emissions has accelerated annual losses from 3 major calamities- U.S Hurricanes, Japanese typhoons, and European windstorms by $27 billion a year and there would 2/3rd increase by the 2080s. Plus the leading cause of death due malaria killing 17 million people a year and creating significant economic hardship for the region or nation.

Lastly, business risks that include legal risks when legal action is taken against companies that contribute to climate change. For e.g. in 2004, 8 states and New York City filed an unprecedented lawsuit against 5 American power companies, demanding them to reduce their CO2 emissions. Another is reputational risks where companies have to be very aware and conscious about environmental sensitive markets due to the fear of losing brand value if greenhouse regulations are not considered. For e.g. automobile industries. The competitive risks as climate regulatory framework would affect the cost of inputs, assets, capital expenditure and investment.

Now as we talk about mitigation policies, carbon tax or green tax is designed to put a price on carbon, increasing the cost of fuels, hence encouraging consumers and industries to use less carbon intensive energy. Technology incentives for the development of cleaner technologies helping them gain tax benefits over other polluting forms of energy production from fossil fuels. Other incentives like solar power subsidy encouraging consumers to use such source of energy. Also keeping a renewable energy portfolio based on the capacity, percentage of energy generated and sales of renewable energy like solar, wind, tidal, or biomass. Product or process GHG standards are set by the government to reduce emissions from industrial processes & products. Carbon trading program such as European Union Emissions Trading Scheme (EU ETS) is a cap set on emissions and tradable permits are granted to key industrial or energy sectors. If emissions exceed the cap then the operators have to either purchase more permits or else pay fine. ETS has already created a new market in CO2 allowances that are valued at $43 billion a year, predicted to rise over $61.8 billion by the end of the decade. EU ETS has also created the opportunities for financial sectors where there is increased demand of risk management tools with private players and corporate financial advisory flowing in. However the difficulty of true carbon pricing is a major challenge due to the infancy state of the market.

Adaptation measures could be easily implemented by the wealthier nations but the developing countries will be affected the most since they are most vulnerable as of low adaptation cost. For e.g. Bangladesh in 1979 and 1991 are estimated to have caused 300,000 and 139,000 deaths, respectively, whereas Hurricane Andrew, which struck United States in 1992 , caused 55 deaths. Early warning systems for flood and forest fires needs to be implemented. Proper land use and urban planning in vulnerable areas by constructing dikes, tidal flood defenses, and rainwater sewers helps moderate the impact of climate change. Educating people, raising awareness and improving the knowledge can help people become self-aware and works towards fighting climate change. Creating an opportunity to develop a dialogue on mitigation efforts and emission reductions could play an active role in climate change counter measures.

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Carbon Finance as a Solution of the Protection of Environment. (2019, Jun 27). GradesFixer. Retrieved August 6, 2021, from
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