EconPapers    
Economics at your fingertips  
 

Transparency principle for carbon emissions drives sustainable finance

Chris Kenyon, Mourad Berrahoui and Andrea Macrina

Papers from arXiv.org

Abstract: Alignment of financial market incentives and carbon emissions disincentives is key to limiting global warming. Regulators and standards bodies have made a start by requiring some carbon-related disclosures and proposing others. Here we go further and propose a Carbon Equivalence Principle: all financial products shall contain a description of the equivalent carbon flows from greenhouse gases that the products enable, as well as their existing description in terms of cash flows. This description of the carbon flows enabled by the project shall be compatible with existing bank systems that track cashflows so that carbon flows have equal standing to cash flows. We demonstrate that this transparency alone can align incentives by applying it to project finance examples for power generation and by following through the financial analysis. The financial requirements to offset costs of carbon flows enabled in the future radically change project costs, and risk that assets become stranded, thus further increasing costs. This observation holds whichever partner in the project bears the enabled-carbon costs. Mitigating these risks requires project re-structuring to include negative emissions technologies. We also consider that sequestered carbon needs to remain sequestered permanently, e.g., for at least one hundred years. We introduce mixed financial-physical solutions to minimise this permanence cost, and price to them. This complements previous insurance-based proposals with lesser scope. For financial viability we introduce project designs that are financially net-zero, and as a consequence are carbon negative. Thus we see that adoption of the Carbon Equivalence Principle for financial products aligns incentives, requires product redesign, and is simply good financial management driving sustainability.

Date: 2022-02
New Economics Papers: this item is included in nep-ene, nep-env and nep-ppm
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://arxiv.org/pdf/2202.07689 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2202.07689

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().

 
Page updated 2022-04-20
Handle: RePEc:arx:papers:2202.07689