Policy: Economy

Markets get a jump on Washington on climate change

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When it comes to climate change, the markets are moving faster than the policymakers in Washington.

Businesses are increasingly pricing into their business plans how much carbon-intensive assets and investments are affected by climate change and policies that might arise to tackle it.

Some lenders and investors also are operating under the assumption of a "shadow" price on carbon, a nod to the riskiness some assets hold in an increasingly climate-conscious international policy arena.

Insurance and re-insurance companies already are using new flood plans in their actuarial assessments, seeking to limit the risk posed by extreme weather linked to climate change. Credit-rating agencies such as Standard & Poor's are looking into how climate policies or falling costs of renewable energy might affect fossil fuel reserves that have yet to reach the market.

"Financial institutions putting a price into the decision-making process for providing capital is having an effect — and we will see this impact grow significantly and rapidly," said Elias Hinckley, a partner in the environment, energy and natural resources group at Sullivan & Worcester LLP.

Investors and lenders are using the shadow price of carbon — basically, an implicit cost reflecting the possibility of policies that would reduce the value of carbon-rich assets — as a bet that the rash of local, regional and, in some cases, national climate and energy policies will continue, as well as competition from low- or zero-carbon energy sources.

The issue is speed. Once atmospheric concentrations of carbon dioxide reach 450 parts per million, the catastrophic effects of climate change will be locked in, according to climate scientists. Concentrations across the northern hemisphere exceeded 400 ppm for the first time in April — they were at 316 ppm when first recorded at the Mauna Loa Observatory in Hawaii in 1958.

Credit-rating institutions, therefore, have been a bit too slow to incorporate a carbon price, said James Leaton, research director with the London-based Carbon Tracker Initiative. He pointed to recent downgrades in U.S. Coal companies' competitiveness, the result of competition from cheap natural gas in the electricity sector and new regulations on mercury and other toxic air emissions.

"There is a concern that the current ratings approach is therefore responsive as it is based on future performance repeating the past, which cannot occur if we are to address climate change," Leaton said in an email.

Awareness of climate-posed risk to assets is growing. The Securities and Exchange Commission in 2010 began requiring companies to disclose exposure to climate risk, though the reporting hasn't been as thorough as desired, said Dan Bakal, electric power program director with Boston business sustainability group Ceres.

Some industries might feel the crunch of the market more quickly than others. Coal companies already are experiencing it, leading to a rash of bankruptcies.

Markets and policy often work together on climate change -- Standard & Poor's noted the proposed Environmental Protection Agency rule could result in downgraded credit for coal-dependent electric utilities, for example.

But for the most part, large oil and gas companies that have planned for various climate policy scenarios are betting on continued dysfunction in Washington.

When investors pushed ExxonMobil, which internally is planning on a $60 per ton price on carbon emissions in 2030, to announce its potential "stranded assets" — meaning, financial risks to oil reserves under certain climate scenarios that would make it undesirable economically to push those reserves to the market — ExxonMobil stated simply in a report released in late March that it found a carbon price or cap "unlikely."

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