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The Carbon Principles

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Guidelines for assessing climate risk from electric power projects

The Carbon Principles are a series of guidelines established by three leading Wall Street banks—Citigroup Inc., JP Morgan Chase, and Morgan Stanley—to assess the risks in financing electric power projects in terms of climate change. They were created to identify the factors associated with the funding of electric power and carbon projects.These principles call for "enhanced diligence" in evaluating electric power industry borrowers in terms of their use of energy efficiency; renewable and low-carbon distributed energy technologies; and conventional and advanced generating technologies. These guidelines were announced in February 2008 to address the increasing public concern over the plans to create over one hundred coal power plants in the United States.[1] The principles were created for investors, companies, and regulators to view and analyze. The implementation of the Carbon Principles was groundbreaking because it was the first time banks, power companies, and environmental groups collaborated on a project of this magnitude.[2] The principles were launched in February 2008 and adopted by JPMorgan Chase, Morgan Stanley, and Citi as a guide to navigate investment meetings. The three principles are:

1. Energy efficiency

2. Renewable and low carbon distributed energy technologies

3. Conventional and advanced generations

The Climate Principles are of a similar framework for the climate change practice of the financial sector. This is a comprehensive industry framework for a response to climate change and has been adopted by Crédit Agricole, Munich Re, Standard Chartered, Swiss Re and HSBC. The Carbon Principles are a development of consultation with the U.S. electricity utilities sector.[3]

Background

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The 21st century brought about increased concern regarding environmental issues. Consumers began to put more pressure on corporations to adopt more sustainable practices. While this mostly affected energy and technology companies, other corporations felt the pressure to adopt more sustainable practices as well. Additionally, there was an increase in the implementation of environmental regulations. To address the concerns of customers and stakeholders, banks began to put more funding towards researching and developing environmentally sustainable initiatives. In their 2007 Annual Report, JPMorgan Chase describes devising the Carbon Principles as one of their key accomplishments.[4] The Carbon Principles were one of the first steps taken towards sustainability by the financial sector. However, allocating financial resources towards more environmentally friendly alternatives was considered a risky investment at the time. JPMorgan Chase, Citi, and Morgan Stanley addressed the riskiness of such ventures in The Carbon Principles and offered solutions to investors.

Energy Efficiency

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This principle argues that the best way to mitigate the damage associated with greenhouse gas emissions is to avoid producing them. Many companies are forced to allocate large amounts of resources to abatement projects to make up for projects that are environmentally harmful. It advocates for policy changes and increased regulation to address the issue of increasing greenhouse gas emissions at its source. It also addresses the barriers associated with investment in projects dedicated to reducing emissions.

Investors are deterred from renewable investments because of the high initial costs usually associated with them. While the costs eventually even out, it can be difficult to assess how successful an investment will be. Policies are also a barrier to investments because they offer subsidies to fossil fuels and may frequently change. Fossil fuels are granted subsidies by the government to keep costs low for consumers. The downside of these subsidies is that fossil fuels are often cheaper than renewable energy. Furthermore, the evolving nature of environmental policies gives investors uncertainty about what the future may hold for their investments.

Renewable and Low Carbon Distributed Energy Technologies

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In this principle, the banks encourage investors to put money into renewable energy and sustainable alternatives. They assert that rising carbon emissions are not viewed by corporations as the pressing issue it is. Fossil fuels such as coal, natural gas, and oil, account for a large percentage of greenhouse gas emissions. Due to the significant role fossil fuels play in rising greenhouse gas emissions, scientists and policymakers have targeted the energy sector when addressing environmental issues. Continued investment and installation of renewable energy sources could drastically reduce carbon dioxide emissions. In addition to lowering carbon emissions, renewable energy solutions usher in jobs and technological advancement. It increases the demand for engineers, scientists, urban planners, installers, and manufacturers.

Government intervention plays a major role in this process, as this is only feasible if the regulatory obstacles involved with renewable energy investments are removed. They also advocate for more legislative changes that allow for the development of carbon capture and storage.

Wind Turbines and an old windmill at the Roscoe Wind Farm in West Texas

Conventional and Advanced Generations

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Although investing in renewable energy will ultimately aid in decreasing greenhouse gas emissions, traditional energy sources such as coal and natural gas must still be used as a reliable alternative. Due to the relatively new nature of renewable energy sources such as solar and hydroelectric power, the banks express uncertainty about the financial and environmental risks associated with renewable energy.

The high initial cost of renewable energy is a big issue discussed among investors. Although the initial costs are usually replaced by profit, it may take years to happen. Lastly renewable energy sources like solar, wind, and hydropower are heavily dependent on natural conditions, making them less reliable.

Carbon Markets

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Carbon markets are a fundamental part of The Carbon Principles. Carbon markets are based on carbon credits, a unit that represents the abatement of one metric ton of greenhouse gas emissions. In a carbon market, carbon credits are bought and sold to promote sustainability and reduce greenhouse gas emissions.[5] In their 2023 Carbon Market Principles Report, JPMorgan Chase highlighted the role of carbon markets in progressing sustainability. Carbon markets have the potential to significantly advance sustainability efforts.

References

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  1. ^ "The Principle Matter: Banks, Climate and The Carbon Principles". issuu. January 19, 2011. Retrieved November 10, 2017.
  2. ^ "Leading Wall Street Banks Establish The Carbon Principles". Morgan Stanley. {{cite web}}: |first1= missing |last1= (help)
  3. ^ "The Principle Matter". Bank Track. {{cite web}}: Missing or empty |url= (help)
  4. ^ JPMorgan Chase. "Building a Strong Foundation 2007 Annual Report" (PDF). JPMorgan Chase.
  5. ^ U.N. "Carbon Markets". UNEP. UNEP.
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