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The future of climate policy: the financial sector perspective

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The financial sector can play a role in mitigating climate change through investment in areas such as no- or low-emission technologies and carbon emissions trading. However, the time frames of the Kyoto protocol – due to conclude in 2012 – do not provide the certainty that investors need to invest in the necessary medium- to long-term projects. This briefing paper from the looks at how governments can act to provide greater certainty and stimulate investment in climate change mitigating activities by the financial sector.The paper notes that many climate-friendly initiatives involve risks that are beyond normal commercial parameters in terms of time scale or familiarity. It suggests therefore that the public sector may have a vital role to play to offset these risks and encourage private investment. This could include the provision of a safety net for investors, or taking on those non-commercial or high-risk activities, for example the early stage development of technologies which are not yet cost-effective, or which are at a pre-commercial stage.The briefing paper also observes that in many cases, a narrow definition of “cost” is used in considering the economics of climate change mitigation. To ensure policy makers are better informed about the economics of climate change, it suggests that independent assessments, for example on the interdependency between carbon and energy prices, should be financed by governments. The paper recommends that, to be successful, a post-Kyoto agreement must:have as its fundamental goal the need to achieve maximum emission reductions at least cost include as many of countries that are the highest emitters of greenhouse gasesadopt a staged approach for participation in the climate policy regime beyond 2012, whereby different forms of commitments that different countries would adopt depending upon their level of developmentTo stimulate financial sector investment in climate change mitigation activities, policy makers should:adopt a clear, precautionary, long-term reduction target and pathway for greenhouse gas emissionsprovide early, clear guidance on the continuation of the international climate policy regime beyond 2012foster an appropriate framework to ensure a liquid and efficient global carbon marketset clear targets for renewable energy and energy efficiency, coupled with an effective, stable support mechanism.