Wednesday, April 22, 2009
Wednesday, April 15, 2009
An additional factor that has not got much attention is the fact that, in the presence of offsets, (assuming they are allowed after Copenhagen), one could see the emergence of a global carbon price. If the offsets are cheaper than carbon permits in the domestic market, then the demand for carbon offsets would rise, increasing their price, and achieving an equilibrium with the different carbon markets around the world. This could lead to a lower cost of compliance, although this lower cost of compliance will likely benefit the producers rather than the consumers). I haven't seen an analysis of this effect, so I will be scouring the literature to see the effects.
"Granville Martin, vice-president for environmental affairs at JP Morgan, said access to OTC contracts was critical for bank financing. “You can’t scale up carbon finance without OTC markets,” he said.
For example, a utility wanting to build a power plant would only get a loan if it could hedge its long-term carbon and fuel risks. In many cases, he said, an appropriate contract is not available and, moreover, the utility would have to tie up a huge chunk of capital with the exchange as collateral.
For such contracts, investment banks would often be the only counterparty, and they could manage the risk by, for instance, taking a second lien in the power plant rather than upfront cash.
Forcing such trades through exchanges would add a significant hurdle to low-carbon development, and would be pointless if the reason was just to ensure transparency, Martin said.
“If the concern is ‘dark corners’ you can come up with solutions. You can have disclosure and preserve OTC,” he said."
Tuesday, April 7, 2009
However, if there is a very small probability of a catastrophic event (essentially tail risk) and if global warming has some positive feedback (in the non-judgemental engineering sense of the word), then there is no way to know this probability*the expected loss, and therefore, the expected value calculations could be off significantly. If the recent financial crisis has highlighted one thing, it is that people are terrible at tail risk assessment. Given that people are unable to appropriately assess tail risk, it seems to me that Pascal's wager arguments would suggest that we should be more actively pursuing climate change mitigation. Taleb makes a similar point here.