POLICY BRIEF No. 66 • October 2015
GLOBAL TREATY OR SUBNATIONAL INNOVATION? CANADA’S PATH FORWARD ON CLIMATE POLICY Sarah Burch
Key Points • Progress toward repairing Canada’s international and domestic reputation on climate change can be made by capitalizing upon successful policy experiments that help to accelerate Canada’s transition to a resilient, low-carbon economy. • Jurisdiction over greenhouse gas (GHG) emissions resides at multiple levels of government, requiring policy alignment and innovation at each level. • A policy approach centred on sustainability, rather than simply climate change, can reveal powerful co-benefits with other pressing priorities such as human health, biodiversity and water quality.
Introduction Canada’s position on climate change is deeply contentious and constantly evolving. While Canada was active in the negotiations that led to the drafting of the 1997 Kyoto Protocol to reduce global GHG emissions (signing it in 1997 and ratifying the treaty in 2002, agreeing to a six percent reduction in emissions below 1990 levels by 2012), it also became the only nation to formally withdraw from the protocol in 2011. Climate change, however, is a challenge of multi-level governance: multiple actors (the public and private sectors, civil society and others) and multiple levels of government (municipal, provincial and federal) play a role in designing and implementing climate change initiatives. Furthermore, many of the most fundamental drivers of GHG emissions are deeply embedded in development pathways, such as cultural preferences for consumption and urban land-use plans, and may remain unaltered by climate policy, suggesting the need for a more holistic and transformative approach to sustainability. This policy brief explores the multi-level governance challenge of climate change in the Canadian context. It describes examples of innovative climate change policy at the subnational level, including the revenue-neutral carbon tax in British Columbia, and the emerging cap-and-trade partnership between Ontario and Quebec. It also explores recent calls for a price on carbon, such as those from the Sustainable Canada Dialogues scholarly consensus and the Ecofiscal Commission. Ultimately, the purpose of this brief is to articulate the different but complementary roles that each level of government plays in responding to climate change, and the crucial role of non-state actors. It also provides a series of recommendations on pathways to carbon-neutral, resilient communities.
Actors at Multiple Levels Bear Responsibility to Act Since the initial negotiation of the Kyoto Protocol, momentum has built behind two dominant narratives about who should take responsibility for reducing the GHG emissions that contribute to a changing climate. The first story embodies the orthodoxy of international relations and supports nation-to-nation negotiations through the United Nations Framework Convention on Climate Change (UNFCCC). Since one tonne of carbon dioxide emitted in Canada
mixes evenly in the atmosphere and affects the global climate (rather than creating a relatively localized effect, such as sulfur dioxide and nitrogen oxide emissions that create regional acid rain), the climate responds the same way if that tonne of carbon dioxide is reduced in Canada or Cameroon. Furthermore, the benefits of reducing GHGs do not accrue directly to the state that took action, but rather are distributed unevenly around the globe. Climate change is a global problem, requiring — as the story goes — a global solution (such as a treaty) and only nationstates have agency to agree to such arrangements. In addition, nations that are struggling under the burden of poverty, most of which had little to do with the emissions of GHGs that led to the current climate trajectory, should be encouraged to reach a higher standard of living, even if this requires increased emissions of GHGs in the process. This perspective suggests that some nations that have grown rich combusting fossil fuels should shoulder their fair share of the reduction burden, while others should be permitted to emit more GHGs until these two groups converge. Recent progress toward climate finance seeks to assist developing countries in both adaptation to climate change impacts as well as mitigation of technology transfer. The second narrative pertains to the individual. Particularly in countries where individualism is favoured over collective approaches to societal problems, the onus has been placed on independent citizens to take the necessary steps to reduce their carbon emissions. Heat and electrical utilities, municipal governments and many advocacy organizations favour this approach, in part because these groups have the most leverage on smaller scales. The focus here is not on collective action or policy shifts, but the impact of many small, independent decisions to consume fewer fossil fuels, for instance by commuting by bicycle, turning off appliances when not in use and composting organic waste. A second variant of this more independent view of responsibility, proposed by Executive Secretary of the UNFCCC Christiana Figueres and endorsed by nations such as Germany and Denmark, suggests that nations can become more economically resilient and competitive by addressing climate change, regardless of the success or failure of an international treaty. The trouble with a binary view of who bears responsibility is that it neglects the reality of responding to climate change for three reasons: •
Jurisdiction over key sources of emissions, and financial/ human/institutional capacities, reside not only at the national level, but also with provinces and states that determine building codes (for instance) and municipalities that make crucial land-use planning decisions. Navigating these regulatory complexities in dozens of arenas to pursue multi-pronged action on climate change may be
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Global Treaty or Subnational Innovation? • Sarah Burch
•
•
incompatible with political agendas and the particular skill sets of decision makers.
It ignores many sources of policy and technological innovation (Burch et al. 2014). As seen in British Columbia, a province can design and test a carbon tax (see below) that provides evidence of success, and small businesses can create radically different production methods that send ripple effects up and down their supply chain, with little government intervention (Burch et al. 2013; Loorbach et al. 2010).
It ignores the critical dimensions of policy coherence or consistency — ultimate success depends on whether or not municipal climate change goals are aligned with provincial transportation planning, and whether federal subsidies to industry mesh with provincial/state taxes on emissions. In other words, cost-efficient, effective and potentially transformative solutions to climate change may be enabled and accelerated by smart policy that accurately identifies leverage points in multiple levels of government and various sectors.
Subnational Innovation Into the vacuum left by relative inaction at the federal level in Canada have stepped a rather startling array of provinces and municipalities. In 2008, the province of British Columbia introduced a revenue-neutral carbon tax — the first of its kind in North America. The tax began at $10 per tonne of carbon dioxide equivalent, increasing by $5 per tonne each year (which translated into just under seven cents per litre of gas at the pump by 2012), and all funds gathered as a result of it were returned to individuals and companies via reductions in other taxes. The final tax increase, however, took place in 2012 (at which point the tax was $30 per tonne), leaving the future of the tax, and its effectiveness in driving long-term transformation, in question. Despite the fact that many economists would have argued that a tax this low would be insufficient to trigger a change in behaviour, evidence suggests that the tax is directly responsible for a reduction in gasoline consumption of between five and 15 percent (Murray and Rivers 2015). Furthermore, this tax has been part of a broader momentum toward carbon pricing in Canada. In 2015, the province of Ontario announced that it would be joining Quebec’s carbon cap-and-trade system — a plan to set a limit on carbon emissions and give away or auction permits. The province of Alberta follows a different system, in which major industrial facilities are required to reduce their emissions intensity, or GHGs produced per barrel of oil, by 12 percent below a baseline. These facilities pay a tax on emissions that exceed this target, and the Alberta government recently increased both the level of the tax and the stringency of the
reduction target. Together, these provinces bring the majority of the country’s population under provincial-level carbon pricing.
More diffuse and diverse are the efforts of municipalities on the climate change file. The city of Vancouver, often held up as an international leader on sustainability, has implemented a series of increasingly ambitious strategies. These have included (but are not limited to) capture of the gases (more than 50 percent methane) that leach out of the city’s massive landfill, and using it to provide heat and electricity to nearby greenhouses. The city also trains small businesses to measure and reduce their GHG emissions, and is dedicated to reducing solid waste by 50 percent from 2008 levels through organics collection and recycling.
But Vancouver is far from being the only municipal leader: the city of Revelstoke in British Columbia uses wood waste from its sawmill to produce electricity through a district energy plant; the city of Winnipeg is home to a vibrant Transition Town movement that promotes the “re-skilling” of residents so they can produce and preserve local food; and the three municipal councils in the region of Waterloo, Ontario, recently unanimously passed a multi-pronged climate change action plan. Across the country, through the Federation of Canadian Municipalities’ Partners for Climate Protection program, 287 municipalities have taken steps to measure their GHG emissions, and design and implement action plans. Some of these municipalities are also shifting to consider climate change within the more holistic lens of environmental, social and economic sustainability by producing integrated (and long-range) community sustainability plans (Shaw et al. 2014). Especially in the absence of a coordinated federal approach, however, the question remains: are these smaller scale and diverse initiatives sufficient to fundamentally alter Canada’s trajectory of steadily increasing GHG emissions?
The Path Forward: Proposals from Scholars and Economists While scientists (both social and natural) might once have remained content to see their findings published in niche peerreviewed academic journals, experts in climate, energy and sustainability are increasingly collaborating to transmit evidencebased policy recommendations to public and government audiences. Over the last two years in Canada, two unprecedented efforts have yielded particularly powerful results in this regard.
In 2014, a process was initiated to bring a diverse array of Canadian scholars together and build consensus on pragmatic, effective and potentially transformative solutions to climate change (Potvin et al. 2015). Acting on Climate Change: Solutions from Canadian Scholars was the result of this process, and represents the consensus position of more than 70 of Canada’s
most respected, accomplished and innovative thinkers. The core claim of this action agenda was that a price on carbon was a crucial step in the direction of carbon neutrality and climate resilience. In addition, the team of scholars recommended reaching 100 percent reliance on low-carbon electricity by 2035, and adopting a medium-term target of between 26 and 28 percent GHG reductions relative to 2005 levels.
Simultaneously, a group of politically independent but policyoriented economists formed Canada’s Ecofiscal Commission — a group that aims to convene an evidence-based discussion about fiscal tools that can deliver both economic and environmental benefits. Central to the Ecofiscal Commission’s proposals is the argument that pricing environmental “bads” (such as pollution or traffic congestion) and “goods” (such as water) sends a signal to consumers that shifts behaviour and reduces environmental impact. Furthermore, this initiative argues that market-based approaches to GHG reduction offer potential gains in GDP over more traditional prescriptive regulatory strategies. This benefit arises from the potential for a well-designed tax to offer protection from volatile energy markets, to trigger technological innovation and related employment, and to lead to the cobenefits of reduced pollution (such as active transportation and improved air quality leading to lower health care costs).
These initiatives focus their message on the power of pricing carbon: without correcting markets to account for the unintended, and largely negative, consequences of combusting fossil fuels and emitting GHGs, Canada is unlikely to transition toward a resilient, low-carbon economy. While a price on carbon is a crucial weapon in the policy arsenal, human behaviour is not motivated simply by a rational assessment of financial costs. It is clear that emotion (Kahneman 2013; Slovic et al. 2007), social pressure (Kollmuss and Agyeman 2002), opportunities to behave differently, and visions of the future (Shaw et al. 2009) all play central roles in guiding behaviour. Furthermore, approaching the challenge of climate change through the more holistic idea of sustainability may suggest strategies or policies that tackle deeper drivers of GHG emissions (Robinson et al. 2006; Shaw et al. 2014).
Policy Recommendations This policy brief has made three claims: • • •
jurisdiction over GHG emissions resides at multiple levels of government;
sources of innovation may be located in the private as well as public sectors; and successful experiments in climate change policy can be capitalized upon to accelerate Canada’s progress toward a resilient, low-carbon economy.
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Evidence from policy-oriented and deeply interdisciplinary climate change governance research therefore informs the following policy recommendations.
Capitalize on evidence of success of British Columbia’s carbon tax, the Sustainable Canada Dialogues process and the Ecofiscal Commission to design and implement a price on carbon. Price signals that accurately reflect the social and environmental costs of consuming fossil fuels clearly influence consumption behaviour and modes of production. A price on carbon is not a silver bullet, however: this tool must be aligned with public engagement strategies that recognize the power of social pressure, opportunities to behave more sustainably and urban land-use plans (to name just a few examples).
Implement ambitious, long-range and adaptable sustainability plans at the national and subnational levels to accelerate transitions toward resilient, low-carbon economies. The underlying drivers of GHG emissions are deeply embedded in the way Canadian cities are designed, as well as cultural preferences for what is currently a high-carbon lifestyle. A policy approach centred on sustainability can reveal powerful co-benefits: reducing GHG emissions can also yield improved human health, enhanced biodiversity, more resilient and innovation-based economies, greater social equity, cleaner water, cleaner air and more beautiful communities. Manage expectations for the UNFCCC negotiations at COP21 in Paris 2015 while reclaiming Canada’s moral authority on the international stage. The damage done at the 2009 negotiations in Copenhagen was not simply the result of a lacklustre agreement and poor leadership. Unreasonably optimistic expectations created a treacherously high pedestal from which to fall, leaving activists, negotiators and scholars emotionally drained and often irreversibly cynical. By being an active part of the negotiations in Paris, moral authority and potential for leadership on the international stage can be reclaimed.
Acknowledgements I gratefully acknowledge the leadership and contributions of Catherine Potvin, the Sustainable Canada Dialogues process, the University of Waterloo Department of Geography and Environmental Management, Ann Dale, John Robinson, Alison Shaw and the “Meeting the Climate Change Challenge” team in British Columbia.
Works Cited Burch, S., H. Schroeder, S. Rayner and J. Wilson. 2013. “Novel multisector networks and entrepreneurship: The role of small businesses in the multilevel governance of climate change.” Environment and Planning C: Government and Policy 31: 822–40.
Burch, S., A. Shaw, A. Dale and J. Robinson. 2014. “Triggering transformative change: A development path approach to climate change response in communities.” Climate Policy 14: 467–87.
Kahneman, D. 2013. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux. Kollmuss, A. and M. Agyeman. 2002. “Mind the gap: Why do people act environmentally, and what are the barriers to proenvironmental behavior?” Environmental Education Research 3: 239–60.
Loorbach, D., J. C. van Bakel, G. Whiteman and J. Rotmans. 2010. “Business strategies for transitions towards sustainable systems.” Business Strategy and the Environment 19 (2): 133– 46.
Murray, B. C. and N. Rivers. 2015. “British Columbia’s revenueneutral carbon tax: A review of the latest ‘grand experiment’ in environmental policy.” Working Paper NI WP 1504. Nicholas Institute for Environmental Policy, Duke University; Sustainable Prosperity. Potvin, C., S. Aitken, F. Berkes, J. Etcheverry, L. Margolis, M. Stoddart. 2015. Acting on Climate Change: Solutions from Canadian Scholars. Montreal: Sustainable Canada Dialogues and Trottier Institute for Science and Public Policy.
Robinson, J., M. Bradley, P. Busby, D. Connor, A. Murray, B. Sampson and W. Soper. 2006. “Climate change and sustainable development: Realizing the opportunity.” Ambio 35: 2–8. Shaw, A., S. Burch, F. Kristensen, J. Robinson and A. Dale. 2014. “Accelerating the sustainability transition: Exploring synergies between adaptation and mitigation in British Columbian communities.” Global Environmental Change 25: 41–51.
Shaw, A., S. Sheppard, S. Burch, D. Flanders, A. Weik, J. Carmichael, J. Robinson and S. Cohen. 2009. “Making local futures tangible: Synthesizing, downscaling, and visualizing climate change scenarios for participatory capacity building.” Global Environmental Change 19: 447–63. Slovic, P., M. L. Finucane, E. Peters and D. G. MacGregor. 2007. “The affect heuristic.” European Journal of Operational Research 177 (3): 1333–52.
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Global Treaty or Subnational Innovation? • Sarah Burch
About the Global Economy Program Addressing limitations in the ways nations tackle shared economic challenges, the Global Economy program at CIGI strives to inform and guide policy debates through world-leading research and sustained stakeholder engagement.
With experts from academia, national agencies, international institutions and the private sector, the Global Economy program supports research in the following areas: management of severe sovereign debt crises; central banking and international financial regulation; China’s role in the global economy; governance and policies of the Bretton Woods institutions; the Group of Twenty; global, plurilateral and regional trade agreements; and financing sustainable development. Each year, the Global Economy program hosts, co-hosts and participates in many events worldwide, working with trusted international partners, which allows the program to disseminate policy recommendations to an international audience of policy makers. Through its research, collaboration and publications, the Global Economy program informs decision makers, fosters dialogue and debate on policy-relevant ideas and strengthens multilateral responses to the most pressing international governance issues.
About the Author Sarah Burch is a CIGI senior fellow with the Global Economy Program, where she is contributing to research on financing sustainable development, focused on the exploration of innovative solutions to address challenges associated with climate change and sustainability.
Sarah is an assistant professor with the Department of Geography and Environmental Management in the Faculty of Environment at the University of Waterloo. In this capacity, Sarah helped launch a Master of Climate Change program, in which she has taught courses on climate change governance and mitigation. She has also conducted extensive research on climate change policy, urban planning and responses to climate change, and renewable energy. Sarah has been published in a wide range of distinguished academic journals. Sarah is a coordinating lead author of the Second Assessment Report on Climate Change and Cities, and was a contributing author to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change (winner of the Nobel Peace Prize in 2007). In her role at the University of Waterloo, Sarah is investigating the relationship between public and private sector actors to trigger transformative shifts toward more sustainable development pathways.
Sarah holds a Ph.D. in resource management and environmental studies from the University of British Columbia, as well as a B.A. in international relations and a B.Sc. (Hons) in environmental science, both from the University of Calgary. She has held a postdoctoral fellowship at the University of Oxford’s Environmental Change Institute and a Banting Postdoctoral Fellowship at the University of British Columbia.
Policy Brief No. 66 • October 2015 • www.cigionline.org
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Fixing Climate Governance Series The Fixing Climate Governance project is designed to generate some fresh ideas. First, a public forum was held in November 2013. High-level workshops then developed a set of policy briefs and short papers written by experts. Several of these publications offer original concrete recommendations for making the UNFCCC more effective. Others make new proposals on such topics as how to reach agreements among smaller sets of countries, how to address the problems of delayed benefits from mitigation and concentrated political opposition, ways that China can exercise leadership in this arena and how world financial institutions can help mobilize climate finance from the private sector. These publications will all be published by CIGI in 2015. Policy Options Could Increase Ambition in the 2015 Climate Agreement Fixing Climate Governance Policy Brief No. 1 Henrik Jepsen Economy-wide targets for emissions reductions will be an indispensable element of a 2015 agreement, but reaching agreement on ambitious targets is notoriously difficult. It needs to include a mechanism that can facilitate and incentivize increased ambition over time, and which focuses on highpotential policy options that contribute to the same general goal: climate change mitigation. Conducting Global Climate Change Negotiations: Harnessing the Power of Process Fixing Climate Governance Policy Brief No. 2 Kai Monheim Process itself — over and above the issues at stake — is a key determinant of negotiation success across all levels of climate change negotiation groups in the United Nations Framework Convention on Climate Change. The author offers six axioms for chairs of negotiation groups that may lead to finding common ground and avoiding deadlocks: brokering compromise while remaining as transparent and inclusive as possible; enhancing influence by acting impartially and recognizing cultural differences; managing the agenda to create momentum while clustering, prioritizing and linking issues; focusing debate using the chair’s information advantage; steering individual negotiation sessions in a time-efficient way; and building trust by creating sheltered negotiation spaces that allow for frank and constructive dialogue. Six Ways to Make Climate Negotiations More Effective Fixing Climate Governance Policy Brief No. 3 Pamela Chasek, Lynn Wagner and I. William Zartman This policy brief proposes six changes that could improve the negotiating process and facilitate consensual outcomes. These include using a single negotiating text; discontinuing “on-screen” negotiations; eliminating the norm that “nothing is agreed until everything is agreed” and dividing the climate change problem into pieces that may be more readily acceptable; giving negotiating roles to ministries besides foreign affairs; establishing a group of states to play the “regime-builder” role; and employing the leadership skills necessary to make this all happen. Focus Less on Collective Action, More on Delayed Benefits and Concentrated Opponents
Mainstreaming Climate Change into Financial Governance: Rationale and Entry Points Fixing Climate Governance Policy Brief No. 5 Sáni Zou, Romain Morel, Thomas Spencer, Ian Cochran and Michel Colombier The financial sector is exposed to the physical risks associated with climate change and the impact of climate policies. Securing global financial and economic stability and scaling up low-carbon, climate-resilient investments are not conflicting, but rather mutually reinforcing, objectives. Policies affecting and instruments matching the demand side and supply side of finance need to be aligned with climate objectives to efficiently shift investments toward a low-carbon, climate-resilient economy. How China Can Help Lead a Global Transition to Clean Energy Fixing Climate Governance Policy Brief No. 6 Alvin Lin, Luan Dong and Yang Fuqiang China’s coal consumption fell marginally in 2014, the first such drop this century, in large part as a result of its policies to address its severe air pollution, develop renewable and alternative energy, and transition its economy away from heavy industry. China should take advantage of its current circumstances to adopt an aggressive national coal consumption cap target and policy to peak its coal consumption as soon as possible, no later than its next Five Year Plan (2016–2020), so that it can peak its CO2 emissions by 2025. It can achieve this target by building upon its existing achievements in developing clean energy such as wind and solar power, and by prioritizing renewable energy development over coal in its western expansion. Central Banks Can and Should Do Their Part in Funding Sustainability Fixing Climate Governance Paper No. 1 Andrew Sheng Central banks, when purchasing financial assets, should consider selecting assets that will promote sustainability, including climate change mitigation and adaptation. Central banks not yet ready to factor social objectives into their decisions should at least incentivize bankers and asset managers to invest in climate mitigation activities and low-emission growth, as well as support a financial transaction tax to fund a new or established global fund for climate mitigation.
Fixing Climate Governance Policy Brief No. 4 Edward A. (Ted) Parson Controlling climate change has significant collective-action aspects, but the importance of these has been exaggerated and efforts misdirected as a result — particularly regarding the feasibility and impact of leading actions to pursue large emission cuts by individual nations or subgroups. Serious climate action must confront other challenges, most importantly, delayed benefits and concentrated opponents. This policy brief sketches several specific approaches to addressing these challenges, which can be pursued nationally or internationally.
Available as free downloads at www.cigionline.org
CIGI Publications
Advancing Policy Ideas and Debate CIGI PAPERS
NO. 77 — OCTOBER 2015
THE IMPACT OF FINANCIAL SECTOR SUSTAINABILITY REGULATIONS ON BANKS OLAF WEBER AND OLAWUWO ONI
The Impact of Financial Sector Sustainability Regulations on Banks CIGI Papers No. 77 Olaf Weber and Olawuwo Oni
SAIIA www.saiia.org.za
GLOBAL SUSTAINABILITY, CLIMATE CHANGE AND FINANCE POLICY A SOUTH AFRICAN PERSPECTIVE
Penelope Hawkins and Olaf Weber
CIGI PAPERS
THE ENVIRONMENTAL GOODS AGREEMENT A PIECE OF THE PUZZLE PATRICIA M. GOFF
No. 65 • September 2015
• Risk narratives need to be adopted to straddle the disconnect between climate change concerns and the general operations of the financial sector. Financial sector policy makers and regulators are only likely to address sustainability and climate change concerns if they understand their responsibility and the potential threat of systemic disruption and other market risks. • In the past, multilateral agencies have employed a narrow definition of climate finance, but the compelling scientific evidence of global warming suggests a way must be found to broaden this definition, in order to crowd in more public and private sector investment. Part of this involves accepting that development finance must incorporate climate change concerns and enhance sustainability.
• Finance to enhance sustainability has to address domestic and regional climate and welfare concerns to be effective. From an African perspective, it needs to identify the most pressing issues, which is likely to involve in-depth, localized research and engagement to enhance climate change resilience.
Introduction One of the most important and topical discussions within the global multilateral arena is the challenge of meeting the world’s climate finance needs in order to reduce carbon emissions to sustainable levels and support adaptation strategies. The mobilization of finance is key in supporting the transition away from traditional high-carbon or business-as-usual economic pathways toward lowcarbon, climate-resilient economic systems.
This paper analyzes the impact of three financial sector sustainability regulations: the Chinese green credit guidelines, the Nigerian Sustainable Banking Principles and the Bangladesh Environmental Risk Management Guidelines. All three address the connection between financial sector activities and sustainable development, and propose guidelines for sustainable banking policies, strategies, practices, products and services.
NO. 72 — JUNE 2015
POLICY BRIEF
Key Points
Global sustainability, climate change and financial policy address innovative methods of regulating resources, including innovative governance arrangements. The conversation on reforming policy that impacts the environment is moving beyond the academic into the realm of practical policy application. The financial system continues to channel investment to unsustainable development and fails to integrate regulatory and physical risks into its assessment of value and return on investment. Implementing these global mitigation and adaption intentions at the national and local levels also presents a major challenge due to capacity constraints, climate readiness and conflicting development priorities. This debate was interrogated at a conference, Global Sustainability, Climate Change and Finance Policy, organized by the Centre for International Governance Innovation and the South African Institute for International Affairs, held in Johannesburg from July 1 to July 3, in three parts, namely: the role of international organizations and climate finance; the integration of climate and sustainability issues into the financial sector; and, finally, the impact of climate finance at the national level, particularly in African countries.
The Environmental Goods Agreement: A Piece of the Puzzle CIGI Papers No. 72 Patricia Goff Can a trade agreement help achieve environmental goals? The answer to this question has traditionally been mixed, even skeptical. The Environmental Goods Agreement has the potential to produce a more positive outcome. This paper explores this potential, reviewing key aspects of the tradeenvironment relationship. Prevailing perceptions tend not to count trade agreements as key contributors to the achievement of environmental goals. The paper then looks at the potential contribution of tariff reduction to environmental objectives, and then examines critical challenges to the completion of EGA negotiations. It concludes that the EGA is an important piece of a complex environmental governance puzzle.
POLICY BRIEF No. 62 • June 2015
THE CHALLENGES OF COUNTING CLIMATE CHANGE RISKS IN FINANCIAL MARKETS Jason Thistlethwaite
Key Points • Climate change represents an overlooked risk in financial markets that could substantially affect the valuation of many publicly listed companies.
• In response to this concern, a nascent climate change risk disclosure regime has emerged, consisting of numerous initiatives designed to standardize, measure and communicate these risks to investors. • A lack of coordination and enforcement limits the capacity of this regime to reduce uncertainty on climate change risks within financial markets.
• International financial regulators should initiate a project to develop a mandatory climate change risk disclosure standard and should conduct research that brings together financial and climate change modelers to reduce the uncertainty involved in measurement.
Introduction Financial reporting standards play a critical function in the world’s economy by providing information to investors that inform capital allocation decisions. These standards help to minimize risk and speculation by giving investors a better understanding of an asset’s underlying fundamentals. In recent years, climate change has been identified as a risk that existing reporting standards have yet to adequately measure and communicate to investors. In response to this concern, a climate change risk disclosure regime has emerged, defined by a range of voluntary, regulatory and accounting governance initiatives. Although the regime is a promising development involving a range of influential financial constituencies, it is highly fragmented and lacks the coordination and enforcement necessary to adequately measure and communicate the impacts of climate change on financial markets. How can policy makers leverage this nascent regime to improve governance of climate change risks within financial markets? This policy brief describes the background for the climate change risk disclosure regime and challenges that limit its effectiveness, and presents several policy recommendations to improve its capacity to measure and communicate climate change risks.
Background Financial disclosure standards dictate the information that must be reported by publicly listed firms in their annual financial statements. International and national financial standard setters have been delegated authority to design and implement these standards. The International Accounting Standards Board (IASB) is the global regulator charged with developing reporting standards. As of 2015, 138 different jurisdictions had adopted the IASB’s International Financial Reporting Standards (IFRS). Domestic financial regulators are ultimately responsible for adopting the IFRS or developing their own reporting standards. Examples of these reporting standards include the Canadian Financial Reporting & Assurance Standards, the European Union’s Accounting Directive, the US Securities and Exchange Commission Regulations S-K, the United Kingdom’s Companies Act, and the Japan Financial Instruments and Exchange Act.
Development of Sustainability and Green Banking Regulations CIGI Papers No. 65 Adeboye Oyegunle and Olaf Weber Interest in sustainable and green financial regulations has grown in recent years due in part to increasing climate-change risks for the financial sector alongside a need to integrate this sector into the green economy. This paper recalls sustainability’s course from fringe issue to central concern, and examines seven countries, all emerging and developing, where regulatory approaches have been implemented successfully.
POLICY BRIEF No. 57 • March 2015
CANADA’S COMING PROPERTY INSURANCE CRISIS Jason Thistlethwaite
Key Points • Climate change will erode the conditions necessary for property insurance to remain available and affordable in many areas across Canada. • Uncertainty combined with inadequate investment and coordination in Canada’s disaster management systems increase the exposure of the insurance industry to climate change and the potential for decreases in availability and affordability.
• Property insurance markets are not sustainable without coordinated efforts among all levels of government to: • increase investments in hazard and climate change risk mitigation;
• assess and identify areas where the socio-economic implications of insurance shortages will be disproportionate; and
• improve awareness about the division of responsibility for hazard risk mitigation among insurers, property owners and governments.
Introduction The insurance industry and the economic benefits it provides are not sustainable without a concerted effort by Canadian municipal, provincial and federal policy makers to improve hazard and climate risk management. Unfortunately, decision makers have yet to establish a framework for managing the impact of extreme weather and climate change on property insurance systems.
Insurance generates important economic benefits, as it helps loss recovery and incentivizes individuals and communities to reduce risk. For these reasons, insurance has been identified as a critical component in managing hazard and climate change risks. For example, high insurance prices can help governments identify areas where investment in structural defenses (for example, dykes to prevent flooding), restrictions on further development and informing property owners about risk can substantially reduce socio-economic vulnerability to hazards. There is a growing concern, however, that the increasing frequency and magnitude of extreme weather generated by climate change is limiting the conditions necessary for insurance availability and affordability (Kunreuther, Michel-Kerjan and Ranger 2013; Cutter et al. 2012). These events also threaten the solvency of insurers without adequate reserves to cover for large disasters. How can policy makers sustain and leverage insurance markets as a climate change risk regime? This policy brief describes the background for the role of insurance in governing hazards and climate change, describes challenges facing the insurance system and presents several policy recommendations aimed at sustaining and maximizing the insurance system and its benefits.
Background Over the last 30 years, insurance markets have experienced an unprecedented increase in payouts generated by extreme weather and natural disasters. Insured
The Environmental Risk Disclosure Regime: Navigating Complexity in Global Financial Markets CIGI Policy Brief No. 65 Penelope Hawkins and Olaf Weber One of the most important and topical discussions within the global multilateral arena is the challenge of meeting the world’s climate finance needs in order to reduce carbon emissions to sustainable levels and support adaptation strategies. The mobilization of finance is key in supporting the transition away from traditional high-carbon or business-as-usual economic pathways toward low-carbon, climateresilient economic systems. A conference, Global Sustainability, Climate Change and Finance Policy, organized by the Centre for International Governance Innovation and the South African Institute for International Affairs and held in Johannesburg from July 1 to July 3, considered aspects of the debate. The Challenges of Counting Climate Change Risks in Financial Markets CIGI Policy Brief No. 62 Jason Thistlethwaite Climate change has been identified in recent years as an investment risk, yet existing financial reporting standards do not adequately measure and communicate these risks to investors. A climate change risk disclosure regime has emerged in response, defined by a range of voluntary, regulatory and accounting governance initiatives. In spite of its promise, this nascent regime is highly fragmented and lacks coordination and enforcement. This policy brief describes the background for the climate change risk disclosure regime and the challenges that limit its effectiveness, and presents several policy recommendations to improve its capacity to measure and communicate climate change risks. Canada’s Coming Property Insurance Crisis CIGI Policy Brief No. 57 Jason Thistlethwaite In many areas across Canada, climate change will erode the conditions necessary for property insurance to remain available and affordable. This policy brief looks at the challenges facing the insurance system and presents policy recommendations aimed at sustaining and maximizing the insurance system and its benefits.
Available as free downloads at www.cigionline.org
About CIGI
CIGI Masthead
The Centre for International Governance Innovation is an independent, non-partisan think tank on international governance. Led by experienced practitioners and distinguished academics, CIGI supports research, forms networks, advances policy debate and generates ideas for multilateral governance improvements. Conducting an active agenda of research, events and publications, CIGI’s interdisciplinary work includes collaboration with policy, business and academic communities around the world.
Executive
CIGI’s current research programs focus on three themes: the global economy; global security & politics; and international law. CIGI was founded in 2001 by Jim Balsillie, then co-CEO of Research In Motion (BlackBerry), and collaborates with and gratefully acknowledges support from a number of strategic partners, in particular the Government of Canada and the Government of Ontario.
Le CIGI a été fondé en 2001 par Jim Balsillie, qui était alors co-chef de la direction de Research In Motion (BlackBerry). Il collabore avec de nombreux partenaires stratégiques et exprime sa reconnaissance du soutien reçu de ceux-ci, notamment de l’appui reçu du gouvernement du Canada et de celui du gouvernement de l’Ontario.
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