Showing posts with label Carbon Finance. Show all posts
Showing posts with label Carbon Finance. Show all posts

Sunday, 5 June 2011

Environmental Finance: A Roadmap beyond the Dirty Dark Spread

Do you know what a dirty dark spread is? To work it out you take the price of wholesale electricity, and you subtract from that the price of coal multiplied by an efficiency factor. What you’re left with is an indication of the profitability of a coal-fired power station. And we call that the dirty dark spread.

But why ‘dirty’? We call it dirty because there’s a clean version of the dark spread, called the Clean Dark Spread. It's basically the same as the dirty one, except it adds the price of carbon dioxide to the equation. What you’re left with is an indication of the profitability of a coal-fired power station within a system that explicitly puts a price on carbon. It's lower, but the key question is 'how much lower?'

The only reason we can make these distinctions is due to the existence of the carbon markets, brought into the fold through the Kyoto Protocol and the European Emissions Trading Scheme, perhaps the world’s most controversial market. 2010 though, saw the carbon markets tank amidst uncertainty over the future of global climate agreements, and last week’s Carbon Expo, held in Barcelona, undoubtedly saw carbon market participants doing some soul-searching. For quite some time, environmental finance has been associated with carbon markets, but the search for more holistic systems is leading to a shift away from pure carbon finance, to a broader focus on climate finance.

So tomorrow, the UNFCCC convenes in Bonn to talk climate in the run-up to December's COP 17 in Durban. The key question for passage-way conversations: How are we going to finance not only climate change mitigation efforts, which has been the focus of the carbon markets to date, but also climate change adaption? Another hotly controversial area is forestry finance. Two weeks ago, the Indonesian government finally signed a two year deal with Norway, in which Norway pays them $1 billion to limit licenses for forest logging. It’s the first major bilateral public climate finance deal, and a big step forward for the so-called REDD programme – Reducing Emissions from Deforestation and Forest Degradation. Nobody really knows how it’s supposed to work yet, but REDD is seen as a key pillar in any future climate finance systems.

The last few weeks have also seen some interesting progress in the UK, with the government launching the Green Investment Bank. The GIB will be in the business of project financing renewable energy and energy efficiency programmes, under the broader prerogative of moving Britain to a low carbon economy. Last week also saw the UK government releasing the National Ecosystem Assessment, an attempt at valuing the ecosystems of the British Isles. I have a vague feeling that, despite being at the cutting edge of economic research, trying to price an abstract concept like 'nature' will one day be looked upon in kind of the same way as we look upon eugenics, astrology, or other past pseudosciences. In the mean time though, it will, for better or worse, become part of the broader debate on ‘payment for ecosystems services’.

Outside of the arcane discussions about whether you can use financial options-pricing theory to value biodiversity, the real entrepreneurs are concerned with more practical matters. In the last month, I’ve been lucky enough to meet two guys separately working in the area of green bonds, credit instruments through which investors can lend money to environmental projects. These things are on the verge of going mainstream, with the IFC recently issuing green bonds to raise money for renewable energy. And that brings me to Luke, who I met whilst sitting in the CafĂ© at Foyles book store. Luke used to design algorithms for financial trading systems. Now he’s got a moleskine notebook with sketches for a new type of solar thermal tower which would use the sun’s energy to heat water to drive electricity-generation turbines. No mainstream bank is going to finance it – He needs renewable energy venture capital, an exciting and growing area of environmental finance aimed at the technology innovation market. “What I need,” he says, “is an old guy with too much money, and not enough time to spend it.” Maybe what he needs a government subsidy – like the feed-in tariffs – but the regulatory environment is getting pretty uncertain.

The most amazing thing about this all though, is that literally nobody has a clue on how it will all work out. We’re creating it right here, right now, ocean blueprints and forest greenprints. Will Luke’s solar project revolutionise the world? Will someone get venture funding to figure out how to harvest electricity from lightning? Will the green bond concept turn out to be a non-starting buzzword magnet? Will the carbon market exist in 10 years time? What innovation will emerge that we cannot yet conceptualise? Will Suitpossum be successful in designing a trans-generational environmental risk management system with almost no budget and a failing Wifi connection?

For more on all these topics, tune into the Suitpossum EnviroFinance series, starting tonight, and unfolding over the next several weeks on a computer screen near you.

Thursday, 7 April 2011


In 2008 I embarked on an unusual experiment in gonzo urban anthropology. I left the world of radical left-wing academia, and went to London with two goals in mind. Goal one: To break into the financial sector at the heart of one of the most powerful centres of the global economy and to see first-hand how it worked, to learn by doing, not by reading. Goal two: To shatter the complacent intellectual comfort zone I’d found myself in, and to learn to move in and out of different worlds like a chameleon. It was an exercise in critical thought, backed by real action.

That’s how I found myself on the 36th floor of the Lehman Brothers offices in Canary Wharf, four weeks before the company collapsed, and how I found myself in the subsequent financial crisis, trying to pitch esoteric inflation derivatives, property derivatives, and longevity derivatives, aboard a mad raft with an oddball crew of old rogues and young rats, fighting against the odds to stay afloat. It’s a pretty interesting story, and I hope to tell it some time.

In the mean time, I’m completely broke, in a room in Brixton, with a pile of business cards and a stack of ideas, most of which don’t add up. Sometimes I help unusual people to get to grips with conceptually challenging things, like what the financial system might be. I look at how financial concepts might be channeled creatively, through the fledgling world of social and environmental finance, and consider why all this might matter in issues of social and environmental justice.

Sometimes I look at bizarre curiosities, like new currencies and new units of time, Islamic finance, Hawala systems and financial crime. I delve into the way the financial sector tries to reconcile our views of the future in the present.

Sometimes I hang out with people who call themselves anarchists, but who are mostly just concerned about a world they perceive as offering them nothing but bland complacency and treadmill materialism. They hack conventions and set up bases in old abandoned buildings, but are still daunted by the seemingly intractable, impenetrable and arcane financial structures around them. I urge them to try engage more, to spend less time throwing rocks at things, and more time subverting their own preconceptions. They look at me weirdly, but I think there’s a lot to be said for a new activist philosophy.

I play a lot of guitar. I once busked on the New York Underground. I have a pricing model on my hardrive that can tell you what rate to charge for a bet on how long people live for. I lifted it from an investment bank, and one day, when I learn to use it, I'm going to create a rock 'n roll financial opera.

I once went to a fancy university, got an MPhil in Development Studies, wrote some papers. Sometimes I hang out with development people and talk trade policy, agricultural subsidies, and NGOs. Other times I hang out with finance peeps, and talk about things like sugar and carbon.