Footnote:
In: City of London Corporation, 2007
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments January 01, 2007 erstellt
Description:
The London Accord and other climate change investigations conclude that there is no single solution to the problem of climate change. Mankind must deploy a diverse range of potential solutions - market solutions, technological solutions and social solutions. The ‘supply side’ of potential solutions does not contain one guaranteed single solution, a ‘silver bullet’. Pacala and Socolow [2004] note, “Although no element is a credible candidate for doing the entire job (or even half the job) by itself, the portfolio as a whole is large enough that not every element has to be used.” On the ‘demand side’, Stern [2006] highlights the limitations of cost/benefit analysis where one cannot afford to fail; cost/benefit analysis is of little use in Russian roulette unless you accept extinction as an option. A portfolio approach to climate change solutions is warranted given the catastrophic nature of failure – “don’t put all your eggs in one basket”.Policy is important; more so is investment. According to the UNFCCC, “When considering the means to enhance financial and investment flows to address climate change in the future, it is important to focus on the role of private-sector investments as they constitute the largest share of investment and financial flows (86%).” [UNFCCC, 2007] As noted elsewhere in the London Accord submissions, “there will be winners and losers”. Investors realise that there is rarely a single winner in any investment field. Long-term investment is about having a range of options. Any single solution may fail or, at the extreme, even increase climate change. Investors analyse a range of options as a portfolio. For the majority of investors, the ‘most effective’ portfolio means the most profitable selection of options for a given level of investment and financial risk. Similarly for policymakers, ‘most effective’ is likely to mean a portfolio that delivers a desired level of emissions reduction for the lowest cost and level of social risk. But policy-makers have a strong tendency to try and pick winners.As explained in A1: Review of the Contents, there is a wide range of investment options, and all of them are sensitive to dynamic factors such as energy prices, carbon prices, policies, standards, regulation, taxation, and rates of technology improvement. Larger investors with longer-term views, e.g. investment managers, asset managers or pension funds, need to develop their own portfolios. The participants in the London Accord have donated their research with the aim of helping longer-term investors develop their thinking on climate change, so it would be useful to demonstrate a basic approach to analysing investment weightings, a Monte Carlo analysis of possible climate change portfolios, a London Accord Portfolio Model. A London Accord Portfolio Model can be neither comprehensive nor rigorous. The data needed for a comprehensive model is not available. Investors and policy-makers have their own assumptions about the dynamic factors, opinions on factor interactions, and views on likely scenarios. There is no consensus view on many important factors. However, Intergovernmental Panel on Climate Change (IPCC) data and London Accord information, in conjunction with a number of ‘heroic’ assumptions, can produce an outline London Accord Portfolio Model as a starting point for further thinking by investors and climate change policy-makers