Climate science tells that the earth is warming due to human activities.  But considerable uncertainty regarding the precise nature and extent of the risks remains. Climate change happens slowly and has a global impact on the physical environment, whereas financial markets react to news in fraction of a second and are almost liberated from specific physical locations.  The low energy intensity of financial sector means that reductions in greenhouse gases (GHGs) emissions would have little impact on physical operations of financial markets and institutions unlike for instance their effect on electricity production and transport. Nevertheless, financial markets potentially play two important roles in the policy response to climate change. They foster mitigation strategies, that is, the steps taken to reduce GHGs emissions for a given level of economic activity by improving the efficiency of the schemes to price and reduce emissions and the allocation of capital to cleaner technologies and producers. 

Furthermore, financial markets can cut the costs of adaptation by reallocating capital to newly productive sectors and regions and hedging weather related risks. In recent years, markets in carbon trading, weather derivatives and catastrophe (CAT) bonds have seen sharp increases in activity and innovations, which bodes well for the future.  Hence recognizing how financial markets will react to climate change initiative and how they can best promote mitigation and adaptation will become crucial to shaping the future policy and minimizing its costs. Failure in reflection of basic understanding of finance can cause major setbacks to climate change policy.

GHGs Emissions:

Burning of fossil fuels is a major source of industrial GHGs emissions, especially for power, cement, steel, textile and fertilizer industries.  The major greenhouse gases (GHGs) emitted by these industries are carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydro fluorocarbons (HFCs), Per fluorocarbons (PFCs) and Sulphur hexafluoride (SF6) which will increase the atmosphere’s ability to trap infrared energy and thus affect the climate.

Carbon Credits: