Banks With Carbon Pricing Buit In Their Risk Planning Will Benefit

According to The Copernicus Climate Change Service, increasing greenhouse gas (GHG) emissions from industries around the world resulted in 2021 being the fifth warmest year on record, somewhat warmer than 2015 and 2018. The average temperature of the earth's surface would have been around -18°C (0°F) without the GHG, rather than the current average of 15°C (59°F). Despite agreements from policymakers all across the world, CO2 emissions are increasing. At the COP21 in Paris, various world leaders agreed to keep global warming between 1.5 and 2 degrees Celsius.

In response to the urgent need to cut CO2 emissions, carbon pricing schemes have sprung up all over the world. Carbon pricing can be used to link GHG emissions to their sources and reduce them through taxes or credit plans. This allows the onus of responsibility for the harm produced by GHG emissions to be moved back to the responsible parties. It also aids in the deployment of financial resources needed to adopt clean technology and promote low-carbon economic growth drivers.

There are two distinct types of carbon pricing schemes:

Carbon Tax:

The government imposes a carbon price on CO2 emitting sources. Emitters are required to pay a predetermined fee per tonne of CO2 released. A carbon tax, on the other hand, has no specific restriction on the amount of CO2 released into the atmosphere.

Emissions Trading Systems (ETS):

A cap-and-trade method sets a limit on the total level of greenhouse gas emissions and allows companies with low emissions to sell their extra credits to large emitters. This guarantees that emitters achieve the necessary emission reductions to stay within their pre-allocated carbon budget. The EU ETS is an example of a framework that has been successfully implemented.

Fuel taxes, the elimination of fossil fuel subsidies, and laws that integrate a social cost of carbon, are all examples of indirect carbon pricing schemes. The instrument selected is determined by the country's and economy's situation. Carbon pricing mechanisms are in place in 27 national and regional governments, with more plans to implement them in the future.

Increasing regulatory pressure is being placed on banks to safeguard themselves from the effects of climate change while also aligning with the global sustainability agenda. They may help reduce CO2 emissions by reporting and monitoring their 'Scope 3' emissions, which are the GHGs they fund through loans and other credit facilities. Many investors are considering environmental, sustainability, and governance (ESG) aspects in their investment decisions and redirecting funds to ‘green’ enterprises, in response to their clients' shifting perspectives. Banks can push corporations to embrace greener solutions that lower their carbon footprint by formulating adequate planning and implementation.

Learn how GreenCap's 'Risk A Service' (RaaS) solution helps banks consolidate their balance sheets in terms of 'Scope 3' emissions and compute the additional risk capital resulting from underlying borrowers' exposure to increasing risks from climate change policies.