Banks Develop Carbon Risk Guidelines

Citi, JPMorgan Chase and Morgan Stanley formed The Carbon Principles, which are climate change guidelines for advisers and lenders to power companies. The principles are the result of a nine-month effort to create an approach to evaluating and addressing carbon risks in the financing of electric power projects.

The uncertainties around regional and national climate change policy drive the need for the principles, the banks said in a recent release.

The financial institutions, in consultation with American Electric Power, CMS Energy, DTE Energy, NRG Energy, PSEG, Sempra and Southern Company. Environmental Defense and the Natural Resources Defense Council, environmental non-governmental organizations, also advised on the creation of the principles.

The consortium has developed an Enhanced Diligence framework to help lenders better understand and evaluate the potential carbon risks associated with coal plant investments.

The principles recognize the benefits of a portfolio approach to meeting the power needs of consumers, without prescribing how power companies should act to meet these needs. However, if high carbon dioxide-emitting technologies are selected by power companies, the signatory banks have agreed to follow the Enhanced Diligence process and factor these risks and potential mitigants into the final financing decision.

"There was full and frank dialogue around the table," said Matt Arnold, director of Sustainable Finance, which helped coordinate the development of the Principles and Enhanced Diligence process. "There was a remarkable amount of debate and exchange of information and views among the banks, power companies and environmental organizations. The dialogue resulted in a rigorous analysis of the carbon risks in power investments, and sets the stage for further discussion."

The principles are:

• Energy efficiency. The signatory financial institutions will encourage clients to invest in cost-effective demand reduction, taking into consideration the value of avoided carbon dioxide emissions.

• Renewable and low carbon distributed energy technologies. The banks will encourage clients to invest in cost-effective renewables and distributed technologies, taking into consideration the value of avoided carbon dioxide emissions. They also will encourage legislative and regulatory changes that remove barriers and promote such investments (including related investments in infrastructure and equipment needed to support the connection of renewable sources to the system).

• Conventional and advanced generation. (This may include power from natural gas, coal and nuclear technologies.) Due to evolving climate policy, investing in carbon dioxide-emitting fossil fuel generation entails uncertain financial, regulatory and certain environmental liability risks. It is the purpose of the Enhanced Diligence process to assess and reflect these risks in the financing considerations for certain fossil fuel generation. The banks will encourage regulatory and legislative changes that facilitate carbon capture and storage.
"Leading utilities and financial institutions understand that the rules of the road have changed for coal," said Mark Brownstein, managing director of business partnerships for Environmental Defense. "These principles are a first step in facilitating an honest assessment of electric generation options in light of the obvious and pressing need to substantially reduce national greenhouse gas pollution."

 "To move the needle on global warming, clean energy technologies need to be developed, demonstrated and deployed as quickly as possible," said David Crane, president and chief executive officer of NRG Energy Inc. "Given the capital intensive nature of this challenge, we welcome these carbon principles as a sign that America's leading financial institutions are ready to support a massive increase of investment in clean energy solutions. With the support of both Wall Street and public policymakers in Washington, the American power industry can lead the way in achieving the dramatic GHG reductions that are critical to the health of both our economy and our planet."

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