How Environmental Finance is Changing Our World
Introduction
Environmental finance isn’t like many other well-known areas of finance such as corporate finance or quantitative finance; instead, environmental finance employs market-based policies to ecologically improve our world. These market instruments differ from traditional areas of finance since most rational consumers and businesses work towards their own benefit. Thus, environmental finance attempts to maintain traditional business structures while improving the sustainability of investments to create a more environmentally friendly climate in worldwide business.
A Brief History
In 1992, UChicago professor, Richard L. Sandor, created an Environmental Finance Course inspired by his work a few years earlier with emission trading and subsidies/taxes to manage the environmental crisis in Chicago. At the turn of the century, the Dow Jones Sustainability Index was made to evaluate social costs of stocks (summing both the private and external costs). By including negative externalities into the calculations for the costs of stocks, companies had a much higher incentive to cut carbon emissions and adopt more sustainable practices to attract new investors.
In the 2000s, the UN’s Millennium Development Goal Scheme — promoting sustainability for large corporations — led to many large global firms reporting their sustainability metrics to the UN directly. And throughout the 21st century, the U.N. has advocated for policies such as carbon taxes (taxes levied based on manufacturer’s carbon outputs) to reach sustainability goals. As these policies are increasingly implemented, environmental finance’s impact in the world can no longer be ignored, leading many countries and companies to commit to being carbon neutral by 2050.
Strategies to Promote Environmental Finance
- Emission Trading (Cap-and-trade mechanisms)
- Emission trading essentially creates a market and price for carbon emissions, as operators of factories require a permit for every ton of CO2 they emit into the atmosphere. By putting a price on each ton of CO2, there would be a higher incentive to reduce emissions and switch to more renewable sources of energy (e.g. wind, solar, hydroelectric). The EU implemented this policy in 2005 as their solution to reduce greenhouse gas emissions, resulting in carbon emissions hitting their all time low in the EU at 8% less than 2022 currently.
2. Investment in Renewable Energy for Developing Nations
- Injecting money into developing countries for sustainable energy would create jobs, future sources of sustainable, cheaper energy, and create loads of economic growth for the nation. Spending on sustainable energy development in these developing nations would hit two goals at one time: creating worldwide clean energy and stimulating economic growth.
3. Removing Atmospheric CO2 by either encouraging the planting of trees or creating technologies that remove CO2 from the air
- Current “carbon taxes” and pledges to reduce carbon emissions have twofold positive impacts: firstly, they will definitely decrease the greenhouse gases in our atmosphere naturally by decreasing the quantity released, and secondly, entrepreneurs and innovators may find new technological solutions to reduce emissions, changing the landscape of environmental finance forever.
4. Subsidizing Solutions to the Problem
- With subsidies and tax cuts, consumers and producers are likely to be more receptive to cutting their carbon emissions. For example, tax cuts and HOV lane passes for those who buy electric cars in the U.S. has led to many more people buying electric cars and accelerating the path to lowering greenhouse gas emissions in the future.
The Future of Environmental Finance
Nobel Prize Winner and economic advisor to Jimmy Carter, William D. Nordhaus shows us environmental finance’s true potential in his prize-winning project. He created a quantitative model that examines the consequences of economic intervention in the economy with an emphasis on the environment, taking into account the cost of negative externalities and the effects on the overall economy as well as regular people. As we look toward a carbon-neutral future, innovation like Nordhaus’s is essential to the forwarding of the field and making the best decisions for everyone involved in the shift to more sustainability.
Conclusion
While Environmental Finance is a relatively unheard branch of finance, it’s effects on our world are immense. Instead of just being a tool to make money, it’s being used as a tool to change our world for the better. While we may be on the right path to solving the climate crisis, we still have a long way to go. Hopefully along this road, environmental finance’s interactions with other fields will allow us to accelerate our path to a carbon-neutral and sustainable society in the near future.
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