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This textbook provides an introduction to environmental finance and investments. The current situation raises fundamental questions that this book aims to address. Under which conditions could carbon pricing schemes contribute to a significant decrease in emissions? What are the new investment strategies that the Kyoto Protocol and the emerging carbon pricing schemes around the world should promote? In the context of carbon regulation through emission trading schemes, what is the trade-off between production, technological changes, and pollution?
What is the nature of the relation between economic growth and the environment?

This book intends to provide students and practitioners with the knowledge and the theoretical tools necessary to answer these and other related questions in the context of the so-called environmental finance theory. This is a new research strand that investigates the economic, financial, and managerial impacts of carbon pricing policies.

Inhaltsverzeichnis

Frontmatter

1. Introduction

Abstract
During the last decade, climate change has emerged as the most serious environmental problem to be faced by mankind in the near future. The inherent dangers cannot be neglected; rather, the situation deserves urgent action to curb the greenhouse gas (GHG) emissions from which this problem arises.
Marc Chesney, Jonathan Gheyssens, Anca Claudia Pana, Luca Taschini

2. The Issue of Climate Change

Abstract
According to the Intergovernmental Panel on Climate Change (IPCC) which aggregates international research efforts on climate change, “global atmospheric concentrations of CO2, CH4 and N2O have increased markedly as a result of human activities since 1750 and in 2005 exceeded by far the natural range of the last 650,000 years” (IPCC 2007), with an increase of 70 % of global greenhouse gas (GHG) emissions due to human activities between the two periods.
Marc Chesney, Jonathan Gheyssens, Anca Claudia Pana, Luca Taschini

3. International Efforts to Tackle Climate Change

Abstract
First scientific evidence of human activity affecting the world’s climate emerged during the World Climate Conference (WCC) held in February 1979 in Geneva. For the first time, a large group of politicians was concerned about human interferences with climate and the environment. As a result of global attention to climate change, the United Nations Environmental Program and the World Meteorological Organization established the International Panel on Climate Change (IPCC) in 1988.
Marc Chesney, Jonathan Gheyssens, Anca Claudia Pana, Luca Taschini

4. The Economics of Mitigation

Abstract
The concept of environmental externality refers to the materialization of a market failure: when agents conduct economic activities that engage imperfectly priced environmental assets, either as inputs (excessive consumption) or outputs (pollution), they engage in socially excessive levels of harmful activities.
Marc Chesney, Jonathan Gheyssens, Anca Claudia Pana, Luca Taschini

5. Economic Growth and the Environment

Abstract
The threat of climate change is raising important questions regarding how could we organize our economic activity in order to deal with the imminent increases in temperature and their consequences. In Chap. 4, we analysed how could the negative externalities from production be internalized, and studied the possible benefits and disadvantages of relying on a tax or cap-and-trade system. Finally, we looked at alternatives to dealing with climate change, such as adaptation and geoengineering strategies. Indeed, many important questions arise when considering the different options, and relying on one strategy or the other is by far not an easy choice. However, besides the practicalities of dealing effectively with climate change, this threat might as well be an opportunity to fundamentally question our entire socio-economic system that created the problem in the first place. Is the climate crisis an unavoidable outcome of a system that always tries to evolve, and should we, thus, find the best way to deal with it? Or, are there some fundamental flaws in this system that we could avoid? This chapter focuses on the link between economic growth and the environment.
Marc Chesney, Jonathan Gheyssens, Anca Claudia Pana, Luca Taschini

6. The Finance of Environmental Investments

Abstract
A proper selection and valuation of investment (or disinvestment) projects is crucial for financial managers. This is particularly difficult in the context of risks, globalization of economy, technology changes, strong competition, and in the presence of information asymmetry and environmental constraints. The decision making tool usually recommended by the corporate finance theory is the so called NPV (Net Present Value) approach. This conventional approach, generated by the neo-classical theory, does not fulfill the needs as it ignores the flexibility inherent to the decision making process and the dynamic aspects of project selection. As shown in this chapter, the real options approach provides a new and powerful decision making tool that overcomes the limitations of the traditional DCF (Discount Cash Flow) method, and permits a more appropriate valuation of investment projects related to the environment in particular.
Marc Chesney, Jonathan Gheyssens, Anca Claudia Pana, Luca Taschini

7. Emission Price Dynamics

Abstract
Since the creation of the European Union Emissions Trading Scheme (EU ETS) in 2005, a burgeoning academic literature has emerged to identify the key price drivers of European Union Allowances. This chapter overviews the main econometric studies that investigate energy prices, weather events, and macroeconomic shocks as determinants of allowance prices. A coal-to-gas switching model is introduced and calibrated to real data. Given the importance of understanding the emission permit price formation, this remaining of this chapter provides an overview of deterministic and stochastic equilibrium permit price models suggested in the literature. Several market design institutions are considered. Banking and borrowing limitations, strategic trading interactions, and asymmetric information in the permit market are the most relevant.
Marc Chesney, Jonathan Gheyssens, Anca Claudia Pana, Luca Taschini
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