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RTCC RESPOND

The need for 2°C capital markets
These positive signals remain just the tip of the iceberg. They are going against the
tide of the short-term drivers of the markets. The fnancial crisis demonstrated that
the capital markets are not good at dealing with systemic risks. Climate change is a
key test of whether the measures put in place to stabilise markets are enough. The
signs to date are that market participants continue to make short-term decisions, in
the belief that they will get out just in time before any crash, but we know that not
everyone can get out the door at once.

The fnancial crisis was based on a market failure to understand and price risk in
mortgage lending, using fawed assumptions that housing prices and demand would
continue to rise indefnitely. If the market continues to believe that demand for coal
and oil will grow forever it is clearly on course for 5-6°C of warming. The fnancial
sector realigning with a two degree world will be a sign that governments are send
strong enough signals to the market.

An orderly transition
Creating and communicating a clear pathway for the energy sector to decarbonise
will be essential if capital is to be diverted from the incumbent energy sources. This
is an opportunity to facilitate a smooth transition without sharp readjustments to the
fnancial markets. There may be a few casualties who fail to adapt to a low carbon
future, but this is normal as the market constituents are always changing.
It is clear that success will require fundamental challenges to the business models of
fossil fuel companies and the way they are valued and rated. Setting a 2°C framework
for investment will ensure that risks and rewards are adjusted for climate change from
the beginning, rather than it being an inconvenient add-on that comes too late to
infuence investment decisions.

Carbon Tracker is working with investors, accountants, actuaries, analysts, ratings
agencies, regulators and NGOs to align the fnancial system with climate change
targets.

Luke Sussams is Senior Researcher at the Carbon Tracker Initiative.
Follow the team on Twitter @carbonbubble
www.carbontracker.org

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