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Wake-up call on carbon risks

Three financial titans have announced "The Carbon Principles" to provide guidance to energy companies in managing carbon risks.

Last week, three financial titans--Citigroup, J.P. Morgan Chase, and Morgan Stanley--announced "The Carbon Principles" to provide guidance to energy companies in managing carbon risks. The upshot of The Carbon Principles is that these big banks are stating explicitly that going forward, they will only provide debt financing to new power projects if proponents can prove that the proposed plants will remain economically viable under future climate change policies.

Put another way, Wall Street sees federal carbon legislation as imminent, and doesn't want power sector executives to try to "sneak in" any last coal plants before the legislation whose economics might be threatened in a carbon-constrained world. The banks' interest is not necessarily environmentally motivated--they simply don't want to see any more loans go bad--but the effect of this announcement is likely to be positive.

The energy sector can't claim they weren't at the table. The principles were developed by the banks in consultation with a who's-who of power industry giants: American Electric Power, CMS Energy, DTE Energy, NRG Energy, PSEG, Sempra Energy, and Southern Company.

But apparently, the willingness of these utilities to participate in the process of developing The Carbon Principles doesn't mean everyone in the energy sector is yet reading the writing on the wall regarding climate change. In the February 4 Wall Street Journal, reporter Jeffrey Ball quoted Jeffrey Holzschuh, vice chairman of institutional securities at Morgan Stanley, as saying, "We have to wake up some people who are asleep."

If a remarkable July 2006 letter (PDF) from Stanley Lewandowski, general manager of the Intermountain Rural Electric Association in Colorado is any indication, it would seem there's still a number of Rip Van Winkels out there in the electric utility world.

Rise and shine! Climate change is a real phenomenon, and carbon legislation is coming--let's begin to deal with it!

Given how Wall Street didn't seemingly exercise any leadership whatsoever on the subprime mortgage debacles, it's refreshing to see that they're actually out in front (at least a little bit) on the climate change issue.