Eco-finance: The Legal Design and Regulation of Market-based Environmental Instruments

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Kluwer Law International B.V., Jan 1, 2004 - Law - 197 pages
Market-based environmental instruments are the most creative of the many initiatives devised to combat air and water pollution and promote biodiversity. Among these, none has attracted more attention than the burgeoning trade in environmental allowances and credits. Originally developed in the United States around 1990, these varieties of tradable instruments were globally validated by the Kyoto Protocol of 1997, which explicitly contemplates the buying and selling of environmental allowances and credits among both sovereign states and corporate entities. Despite U.S. opposition to the Kyoto Protocol, global trading in pollution instruments is growing at an exponential rate, with instruments representing over 70 million tonnes of greenhouse gas emissions estimated to have been traded in 2003.

Eco-Finance is the first in-depth legal analysis of this extraordinary hybrid of environmental regulation and global financial markets. It deals with what are currently the two dominant types of market-based environmental instruments: market-traded environmental instruments (which include the tradable pollution allowances envisaged by the Kyoto Protocol), and environmental financing instruments (which include the emerging class of environmental and socially responsible investment funds). Among the numerous topics and issues treated by Ali and Yano are the following:

the ?cap-and-trade? regime; debt-for-environment swaps; forestry securitisations; greenhouse gas emissions markets; carbon funds and swaps; tradable green certificates weather derivatives; duty to hedge climatic risks; catastrophe bonds; protected cell companies; the prudent investor rule; and ethical security indices.

The authors deal searchingly with the critical legal issues that arise in connection with these market-based environmental instruments, such as the danger that courts might recharacterise underlying risk transfer agreements as illegal insurance products. For this reason, and for its wealth of practical, theoretical, and informational detail, Eco-Finance will be of enormous value to a broad range of legal, governmental, and business professionals, including environmental regulators, securities regulators, financial market professionals, institutional and other fiduciary investors, corporate risk managers, and investment fund managers, as well as practitioners and academics in both environmental law and financial law.

 

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Contents

Introduction
1
Tradable Pollution Instruments and Biodiversity Finance
7
2 Pollutant Trading
10
212 Attributes of Emissions Markets
12
2132 US NOₓ Emissions Trading
17
2133 Southern California RECLAIM and Chicago ERMS Markets
19
2134 Texas Mass Emissions Cap and Trade Program and New Hamphsire Multiple Pollutant Annual Budget Trading and Banking Problem
20
2135 HCFC Emissions Trading
21
2 Securitisation of Natural Disaster and Climatic Risks
97
22 Structure of NatureLinked Securities
98
221 Catastrophe and Weather Bonds
99
2212 Catastrophe Bonds
102
2213 Weather Bonds
106
3 Key Regulatory Issues
109
312 Contingent Surplus Notes
111
33 Fiduciary Purchasers of NatureLinked Securities
114

215 Hybrid Emissions Markets
22
22 Nutrient Trading
24
23 Salinity Trading
25
3 MarketBased Strategies for Promoting Biodiversity
27
311 Mitigation Banking of Wetland and Endangered Species
29
312 Tradable Native Vegatation Obligation
30
33 DebtforEnvironment Swaps
32
34 Forestry Securitisations
35
Carbon Finance
39
2 Greenhouse Gas Trading
43
212 KyotoCarbon Instruments
46
22 European Union and Domestic Greenhouse Gas Emissions Markets
51
222 Australian GHG Emissions Markets
52
223 Danish and UK GHG Emissions Markets
55
224 Other GHG Emissions Markets
56
225 GHG Emissions Derivatives
59
3 Financing Carbon Credits
61
32 Carbon Swaps
64
4 Tradable Green Certificates
65
42 Australian TGC Markets
67
43 US TGC Markets
69
44 European TGC Markets
71
Weather Direvatives
75
2 Managing Climatic Risks
78
22 Catastrophic Risk Swaps
80
3 Key Regulatory Issues
82
31 Weather Derivatives and Insurance
85
32 Weather Derivatives and the Duty to Hedge Climatic and Other Risks
92
NatureLinked Securities
95
Environmental Investment Funds
119
2 Environmental Investment Funds
122
22 EnvironmentallyOriented Investing
124
23 Implementing EnvironmentallyOriented Investment Strategies
126
the Prudent Investor Rule
128
242 Prudent Investor Rule Traditional Formulation
131
243 Prudent Investor Rule the Influence of Modern Portfolio Theory
132
244 Prudent Investor Rule United Kingdom
134
245 Prudent Investor Rule Australia
135
246 Prudent Investor Rule United States
137
247 Prudent Investor Rule Canada
138
25 Prudent Investor Rule Implications for EnvironmentallyOriented Investing
139
26 Performance of EnvironmentallyOriented Investment Funds
142
27 Hedge Funds and Environmental Investments
144
272 Investment Strategy of Environmental Hedge Funds
145
273 Environmental Hedge Funds and the Prudent Investor Rule
146
3 Environmental Investments and IndexTracking
148
32 Ethical Security Indices
151
321 Calvert Social Index
152
322 Citizens Index
153
325 Domini 400 Social Index
154
the AntiDelegation Rule
156
341 Delegation of Investment Powers United Kingdom
157
342 Delegation of Investment Powers Australia
159
343 Delegation of Investment Powers United States
161
344 Delegation of Investment Powers Canada
162
Bibliography
165
Index
193
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