  Alignment of financial market incentives and carbon emissions disincentives
is key to limiting global warming. Regulators and standards bodies have made a
start by requiring some carbon-related disclosures and proposing others. Here
we go further and propose a Carbon Equivalence Principle: all financial
products shall contain a description of the equivalent carbon flows from
greenhouse gases that the products enable, as well as their existing
description in terms of cash flows. This description of the carbon flows
enabled by the project shall be compatible with existing bank systems that
track cashflows so that carbon flows have equal standing to cash flows. We
demonstrate that this transparency alone can align incentives by applying it to
project finance examples for power generation and by following through the
financial analysis. The financial requirements to offset costs of carbon flows
enabled in the future radically change project costs, and risk that assets
become stranded, thus further increasing costs. This observation holds
whichever partner in the project bears the enabled-carbon costs. Mitigating
these risks requires project re-structuring to include negative emissions
technologies. We also consider that sequestered carbon needs to remain
sequestered permanently, e.g., for at least one hundred years. We introduce
mixed financial-physical solutions to minimise this permanence cost, and price
to them. This complements previous insurance-based proposals with lesser scope.
For financial viability we introduce project designs that are financially
net-zero, and as a consequence are carbon negative. Thus we see that adoption
of the Carbon Equivalence Principle for financial products aligns incentives,
requires product redesign, and is simply good financial management driving
sustainability.
