Canada is no stranger to the contemporary environmental challenges and scrutiny attracted by industrial processes and facilities in our natural resources and power generation sectors. Yet, in terms of power generation, Canada has been endowed with massive hydro-electric resources and enjoys relative acceptance of nuclear power generation in close proximity to major load centres. These two aspects of our electricity supply mix substantially temper the pressure and appeal to rely on thermal generated baseload in many areas of Canada. As a result, with important exceptions — primarily in Alberta and Saskatchewan — many regions of Canada have not experienced or required major investments in coal-fired power generation in recent years, and do not face the same supply mix dilemmas familiar to U.S. utilities and independent power producers.

At the same time, federal and provincial discretion in Canada to determine environmental regulation is expected to become increasingly impacted by U.S. law and policy in the area of carbon emissions. In discussions with U.S. policymakers keen to influence carbon emission reductions from Canadian commodity exports, particularly oil sands extraction and upgrading, the latest jointly acknowledged quid pro quo is the need to address carbon emissions from coal power generation in the U.S. This, combined with anticipated U.S. carbon reduction legislation, has led investors in heavy emitting industries such as coal power generation to call for increased continuous disclosure and, in some cases, to employ shareholder activism and litigation to influence strategic and operational business decisions around emissions management. Certain U.S. lending institutions are now looking through a similar lens of scrutiny, and have adopted the Carbon Principles to apply to coal power project financing decisions.


On February 4, 2008, three major U.S. financial institutions introduced their adoption of a voluntary set of principles to be applied to lending decisions for coal power generation projects. Citigroup, JP Morgan Chase, and Morgan Stanley were the first to adopt the Carbon Principles for assessing and managing climate change risk in the context of coal power plant financing. Bank of America joined the ranks in April of 2008, and in June of 2008 Credit Suisse announced adoption, followed by Wells Fargo in July.

Similar to the Equator Principles, but with a more narrow application specifically aimed at coal-fired power project finance, the Carbon Principles include an Enhanced Due Diligence Process ("Enhanced Diligence") for evaluating 200+ MW additions or expansions of coal power generation capacity.

Although there is no legal requirement to provide the information for the Enhanced Diligence, the adopters have committed not to proceed with the financing where a borrower is unwilling to provide such information.


The Carbon Principles comprise the following three principles:

  • renewable and low carbon energy technologies will have value;
  • energy efficiency will be encouraged; and
  • conventional generation investment will continue to be required.

1. Renewable and Low Carbon Energy Technologies Will Have Value

This principle recognizes the value of low-carbon or carbon-free generation as a source of offset credits, and supports lowering barriers to entry or grid interconnection in order to promote investment in these areas. By recognizing the values of clean power generation, including (a) lower relative risk exposure to carbon reduction laws; (b) carbon offset credits creation; (c) meeting renewable portfolio standards; and in some cases (d) fewer relative regulatory obligations associated with other emissions, the Carbon Principles generally recognize the value of avoided emissions. Renewable power generation and low-carbon distributed generation are viewed as having significant potential to compliment supply requirements and utilize domestic technologies.

2. Energy Efficiency Will Be Encouraged

This principal is based on the simple notion that one way to reduce carbon emissions is not to produce them, and views demand reduction investments as a cost-effective carbon emissions reduction tool. The Carbon Principles embrace a portfolio approach in an attempt to strike a balance between cost control and carbon emissions risk, which also recognizes that load requirements for electricity will be met not only through traditional and renewable generation sources, but also through efficiency, conservation, demand side management, and low-carbon distributed generation.

3. Conventional Generation Investments Will Continue to be Required

This principle acknowledges that investments in nuclear, gas, and coal power generation are expected to continue to be required to meet load requirements but that investment uncertainties exist. Under this principle, the Enhanced Diligence should be employed to assess investment risk. This process includes evaluation of a borrower’s mitigation strategy (including carbon capture and storage), compliance plans and anticipated future obligations. The Enhanced Diligence is designed to factor in plans to incorporate capture-ready technology or which have the capacity to accommodate capture, transportation, and storage of carbon.

Adopters of the Carbon Principles have committed to encourage investments in energy efficiency, renewable energy, and emissions avoidance; ascertain and evaluate the financial and operational risk of potential regulations; and educate stakeholders regarding additional due diligence requirements and the need for regulatory certainty.

The Carbon Principles and Enhanced Diligence are designed to assist the investment evaluation process in light of law and policy uncertainties related to a cap and trade or mandatory reductions regime, and the associated carbon market price risks, by considering a range of assumptions with respect to carbon controls, mitigating technologies, and future costs. The Carbon Principles also reflect a collective establishment of new processes focussed on quantifying, reducing, and mitigating risks by:

  1. utilizing a wide range of assumptions regarding the timing, structure, and stringency of future regulation, as well as the ability of a project owner to pass through or recover compliance costs, where uncertainty exists;
  2. making corporate or project level commitments to reduce carbon emissions; and
  3. implementing programs or actions to increase energy efficiency or acquire cost-effective renewable power generation assets.

Much of the impetus for the creation of the Carbon Principles has been the absence of carbon policy certainty amidst growing anticipation that reductions will be legislated. As part of the Enhanced Diligence, adopting lenders will wish to see that borrowers recognize climate change related risks and are responding appropriately in light of their business and jurisdiction. While adopting lenders have not gone so far as to avoid investments in coal or other thermal power generation or set project performance criteria, such lenders recognize that carbon emissions laws are likely to be adopted during the operational life of the coal plants now being financed and view it as prudent to identify risk and mitigation. Certain adopting lenders are also calculating carbon market price projections, and at least one has set and announced a carbon emissions reduction target with respect to its power sector lending. The Carbon Principles establish a process for formal risk analysis and guide adopting lenders in integrating the results of that analysis into lending and underwriting decisions.


The Carbon Principles are intended to be applied to potential financings of both public and private investor owned electric utility construction or expansion projects of 200 MW or more of coal-fired generation capacity. Lenders who have adopted the Carbon Principles will apply the Enhanced Diligence when leading a financing:

  1. that is a committed bank loan or analogous corporate facility, including bank market term loans, revolving lines of credit and bonds, in an amount over US $10MM;
  2. where the known use of proceeds includes constructing a new coal-fired generation facility in the U.S. of 200+ MW or an expansion of capacity of 200+ MW.

However, transactions that simply refinance existing debt or another credit facility, as well as amendments to such facilities, will not require the Enhanced Diligence. Reporting obligations will arise due to the adopting lenders’ commitments to periodically disclose their implementation (numbers and case studies) of the Enhanced Diligence.

More information regarding the Carbon Principles is available at