effects. such macro - impact is tantamount to a supply shock on the country ’ s long - term productive capacity i. e. capital stock and technology, leading to a decline in long - term output growth, higher production cost and inflation, shift in relative price away from carbon - based energy, and a decline in productivity. some countries may suffer balance of payments problems if they are financially unable to cope with the impact. on top of this, there is also uncertainty whether a larger impact could materialize because of the potential for catastrophic damages. given the performance of the financial sector is closely related to the macroeconomy, implications for the financial system could be significant through increased exposure of the financial system to risk, both its own and through its clients, as well as possible damages to its assets. the key risk - driver includes market risk linked to large economic disasters, and operational, reputational, political, legal and counterparty risk relating to defaults after a disaster. in addition, there is also a business risk if it fails to properly incorporate climate change into its portfolio risk management. as for threat to financial stability, this would depend on whether the impact is slow - moving, which can be offset by risk - management, adaptation, and financial response. alternatively, the impact could take the form of a series of catastrophic events that impair the operative capacity of financial institutions. second, being a global problem, the collective response to climate change can set off an economic transformation, in terms of the changing patterns of demand and production, toward a low carbon economy that will require the financial system to adapt by managing risk and exploring related business opportunities. three triggers will be key in driving this transformation : namely, regulations set by the government, response by the private sector through adaptation and mitigation, and increased public awareness of the issue. such transformation will result in a shift in relative prices ( away from carbon - based technology ), influence the patterns of consumption and production ( towards non - carbon, carbon - efficient, and carbon - capture technology ), and redirect the financial resources to support the process. as i noted earlier, being a service industry, the financial sector will need to adapt by managing risk, developing supportive financial services, and exploring business opportunities. both the threat and the opportunities that emerge will be a challenge for all segments of the financial system i. e. insurance, banking, and fund management. in this process, awareness, right incentive, and market mechanism will be

the development of tools for internalizing climate change in emerging markets. at this time, the main tools for internalizing climate change are provided in the global financial market, but access of emerging markets to this market are limited by its own capacity, as well as by the market nascent development. under the current conditions, the key tools for emerging markets for adaptation and mitigation are likely to be : first, is cdm, which presently offers clarity up to 2012. cdm provides core demand for carbon credit that forms the core primary market and allows secondary and derivatives market to grow. second, is the insurance market that offers products for risk mitigation. third, is the investment fund market that bridges carbon credit buyers ( which is cdm driven ) and sellers in emerging markets. many countries have set up such funds, but less so in the context of emerging markets ’ own funds. and fourth, is the direct lending by financial institutions in emerging markets to promote energy - efficient projects and companies. response to climate change in emerging markets, therefore, can be judged in the deployment of these four tools. currently, the efforts remain scattered. promoting the use of these instruments will be key for building momentum in adaptation and mitigation. at this time, however, there are many problems in emerging markets that remain to be tackled. for example, in the case of cdm, existing practical problems include the absence of key global infrastructure beyond 2012, lack of legal recognition of carbon credits as tradable securities or assets, lack of knowledge and awareness including the high search cost for identifying sellers and matching trades, and the need to set up a supportive “ guarantee fund ” to help banks share risk on lending to cdm - projects. in the case of bank lending and pricing, uncertainty in cash flows from the projected carbon credit, and the slow process of local approval, is seen as a major risk to banks. lack of understanding of cdm and carbon trading market by financial institutions is also a factor weighing on its progress. in the case of investment fund, this is an area that has the strongest potential for private investors ’ participation in supporting clean technology and energy - efficient companies. again, clarity beyond 2012 is needed for evaluating the longer - term economic payoffs, and whether carbon credit is considered securities legally is an issue in some countries. what i have mentioned are some of the practical issues that have emerged in emerging markets, and need to be addressed in order to be able to speed up the process.