Around 2001, reports and publications about climate change began referring to a broad or diverse portfolio of policies, approaches, or technologies for coping with climate change. Working Group III of the Intergovernmental Panel on Climate Change (IPCC) issued a 2001 report listing portfolio theory as a potential tool of analysis. This report's description of portfolio theory highlighted the weighing of options by their risks and expected returns, consideration of budget, and arrival at a portfolio of options providing the highest anticipated returns for the lowest level of risk.

In the early 1970's, when large companies were acquiring unrelated businesses and becoming conglomerates, Barry Hedley and the Boston Consulting Group (BCG) developed the business portfolio concept as a planning framework. A parent company's managers could examine their various businesses, which might vary widely in performance and market share, in light of the company's overall resources (Botterill, 2003). In portfolio analysis, managers view the company as a portfolio of businesses and select strategies for each business that fit the business's position in the growth-share matrix, as well as the overall needs of the company.

The 2007 IPCC Working Group III report, "Mitigation of Climate Change," includes numerous references to both portfolio analysis and portfolios of policies. Gary Yohe, an economics professor at Wesleyan University and a lead author of the 2007 report, has written that his research strongly supports a portfolio approach. The portfolio's components should include adaptation measures (whose benefits would be immediate but would gradually decline); mitigation techniques (which would grow in importance as climate change has greater impact); and research and development (to create green technologies that will increase mitigation's efficiency).

This decision-making approach, unlike some others, takes market risk into consideration, weighing actions that will help businesses diversify their investments against risk (Axelrod, 2004). For example, it considers the interrelationships of the costs of different energy sources. This allows a diverse portfolio that contains large amounts of wind, solar, geothermal, and other non-fossil fuels. Though they cost more to generate than do fossil fuels, these alternative fuels do not fluctuate as much in cost. They decrease risk by increasing energy security and thus ultimately reduce costs.

The 2007 report recommends a broad portfolio for both mitigation and adaptation technologies-- as well as a broad portfolio of research into such technologies--because it is doubtful that any single technology will solve the climate change problem. It also notes that many research studies show that certain adaptation measures affect mitigation, while other mitigation measures affect adaptation.

References

1. Axelrod, Regina S., David Leonard Downie, and Norman J. Vig, eds. The Global Environment: Institutions, Law, and Policy. 2d ed. Washington, D.C.: CQ Press, 2004.

2. Botterill, Linda C., and Melanie Fisher, eds. Beyond Drought: People, Policy, and Perspectives. Collingwood, Vic.: CSIRO, 2003.

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