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WORLD BANK EXEC TO CORPORATIONS: TAKE NOTICE

Price is right for 'carbon fund' investments now

It would be wise for Japanese firms to invest in so-called carbon funds soon so they can meet greenhouse gas emissions targets more cheaply and on schedule, according to Ken Newcombe, manager of one such fund run by the World Bank.

The international institution opened the $180 million Prototype Carbon Fund in April 2000 to finance energy-related projects to reduce emissions of global warming gases in developing countries and thus mitigate climate change. The fund was closed earlier this year.

Investors in the fund — private-sector companies and governments of industrialized nations — are expected to be able to obtain credits for emission cuts from those projects under the clean development mechanism of the 1997 Kyoto Protocol.

“It is very smart for Japanese firms to invest heavily in the Prototype Carbon Fund before prices start going up and get emission-reduction (credits) in time (for) the first commitment period (of between 2008 and 2012),” said Newcombe, who was visiting Tokyo for the announcement of another new carbon fund by the World Bank.

Prices for emission-reduction credits are widely expected to rise as international and domestic rules regarding carbon credits become clearer and more players engage in carbon-related activities on a global basis.

Credit for reducing 1 ton of carbon dioxide emissions is currently priced at $5 to $7 at the PCF, which includes the fund’s management costs. The price would be attractive to Japanese companies that face higher costs if they try to reduce emissions domestically, according to Newcombe.

In addition, energy-related projects take a couple of years — even in the best business environment — before they actually reach the point where they achieve the intended emission cuts, Newcombe said.

“Even if companies and governments invest heavily two years from now, they can get only a small proportion of emission reductions in those projects before 2012,” Newcombe said.

The 1997 Kyoto Protocol requires signatory industrialized countries to achieve quantitative greenhouse gas emission-reduction targets, including for carbon dioxide.

Under the protocol, Japan is required to cut emissions of six greenhouse gases by an average of 6 percent from 1990 levels between 2008 through 2012. Many experts consider the target a tough challenge.

Earlier this week, the World Bank launched the $100 million Bio Carbon Fund, which is designed to finance afforestation and reforestation projects that could be used to obtain credits for carbon dioxide emission cuts, with a view to operations starting early next summer.

The World Bank made the announcement in Tokyo because it believes the proposed fund will attract the interest of Japanese firms, Newcombe said. In fact, of the 14 companies and governments that have shown an interest in the fund, four are Japanese utilities — Tokyo Electric Power Co., Chugoku Electric Power Co., Shikoku Electric Power Co. and Okinawa Electric Power Co., and trading giant Mitsui & Co.

The Bio Carbon Fund is the third carbon fund set up by the World Bank, following the PCF and the Community Development Carbon Fund launched in September.

In contrast to the PCF, which invests in large-scale energy-related projects, the other two funds aim to channel money into smaller-scale projects that serve rural areas in smaller and poorer countries, Newcombe said.

Experience from the PCF shows investors are interested in bigger projects in major countries, including Mexico and Brazil, because the benefits from smaller projects are relatively small despite substantial transaction costs.

And smaller, poorer countries, which account for some 80 percent of developing nations, face difficulties receiving the benefits of carbon financing, Newcombe said.

“Small countries have only small projects to offer,” he said. “And transaction costs of small projects are significant unless special provisions are made to reduce costs to bundle together small projects and present them as a group to investors.”

The World Bank hopes private-sector financial institutions will take over its role of managing carbon funds in the future, limiting the bank’s role to long-term projects in poorer countries that private-sector institutions do not want to cover, he said.

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