ADB to continue with carbon funds despite global uncertainty

Emerging Markets, May 2010

The Asian Development Bank is to continue with its carbon fund initiatives despite growing uncertainty about the future of carbon markets.

The development of carbon markets based on the clean development mechanism – in which polluters in wealthy countries offset their own pollution by buying credits generated by clean energy projects in the developing world – have suffered a series of setbacks in the last six months. The Copenhagen agreement failed to deliver clarity on the structure for carbon credits after the Kyoto accord expires in 2012, and several countries who had pledged to develop carbon trading initiatives have delayed or abandoned them.

Most recently Australia announced its cap and trade system will not now be launched until there is a clear post-2012 structure, and even then it will clearly face a challenge to be passed into law.

“Basically in the last 12 months some of the events were less than ideal,” said WooChong Um, the ADB director who has spearheaded carbon trading initiatives at the bank. “But I’m still optimistic that there will be some kind of global agreement.”

The ADB has launched two carbon funds. The Asia Pacific Carbon Fund was launched in 2007 and raised $151.8 million from European nations. This fund invests in clean energy projects and buys the carbon credits that come from them, and has allocated most of its money in projects such as hydropower, landfill and biomass to energy in countries including Vietnam, India and China.

A second, innovative Future Carbon Fund was launched in 2008 to invest in projects that will generate carbon credits after 2012. This was designed to make sure clean energy projects were not delayed because of uncertainty about the future structure of carbon markets – uncertainty that has worsened since Copenhagen.  This raised $100 million, including a $20 million contribution from Korea.

Both funds are distinctive because they commit money up front, whereas others do not contribute until the project is built and generating credits, which can undermine the projects’ viability.

“Our direction is the same,” said Um. “Our energy and climate change priorities remain the same. All of them have to be undertaken, it’s just that it’s probably not as easy now.”

The effectiveness of carbon markets divides opinion. “The carbon market is an effective tool primarily for meeting the commitments of developed countries to mitigate [their pollution] at lower cost,” said Prodipto Ghosh, a member of the Indian Prime Minister’s Council on Climate Change, and former Indian environment minister. “But it is not a tool for financing developing countries’ own actions for mitigation.”

Philippe Delhaise, CEO of Carbon Management Consulting, disagreed. “It [carbon markets] helps, because it makes the difference between a project that would not be undertaken and a project that is. There’s a huge transfer of technology and funds going to 2000 projects all over the world. The volumes are small, but we have a war here, we have to do something and every bit helps.”

Mr Delhaise said that despite uncertainty, it was inconceivable that the carbon market would not have a future post 2012. “Nobody really knows but the one thing that is certain is you cannot, on December 31 2012, tell your Guatemala pig farmer reducing methane emissions: ‘sorry, you expected 21 years of carbon credits, but now nobody will buy them from you.’ That is nonsense. It’s not going to happen.

“Whatever the new system, there will be a way to price those carbon credits and get the reward to the investor.”