ADB to launch private sector carbon fund

Emerging Markets, ADB annual meeting, Madrid, May 2008

The Asian Development Bank is to launch a new $200 million carbon fund with an unusual model: it will entice private sector investors who believe they can take advantage of uncertainty in environmental regulation.

The future carbon fund, which should be launched in a few months time with the participation of both public and private sector investors, will invest in renewable energy projects which will start producing carbon credits after 2012, when the Kyoto agreement expires.

There is already a forward market for such credits to trade, but because of uncertainty about the policy framework that will replace Kyoto and govern emissions trading from 2013 onwards, they trade at a fraction of the level of credits for the period governed by Kyoto. According to WooChung Um, director of the energy, transport and water division in the ADB’s regional and sustainable development department, these permits trade at around $4 to 5, compared to Eu25 to 30 for Kyoto credits. Once a post-Kyoto framework is established, the value of those credits should rise; far-sighted investors can, in theory, cover their future emissions offset obligations more cheaply by investing in the fund now. “It suits the private sector because post-Kyoto is more risky, but so is the payback potential,” says Um.

The new fund will follow the same basic model as the first, $150 million carbon fund launched last June: commit funds to invest in clean energy projects (generally ones already within the ADB pipeline), to buy the carbon credits that will come from those projects. Unlike many other carbon funds, which only pay once the credits are produced, the ADB fund puts the money in up front. “We fill the financing gap during the construction of the projects,” Um says.

That said, progress with the first fund has been slower than expected. Of 40 ADB funds under consideration for participation by the fund, only one has actually signed:  a small hydro project in China. Three others, including one in Indonesia, are expected to sign shortly and heads of agreement, a key stage in negotiations, have been signed with a further 17. “It’s not happening as fast as it should, but it’s happening,” says Um.

The new fund comes at a time when concern is growing about the piecemeal development of carbon trading exchanges in the Asia Pacific region.

At least five carbon trading exchanges are under development or being actively considered across the region. Australia is planning a carbon trading arm of the Australian Securities Exchange in Sydney. Hong Kong Exchanges and Clearing has completed a feasibility study and “has commenced discussions with external parties regarding the potential for emission trading in Hong Kong,” according to spokesman Scott Sapp; it expects to commence trading in some form at the end of the year. In China, the Tianjin Binhai New Area is to be home to a pilot emissions trading exchange. And exchanges are being mooted in Singapore and India too.

But concern is already growing about the lack of a standard policy or coordinated framework between these exchanges. “It makes sense to have many different points of trading, but you need to have one set of rules,” says Gordon Noble at Responsible Investment Consulting in Sydney. “That would mean you start to get an Asian hub for carbon. Otherwise you’re going to have a series of disconnected carbon exchanges.”

Redat Heuberger at South Pole Carbon Asset Management adds: “Volumes will be the trick. There’s no point in doing an exchange for a couple of thousand [trades], to make it interesting there need to be much higher volumes.” He says “it’s very clear that at least one or two emissions exchanges will come up, but I doubt whether they are going to be a success in the next one or two years.”