WASHINGTON, D.C., November 22, 2005 – The developing world is now attracting companies eager to benefit by reducing pollution. How is that possible? This is part of the Kyoto Protocol. Next week in Montreal governments involved in the protocol will meet to discuss the agreement which came into force this year.
Companies based in countries that adhere to the Kyoto Protocol must reduce their carbon dioxide (CO2) emissions. When companies are unable to reduce them on their own, the Kyoto Protocol allows them to trade with companies that are reducing more than their share by buying from those companies. This is called “carbon trading”.
Another way for companies to meet their reduction obligations is to invest in the developing world in projects which reduce CO2 emissions.
According to Jonathan Pershing, Director of the Climate, Energy and Pollution Program at the World Resources Institute, carbon trading is a relatively new feature in the international environmental effort: “We’ve got a couple of examples,” he said, “the most advanced is Europe, which has developed a carbon market beginning in January, in which you begin already to see a change of performance on the part of companies. We also have a slightly older carbon market that’s developed in developing countries around specific projects, in projects in agriculture, projects in land use and forestry, projects in transportation.”
Carbon trading is now a global phenomenon which also involves companies from non-signatory countries, such as the United States where companies also engage in carbon trading.
Ben Feldman, Managing Director at Natsource, a provider of services in emissions and renewable energy markets, described the three kinds of carbon trading occurring in the United States as voluntary, regulatory and reputational. “The voluntary carbon trading involves companies who have voluntarily taken on carbon emissions commitments and have used carbon purchases to meet those voluntary goals,” he said.
“On the regulatory side, there are regions and states in the country where there are legal obligations to reduce CO2 emissions and companies have used trading as one means of achieving those emissions limitations. Finally, there’s reputational trading which involves companies who want to make statements about their products and how they’ve become carbon neutral and they’ve used purchases of credits to buttress that statement.”
The Kyoto Protocol has unleashed the power of private sector and multilateral organizations, like the International Finance Corporation, are eager to encourage it. It is still early in the game but carbon trading and investments in CO2 reduction projects in developing countries have great potential.
The carbon market has the potential to be an enormously significant influencing factor on the global environment, according to Jonathan Pershing. “Many billions of dollars have already been invested by many institutions,” he said, “including development banks, the IFC, and including in activities for developing countries.
What is special about carbon reduction projects in developing countries is that no one loses out, it is a win-win operation.
First, they benefit poor economies by encouraging injections of investment from richer countries, investment which may otherwise not have happened. Second, these investments benefit investor companies because they can meet their emissions reduction obligations at a lower cost. And finally, these investments have a real beneficial impact on the environment.
However, companies are still confronted with many complexities and uncertainties. That is why IFC, aiming to facilitate and encourage investments in developing countries, is developing a series of financial products which will lower investors’ risks.
“IFC is in a unique position to do so as the only institution that focuses on emerging market projects and has significant experience in the carbon market,” according to Vikram Widge, Program Manager at the Carbon Finance Unit of the IFC. “IFC is developing new products for the carbon market, one of them being a guarantee on behalf of projects in developing countries that carbon credits from these projects will be delivered,” he says.
IFC will be present in Montreal to present the development and deployment by the private sector of new technologies, business models, and financial products that can help reduce CO2.
The mission of IFC (
www.ifc.org
) is to promote sustainable private sector investment in developing countries, helping to reduce poverty and improve people’s lives. IFC finances private sector investments in the developing world, mobilizes capital in the international financial markets, helps clients improve social and environmental sustainability, and provides technical assistance and advice to governments and businesses. From its founding in 1956 through FY04, IFC has committed more than $44 billion of its own funds and arranged $23 billion in syndications for 3,143 companies in 140 companies in 140 developing countries. IFC’s worldwide committed portfolio as of FY04 was $17.9 billion for its own account and $5.5 billion held for participants in loan syndications.
