"Dedicated to investing
in our common future" |
 |
Climate Change : Carbon Finance and CDM
The Science
International Policy
Implications for energy
Opportunities in Renewable Energy
Carbon Finance and CDM.
Investment Opportunities in CDM Projects
The investment service
industry has a two-fold responsibility with respect to climate
change. On one hand, it needs to gear up for the negative impacts
that climate change has on its business and its customers. On the
other hand, it can have significant contribution in the development
of the low carbon economy by providing related products and services.
Geographical Opportunities:
To date, CDM projects in 37 nations
have been registered (UNEP Finance Initiative). Latin American
and Asian nations dominate the market with 48% of all registered
projects each. However, with heavy industrialization as an on-going
concern in developing Asian nations, especially India and China,
we believe the focus will be skewed towards CDM project development
in Asia.
Financing Opportunities:
Within a short span of time, the CDM
has become a well developed market segment. Technical consultants
are offering their industrial services for project development,
large corporates are setting up their own carbon project departments
and brokers bridging the project developers and buyers of certificates.
Although more climate change theme funds (Schroder Isf Global Climate
Change Equity Fund and DWS Global Climate Change Fund) are emerging
in the public equity markets, project developers are still finding
it difficult to source funding for the implementation of their
projects due to lack of private equity risk capital. In contrast
to the estimated current amount of 700 million CERs in supply to
the market, the World Bank has calculated a demand of about 2.5
billion CERs between 2008 and 2012 (UNEP
Finance Initiative). Going
forward, we believe the buoyant demand for CERs will underpin the
CER price. This translates to higher returns for CDM projects.
Specific Risks of CDM projects
Just like any other projects, CDM
projects are subjected to conventional project and political instability
risks. In addition, the CDM projects are exposed to risks that
derive from its complex and evolving political design:
- Registration risks – Since the profitability of a
CDM project usually depends on the CERs and since a considerable
amount of time and effort goes into the project development before
submission for registration, possibility of non-approval to project
registration pose risks. However, this risk can be mitigated
through a thorough development of the project documentation.
- Host
country risks – Only a few countries have specific legal
constraints to CDM. More commonly, CDM process is obstructed
by an inefficient Designated National Authority or by very high
standards for host country approvals.
- Delivery risks – Since
the projection of emission reductions are based on hypothetical
assumptions and future prognosis, the actual emission reduction
might underperform. In translation, fewer CERs will be awarded
which will impact the project’s bottom-line. Delivery risks
can be minimized through a conservative approach to calculating
emission reductions. In addition, buyers of the CER forward contracts
should reassess the seller’s baseline calculation before
concluding the emission reductions purchase agreement (ERPA).
- Kyoto
Protocol risks – Expiring in 2012, the Kyoto Protocol faces
possibility of non-extension. Similarly, CDM officially ends in
2012 and the time frame for projects is already coming to a close
before the first Kyoto commitment period commencing in 2008. Since
many CDM projects have long life span, the certificate vintages
that remain between the date of registration and 2012 may not be
sufficient to secure profitability. On a brighter note, the “U.N
2009 climate summit” will be scheduled during 2007/8 and
a new plan on replacing the Kyoto treaty will be expected by
2009. On the backdrop of drastic climate changes (i.e. higher
frequencies of heat waves, cold spells and rising global temperature,
etc), it is likely that a revised form of the Kyoto Protocol
will be established to extend beyond 2012.
References
Website
|
