Tuesday, July 08, 2008

Asian Development Bank to Invest in Carbon Credits

Financial Times
ADB Website

The Asian Development Bank (“ADB”) recently announced that it would start a fund to invest in carbon credits that will be generated after 2012. 2012 marks the end of the Kyoto Protocol. The ADB hopes to invest close to $200mil. Many investors have not financed projects set to take affect after the dissolution of the Kyoto Protocol given the uncertainty surrounding the potential new agreement. However, the ADB hopes that its investments will spur other developmental and commercial banks to follow suit.

The Kyoto Protocol created a carbon emissions program trading where developed nations trade carbon credits between themselves or with developing countries in order to meet their emission goals. For instance, if a nation is producing more carbon byproducts than their emission goals allow for, they can buy carbon credits from other countries to compensate for their overproduction. In other words, if an over-producing country purchases carbon credits from under-producing countries then the net emissions will be within the overall emissions goal. The ADB plans to utilize this carbon trading system to invest in carbon credit producing enterprises in developing nations that can sell their carbon credits to more developed countries.

The ADB plans to offer funding for such carbon credit producing enterprises by offering upfront investments for developing nations. The majority of ADB projects are “pay-on-delivery,” which means the countries must be able to put up initial capital in order to secure ADB financing. This typical method does not work well in the carbon credit industries because the industries often require large initial capital investments and a reliable, structured financing system in order to be successful. In addition to the up-front financing, the ADB plans to offer technical assistance to the carbon credit start-ups. This, the ADB hopes, will make private investment in the start-ups less risky given the ADB’s technical expertise.


Some critics feel that when developing countries pursue lower emissions in order to create credits it leads to the developing countries taking actions that are not in the best interest of its citizens and the environment. For instance, in some countries “old-growth” forests (which absorb lower levels of carbon) are cut down in order to encourage new plant growth that will absorb larger quantities of carbon. Should the ADB carefully monitor such trade-offs before investing in a project? Is it worth it to reduce greenhouse gas emissions at the expense of developing countries?

The United States did not officially sign the Kyoto Protocol and was not bound to its emission goals. The US has stated that it will not sign a new version of the protocol unless China and India agree to it as well. Do you think major players such as the US, China, and India will have a negative effect on the carbon credit market if they do not agree to a plan in 2012? Is the ADB banking on the US to join the new emissions agreement?

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