UK Green Investment Bank Commission report released today

Posted on 29. Jun, 2010 by in blog

Commissioned by the UK Conservative Party, the report outlines the need and proposed risk mitigation role of a new Green Investment Bank, and how it would raise and invest funds. It includes an explanation of how Green Bonds could be used to fund the Bank and its activities.

The new UK Government, in its 2010 Budget, committed to setting up a Green Investment Bank in 2011.

The report provides a useful template for a key enabling institution for countries committed to tackling climate change. Such institutions are critical to mobilizing investment at the scale and speed needed for a transition to a low-carbon economy rapid enough to avert catastrophic climate change.

The Climate Bonds Initiative is part of the TransformUK coalition, including E3G, Climate Change Capital and various NGOs, that has been pressing for a Green Investment Bank in the United Kingdom.

Papandreou says G20 to discuss green bonds

Posted on 23. Jun, 2010 by in blog

Speaking in Brussels after a European leaders summit, Greek Prime Minister George Papandreou said that the leaders had discussed Europe putting forward new ideas to this week’s G20 meeting in Toronto for, among other things, Green Bonds to fund new (presumably energy) infrastructure. No further details are yet available, but I for one am very keen to hear more …

World Bank to issue retail Carbon Bonds

Posted on 20. Jun, 2010 by in blog

A report in PointCarbon this week suggests that the World Bank is considering a new issue of “carbon bonds”, after a two-year pause in issuance.

The story quotes World Bank head of derivatives and structured finance, Ivan Zelenko, as saying “We are in talks with a number of countries and banks about issuing new carbon bonds” .

An earlier version of the carbon bond was called a ‘CO2L’ or ‘Cool Bond‘, marketed to Japanese retail investors in 2008 with a total offering was $31.5 million. The bonds pay a fixed rate coupon for an initial period and then a coupon linked to future Certified Emission Reduction (CER) market prices and the actual volume of CERs issued by a hydropower plant located in the Guizhou Province in China and a bio-energy project in Malaysia. Investors make money if the price of the CER goes up.

Zelenko explained that, beyond 2012, UN-backed carbon credits will be accepted in the EU emissions trading scheme and the market price should remain correlated with the EUA price.

EIB has to green itself if it wants to be channel for EU climate funds

Posted on 17. Jun, 2010 by in blog

The Climate Bonds Initiative called today for the “greening” of the European Investment Bank (EIB). The call was in response to the EIB’s push this week to become the main route for EU climate cash to the developing world.

Speaking in London’s Canary Wharf, Climate Bonds Initiative Chair Sean Kidney said: “We support the bank becoming a conduit for European Union climate financing; climate investment banks will be a key part the financing of a rapid transition to a low-carbon economy”.

Mr Kidney added: “The Bank has done much good work already in climate finance; but this needs to go further. The scale of the challenge before us means that the EIB needs to shed its carbon-sector investing and re-direct all its resources to helping nations make a rapid transition to a low-carbon economy.”

“That means phasing out the EIB’s exposure to programs that are funding high-emission activities, like coal-fired power plants, and re-focus on climate change finance. It will then be a suitable channel for climate finance around the world.”

“By leveraging all available funds, not just a portion, and entering into partnerships with private investors, the EIB could mobilise the capital needed to build clean rather than dirty energy around the world.”

Mr Kidney added that the EIB could also wholesale climate bonds, manage developing world project guarantee pools for the EU, and set up leveraged funds, such as securitized renewable energy asset funds.

IATD says IETA proposal is just “Carbon Trading Wrapped in a Green Bond Proposal”

Posted on 13. Jun, 2010 by in blog

Interesting comment on the International Emissions Trading Association (IETA) green bond / carbon credits proposal from  the Institute for Agriculture and Trade Policy (IATD).

IATD is concerned that the IETA proposal would transform global climate finance from what they call “a public fiduciary duty” of developed countries, to a new source of developing country debt to private creditors. Mind you this may happen anyway, given that Copenhagen Accord signatories are already saying the bulk of funding will have to come from the private sector – which will mean debt.

The paper paraphrases the IETA proposal as saying to developing countries: “This is the only way that you’ll get climate finance because OECD countries will never acknowledge a climate debt, much less pay it …”

We would agree that the carbon credit aspects of the IETA proposal aren’t the “only” way forward; on the other hand the IATD paper doesn’t discuss just how a “climate justice” approach, given a dearth of public funds and entrenched interests in countries like the US, will succeed.

A climate bonds approach with guarantees provides an opportunity for developing countries to get energy infrastructure and other finance at developed country rates. That’s better than where we are now.

“Why, sometimes I’ve believed as many as 6 impossible things before breakfast…”

Posted on 10. Jun, 2010 by in blog

Two weeks ago we sent you a note about the release of an International Emissions Trading Association (IETA) discussion paper proposing a new international scheme of asset-linked green bonds tied to carbon credits. We welcomed that contribution to the debate.

Below for your interest is a comment on that paper from Climate Bonds Advisory Panel member Prof. John Mathews. John is Eni Chair in Competitive Dynamics and Global Strategy at LUISS Guido Carli University, Rome.

Please let us know what you think! Simply use the Reply box below.
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“Thanks for this invitation to comment. In the interests of clarifying issues, let me take this IETA paper and show where I think it would take the climate bonds initiative in the wrong direction. I mean no disrespect at all to the IETA itself.”

Prof. John Mathews,

Why, sometimes I’ve believed as many as six impossible things before breakfast…

The IETA paper on ‘Green sectoral bonds’ is welcome as a means of furthering discussion on green bonds and how they might be used to accelerate investment in renewable energies (REs) and energy efficiency (EE) to reduce greenhouse gas emissions from continued use of fossil fuels.

But it betrays much of the top-down thinking that poisoned the Kyoto process and that has made the Clean Development Mechanism almost useless as a means of reducing real carbon emissions on any scale (a point on which the IETA itself surely agrees) – even if some individuals and organizations have managed to make money out of it. But along the way, the IETA proposes financing mechanisms – to be used by emerging industrial giants like China, India and Brazil – that would involve these countries agreeing to subordinate their efforts to:

• Approval of the bond by an international body;

• Compliance by the bond with standards issued by the international body covering monitoring, reporting and verification (MRV) processes;

• Issuing of green bonds to be circumscribed by an over-arching Guaranteed Carbon Collateral Units (GCCUs) (issued by someone) that set a ceiling on the range and volume of climate bonds to be issued; and

• Investors such as pension funds being expected to accept carbon credits as means of payment in addition to equity or interest payments.

Frankly, these are four impossible conditions that would strangle the climate bonds initiative at birth.

Let me take these conditions in reverse order. On the final point, the whole purpose of climate bonds, as conceived by members of the Climate Bonds Initiative, is to break with the clumsy and bureaucratic mechanisms of the CDM, and instead allow funding agencies to build new financing vehicles based directly on the long-run revenue potential of REs and EE investments. The financing vehicles would be attractive to institutional investors if they can be structured to deliver a return for a given amount of risk, reducing over time as the returns from the REs and EE investments bear fruit. To complicate this clear picture by offering ‘carbon credits’ as part of the return would be to irretrievably confuse the issue.

Carbon credits can indeed be made part of investment projects in REs and EE; they could be included in underlying agreements such as energy off-take agreements that a wind energy provider might negotiate with an electricity distributor, say, over a 20-year period. To make such an agreement interesting, a national body might designate ‘renewable energy certificates’ or carbon credits to be generated by the wind power as well as the electricity itself, and these could be counted as assets by the electricity distributor (and be traded on international carbon markets).

With such an agreement in place, a national government or development bank could approach the bond markets with a bond proposal, backed by this agreement between the wind company and the electricity company. But the carbon credits generated would be used to cement the underlying agreement; they would not be used as part of any bond structure itself nor offered as part-payment to potential investors. What would CALPERS as a large institutional investor do with carbon credits, and how would it fulfil its fiduciary obligations by accepting payment in carbon credits?

On the third point, the proposed GCCUs are designed to limit the range and frequency of national governments resorting to financing mechanisms called ‘green bonds’.

They resemble caps as discussed in cap and trade systems, and derive apparently from Kyoto-style emissions caps to be committed to by governments over time. Countries are envisaged as having a GCCU ‘inventory’ which they can replenish from time to time as emissions are accomplished and verified. Surely this is Kyoto all over again.

Again, there is no reason why such emissions caps should be part of the bond – and indeed their inclusion would kill off any possibility of getting such bonds to the point of lift-off. Rather, in the Climate Bonds Initiative discussions we have seen the market in climate bonds already issued as providing the needed discipline on governments that might be tempted to ‘game the system’ and issue green bonds beyond the scale warranted by their real GHG reductions.

To see their issued green bonds losing value on the international markets (i.e. watching their yields rise, indicating rising risk levels associated with them) would be a salutary lesson for any such government. You don’t need GCCUs (whatever they are) for that.

On the second and first points, the Climate Bonds Initiative discussions so far have certainly envisaged an international body emerging, and one that has critical certification powers to establish whether a green bond really is ‘green’ or not, and whether claimed GHG reductions really are taking place or likely to take place.

But in the Climate Bonds Initiative discussion paper, such an international body is seen as emerging as banks looking to issue climate bonds view it as a necessary market discipline.

It might be four or five years before a group of issuing banks designate their offerings as ‘meeting the standards of X International’ where they themselves would probably have created ‘X International’, in response to the perceived need.

Such a body might then be endorsed by an international grouping of countries, such as Annex 1 countries, to impose some discipline on the mitigation efforts of Annex II countries, or rather to clarify which initiatives could be included in bond prospectuses and which could not. But to impose such a body as having powers to veto a bond issued by China, India or Brazil at this stage is to invite a hostile response.

These comments are offered constructively as a means to clarify the issues. I do appreciate the efforts made by IETA to define what they mean by Green climate bonds, and to invite responses from members of the Climate Bonds group.

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A Climate Bonds meeting to further IETA and related ideas will be held In London at lunchtime, Friday 18 June 2010. Leave a Reply below if you’d like to come along.