Carbon Funds in 2010: Investment in Kyoto Credits and Emissions Reductions

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Launched in 1999 with the creation of the World Bank’s Prototype Carbon Fund, the development of carbon funds has increased rapidly since 2005. In 2009, the sector numbered 96 funds investing in emissions reduction projects, compared with 66 funds in 2007. These 96 carbon funds declared a total capitalisation of 10.8 billion euros in 2009, representing a 54% increase in capital since 2007. The majority of carbon funds are private (48% compared with 29% public funds), buy credits directly (52% compared with 23% of funds investing in CDM/JI projects), and invest according to a regulatory compliance objective (55% compared with 42% of funds which only declare a financial profitability objective).

In January 2010, carbon funds had financed a total reduction in greenhouse gas emissions estimated at 113 million tonnes, as the result of CDM projects (around 112 MtCO2) and JI projects (around 1 MtCO2). They expect a total emissions reduction until around 685 million tonnes by 2012 from CDM projects (645 MtCO2) and JI projects (40 MtCO2). Integrating delivery risk factors, expected emissions reductions would most likely be around 300 million tonnes by 2012. Carbon investment funds are the biggest credit buyers from CDM projects (nearly a third of credits issued), followed by industrial investors (a quarter), financial intermediaries (a fifth) and energy companies (a seventh). They are also the third biggest credits buyers from JI projects.

In 2009, the carbon funds sector completed the first stage in its development: the "first generation" of investments in the most profitable emissions reduction projects – relating to elimination of HFC and N2O gases – is now over. While most of the credits obtained by carbon funds between now and 2012 will come from these types of projects, funds are moving their investments into projects tackling hydroelectric, wind power, flaring and energy recovery from landfill gas, as well as reductions in methane from coal mines.

The challenge now is to find new investment opportunities in emissions reduction projects. These project mechanisms will develop in three directions in the future: some "first generation" HFC and N2O-type reduction projects will disappear to be replaced by regulatory standards; project mechanisms in the agro-forestry sector, which are difficult to regulate using cap-and-trade systems, will increase; and the framework of emissions reduction project mechanisms will change in favour of reformed, programmatic, sectoral CDMs and domestic offset projects.

The lack of clarity over post-2012 climate policies and the future of CDM and JI, increasing competition between purchasers of credits and the decline in large, highly profitable projects, make the development of carbon funds more uncertain.

Measures | Analysis
Summer 2010

Site Entry Created by J A Kelly on Dec 06, 2010

Reference This Source (2019). Carbon Funds in 2010: Investment in Kyoto Credits and Emissions Reductions. Available: Last accessed: 26th March 2019

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