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2012 Dec/01
Development Strategy for Carbon Finance
Research Papers 12-04
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- Research Topic Corporate Finance
Noh, Hee-Jin
- Other Publications
Kim, Gyu-Lim
- Summary
- Global warming is caused by greenhouse gases(GHG) emissions, which is regarded as a crisis threatening human survival, leading to a big economic loss. Carbon finance provides money to economic activities reducing the emission of carbon, the major element of GHG. Financial support is necessary to develop technology of reducing GHG emission or projects. Establishment of new financial instruments, markets, institutions, systems, and infrastructure is required to develop carbon finance for the purpose of reducing carbon emission. The United Nations Framework Convention on Climate Change (UNFCCC) provides a framework for negotiating specific international treaties that may set binding limits on carbon emission. The important UNFCCC treaty is the Kyoto Protocol, which fulfills the commitment made by one hundred and eighty six countries under the UNFCC that industrialized countries should take the first steps towards sustainable energy consumption, use of clean technologies and sustainable land management practices, which are needed to mitigate the impacts of climate change. The EU Emissions Trading Scheme(EU ETS) remains at the center of the global carbon market. The value of transactions in carbon markets worldwide rose rapidly. Trading in the global market remains dominated by the allowance market, which accounted for 85% of the value of transactions in 2011. The market for project-based transactions consists of investment in projects that offset carbon emissions: first in developing countries through the Clean Development Mechanism (CDM) of Kyoto Protocol and second in industrialized countries through the Joint Implementation(JI) Framework. In addition to established schemes such as those operating in New Zealand, New South Wales in Australia, as well as the Regional Greenhouse Gas Initiative(RGGI) in North America, several domestic and regional low-carbon initiatives emerged or improved in both developed and developing economies. As a new carbon finance product, carbon fund is a structure where investment to both projects and emission rights are available. In addition, global investment in renewable energy jumped 32% in 2010, to a record $211 billion. UK launched Green Investment Bank(GIB) and Australia revealed the plan of establishing Clean Energy Finance Corporation. As above, first, global consensus on necessity for carbon reduction is formed. It is necessary to actively participate in the global trends to upgrade the global positioning in the field of environment in the future. Second, cooperative system by each regional block is established. Third, the role of the specialized green financial institutions to support the risk-return profile in the field of green finance is required. There is a limit in the existing financial institutions to make investments to the fields of carbon and green industry where uncertainty is large. Fourth, carbon reduction should be a help for business activities and economic growth in the end. It is necessary to consider the utilization method of the revenue from sale of emission rights. Fifth, it is necessary to reinforce the role of public finance as a catalyst. In case of the GIB, it is inducing participation of the private finance based on public finance. In the early 2010, the Republic of Korea enacted the Framework Act on Low Carbon and Green Growth. The act establishes the legal framework for implementing policies and measures set out in the country’s Green Growth Strategy and its pledge to reduce the GHG emission by 30% below business-as-usual levels by 2020. It is intended that the main instrument of the national climate change policy will be the implementation of a nationwide emission trading scheme(ETS). On May 2, 2012, after almost a year of review, the ETS Act was passed by the National Assembly. In 2011 the Republic of Korea also implemented a GHG/Energy Target Management System(TMS) to support the development of the infrastructure and measuring, reporting, and verification(MRV) frameworks necessary to implement the ETS. The Green Certificate System was implemented in 2010 to vitalize private investment through clear regulation on subjects and scope of support for green industry. The Tax Support System was also provided. In spite of these legislation and the efforts for developing carbon finance and/or green finance, there are some problems. The awareness about carbon finance by domestic financial institutions is insufficient. Participation of private financial institutions is low due to their insufficient awareness, and the fund raising through the bank is the type requiring mortgage or guarantee. The subjects for tax support through the Green Certificate System is not sufficient. There emerges no financial instrument at all that can receive the benefit linked with the Green Certificate System and Tax Support System as of May 2012. Moreover, the analysis system on the subjects for the investment is weak. Since this is the field where knowledge about carbon emission from industries is required, the ordinary financial institution has difficulty in assessing their risks. The infrastructure such as accounting process on emission rights, the analysis or assessment system on the carbon reduction technology or enterprise and the professional manpower who can link the carbon field with the financing field is not enough. To develop carbon finance to reduce the GHG and to boost economic growth simultaneously, the following strategies are suggested. First, the concept of carbon finance needs to be clarified. At present, it is perceived that the environmental factors are too much emphasized. We recognize that the objective of carbon finance is to pursue economic growth and reduction of carbon. Second, it needs to establish the criteria of business conduct related to the concept of carbon finance. The profitable environment for the financial companies to do carbon finance needs to be provided. To do so, the government’s support in the beginning is compulsory. Third, it is necessary to improve the legal system related to carbon finance. The ETS system will be improved in the future considering the fairness, efficiency, and transparency. For example, it is necessary to allow participation of the private and overseas financial institutions according to market conditions, and re-examination is required to the standards concerning re-adjustment of auctioning ratio and suitably grandfathering for the effectiveness of the GHG reduction. Additionally, it is necessary to improve the tax system linked with the green certificate system to provide more benefit to the investors. Finally, it is required to activate carbon finance. The establishment of the Korea`s Green Financial Institution(KGFI) like the UK`s GIB is recommended. New climate financial products like weather derivative products need to be developed. Moreover, for the preparation of the cooperation with the GCF, green fund of fund schemes need to be developed, where GCF may eventually participate. The education and training of financial personnel for carbon finance is also necessary.