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Capital Market Can Overcome Cancun: Michael Liebreich

((Corrects seventh paragraph in Nov. 25 article to state investment will be made in developing nations.))

Nov. 25 (Bloomberg) -- At the end of November the global climate change fraternity descends on Cancun, Mexico, for the latest attempt at replacing the Kyoto Protocol, which is set to expire in 2012. Last year’s United Nations meeting in Copenhagen ended after two weeks of protests and negotiations with a face-saving document long on promises but short on details.

At Cancun the challenge will be to turn the Copenhagen Accord into a binding agreement.

If a deal could not be sealed last December, it will be even harder this year. Yvo de Boer, the head of the UN Framework Convention on Climate Change, who did more than anyone to create the sense of urgency around Copenhagen, has moved on. Gone are many of those who pushed hardest for an agreement last year, including Brazil President Luiz Inacio Lula da Silva and British Prime Minister Gordon Brown. Gone, too, is any remaining hope that the U.S. Congress might take decisive action.

The months since Copenhagen have seen a series of increasingly bad-tempered preparatory negotiating sessions. India has demanded that any outcome enshrine Kyoto, which gave developing countries a free pass on any binding commitments, a position supported by many of its emerging-market peers. The U.S. has refused to consider any framework based on Kyoto, which it feels will cost it jobs. China is investing heavily in clean energy but has refused to countenance any sort of verification of actions it is taking. Europe, which is grappling with fiscal crises, has been reduced to the role of bystander.

Talking Down

Not surprisingly, de Boer’s successor, Christiana Figueres, has spent her first six months on the job talking down expectations. She has been positioning Cancun as something of a reboot of the international process, an early step in a long engagement that might ultimately result in carbon emissions coming down.

Figueres hopes that after Cancun she will be able to point to progress on a number of concrete if modest initiatives, including a program that provides poorer countries with incentives to curb deforestation and another to speed the transfer of low-carbon technology to the developing world. There may also be momentum on the deployment of $30 billion in funding, earmarked under the Copenhagen Accord, for investment in the developing world to help it reduce emissions and deal with the effects of climate change.

Fast Funding

This Fast Start Funding was meant to be the first installment of a flow of investment to developing nations that would hit $100 billion a year by 2020. Immediately after Copenhagen, the UN Secretary General convened an advisory group to figure out how the $100 billion target could be achieved. Unfortunately the panel couldn’t agree on its remit. Can the $100 billion include private funds, or must it be all public money? Can it include money invested in China?

This uncertainty didn’t stop the committee’s report from concluding that achieving the $100 billion-a-year goal would be “challenging but achievable,” as long as the world adopted a carbon price of at least $20 per metric ton along with taxes on global aviation and shipping, a position that seemed quixotic before the U.S. midterm elections and almost delusional after. To its credit, the panel did not back a Tobin tax on financial transactions.

Clear Commitment

The irony is that just as the UN negotiations are bogging down, the commitment of the world powers to act on climate change is becoming clear. Global investment in clean energy -- renewables, energy efficiency and other technologies to reduce emissions -- has soared from $46 billion in 2004 to nearly $200 billion this year, shrugging off the recession to reach a record. This is mainly private money, responding to a flood of regulation and government incentives in support of low-carbon energy or energy efficiency.

More than 90 percent of this investment has taken place in the developed world or in rapidly emerging economies such as China and Brazil. The countries that are finding it hard to secure climate financing are those that have underdeveloped capital markets and poor records on attracting foreign direct investment. And therein lies the germ of a solution to the $100 billion challenge.

Instead of dreaming of a global carbon market or a global tax on financial transactions or trade, ask yourself this: Under what terms would you want your pension or tax dollars being invested in infrastructure development in the world’s poorest countries? The answer: when it’s not going to disappear.

The Mix

Here is how it might work: Take the $21 billion already being invested annually in clean energy by multilateral and national development banks. Increase it by as much as fiscal constraints will allow. Throw in a sovereign guarantee, underwritten by the same governments that signed the Copenhagen Accord and reaffirmed their commitment to fighting climate change at this month’s G-20 meeting in Seoul.

Mix in some currency hedging to protect investors from macroeconomic forces beyond their control. Add a sprinkling of grants to cover the extra cost of clean energy over fossil-based alternatives (a differential that is shrinking all the time).

Throw in a few export credits and some funding via the existing carbon markets, stir the mixture, and secure an investment-grade rating. This is the only way to get the big pension funds interested and generate cash on the scale required.

For Western taxpayers to underwrite a sovereign guarantee on anything like this scale, the acceptance of these cheap climate funds would need to be conditional on an investment treaty. Recipient countries must not be allowed to expropriate the resulting projects. They also would have to commit to phasing out subsidies to fossil fuels.

Will all developing countries agree to this formula? Almost certainly not. But who says they need to? To those that do agree go the funds. To those that don’t, wait and see if there’s a better deal on offer in the UN process. If not, then this sort of Coalition of the Committed may be the best way for the world to move from rhetoric to action.

(This column by Michael Liebreich, the chief executive officer of Bloomberg New Energy Finance, appeared in Bloomberg Businessweek’s Nov. 29 edition. The opinions expressed are his own.)

To contact the writer of this column: Michael Liebreich at

To contact the editor responsible for this column: Tim Coulter at

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