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Political-Risk Insurer Underused as Climate Talks Fail

A World Bank Group agency providing insurance, including political-risk coverage, in developing nations is being underutilized by 30 percent because of a lack of demand as the United Nations fights to protect the climate.

The Multilateral Investment Guarantee Agency in Washington provided a record $2.1 billion of guarantees in the year through June last year, which may jump another 14 percent this fiscal year, said Edith Quintrell, MIGA’s director of operations. A lack of global climate-protection laws after 2012 may be curbing demand, Quintrell said in a phone interview on May 7.

“Right now we don’t see a flood of inquiries” from climate-finance investments, she said. “We have capacity to do more. We could do $3 billion a year” without raising new capital, she said.

The agency has expanded guarantees into new countries, including projects in the Republic of Congo, Iraq, Kosovo and Liberia. Insurance for climate-protection projects is one of several risks MIGA covers, and includes geothermal and hydroelectricity generation, as well as a plant that captures heat-trapping methane gas at a landfill in San Salvador, El Salvador. MIGA doesn’t specify what portion of its guarantees are for climate-related projects.

The guarantees for the San Salvador project cover risks of expropriation, war and civil disturbance, and breach of contract, including any failure of the Salvadoran government’s commitments under a letter of approval for the Certified Emission Reductions under the Clean Development Mechanism of the 1997 Kyoto Protocol, according to MIGA’s website.

‘Fantastic Facility’

“It’s a fantastic facility, but must be better utilized,” Sean Kidney, London-based executive chairman of the Climate Bonds Initiative in London, said April 30 by phone. “If we are not using every cannon we have at this point, then there is something wrong.” His group in November set a quality standard for debt securities that may help expand the class of assets to be known as climate bonds.

Global emissions may be about 53.5 billion metric tons in 2020, 22 percent more than they need to be to stabilize the climate and 13 percent more than levels in 2008, Deutsche Bank AG estimated on April 26.

The world may need to spend an additional $15.2 trillion in the 25 years through 2035 to keep temperature increases to about 2 degrees Celsius (3.6 Fahrenheit), the International Energy Agency in Paris forecast in November. That’s on top of spending required under current and proposed energy-and-climate policies, said the adviser to 28 developed nations.

Record Guarantee Levels

Some bankers and lawmakers are seeking to boost climate-protection finance as carbon prices dropped to record levels last month, reducing the incentive to invest in clean technology in the European Union, which has the biggest greenhouse-gas market by traded volume.

The world probably won’t be able to achieve a peak in greenhouse-gas emissions by 2020, which will place the climate at risk, Henry Derwent, retiring chief executive officer of the International Emissions Trading Association, said May 4 by phone from Geneva.

A global financial institution similar to the U.S.’s Overseas Private Investment Corp. is needed to help create climate bonds, boosting funds for climate protection as it cuts costs and risks for investors, Michael Eckhart, global head of environment finance and sustainability at Citigroup Inc., said in February.

MIGA’s Mandate

OPIC in Washington helps mobilize private capital and insure against political risk in developing nations, according to its website. The “global OPIC” would serve developed and developing nations, excluding no one, Eckhart said.

MIGA is forecasting record guarantee levels of $2.2 billion to $2.4 billion in the year through June this year, Quintrell said. New issuance in the year through June 2010 was $1.5 billion, up from $1.4 billion the previous year.

Moving beyond guarantees in poor nations on climate change would probably require a change in MIGA’s mandate, she said. “We’ve been exploring how MIGA can take more of a role,” she said. “Our coverage is fairly well-defined. It’s not so much the resources, but the mandate that we have.”

Paris Hub

MIGA, owned by nations including the U.S. China and the U.K., last year opened a so-called Europe, Middle East and Africa hub in Paris to focus partly on investments in sub-Saharan Africa and help ease capital constraints caused by the European sovereign-debt crisis, according to an e-mailed statement. In November 2010 it expanded its authority to allow cover for stand-alone debt and some existing investments for the first time.

Factories and power stations in the European Union carbon market are the biggest consumers of UN emission credits. The EU will accept starting May next year credits from new projects only if they are located in least developed countries.

Interest in MIGA guarantees for government obligations under climate protection laws will probably increase as nations and the UN have more success installing such laws, Quintrell said.

“It’s a bit of a chicken-and-egg situation,” she said. “There’s still a lot of uncertainty, with not knowing what’s going to happen after Kyoto.” That protocol’s targets for some rich nations run through this year.

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