In particular Citi is investing in clean development mechanism projects, seeking the relevant national and UN approvals, and marketing the resulting credit flows to its customers around the world. The bank's London-based head of environmental markets, Garth Edwards, was recently in Asia and took time out to speak with FinanceAsia.
Carbon emissions trading has taken off in London, but is new to Asia. How do you plan to build the business here?
London is where most of the demand for international emission instruments is concentrated. But most of the supply is sourced from Asia, with India and China being the dominant sellers. In fact the clean development mechanism has had a good five years of growth in Asia and there are many sophisticated and successful counterparties across the region. Citi now engages with Asian companies across the full emission-market value chain, from structuring project finance solutions, through clean development mechanism project management, to maximising the value of the resulting emission commodity flow.
Is it tough to convince people that it's a worthwhile endeavour?
No. Of course the objective of the Kyoto Protocol is to reduce emissions. But emissions are not reduced by goodwill alone, it's the market institutions established under the Kyoto Protocol that drive capital to work in emission reducing projects. People deploy their time, effort and resources in emission reducing projects because they earn an excellent rate of return. Reducing emissions is of course all good for the environment but capital and technology is largely put to work in emission markets because it earns a competitive return.
What countries are most receptive to the idea?
Both India and China established the relevant approval agencies (designated national authorities) at an early stage and clearly set out the rules by which projects in their jurisdictions could seek approval.
Most other Asian countries have now followed suit and the relevant institutions are now in place across the region. Countries do this because efficient institutions attract capital and technology flows to emission reducing projects in their country. This of course provides employment, improved local environmental conditions and economic benefit.
So then, what sectors are most receptive to the idea?
Renewable power generation is now a major focus for support through the CDM, but any existing sector that has high emission levels offers the opportunity to reduce emissions through technology change, fuel switching or improved efficiency. Hence there are tremendous opportunities in coal mining, steel, cement, oil production and refining, and landfill gas capture. Legislation is now emerging that will also incentivise forest projects.
There's an argument that people shouldn't be trading û but rather reducing. How do you respond to the criticism that a trade is just deferring responsibility?
Let's be clear, emissions will really only be reduced by deploying new kinds of technology and production systems. Nothing will happen unless capital is directed to the right projects and activities. And this is exactly what's happening. The market institutions created under the Kyoto Protocol incentivise companies to take action to reduce emissions in order to earn a return on their investment. Emission reductions simply would not happen without the investment signals created by the market rules.