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Climate change heats up

While environmentalists and policy makers gather at an international conference on climate change in Buenos Aires, the trading of securities linked to greenhouse gas emissions, known as the carbon finance market, keeps growing. With Russia's recent ratification of the Kyoto Protocol—the agreement requiring 30 of the world's developed nations to reduce greenhouse gas emissions below 1990 levels by 2012—heavier polluters now have a binding requirement. They can either reduce their carbon dioxide (CO2) emissions or buy “certified emissions reductions (CERs)”--credits from cleaner industries in developing countries to comply with their target levels and reduce global warming. A secondary market in CERs is expected to emerge shortly.

During a recent seminar at IDB headquarters, expert Jonathan Pershing, director of the World Resources Institute's Climate and Energy Program, highlighted developments in the field and looked at the road ahead.

“The problems for engagement into more stringent commitments are cost and uncertainty,” noted Pershing. So far the main CER credit buyers in the carbon market are Japan, which buys 41 percent of these securities, the World Bank's Carbon Finance Business (24 percent), and the Netherlands (23 percent). Other powerful buyers are Spain and Italy.

Asia sells almost 50 percent of annual credits in the carbon market while Latin America sells 17 percent of credits. But Latin America has a higher number of projects involved. Brazil alone has 64 eligible projects, while China, Korea and other Asian countries combined have 67 projects.

According to Pershing's research, most of these projects are in worldwide electricity generation, generating a 24 percent of all supply.

The greatest opportunities for cost-effective and socially beneficial renewable investments in Latin America are likely to be found in portfolios of smaller-scale rural electrification projects, said IDB specialist Michael Toman.

Seminar participants agreed that post-Kyoto options and agreements will be crucial to control global warming. New policy dialogue will be a challenge, Toman noted, because it is hard for any country to be competitive when investing in cleaner and renewable energy while others produce cheaper fuel and energy with higher returns.

Pershing cited the ratification of the Kyoto Protocol as an important step forward toward raising global warming awareness, even though the United States and Australia have refused to ratify it.

Carbon dioxide levels are already high, and the carbon market is at an early stage, experts agreed. How the world addresses uncertainty, national priorities, certified credit issuance, and time, cost and risks will determine whether the years ahead bring climate change or policy change.

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