The Wall Street firm Natsource and the Bogotá-based Andean Center for Economics in the Environment (Caema) plan to tap a global market for greenhouse-gas credits that by some estimates could reach $100 billion annually.
“This has real potential to connect quality projects with key purchasers in the marketplace and increase investment opportunities for emissions reductions in the region,” says Tia Nelson, director of the Climate Change Initiative at the U.S.-based Nature Conservancy. “I know of no other alliance of this kind.”
The carbon market’s growth hinges on Russia ratifying—and, thus, bringing into force—the Kyoto Protocol at the International Conference on Climate Change in Moscow this September. By providing the final ratification needed to put the protocol into effect, Russia’s action is expected to trigger an increase in prices for greenhouse credits.
The Natsource-Caema alliance hopes to exploit that development by selling 10 to 20 million tons of carbon-emissions reductions—worth up to $180 million, according to analysts—from Latin American renewable-energy, methane-capture and forestry projects.
Caema will help Latin American companies design and develop these projects, while Natsource will sell the resulting carbon credits to developed-world companies and governments that need them to meet Kyoto emissions-reduction targets. “This is a changing market in which the first movers have the advantage,” says Natsource President Jack Cogen. “Latin America has positioned itself ahead of the rest of the developing world to take advantage of that market, and we’re hoping to take advantage of it as well.”
The Kyoto Protocol on global warming has been in legal limbo since it was signed in 1997 because it lacked ratification by industrialized countries representing at least 55% of 1990 greenhouse emissions, as its charter requires. The surprise withdrawal of the United States—by far the world’s largest emitter—from the Kyoto process following the election of U.S. President George Bush dealt what some thought would be a fatal blow to Kyoto.
But with the expected ratification of the treaty by Russia, which accounts for 17% of global emissions, Kyoto-ratifying nations will represent 61% of global greenhouse-gas emissions—up from the current 44%—and the protocol will take force.
Analysts expect a flurry of carbon-market activity thereafter. They say prices for carbon credits could rise by up to 300% as the existing ad hoc system of voluntary emissions reductions and trades gives way to a legally binding treaty. The average price currently is about $3 per ton of CO2 equivalent (CO2e).
With Kyoto ratified, virtually all major industrialized nations with the exception of the United States and Australia will have to cut their greenhouse emissions to 5.2% below 1990 levels by 2012 or face economic penalties.
CDM sets the stage
Natsource and Caema want to take advantage of the Clean Development Mechanism (CDM), a Kyoto Protocol provision that allows polluters in industrialized nations to meet their emissions targets by funding greenhouse gas-reduction projects in the developing world.
Their venture, formally called the Caema-Natsource Strategic Alliance for CDM in Latin America, already is negotiating emissions-reduction projects in Bolivia, Colombia, Ecuador, Peru and Uruguay. These include methane capture at wastewater treatment facilities, landfills and palm-oil factories; fuel switching and efficiency measures for urban bus systems; and reforestation in high-Andean ecosystems.
“A financial window is about to open to those who know how to play the market,” says Manuel Rodríguez, a former Colombian environment minister. “Developing countries must make sure they get their fair share.”
With the protocol in limbo, trading so far has been soft and prices low as few nations have limited greenhouse emissions or established trading rules. But corporations, anticipating such regimens, have invested in greenhouse projects. And the Natsource-Caema alliance marks a ramping-up as CO2-emitting companies, their host governments and brokers position themselves to enter a genuine, international carbon market.
Market momentum seen
In the last two years, the United Kingdom and Denmark have created emissions limits and trading systems; U.S. state governments are starting to address carbon emissions on an individual basis; and the Chicago Climate Exchange has linked 14 major U.S. carbon emitters in a voluntary cap-and-trade system.
The European Community has finalized rules for a European-wide trading system to start in 2005, and most Kyoto trading rules have been ironed out at annual meetings known as the Conference of the Parties (COP). A notable exception is forestry-project rules, which Kyoto participants hope to clarify during the next COP, slated for November in Milan, Italy.
As greenhouse-gas emitters and governments look to the new market for carbon credits, companies in the developing world are moving increasingly to meet the demand by preparing greenhouse gas-reduction projects. Natsource says the global volume of carbon trades last year equaled that of the previous five years combined. And many analysts expect trade this year to double last year’s volume.
The Natsource-Caema alliance enters this nascent market with unique advantages. Natsource, with its core business in natural gas, electricity and coal brokerage, works with the world’s biggest greenhouse-gas emitters. (Shareholders of Natsource Japan include Mitsubishi, Sumitomo, and Tokyo Gas.) Caema, meanwhile, is a leader in developing Latin American emissions-reduction projects.
René Castro, a former Costa Rican environment minister who pioneered carbon sales in the mid-1990s, advises the alliance. “The standardization and the scale of the endeavor should reduce costs and give smaller projects a chance on the market,” Castro says. “The model could be repeated in other continents, including Africa, which has been completely excluded from the emissions-reduction market because of the high costs of bringing projects to fruition.'