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How Financial Tools Help Develop a Low-Carbon Economy. Atsuhito Kurozumi. Asia Pacific Finance and Development Center 2010 Biennial Forum. November 26, 2010. Topics. Policy objectives and roles of financial tools The case for intervention Examples in Japan Advantages and limitations

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slide1

How Financial Tools Help Develop a Low-Carbon Economy

Atsuhito Kurozumi

Asia Pacific Finance and Development Center 2010 Biennial Forum

November 26, 2010

slide2

Topics

  • Policy objectives and roles of financial tools
  • The case for intervention
  • Examples in Japan
  • Advantages and limitations
  • New areas
  • Concluding remarks
slide4

Strategic energy plan of Japan (revised consistent with the “New Growth Strategy”)

“Ambitious” targets toward 2030

  • Doubling the energy self-sufficiency ratio (18% at present) and the self-developed fossil fuel supply ratio
  • (26% at present) and as a result, raising its “energy independence ratio” to about 70% (38% at present).
  • Raising the zero-emission power source ratio to about 70% (34% at present)
  • Halving CO2 emissions from the residential sector
  • Maintaining and enhancing energy efficiency in the industrial sector at the highest level in the world
  • Maintaining or obtaining top-class shares of global markets for energy-related products and systems
  • Domestic energy related CO2 emissions will be reduced by 30% or more in 2030 compared with
  • the1990 level, if we promote policies sufficiently.
  • A 30% emissions reduction means that about a half of the reduction to be achieved from the current
  • level to 2050 (-80% compared with1990) will have been realized in 2030.

Source: METI

slide5

An example of recent financial measures

  • Low Carbon Investment Promotion Act(2010)
  • Aimed at
  • (1) Providing low–interest rate, long-term funds for developers/manufacturers of “low-carbon products,” such as electric cars, storage batteries or solar panels
  • (2) Encouraging small and medium enterprises to introduce low-carbon equipment through leases
slide6

Set of policies and measures toward a low-carbon economy

Fiscal, tax, financial policies

Environmental

tax?

Energy security, economy, and the environment

slide7

Policy objectives and financial tools

  • Private risk money is far from sufficient to achieve ambitious targets toward a low-carbon economy
  • Requires effective policy mix in which the cost performance is high,
  • especially to mobilize private money (cf. GIB plan in U.K.)
  • Adopting financial tools and the market mechanism
  • can be highly cost–effective
  • with less demand on the government’s own revenues than would be the case through subsidies and other measures
  • can be effective in monitoring the projects
  • Clear policy, expertise, and transparency of operation are essential.
slide8

Financial measures toward a low-carbon economy(1)

Financing for relevant projects

Carbon finance

example 1
Example 1

Environmental Finance: Case 01; Clean Energy

  • DBJ provides loans for 36% of all the wind power generation equipments in Japan
  • For Tomamae Green Hill Wind Park, DBJ conducted financing with project finance scheme

Tomamae Green Hill Wind Park

  • Tomamae Green Hill Wind Park, thefirst commercial wind power generationplant in Japan, is operated in the town of
  • Tomamae in Hokkaido.
  • DBJ investigated risks of the plant fromaspects of wind volume, Japan’s wind
  • characteristics and natural disaster risks.
  • Finally DBJ provided a loan to thecompany, utilizing a project finance scheme, and supported the plant construction.
example 2
Example 2

Environmental Finance: Case 02; Waste Management

  • DBJ provided a loan to a waste management company, Ichihara New Energy, K.K.
  • With the DBJ loan, Ichihara New Energy constructed a waste thermal power generation plant

Ichihara New Energy

  • Ichihara New Energy constructed a waste thermal power generation plant in Ichihara City, Chiba Prefecture.
  • The plant has a capacity of 1,950kW ofpower generation and generates electricity by incinerating wastes from construction sites and medical institutions.
  • DBJ evaluated its feasibility of business and profitability, and provided a long-termloan for construction of the plant.

Finance for Clean Energy: Case 01

Finance for Clean Energy: Case 01

Finance for Clean Energy: Case 01

example 3
Example 3

Greenhouse-gas Reduction

  • DBJ provided a loan for accelerating the Kyoto Protocol Achievement Plan
  • With the finance, Nishi Ikebukuro NetsuKyokyu K.K. introduced energy-efficient AC

Nishi Ikebukuro Thermal Supply Co., Ltd

  • DBJ provided Nishi Ikebukuro Netsu
  • Kyokyu K.K. with a loan for introducing
  • energy-efficient air conditioning, which
  • reduces CO2 emission by 9.0% compared
  • with business as usual.
  • The company conducts thermal supplies
  • for hotels, railway stations and
  • merchandizing stores in the western
  • Ikebukuro area, Tokyo.
  • The newly introduced air conditioner supports the western Ikebukuro area’s urban design to develop a low-carbon community.
slide12

Example 4-1: Carbon fund (1)

  • JGRF (Japan Greenhouse-gas Reduction Fund) was established in December 2004.
  • JGRF acquires carbon credits through the operating company, Japan Carbon Finance (JCF).
  • Investors acquire carbon credits in accordance with their percentages of investment.

JGRF Structure

Investors

CDM/JIProjects

ERPAs

SERPAs

JCF

(operating

company)

JGRF

(fund)

$141.5m

Credits

Credits

Credits

Payment

Payment

Payment

Operational Manager

Shareholder

12

example 4 2 car b on fund 2 investors
Example 4-2: Carbon fund (2)Investors

The JGRF is invested in by two governmental banks and 29 Japanese companies,

covering all the major compliance buyers in Japan.

Non-operational investors

13

slide14

What we have learned

  • Financial tools may be effective in promoting environmentally-friendly projects.
    • Especially so in encouraging new (and modern) factories, large-scale changein energy source, epoch-making technologies etc.)
  • However, they are not a panacea, of course.
  • After all, you cannot finance projects unless businesses see enough profitability to give them the will to do so.
  • Effective in some fields, but not so in others
  • Directed credit may be effective in promoting eco-friendly buildings, cars etc., but what about appliances, business processes, etc.?
  • How can you encourage such areas where finance alone may not be effective?
additional tools
Additional tools
  • Building new (and modern) factories, entailing large-scale energy-switching and epoch-making technologies, is critical. But the key to realization of a low-carbon economy is accumulation of companies’ steady KAIZEN-type efforts.
  • The point is how to give companies enough incentives for those efforts.

Finance can play an important role in this by providing effective review and monitoring.

slide16

How money encourages “environmental” actions in businesses

Business entities

Financial institutions,

Investors,

Suppliers

Etc.

Ccc

Buyers,

Consumers

Info

Products, Service

Development and Production

Plan

Sell

Pushing

the Environmental Actions

Forward

“Environmental” money

Eco loans

Eco deposits

Rating

Understanding and Accepting

Eco ETF,

Eco bonds

slide17

Financing based on environmental ratings

Environmental rating–based financing

  • Preferential interest rates on financing available according to an organization's environmental rating (environmentally responsible management evaluation)
  • Evaluation with a screening sheet containing 120 questions developed based on the exchange of information with the United Nations Environment Program (UNEP) Finance Initiative and Japan's Ministry of the Environment(Conducted through interviews)
  • Extensive evaluation experience: More than 100 ratings conducted since introducing the system in 2004
  • Expertise with a wide range of clients, includingmanufacturers and non-manufacturers from medium-sized companies with close regional ties to mega corporations
  • Benefits
  • Through interviews conducted during the process of acquiring environmental ratings, clients receive objective evaluations, providing them the following benefits:
  • Incentive to employ additionalimproved environmental measures
  • Clear explanation of environmental measures to stakeholders

Evaluate company credit risk, collateral and other factors

Environmental rating is also considered in setting interest rates.

Application

Conduct environmental screening

Financing

(Ineligible)

17

slide18

Financial measures toward a low-carbon economy (2)

Can be encouraged by environmental rating–based finance

slide19

(billion yen)

100

200

80

150

60

100

192

40

149

116

50

20

40

-289

0

0

2004

2005

2006

2007

2008

2004

2005

2006

2007

2008

Expansion of environmental rating–based loans

Cf . SRI Funds net increase per year

(billion yen)

協調行

?

DBJ

(単独+協調)

By DBJ

slide20

Regional expansion through coordination with regional banks

Regional Enterprises

DBJ Group

DBJrating

Ministry of the Environment

Bigger

Environmental rating subsidy

Support

Regional Banks

SMEs

Rating supportedby DBJ

Support

Smaller

Local Government

slide21

Concluding remarks

  • Financial tools can be effective in promoting environmentally-friendly projects in areas where private risk money is insufficient to achieve policy targets, with less demand on the government’s revenue.
    • …….. as long as clear policy, expertise, and transparency of operation are assured.
  • This supports the case for policy intervention and directed credit in promotion of a low-carbon economy.
  • Innovative scheme design, based on each country’s specific situations,
  • is expected to play a key role in supplementing traditional loans and investments, which have limitations.
    • International cooperation, such as the sharing of views and experiences
    • (like through this forum) and the provision of technical assistance in the finance area, will be increasingly important.