December 17, 2009
Since the financial crisis stroke some 18 months ago, substantial discussions have taken place both on Climate change and on how to globally save the financial industry, albeit few have tried to link both themes.
Consider the financial crisis as a result of a chain reaction triggered by such key elements as the massive facilities once granted to the real estate market in the US combined to the transformation of those credits into tradeable securities – the subprimes – and the use of those (at the time) hugely liquid instruments by banks as a collateral into their funding operations, through Repo’s operations. The very disappearance of this liquidity is what actually helped interbank funding grounding to a brutal halt.
Consider, on the other hand, the still emerging market of offset transactions under Kyoto’s flexible Clean Development Mechanism (CDM). Whenever an Annex I country decides to invest in a certified CDM project, it can expect a certain amount of carbon credits to be generated by this project at a certain date in the future, or over a certain operating period. Those carbon credits, referred to as ‘primary market’ carbon credits, can then be traded on financial exchanges, albeit usually at a discount against EUA’s reflecting the relative uncertainty associated with their future existence.
So basically, one invests in a particular project and expects returns under the form of future tradeable credits. This is actually very close to lending money and expecting reimbursements in the future.
Considering at last the huge money transfers at stake in climate talks between Annex I and non Annex I countries, there is a reasonable chance that a fair deal of those will be made via offset programs. The logical next step will then be for senior banks to issue tradeable securities backed by those carbon credits – genuine Asset Backed Securities (ABS), thus – hence generating an alternative investment vehicle that could eventually as well be used by banks to fuel their funding operations. QED!Author : Bruno Simon