To facilitate the transition to a global low-carbon society, private industries and financial institutions need to join hands with the government in promoting investments in greenhouse gas emission reductions.
According to an estimate by the International Energy Agency, halving greenhouse gas emissions by 2050, the target agreed upon at the G8 Hokkaido Tohyako Summit, will need close to US$8 trillion in abatement costs.
As public sector financing alone is far from meeting these enormous needs, it is crucial to mobilize efforts from the private sector.
Industries including electric power, iron and steel, cement, oil and petrochemicals are major carbon dioxide (CO2) emission sources (a main greenhouse gas) in developing and industrial countries alike.
These industries have been either already privatized or are in the process of being privatized, even in developing countries.
Meanwhile, those who possess technologies required for investments in energy efficiency products are also private firms in industrial countries. Thus, it is critical to create an investment climate that encourages these private sectors to make larger investments in developing countries.
One of the key elements constituting the investment climate is financing. The Kyoto mechanism requiring developed countries to acquire carbon credits in developing countries has been utilized as a financial instrument in recent years.
But such financing itself is not sufficient to sustain the financial flows to developing countries, and there is still a need for conventional financing.
About one half of financial flows to developing countries are private sector flows. Among them, direct investment is a more desirable form. The firms provide not only capital but also technologies. In addition, they participate continuously in business management.
Financial institutions have addressed environmental issues primarily by confirming that their financed projects have taken appropriate measures for environmental considerations.
However, the most important contribution they can make is active and efficient financial support to the projects directed to environmental improvement.
Take the activities of Japan Bank for International Cooperation (JBIC).
In the past, JBIC used to extend financial support primarily to developing country governments.
Today, however, as represented by independent power producer projects in the power sector, privatized projects are rapidly increasing and a significant share of JBIC's financing is extended to the private sector.
Last year, JBIC cofinanced with another Japanese bank a loan for a large wind power plant project with private sector participation in Bulgaria.
In developing countries, there are also many small-scale projects undertaken by local firms. In such cases, flexible financing schemes in partnership with the local financing institutions are more effective.
JBIC has extended credit lines to local institutions in India, Brazil, the Philippines and other countries to support clean development mechanism projects undertaken by local firms in cooperation with Japanese firms.
Supplying huge funds in a timely manner for investments to mitigate global warming requires some mechanism for scaling up and speeding up such financing.
The most promising approach is to collaborate with various industries with ongoing efforts to establish their energy efficiency standards.
Admittedly, this is a challenging task, for it is linked to the competitiveness of respective countries and companies.
If the financial community shares these targets and standards, they will serve as international de facto standards, providing a good guidance to investments for effective measures to fight global warming and thereby helping provide speedy financing.
(Shanghai Daily October 29, 2008)
