Carbon investors see both chances and challenges ahead of UN climate conference

As an investor, Abyd Karmali just announced on Wednesday his decision to put multi-million dollars in a low carbon project in Africa, where a crucial climate conference of the United Nations will start next week. He is foreseeing both chances and challenges over there. The chances are with the international commitments in climate financing. In 2009, rich nations agreed in Copenhagen to provide 30 billion dollars in "fast-start" finance to tackle climate change between 2010 and 2012, scaling up to 100 billion dollars a year by 2020. If those promises are further confirmed and implemented during the conference starting on Nov. 28 in Durban, South Africa, there could be huge opportunities for the carbon market, because the money might be gained through channels such as the Clean Development Mechanism (CDM), which could act like a multiplier. "One shouldn't neglect the multiplier effect that CDM has in some transactions and in some cases this can help lever in at least 10 times the value of the underlying carbon commodity," said Karmali, who is the Global Head of Carbon Markets at the Bank of America Merrill Lynch and based in London. He gave the example of his latest investment. The Bank of America Merrill Lynch announced on Wednesday a multi-million dollar financing agreement with CleanStar Mozambique, which produces ethanol-based cooking fuel from surplus cassava in least developed African countries such as Mozambique. The fuel would be a safe and affordable alternative to charcoal. From Karmali's point of view, it's a transaction "where CDM has been the financial enabler that has catalyzed supplementary flows of finance." The chances could be even bigger if the Durban conference can make a breakthrough about the caps on emissions, but that is exactly where the challenge lies. Since the Copenhagen conference, the disagreement over the caps on individual countries is so great that few people now thinks a new legally binding international agreement can be achieved in Durban. John Ashton, Britain's Foreign Secretary's Special Representative for Climate Change, told Xinhua his major objective for Durban is to get a roadmap, "a clear plan to negotiate and reach an agreement," rather than a new agreement itself. That is the major uncertainty for global carbon market, and a great concern for Karmali, who is also President of the Climate Markets & Investment Association (CMIA), whose international membership accounts for an estimated 75 percent of the global carbon market. "Investors are realistic that without tighter caps on emissions, whether agreed through the UN process or bottom-up, through country-specific emission trading programs, the emission markets are entering a challenging transition period," Karmali said. "For CMIA, success in Durban will be defined by how well private capital is mobilized to help finance the low-carbon economy," he said. If Durban can't show a clear roadmap to achieve a new legally binding agreement on emission reduction that involve all the countries beyond 2012, when the first commitment period of Kyoto Protocol expires, the "cap and trade" basis of a global carbon market might be in danger, and private investors might gradually lose interest in it, he warned. Karmali pointed out that some other forms of low-carbon finance, such as Britain's Green Investment Bank (GIB) and the proposed multilateral UN Green Climate Fund, as well as domestic emission trading policies in some big emerging markets, will continue to develop and help sustain the carbon market. And those issues might also be on the agenda in Durban. He will fly to Durban to catch up on the results, and it would be much easier then to see how the situation will evolve.