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THE GLOBAL carbon market is expected to become a US$100 billion business over the next few years, buoyed by recent scientific findings on climate change, the entry into force of the Kyoto Protocol, and the EU Emissions Trading Scheme.

Industrial groups in the European Union and Japan among others continue to require carbon credits in order to balance out financial risks and penalties resulting from their greenhouse gas emission levels. In the EU alone these penalties will amount to €100 per tonne of carbon dioxide-equivalent during 2008-2012.

They can buy carbon offsets from other sources – often in developing countries, who reduce emissions by more than the necessary amount. This trading system ensures emissions reductions are achieved at the lowest economic cost.

However, despite the obvious benefits of bringing buyers and sellers together in the carbon market, there are significant financing – as well as technical – gaps in the development cycle.

For development projects, whether public or private sector funded, investment plans require long term and at times structured financing. Such projects are often major carbon credit suppliers. Yet this potential market is a long way from reaching its potential. If captured, carbon sales could yield important additional income and even convert economically marginal projects into highly attractive ones.

The carbon market itself could be enhanced if the financing plans of projects with greenhouse gas reduction potential were to be supported by special trust funds, with their financing secured against the carbon credits that will be generated by the projects. This would also reduce the capital outlay expected from sponsors, strengthen financial viability, and be good for the environment.

“ADB believes that the financing gaps in the carbon market can be met through the establishment and management of a dedicated carbon cofinancing fund,” says Bindu Lohani, Director General of ADB's Regional and Sustainable Development Department.

“The cofinancing scheme would make available funds up front through securitization of future carbon credits, thus reducing capital outlays required from sponsors.”

Therefore, as part of a new focus on clean energy and environment, ADB is proposing to set up a Carbon Market Initiative (CMI). The fund would provide developing countries with access to additional financing and technical support for promoting energy efficiency and renewable energy projects that are eligible under the Clean Development Mechanism of the Kyoto Protocol.

CMI, which was introduced during ADB's Clean Energy Week activities last week, would have three main components:

• An Asia-Pacific Carbon Fund to provide the upfront financing for purchases of future carbon credits generated by eligible projects
• A credit marketing facility to assist project developers and sponsors attain the best available market price and/or sales conditions for carbon credits
• A technical support facility to assist with project screening, feasibility studies, documentation, monitoring, and certification of carbon credits.

CMI would support projects in the areas of methane capture and utilization, energy efficiency, and renewable energy, for example small hydropower projects, landfill gas utilization, and biomass energy. ADB has a portfolio of projects in such areas with a capacity to generate more than 50 million tones of carbon dioxide-equivalent to 2012.

The result would be lower budget commitments and additional expertise and financing for project development on the part of developers and sponsors. Meanwhile, buyers of carbon credits would benefit from reduced credit delivery risk, reduced Kyoto compliance costs, and participation in projects with high development impacts.

“CMI presents a unique opportunity for all stakeholders to address two critical global issues confronting today's and future generations – energy security and climate change,” adds Mr. Lohani, who is also Special Advisor to the ADB President on Clean Energy and Environment.

Consultations are ongoing with potential partners with the aim of launching CMI next year.

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