Cynics might argue that the US and Russia are leading villains in the global warming piece. But financial Realpolitik suggests that the world’s biggest polluter and Europe’s most polluted country have key roles to play in the fight to cut greenhouse gas emissions.
Certainly Merrill Lynch’s recent decision to plough an estimated $200 million into the Russian Carbon Fund (RCF) indicates that the development of a carbon-trading market in emerging Europe is beginning to gain real momentum. Under the terms of the Kyoto Protocol Joint Implementation directive, rich developed economies that face cuts in greenhouse gas emissions for the period 2008-12 can meet those targets by funding reductions elsewhere – essentially emerging economies such as Russia. With its vast oil and gas industries, Russia is seen as a particularly attractive carbon trading market, as analysts believe there is massive scope to slash emissions. Energy use in Russia is two-and-a-half times less efficient than that in western Europe, according to a recent UN report.
Under its strategic alliance with RCF, Merrill Lynch is taking a minority equity stake in the company, providing it with loan financing and purchasing a large volume of carbon credits. The fact that the US investment bank’s corporate principal investment arm is participating alongside its commodities operation demonstrates that the firm is putting its money where its mouth is when it comes to promoting carbon trading.
Founded in 2004 by Danish and Russian shareholders, Copenhagen-based RCF is looking to invest in projects that reduce emissions of two key greenhouse gases – methane and nitrous oxide. To date RCF has originated 35 projects with the potential to cut emissions by 100 million tonnes between 2008 and 2012.
Morten Prehn Sorensen, chief climate change officer at RCF in Copenhagen, says that Merrill Lynch’s participation will add gravitas to what it is already doing and provides RCF with a strong, well-known financial partner. “Additionally, Merrill Lynch is a very active trader in the European carbon trading market and so will bring us additional expertise in this area,” he says.
He adds that prices for carbon credits in recent years have traded as low as €3 per tonne to as high as €20 per tonne, and especially over the past year prices from Russia had been on the rise.
Other link-ups geared towards creating carbon trading revenues in emerging Europe include a joint venture between Gazprombank and Dresdner Kleinwort. One big hurdle remains, however, as the Russian government has yet to pass regulations to underpin trade in carbon credits, meaning that Russian companies are unable to take full advantage of the opportunities. RCF’s Prehn Sorensen believes that the passage of government regulation, which should occur in the next few weeks, will take the whole carbon trading market for Russia to a new level.
