9 September 2009 | Luca Del Buono

 

Bonds providing a hedge against the risk of governments missing their climate commitments could give investors the necessary confidence to invest in low-carbon projects, Professor Michael Mainelli from Z/Yen, a City of London-based risk management firm, told EurActiv in an interview.

The biggest obstacle to investment in green projects is a general lack of confidence in government policy being enacted, Mainelli argued.

He pointed out that when the EU's emissions trading scheme was inaugurated, politicians agreed that carbon prices need to stand at about €25-€30/tonne, but in reality, the market crashed in 2007 when too many permits were issued and the price is still nowhere near that.

High carbon prices are crucial to the profitability of renewable energy projects, the financial expert argued.

"And they depend on government policy," he said, adding that policies such as feed-in tariff rates are equally important.Mainelli presented the idea of index-linked bonds as a way for governments to guarantee investors that they will get a return on their low-carbon investments, regardless of whether the government keeps its climate pledges.

"The basic idea here is that governments would pay interest on their own debt, and they would pay more interest if they failed to meet their carbon targets," he said.

The targets of the bonds could vary, Mainelli said.

He cited as examples carbon prices, where the government pays interest if carbon is below a set price, and feed-in tariffs, where the government pays if it does not maintain a set rate or fails to reach the country's emissions reduction target.

To illuminate the issue, Mainelli offered a scenario whereby a large pension fund puts €500 million euros into a wind farm that produces at €90/MWh, when thecurrent price of electricity stands at €85/MWh.

At the same time, it buys government bonds priced at a feed-in tariff of €110/MWh.

In case in reality the tariff turns out to be only €100, the investor's profit from the wind farm is only €10/MWh, instead of the expected €20, but it is making €10 on the French government.

The idea differs from many other bonds proposals in that it is simple and does not involve forfeiting returns out of concern for the climate, Mainelli stressed.

Click here to read more

Source: EurActiv.com

blog comments powered by Disqus