Yvo de Boer’s climate bonds – how are they different to normal government bonds?

Yvo de Boer, the head of the UNFCCC, told the FT yesterday about his idea for ‘climate bonds’.

Such bonds would involve a developing country government setting a national target on emissions or energy, for example a goal of producing a certain amount of renewable energy by 2020. It could count on receiving carbon credits equivalent to this renewable energy under a successor to the Kyoto protocol, which would enable the finance ministry to issue “climate bonds”. These would raise money from investors based on the promise that they would receive returns from the sale of the resulting carbon credits.

This is not possible under the Kyoto protocol because the system for awarding carbon credits requires would-be investors to put their money into emission-cutting projects, often small-scale and carrying big investment risks.

I can see that the formal Kyoto mechanisms don’t include provisions for up-front finance for emission reduction projects – the CDM requires projects to have reached a fairly advanced level of maturity before it awards credits. But if there are people out there who are prepared to take on the risk associated with CDM projects, couldn’t the market already deliver debt instruments like de Boer’s climate bonds?

Mr de Boer believes government-sponsored climate bonds would reduce the investment risk, because governments could act as a guarantor, and encourage much greater investment in carbon reduction in the developing world.

If the government takes on the risk of the CDM project, surely the coupon would be the same as one of that government’s normal bonds. How would that be different to a government raising debt money and deciding to spend it on national CDM projects?

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One Response to “Yvo de Boer’s climate bonds – how are they different to normal government bonds?”

  1. Dan, thanks for visiting my blog, and for your comment. It is a real privilege to meet other like-minded, concerned minds who know how to think about these most important issues.

    marguerite
    http://lamarguerite.wordpress.com

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