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November 26, 2010
How Financial Tools Help Develop a Low-Carbon
Economy
Asia Pacific Finance and Development Center 2010 Biennial Forum
Atsuhito Kurozumi
2
Topics
Policy objectives and roles of financial tools
The case for intervention
Examples in Japan
Advantages and limitations
New areas
Concluding remarks
4
Strategic energy plan of Japan (revised consistent with the “New Growth Strategy”)
Doubling the energy self-sufficiency ratio (18% at present) and the self-developed fossil fuel supply ratio
(26% at present) and as a result, raising its “energy independence ratio” to about 70% (38% at present).
Raising the zero-emission power source ratio to about 70% (34% at present)
Halving CO2 emissions from the residential sector
Maintaining and enhancing energy efficiency in the industrial sector at the highest level in the world
Maintaining or obtaining top-class shares of global markets for energy-related products and systems
Domestic energy related CO2 emissions will be reduced by 30% or more in 2030 compared with
the1990 level, if we promote policies sufficiently.
A 30% emissions reduction means that about a half of the reduction to be achieved from the current
level to 2050 (-80% compared with1990) will have been realized in 2030.
“Ambitious” targets toward 2030
Source: METI
5
An example of recent financial measures
Low Carbon Investment Promotion Act (2010)
Aimed at
(1) Providing low–interest rate, long-term funds for
developers/manufacturers of “low-carbon products,” such
as electric cars, storage batteries or solar panels
(2) Encouraging small and medium enterprises to introduce
low-carbon equipment through leases
Set of policies and measures toward a low-carbon economy
6
Energy security, economy, and the environment
Fiscal, tax, financial policies
Energy mix
Renewable energy
Nuclear energy
Sectoral efforts Process/ product innovation
Commerce and household ecoappliances
ecobuildings
lifestyle
Transport modal shifteco-vehicles
R&D
Industry processinnovation
energyefficiencyinvestments
new (andmodern)factories
R&D
Emissions trading
Other technology
7
Policy objectives and financial tools
Private risk money is far from sufficient to achieve ambitious targets
toward a low-carbon economy
Requires effective policy mix in which the cost performance is high,
especially to mobilize private money (cf. GIB plan in U.K.)
Adopting financial tools and the market mechanism
can be highly cost–effective
with less demand on the government’s own revenues than
would be the case through subsidies and other measures
can be effective in monitoring the projects
Clear policy, expertise, and transparency of operation are essential.
Financial measures toward a low-carbon economy (1)
Energy mix
Renewable energy
Nuclear energy
Sectoral efforts Process/ product innovation
Commerce and household ecoappliances
ecobuildings
lifestyle
Transport modal shifteco-vehicles
R&D
Industry processinnovation
energyefficiencyinvestments
new (andmodern)factories
R&D
Emissions trading
Other technology
8
Financing for relevant projects
Carbon finance
【 9】
Example 1
Environmental Finance: Case 01; Clean Energy
DBJ provides loans for 36% of all the wind power generation equipments in Japan For Tomamae Green Hill Wind Park, DBJ conducted financing with project finance scheme
Tomamae Green Hill Wind Park, thefirst commercial wind power generationplant in Japan, is operated in the town of
Tomamae in Hokkaido.
DBJ investigated risks of the plant fromaspects of wind volume, Japan’s wind
characteristics and natural disaster risks.
Finally DBJ provided a loan to thecompany, utilizing a project finance scheme, and supported the plant construction.
Tomamae Green Hill Wind Park
【 10】
Example 2
Environmental Finance: Case 02; Waste Management
Finance for Clean Energy: Case 01Finance for Clean Energy: Case 01Finance for Clean Energy: Case 01
Ichihara New Energy constructed a waste thermal power generation plant in Ichihara City, Chiba Prefecture.
The plant has a capacity of 1,950kW ofpower generation and generates electricity by incinerating wastes from construction sites and medical institutions.
DBJ evaluated its feasibility of business and profitability, and provided a long-termloan for construction of the plant.
Ichihara New Energy
DBJ provided a loan to a waste management company, Ichihara New Energy, K.K. With the DBJ loan, Ichihara New Energy constructed a waste thermal power generation plant
【 11】
Example 3
Greenhouse-gas Reduction
DBJ provided a loan for accelerating the Kyoto Protocol Achievement Plan With the finance, Nishi Ikebukuro Netsu Kyokyu K.K. introduced energy-efficient AC
DBJ provided Nishi Ikebukuro Netsu
Kyokyu K.K. with a loan for introducing
energy-efficient air conditioning, which
reduces CO2 emission by 9.0% compared
with business as usual.
The company conducts thermal supplies
for hotels, railway stations and
merchandizing stores in the western
Ikebukuro area, Tokyo.
The newly introduced air conditioner supports the western Ikebukuro area’s urban design to develop a low-carbon community.
Nishi Ikebukuro Thermal Supply Co., Ltd
JGRF
(fund)
$141.5m
CDM/JIProjects
ERPAs SERPAs
Investors
Operational Manager
Credits
Payment PaymentPayment
JGRF (Japan Greenhouse-gas Reduction Fund) was established in December 2004.JGRF acquires carbon credits through the operating company, Japan Carbon Finance (JCF). Investors acquire carbon credits in accordance with their percentages of investment.
JCF(operating
company)
Credits
Credits
12
Example 4-1: Carbon fund (1)
Shareholder
JGRF StructureJGRF Structure
The JGRF is invested in by two governmental banks and 29 Japanese companies, covering all the major compliance buyers in Japan.
Example 4-2: Carbon fund (2) Investors
13
Category Company Sector Commitment ($) Percentage
Operational Manager Development Bank of J apan (DBJ ) Governmental Bank 10,000,000 7.1%J apan Bank for International Cooperation (J BIC) Governmental Bank 10,000,000 7.1%Nippon Oil Corporation Oil 10,000,000 7.1%Chubu Electric Power Corporation Power 10,000,000 7.1%Tokyo Electric Power Company Power 10,000,000 7.1%Tohoku Electric Power Company Power 10,000,000 7.1%Mitsubishi Corporation Trading 10,000,000 7.1%Mitsui Corporation Trading 10,000,000 7.1%Sumitomo Corporation Trading 5,000,000 3.5%The J apan Iron and Steel Federation Manufacturer 5,000,000 3.5%Idemitsu Kosan Co. Ltd Oil 3,000,000 2.1%Itochu Corporation Trading Company 3,000,000 2.1%Kansai Electric Power Company Power 3,000,000 2.1%Kyushu Electric Power Company Power 3,000,000 2.1%Shikoku Electric Power Company Power 3,000,000 2.1%Sony Corporation Manufacturer 3,000,000 2.1%Chugoku Electric Power Corporation Power 3,000,000 2.1%Electric Power Development Co. Ltd. (J - Power) Power 3,000,000 2.1%Tokyo Gas Corporation Limited Gas 3,000,000 2.1%Toshiba Corporation Manufacturer 3,000,000 2.1%Toyota Motor Corporation Manufacturer 3,000,000 2.1%Hokuriku Electric Power Company Power 3,000,000 2.1%Hokkaido Electric Power Company Power 3,000,000 2.1%Marubeni Corporation Trading 3,000,000 2.1%Terumo Corporation Manufacturer 2,000,000 1.4%Okinawa Electric Power Company Power 1,000,000 0.7%Kyushu Oil Corporation Company Oil 1,000,000 0.7%Sharp Corporation Manufacturer 1,000,000 0.7%J apan Energy Corporation Oil 1,000,000 0.7%Sojitz Corporation Trading 1,000,000 0.7%Taiheiyo Cement Corporation Cement 1,000,000 0.7%J GC Corporation Manufacturer 1,000,000 0.7%Fuji Xerox Corporation Limited Manufacturer 500,000 0.4%
141,500,000 100.0%Total
Non-operational investors
14
Financial tools may be effective in promoting environmentally-friendly
projects.
Especially so in encouraging new (and modern) factories, large-scale change
in energy source, epoch-making technologies etc.)
However, they are not a panacea, of course.
After all, you cannot finance projects unless businesses see enough
profitability to give them the will to do so.
Effective in some fields, but not so in others
Directed credit may be effective in promoting eco-friendly
buildings, cars etc., but what about appliances, business processes, etc.?
How can you encourage such areas where finance alone may not be
effective?
What we have learned
Additional tools
Building new (and modern) factories, entailing large-scale energy-
switching and epoch-making technologies, is critical. But the key to
realization of a low-carbon economy is accumulation of companies’
steady KAIZEN-type efforts.
The point is how to give companies enough incentives for those efforts.
Finance can play an important role in this by providing effective review
and monitoring.
15
16
How money encourages “environmental” actions in businesses
“Environmental” money Eco depositsEco loans
Eco ETF,Eco bonds
Financial institutions,Investors,Suppliers
Etc.
Buyers, Consumers
CccPlanDevelopme
nt and Production
Sell
Info
Products, Service
Business entities
Rating Understanding and Accepting
Pushing the Environmental Actions
Forward
17
Financing based on environmental ratings
Environmental rating–based financing
Environmental rating is also
considered in setting
interest rates.
Environmental rating is also
considered in setting
interest rates.
Fin
an
cin
gF
ina
nc
ing
Co
nd
uc
t en
viro
nm
en
tal s
cre
en
ing
Co
nd
uc
t en
viro
nm
en
tal s
cre
en
ing
Ap
plic
atio
nA
pp
lica
tion
Evaluate company credit risk, collateral and other factorsEvaluate company credit risk, collateral and other factors
(Ineligible)
Preferential interest rates on financing available according to an organization's environmental rating (environmentally responsible management evaluation)
Evaluation with a screening sheet containing 120 questions developed based on the exchange of information with the United Nations Environment Program (UNEP) Finance Initiative and Japan's Ministry of the Environment(Conducted through interviews)
Extensive evaluation experience: More than 100 ratings conducted since introducing the system in 2004
Expertise with a wide range of clients, includingmanufacturers and non-manufacturers from medium-sized companies with close regional ties to mega corporations
BenefitsThrough interviews conducted during the process of
acquiring environmental ratings, clients receive objective evaluations, providing them the following benefits:
1.Incentive to employ additional improved environmental measures
2.Clear explanation of environmental measures to stakeholders
Financial measures toward a low-carbon economy (2)
Energy mix
Renewable energy
Nuclear energy
Sectoral efforts Process/ product innovation
Commerce and household ecoappliances
ecobuildings
lifestyle
Transport modal shifteco-vehicles
R&D
Industry processinnovation
energyefficiencyinvestments
new (andmodern)factories
R&D
Emissions trading
Other technology
18
Can be encouraged by environmental rating–based finance
19
Expansion of environmental rating–based loans
Cf . SRI Funds net increase per year
DBJ(単独+協調)
協調行
0
20
40
60
80
100
2004 2005 2006 2007 2008
( billion yen )
40
149
116
192
0
50
100
150
200
2004 2005 2006 2007 2008
-289
( billion yen )
By DBJ
?
20
Regional Banks
Support
Ministry of the Environment
Local Government
Environmental Environmental rating subsidyrating subsidy
Regional Enterprises
DBJ Group
Bigger
SMEs
Smaller
DBJ rating
Rating supported by DBJSupportSupport
Regional expansion through coordination with regional banks
21
Concluding remarks
Financial tools can be effective in promoting environmentally-friendly
projects in areas where private risk money is insufficient to achieve
policy targets, with less demand on the government’s revenue.
…….. as long as clear policy, expertise, and transparency of operation are
assured.
This supports the case for policy intervention and directed credit in
promotion of a low-carbon economy.
Innovative scheme design, based on each country’s specific situations,
is expected to play a key role in supplementing traditional loans and
investments, which have limitations. International cooperation, such as the sharing of views and experiences
(like through this forum) and the provision of technical assistance in the
finance area, will be increasingly important.