CDM new tool to avert risk

Source: http://www.thejakartapost.com/yesterdaydetail.asp?fileid=20080131.A04

Forum Business and Investment – January 31, 2008
Andi Haswidi, The Jakarta Post, Jakarta

The 1997 Asian crisis eventually gave birth to an era where most inventions to minimize risk and improve returns occurred in the world of financing.

To the surprise of many, the latest gimmick in efforts to manage risk comes from a combination of long-time foes — a concern for the environment and an insatiable yearning for more money.

“Banks have been minimizing risks through shortening the tenure of a loan, imposing stronger cash-flow projections and many others,” Bank Danamon’s head of trade finance Herry Hikmanto told a forum held by the International Chamber of Commerce on Wednesday.

He said options to minimize financial risks now could include the so-called Clean Development Mechanism (CDM) under the United Nations Framework Convention on Climate Change.

The UN’s CDM aims to reduce green house gasses and to prevent further global warming via the trade of emission reduction certificates (CERs).

A certificate is given by the United Nations to firms planning to reduce their emission production.

The certificate is usually purchased by firms in countries obliged under the UNFCCC to reduce their emission rate, including all developed countries except for the United States.

One CER is equal to one metric ton of carbon dioxide equivalent (CO2e) and is priced from US$5 to $20, depending on the market.

“Under a CDM financing process, a CER buyer will issue a payment instrument to a domestic bank or a lender, and then the lender issues a payment instrument to the CER supplier,” Herry said.

He said the supplier then implements the emission reduction plan and claims the money from the lender. This is followed by the lender claiming the CER buyer. The process takes place after a certification from the UN.

“CDM financing is part of risk certification.”

And there was no reason to doubt a UN-based mechanism, Herry said.

With the implementation of CDM financing and trading, Herry said domestic banks could become involved in shorter financing for intermediary purposes, and once comfortable, they could take-up longer exposure.

Despite the potential of CDM financing, Luke Devine of law firm Baker & McKenzie said recognition from the Indonesian government in terms of sectoral-specific regulations on CDM were still lagging, particularly around carbon rights and ownership.

“There is little recognition from the government, very few incentives and very little concrete movement, making it difficult for firms to benefit from CDM,” Devine said.

He said in order to capitalize on the current momentum and interest in development of CDM projects, Indonesia needed to move quickly to align sectoral regulations and provide certainty for ownership of carbon rights.

The environment ministry said between 2008 and 2012, Indonesia could produce a total of 24 tons of CO2e a year from the energy sector and 23 tons from the forestry industry annually.

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(Admin notes: 24 tons of CO2e a year??? is that it?)