Climate change financing will be central to the success of the upcoming United Nations (UN) summit in Cancun, Mexico, and offers the possibility of an agreement on an adequate mechanism to combat global warming, a report by Standard & Poor’s (S&P) said.
Any agreement made at the UN Framework Convention on Climate Change Summit being held towards the end of the year must be coupled with new sources of funding amounting to $100bn a year, S&P said.
Michael Wilkins, global head of carbon markets at S&P, said, ‘To be both feasible and acceptable to UN host countries, we think an effective financial framework for climate change should secure short- and long-term funding commitments from the developed world to developing countries.’
He added, ‘It should also include bilateral and multilateral delivery channels for the agreed funding.
Furthermore, the framework should set out institutional arrangements for the measurement, reporting, and verification of both the delivery and allocation of this funding, in order to build trust between developed and developing countries and promote accountability.’
In a special report by S&P’s Rating Service, Global efforts to address climate change are just warming up, the company said developed countries also need to show evidence that they are delivering the $30bn ‘fast start’ funding for climate change mitigation as outlined in the Copenhagen Accord agreed on in 2009.
While capital markets do have a potential role to play in financing climate change mitigation, there are several stumbling blocks that are needed to be overcome before institutional investors will allocate substantial amounts to their capital to low-carbon projects.
The report found companies in Europe and Asia Pacific to be at different stages of preparedness for the introduction of carbon pricing, emissions trading and other market-based instruments.
In addition, it said if the US were to introduce a countrywide carbon cap-and-trade scheme – which indicated to a global treaty being put in place – carbon may eventually become a larger commodity globally than oil is today.
Meanwhile, Phase III of the EU Energy Trading Scheme, which takes effect from the end of 2012, could increase pressure on credit quality for European companies.
‘We think this pressure will be especially acute in the power sector, which has to hedge power sales with future carbon allowance purchases three years ahead,’ S&P said.
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