Clean Development Mechanism (CDM) and green bonds as financial mobilizers. An opportunity for climate-aligned investments in Latin America?

Abstract

Climate is changing, the atmosphere and the ocean are warming up, snow volumes and ice are diminishing, sea levels are increasing and greenhouse gas emissions keep increasing (IPCC,2013). The upcoming danger of climate change has invoked the international community to take immediate action to tackle it. Embracing green finance tools within this process has been ratified by several countries by the Kyoto Protocol in 1997 and lately through the Pari Agreements in 2015, both agreements convened by the United Nations Framework Convention on Climate Change (UNFCCC).

In the Kyoto Protocol, both developed and developing countries agreed to finance the reduction of greenhouse gas emissions through the Clean Development Mechanism (CDM), in which developed countries with the commitment to reduce or limit emissions, must implement emission reduction projects in developing countries in exchange for credits for Certified Emission Reductions (CERs) (Ledezma & Caballero, 2013a) which may be traded in carbon emissions trading schemes.

Globally, the issuance of CERs at the end of the first Kyoto commitment period (2008-2012), exceeded 1,000 million units, which shows the dynamism of the mechanism (UNFCCC, 2011). On the other hand, Green Bonds (GB) or fixed income debt securities are another climate-aligned financial market mechanism issued by multilateral organizations, state or municipal public entities, and private financial and non-financial entities. The issuance of Green Bonds in Latin America has shown a conservative development according to the report of the Climate Bonds Initiative (2018).

The aim of this study is to obtain a comparative analysis of the two mechanisms described above, in terms of their contribution to the region's energy policy. The methodology starts from the case study in countries that have implemented such instruments in a relevant manner (Brazil and Mexico).

For the comparative analysis, aspects related to the procedures, the evolution, the advantages and / or disadvantages of implementation were reviewed, with special emphasis on the selected countries and from the point of view of their attractiveness for international investors. The preparation of the study required a bibliographic review of academic sources (doctoral theses), normative documents related to investment in the capital market, statistical sources related to organizations that provide information on Latin American finances, official websites, and a review of scientific articles.

The resources obtained by Latin America and the Caribbean (LAC) for the application of CDM projects as a result of the implementation of energy projects are significant. This mechanism has promoted investments in technologies with lower energy consumption. The main barriers to its development are the lack of diversification of emitters and the fluctuation of the carbon market that discourages investments. Regarding green bonds, the market is fickle and still requires strategic conditions for its development. Brazil is at the forefront in attracting the two mechanisms; development banking has played an important role in supporting these instruments.

Main conclusions: The results suggest that, among the analyzed mechanisms, those highly participated by the State are the ones that have better results in terms of energy investments. Regarding the CDM, there are expectations about what will happen in 2020 when the commitment to the Kyoto Protocol will conclude and therefore the formal process of mobilizing resources towards developing countries. Green Bonds have financing potentials in the green market, but there is no clear horizon in Latin American markets.