November 26, 2010 How Financial Tools Help Develop a Low-Carbon Economy Asia Pacific Finance and Development Center 2010 Biennial Forum Atsuhito Kurozumi.

November 26, 2010

How Financial Tools Help Develop a Low-Carbon

Economy

Asia Pacific Finance and Development Center 2010 Biennial Forum

Atsuhito Kurozumi

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Topics

Policy objectives and roles of financial tools

The case for intervention

Examples in Japan

Advantages and limitations

New areas

Concluding remarks

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Increase of CO2 emission, by sector, Japan 1990-2008

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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

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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

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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

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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

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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

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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　　

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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

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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.

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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

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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

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Ap

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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

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Can be encouraged by environmental rating–based finance

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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

?

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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

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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.