Banks, including Deutsche Bank, Dresdner Kleinwort Wasserstein and Rabobank, are looking at using carbon emission derivatives to reduce the cost of project finance loans. The firms would strip out the carbon credits and then either sell them as forwards and options or use them as a revenue stream for the loan. Justin Mundy, senior advisor in the global markets group at Deutsche Bank in London, predicted it would be offering these loans within a year. The major users will be power generators, oil refiners and heavy industry, according to Steve Drummond, ceo of emissions broker CO2e.com in London.
However, a major problem is valuing the certificates as they will not be recognized until Russia ratifies the Kyoto protocol early next year and even then the real value will not be until 2005, when the European emission trading system starts, or 2008, when the Kyoto treaty comes into effect. Ingo Ramming, an official in the structured trading group at DrKW in Frankfurt, said the long-term nature of these contracts means the firm is examining the interest rate component and would likely have some form of interest rate derivative embedded in the carbon derivative.
Deutsche Telekom is also studying the benefit of stripping the carbon certificates out of project finance loans as an end user. It has joined a group known as the Hessen-Tender, which will earn carbon certificates through building project finance loans, but it will be lending the money rather than borrowing it, said Markus Reichling, responsible for environmental and sustainability strategy at Deutsche Telekom. In return for a low interest rate the telecom giant will get the certificates the projects generate. Reichling envisages most of the borrowers being power or chemical companies.
