Tuesday, September 27, 2011

Raising finance through carbon credits

Earlier this week international law firm, Shearman & Sterling LLP announced they had advised East Asia Power (Xiamen) Company Ltd., a subsidiary of Pacific Oil and Gas, on the sale of certified emission reductions to be generated under the UN Kyoto Protocol’s Clean Development Mechanism regime. Switzerland-based Mercuria Energy Trading SA is purchasing the credits from East Asia Power (Xiamen) Company Ltd. for an undisclosed amount. East Asia Power (Xiamen) Company Ltd. intends to generate the carbon reduction credits over a seven-year period at its less carbon-intensive Fujian Xiamen Dongbu natural gas-fired plant. Emission reduction credits certified under the Kyoto Protocol’s Clean Development Mechanism regime are freely tradable and may be used to satisfy emission reduction targets under the Protocol itself and in the European Union Emissions Trading System under certain circumstances.

It is believed that East Asia Power (Xiamen) Company Ltd. used a portion of the funds to finance the construction of the natural gas-fired plant. Such arrangements can be comparable to a joint venture in many ways and in my view, are a fairly good method of raising finance for smaller projects. I expect that other renewable energy developers will be selling their certified emission reductions in order to secure funding for their projects.

Given the delays with Saskatchewan’s carbon credit legislation, and the huge number of offsets generated by farmers from zero-till agriculture in Saskatchewan, I would have assumed that some enterprising developer, aggregator or emissions trader would have already capitalized on the idea of using the Kyoto Protocol’s Clean Development Mechanism to generate credits in Saskatchewan for sale to European energy traders such as Mercuria.

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