Turning hot air into hard cash
(Filed: 22/09/2006)
Founder of the world's biggest private carbon fund tells Charles Clover why he believes Kyoto will lead to real change
The launch of the world's biggest private carbon fund must have shocked those who believe that rapid climate change is "inevitable" and that the Kyoto agreement will be "ineffectual".
Climate Change Capital (CCC's) fund is valued at £455m and is expected to top £536m ($1bn). Among its heavyweight investors are two Dutch pension funds and the energy giant Centrica. Its rise, and that of the other carbon funds, shows that some very big players think Kyoto will be effectual - and will make a greenhouseful of money.
James Cameron founder of Climate Change Capital
James Cameron, the founder of the CCC, believes that Kyoto will do more than that. The 44-year-old, an international lawyer at both the Rio and Kyoto treaty talks before he switched to investment banking, believes that tackling climate change is a necessity and that Kyoto provides a workable framework for doing so. But what has made big investors listen is that he thinks Kyoto, and the green economy it introduced, means opportunity.
Specifically, Mr Cameron believes that the international legal framework it set up will, by placing a value on every ton of carbon saved, enable international markets to begin solving the world's most serious problem in ways more inventive than mere politicians could ever devise. You can tell when you arrive in CCC's offices in Grosvenor Street - the kind of address favoured by hedge funds and boutique merchant banks - that a number of very rich people are backing his legal knowledge, rather than the spluttering of the ideologues.
Three years ago, CCC was a company with three desks in the Park Lane offices of a friend of a friend of Mr Cameron's. It has gone from holding no funds to holding funds worth more than $1bn. It makes a profit, is already worth tens of millions of pounds, and those three employees have multiplied to 90. And in under two years, the lease runs out, it will need an office for 150 to 200.
CCC has on its advisory board Lord Oxburgh, a former chairman of Shell, who knows about fossil fuels and the alternatives to them. And its chairman is Otto Van der Wyck, the founder of BC Partners, who knows about private equity investment. CCC's latest carbon fund is 10 times larger than the one it launched last year – and a large fund by private equity standards. As Mr Cameron, its vice-chairman, says: "Anyone who understands business growth will be interested in that."
How, then, is one meant to reconcile the frantic scramble to get on the carbon fund bandwagon with the view that Kyoto will be ineffectual, expressed by Ruth Lea, a director of the Centre for Policy Studies and a Daily Telegraph columnist, and Frances Cairncross, president of the British Association, holder of this autumn's Festival of Science?
Mr Cameron believes the sceptics "simply don't understand the Kyoto Protocol and haven't done a good economic analysis". He describes Ms Lea's stated view that China and India were "excluded" from Kyoto, a treaty both countries have ratified, as "little short of ridiculous".
Drax power station, Britain's biggest coal-fired station. Some claim it is the UK's largest single emitter of carbon dioxide
Specifically what the sceptics have not understood, he says, is that while China and India, the two biggest drivers of developing world carbon emissions, were not given an emission reduction target under Kyoto, they are allowed to trade audited emission reductions with companies in the developed world. Western companies are likely to be short of allowances to pollute – under the European Union trading scheme which began last year and will get tighter from 2008.
And it will usually be cheaper to buy them from the developing world than achieve them here.
This mechanism – the Clean Development Mechanism (CDM) - allows companies like his to buy emission reductions in China, at the current going rate of $7-$12 a ton of carbon saved by building Chinese wind farms, and sell them to European companies in a couple of years at whatever the going rate - currently fluctuating at between €15 and €30. The price depends on how good politicians are at capping emissions but is likely to be higher.
CCC's new fund made its first investment in the carbon credits generated by Zhejiang Juhua Co Ltd, a Chinese chemical company, which produced an HFC refrigerant rated 12,000 times more powerful as a greenhouse gas, molecule for molecule, than carbon dioxide. The gas will be incinerated using proven technology and the credits sold or traded under the EU's carbon trading scheme.
CCC estimates that this alone will achieve a reduction of 29.5m tons of carbon dioxide equivalent over six years, or more than a third of the annual greenhouse emissions of UK households.
What CCC does for its money is invest in projects, do the paperwork needed to get those projects accepted by the executive board of the UN Framework Convention on Climate Change (UNFCCC), based in Bonn, and take the risk that there will be a profit in it. This week, the UNFCCC secretariat estimated potential annual green investment flows between developed and developing countries at up to $100bn.
Of course, there are plenty of uncertainties. The carbon market is based on a legal mechanism. "It depends on European governments holding their nerve and doing the right thing" – ie setting caps that makes industry actually do something.
That's a big if and will require sustained lobbying. There is also the sneaking suspicion that carbon projects could become scams which produce no reductions at all. Mr Cameron says the way he does it means the firm doesn't pay unless real reductions are proven by independent, indemnified auditors. All the projects are on the UNFCCC's website and are crawled over by accountants and environmentalists.
No one knows quite how successful carbon trading will be, either in reducing carbon or making money. The projections that Kyoto will mean only a two per cent reduction in carbon emissions - even including America are much quoted by sceptics. They were based on modest amounts of carbon being traded - still a possibility.
I remember another possibility was discussed as we whiled away the long hours in Kyoto back in 1997 while the global deal was done: that the carbon market might be so successful it would make countries' individual carbon-reduction targets irrelevant, because of what Cameron calls "capital markets' tendency to over-achieve."
Just think of it: a green economy in which politicians played very little part.
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