The thriving carbon credit market hinges on the final decision, as a move to scrap the current model could cost traders billions and slow the rate of CO2 mitigation. The future is so uncertain that the Post-2012 Carbon Credit Fund is among the very few buying post-Kyoto carbon credits.

At the same time, the US administration led by Barack Obama represents a new future for climate change, which bodes well for Mexican renewable projects. The two countries soon could begin trading carbon credits under either a three-nation trading bloc with Canada or as part of wider regional initiatives.

BNamericas' Mexico City bureau caught up with Santiago, Chile-based CDM senior project manager Arturo Brandt from German carbon credit company First Climate Group, which is the investment advisor to the Carbon Credit Fund. In this interview, Brandt discusses Mexico's post-2012 potential for generation of carbon credits in light of both a possible post-Kyoto agreement and the new US administration.

BNamericas: I haven't seen others buying post-2012 carbon credits. Is that because there is too much risk?

Brandt: It's because there's uncertainty. It isn't known whether the Kyoto Protocol will be renewed or not.

Facing that uncertainty, a lot of people are opting not to develop projects because they don't know what is going to happen. In those projects where the generation of revenues from carbon credits is very important, for example, in the case of landfills or the reduction of nitrous oxide, the uncertainty about income beyond 2012 impedes investment.

It is a market that runs to 2012, given that the negotiations for a framework to succeed Kyoto will not be finalized until at least the UN conference in Copenhagen at the end of this year. Today there are many buyers who purchase carbon credits under the condition that Kyoto be renewed or that there be some other international regulatory framework that recognizes the credits.

The Post-2012 Carbon Credit Fund is the first fund that guarantees the purchase of post-2012 carbon credits, whether the condition of a Kyoto successor is met or not.

So it is a very important competitive advantage for First Climate to be the investment advisor to this fund, because in that market segment there aren't many buyers with purchase conditions similar to the fund. What we are doing now in Latin America is focusing on post-2012.

BNamericas: Will that also be the focus specifically in Mexico?

Brandt: Mexico, despite its enormous economic importance, is in the very early stages of development for CDMs. First Climate will not ignore pre-2013, but also will focus on those markets where we have certain competitive advantages.

If you look at the 200 projects in existence in Mexico, you see there are 138 that concentrate on two technologies that come from the burning and capture of methane for changing the system of treating pig waste. But if you look at how many projects there are in renewable energies, there are 11 in wind energy, five in hydroelectric and two or three in energy efficiency. It is in those segments that one can develop interesting projects that are capable of generating carbon credits.

BNamericas: Do you think that's because people don't know what will happen after 2012 in Mexico?

Brandt: I don't have a clear answer to that. I am trying to see why there aren't more projects.

Obviously I am much more familiar with Chile than Mexico. Chile today has more or less 55 projects in the pipeline, though that could drop to around 40. But Chile, from an economic perspective, is a much more privatized country.

Mexico is a country that is still very state-run. So many people are waiting for the government to do something. For that reason, the issue of the reform of [state oil company] Pemex is important because it recognizes the issue of renewable energy generation; the government fixes certain goals. I hope that projects begin to develop.

BNamericas: But on Mexico's energy reform front, we still are waiting for regulations for renewable energies, which should be coming out in the middle of this year.

Brandt: The energy reform law establishes how things will be done, but regulations need to be released that indicate when and what the procedures will be, etc. So in Mexico I think that could be a very important driver.

The change of leadership in the US also is important because Barack Obama obviously has a different posture than the one George Bush had toward climate change, and there are some local initiatives in the US that recognize the generation of carbon credits as a commodity.

The fact that 70% of Mexican exports go to the US generates great interest in US politics. As such, that could be a good alternative for the creation of a certain carbon credit market.

But it must be made clear that the European Union and the Kyoto Protocol already have a functioning market, which creates an advantage with respect to the potential US market that is in development.

BNamericas: Everyone believes Obama is going to sign a new international agreement, isn't that right?

Brandt: I think so. He is going to participate in a new agreement, but the question is when. I don't know if negotiations will happen from here to December [for the UN Climate Change conference in Copenhagen], but obviously Obama has rather drastic goals for greenhouse gas reduction and non-conventional renewable energies that he hopes to implement in the US.

Regardless, one has to remember the fact that the US is a federal nation, and there can be regulations at state levels. There are a few initiatives - for example, the Regional Greenhouse Gas Initiative (RGGI) - in which there are various states on the east and west coasts that starting in 2009 will begin operating with CO2 cap-and-trade systems.

In fact, there already was a tender for allowances, which were awarded at a price of US$3.28, if I'm not mistaken. That gives us an idea of the value of the allowances, which contrasts with the price paid in other markets, like the one created by the Kyoto Protocol that is at roughly US$10 currently.

BNamericas: If those systems are implemented, could that be a driver to projects in northern Mexico?

Brandt: Exactly. Those initiatives are underway. Mexico is attentive, because there could be an opportunity.

BNamericas: But it seems to me that Mexico has the majority of carbon credit opportunities in wind down south or solar projects in the northwest. I imagine many large companies already have purchased those lands, or already have the base to carry out those projects if the opportunity presents itself.

Brandt: In Chile something rather curious is happening where there are many companies developing wind projects that are buying land and blocking them off. They leave them there in case the possibility arises to install the project.

In Mexico, perhaps the same thing could happen in the south. Now, there is an issue there with the communities. A lot of times there are indigenous laws that do not allow a single person to negotiate, but rather the entire community has to do it. So a problem arises for project developers.

Transmission lines are another barrier.

Now, where is the potential in Mexico? In the issue of landfills, there is enormous potential. Mexico is a country with 100mn inhabitants. There is major potential for the generation of carbon credits from methane capture.

The same thing happens with the development of renewable energies, especially in relation to wind generation and energy efficiency. Photovoltaic plants, on the other hand, are less apt to be CDMs given that the investments are very large, in effect several times larger than the revenue from the sale of carbon, which impedes these projects from being seriously recognized as CDMs.


BIOGRAPHY:
Arturo Brandt has experience in consulting and leadership of interdisciplinary task forces for CDM projects in Latin America. He previously worked for the World Conservation Union (IUCN); consulting firm POCH Ambiental; law firm Vergara, Melo and Compañía; and was director of the environmental studies center of Santiago's Universidad de los Andes.

Brandt holds a postgraduate degree in environmental law from the Vermont Law School in the US.

ABOUT THE COMPANY:
As a buyer, intermediary and investment advisor, First Climate identifies emission reduction opportunities worldwide and facilitates the development, financing and implementation of CDM, JI and VER projects. The company offers innovative investment solutions for owners of and investors in emission reduction projects by tapping conventional and specific carbon financing sources. The Post-2012 Carbon Credit Fund is made up of five European financial institutions: France's Caisse des Dépôts; the European Investment Bank; Spain's Instituto de Crédito Oficial; Germany's KfW Bankengruppe; and the Nordic Investment Bank.


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