Public-Private Dialogue on Unlocking the Potential of

Private Finance for Low-Carbon Transition

21-22 February 2019, Tokyo

Building Capacity of Banking Sector for green infrastructure

Finance for Low Carbon Economy

Takashi Hongo
Senior Fellow
Mitsui & Co. Global Strategic Studies Institute
The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian
Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they
represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any 1
consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.
 What is Green Infrastructure for ASEAN?

◆ Green Infrastructure (proposed)

➢ Low carbon energy supply (supply side)
Renewable, hydrogen (zero or low emission hydrogen) and low carbon fuel by CCS
➢ Energy efficiency (demand side)
a/ Efficiency improvement of infrastructure; e.g. efficiency of power generation
b/ Low emission Infrastructure; higher efficiency infrastructure like mass transit
c/ Supporting infrastructure; digital information infrastructure
➢ Supply chain of low carbon energy (bridge between supply and demand)
LNG supply chain for maritime, EV charging network, hydrogen supply chain and CO2
pipeline for CCS and/or CCUS.

◆ Green Infrastructure and SDGs

✓ CO2 emission reduction (SDGs 13)

✓ Improvement of energy success (SDGs 7)

✓ Sustainable economic growth (contribution

to economic growth and innovation) (SDGs
8 and 9) 2
 Barriers and solutions
for scaling up finance to Green Infrastructure

1 Effective allocation of finance resources

2 Investment climate
3 Effective use of incentives

3
(Good Practice 1)
Efficiency of resource allocation by MRV
JBIC’s Green Finance J-MRV for quantification of reduction
Program/policy Purpose Tools

Finance program J-MRV guideline (MRV

supporting GHG guideline) for the
GREEN emission reduction confirmation of CO2
project including emission reduction at the
infrastructure project.

Finance program
supporting higher
Quality
quality infrastructure. List for eligible
Infrastructure /
CO2 emission technology and project
QI-ESG
reduction project is
eligible.

A matrix of conditions;
Conditions of Condition of finance
CO2 emission, technology
finance to coal (best available
and economic
power technology is
development stage of
generation required)
host country
Benefit
Due diligence ・Objective
guideline for reducing
the gap of ・CO2 emission can be monetized when carbon
Financed project shall be
Environment environment
comply with JBIC’s market can be used (upside profit)
Guideline consideration
between host country
Environment Guideline Weakness
and ・It takes time and efforts. Capacity building is
Japan/international.
needed. 4
 Taxonomy of Green Infrastructure – narrative approach
Quality Infrastructure Eligible projects for Green Bond
Category Project types Eligibility Remarks
Energy PV, CSP, wind △ No more 15% from non-
renewable
Bioenergy △ 80% emission reduction
compare to fossil fuel base
one and be sustainable.
Hydropower △ Consider environment and
social risk
Nuclear ○
Coal without CCS X
Coal with CCS △ 100% capture is required
Gas with/without CCS △

Transport EV and charging infra. ○

New road construction X

Bus ○ Infra for bus is “○ or △“

(electric/hydrogen)
Train(rolling stock & ○
infra)
Maritime（vessels） △ Use of low GHG fuel.
Aviation (aircraft) - Use of low GHG fuel
Building Office, residence △ Top 15% low emission in the
area
Urban △ Top 15% low emission in the
development area

Industry Cement, steel, -

chemical – primary
resources
CCS △ 100% capture is required
Processing -
Supply chain △
Source Climate Bond Initiative 5
Note 〇 Eligible, △ Case by case, X Not eligible, - Further study is needed
Source Climate Bond Initiative
(Good Practice 2)
Improving investment climate by policy dialogue

➢ NEDO provides finance support to advanced technology projects at the early diffusion
stage. It is a bridge to the commercial finance stage.
➢ They began to emphasis on policy dialogue for improving investment climate

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(Good Practice 3)
Implementation of incentive program by banks
➢ MOE Japan contracts with commercial banks for implementing some incentive
programs. Banks provides incentives when they can confirm CO2 emission reduction
at projects or companies.
➢ It is expected that regional banks should be involved in this scheme. If they can, this
mechanism will support local economy.

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 Barriers for diffusion of advanced technology and role of banks
types of barrier outline Counter measures
Information ➢ Performance and reliability of new technology ➢ Pilot project by public support
gap is unknown for buyer. ➢ Matching of sellers and buyers
➢ Absence of local partner
Price gap ➢ Higher upfront cost ➢ Subsidies for reducing the cost.
➢ Expensive at the early stage of technology ➢ Scale of the market (cost down by
diffusion learning effect)
Policy gap ➢ Regulation (energy efficiency, CO2 emission) is ➢ Carbon Pricing and energy efficiency
not sufficiently introduced. standard
➢ Difference of regulation from country to ➢ Harmonization of standard for cross
1 Scale up of financing
country to Green Infra project boarder market, like ASEAN market
2 Improve access
Supporting ➢ Weak to advanced
distributiontechnology
network ofinformation
low carbon ➢ Construction of infrastructure necessary
system gap energy for value chain
➢ Lack of supporting infrastructure and system ➢ Implementation system with local
e.g. waste collection system for waste to energy government.

Information access to measures and technology

Access through banks

Strengths
・Technology neutral
・Same interest as owner of the
project.
Weakness
・Less expertize on technology
evaluation 8
Challenge for the scale up of Green Infra finance
～ Limitation of voluntary action ～

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 Green Bond – what is the next step?
➢ Green Bond is increasing and it impact is big. But profit of Green Bond is likely to be the
same as conventional bond.
➢ Regulation which realize risk and return of carbon externality is needed for further
development.

Over Over IPT gap IPT gap

$ million subscripti subscripti (EUR (USD
on on Bond) Bond)
1,400,000
(EUR (USD
1,200,000 Bond) Bond)
1,000,000
800,000 Green
2.3 x 3.4 x -8 bps -17 bps
Bond
600,000
400,000 Vanilla
2.0 x 3.0 x -7 bps -14 bps
Bond
200,000
0
2013 2014 2015 2016 2017 2018
Gap +0.3 x +0.4 x 1 bps 3 bps
Fully-aligned Strongly-aligned Green bond

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 Limitation of voluntary action
➢ Advanced technology should be used but there are two barriers; cost of
technology at early stage and carbon externality
⇒ public support is necessary (but should be limited)

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 Present Situation of Carbon Market
➢ Paris rule book (article 6) has not been concluded at COP24. A key is avoid double
counting (corresponding adjustment).
➢ Demand driven market.

Types of
General description Demand
credits
It is designed to use for achieving emission target It is understood that Japan, Korea,
under Paris Agreement. Paris Agreement set two Australia, New Zeeland and
Internati
types of eligible credit which can use for offset of Switzerland need international offset
onal
national emission; UN administration and Bilateral credit. Also ICAO decided to use offset
offset
cooperation. Joint Credit Mechanism (JCM) is an credits for CORSIA but which programs
credit
option of bilateral cooperation types. Rule book will are eligible is not determined.
be decided in 2019.
It is designed to use for achieving emission target Demand is mostly depending on
Domestic
but not for international commitment. J Credit and domestic regulation.
Offset
China CER are classifies as this category and will be
credit
used for domestic regulation or voluntary offset.
It is called as voluntary standard or private standard Mostly voluntary offset purpose. But
and it is not designed for compliance purpose; VER, California and Colombia use private
Voluntar
Gold Standard, ACR etc. standard for their domestic regulation.
y
Some of private standard has intention
credit
to be eligible program for ICAO
CORSIA.
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Challenge for the scale up of Green Infra finance
～ Project risk and project base finance ～

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 Modalities of finance
➢ Commercial banks are good at short – mid term finance. Institutional investors, such as
pension fund, can provide log term finance.
➢ Green Bond are often used for corporate risk finance but not common for project cash
flow base finance.
➢ Green Infra needs mid - long term finance. Coverage of private finance should be
expanded.

Short term – Mid term Mid term –

Risk Mid term Long term
(3-5 years) (5-7 years) (7-15 or 20 years)
・Institutional investors
・Institutional investors
Sovereign risk ・Commercial bank ・Green Bond
・Green Bond
・MDBs
・Institutional investors
・Institutional investors
Corporate risk ・Commercial bank ・Green Bond
・Green Bond
・Policy base public banks
Structure ・Commercial bank
・Commercial bank
(Collateral, ・Commercial bank ・Policy base public banks
・Institutional investors
policy back up
・Commercial bank ・Commercial bank
Project cash
- ・MDBs ・MDBs
flow
・Policy base public banks ・Policy base public banks
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 Fund approach – Feed in Tariff

➢ FIT can reduce project cash flow risk and it is easier for institutional investors to invest
Green Infra projects through funds. Fund has risk pool function.

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Risk control table for Green Infra Finance

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 Recommendation

➢ Financial institutions
✓ Long term transition strategy
✓ MRV and stress test as tools for banks
✓ Development of innovative finance
✓ Finance for soft landing
➢ Government
✓ Carbon Pricing
✓ Incentive to financial investors
✓ Exit policy of subsidies

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 Improvement of investment climate by policy dialogue

➢ Policy dialogue is recommended for improving investment climate. When public and
private finance is involved, restructuring is easier to be accepted and accelerated.
➢ Finance to support soft landing is needed in addition to new investment.

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 Long term transition strategy
➢ Bank should have long term strategy under climate constraints and climate related
disaster. Dialogue with developer of Green Infrastructure is effective.
➢ Monitoring of international framework and scientific analysis is essential.

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