The New Climate Debt: Carbon Trading Wrapped in a Green Bond Proposal

During the upcoming negotiations on climate change in Cancún, Mexico, International Emissions Trading Association (IETA) members will be trying to sell their June proposal on “green sectoral bonds” as a “new carbon mechanism.”1 Like a conventional bond, the “green sectoral bond” is a debt instrument issued for a specific purpose, in this case for investments to meet bond-stipulated greenhouse gas (GHG) reductions, and whose principal must be paid back with interest over an agreed time period.

Conventional bonds require collateral for bond repayment, such as physical assets that can be sold for cash, or in some cases abstract concepts, such as “the full faith and credit of the United States” for government-issued bonds. The collateral of the “green sectoral bonds” would be developing country carbon emissions credits, which bond creditors and other investors can buy and sell as often as they wish. And, of course, developing countries would be required to pay back the bond principle with interest, if they wish to retrieve their carbon emissions collateral to trade for their own profit. The following brief analysis explains some of the features of this proposal in the context of the climate change negotiations.

IETA brings together about 170 transnational financial, law, energy and manufacturing firms who believe that trading carbon emissions and their financial derivatives is the most effective way to induce emitters to invest directly in low greenhouse gas–emitting technology.2 Given the IETA members’ economic power, revolving-door presence in government and lobbying clout, developing country governments may view “green sectoral bond” funds as a reliable form of climate finance. If implemented, the green bond proposal would transform climate finance from a public fiduciary duty primarily funded by developed countries to a new source of developing country debt to private creditors—and a new source of profits for IETA members, particularly from trading the emissions credits in the secondary market of carbon derivatives.