November 26, 2010

1. How Financial Tools Help Develop a Low-Carbon Economy Atsuhito Kurozumi Asia Pacific Finance and Development Center 2010 Biennial Forum November 26, 2010

2. Topics • Policy objectives and roles of financial tools • The case for intervention • Examples in Japan • Advantages and limitations • New areas • Concluding remarks

3. Increase of CO2 emission, by sector, Japan 1990-2008

4. Strategic energy plan of Japan (revised consistent with the “New Growth Strategy”) “Ambitious” targets toward 2030 • Doubling the energy self-sufficiency ratio (18% at present) and the self-developed fossil fuel supply ratio • (26% at present) and as a result, raising its “energy independence ratio” to about 70% (38% at present). • Raising the zero-emission power source ratio to about 70% (34% at present) • Halving CO2 emissions from the residential sector • Maintaining and enhancing energy efficiency in the industrial sector at the highest level in the world • Maintaining or obtaining top-class shares of global markets for energy-related products and systems • Domestic energy related CO2 emissions will be reduced by 30% or more in 2030 compared with • the1990 level, if we promote policies sufficiently. • A 30% emissions reduction means that about a half of the reduction to be achieved from the current • level to 2050 (-80% compared with1990) will have been realized in 2030. Source: METI

5. An example of recent financial measures • Low Carbon Investment Promotion Act(2010) • Aimed at • (1) Providing low–interest rate, long-term funds for developers/manufacturers of “low-carbon products,” such as electric cars, storage batteries or solar panels • (2) Encouraging small and medium enterprises to introduce low-carbon equipment through leases

6. Set of policies and measures toward a low-carbon economy Fiscal, tax, financial policies Environmental tax? Energy security, economy, and the environment

7. Policy objectives and financial tools • Private risk money is far from sufficient to achieve ambitious targets toward a low-carbon economy • Requires effective policy mix in which the cost performance is high, • especially to mobilize private money (cf. GIB plan in U.K.) • Adopting financial tools and the market mechanism • can be highly cost–effective • with less demand on the government’s own revenues than would be the case through subsidies and other measures • can be effective in monitoring the projects • Clear policy, expertise, and transparency of operation are essential.

8. Financial measures toward a low-carbon economy(1) Financing for relevant projects Carbon finance

9. Example 1 Environmental Finance: Case 01; Clean Energy • DBJ provides loans for 36% of all the wind power generation equipments in Japan • For Tomamae Green Hill Wind Park, DBJ conducted financing with project finance scheme Tomamae Green Hill Wind Park • Tomamae Green Hill Wind Park, thefirst commercial wind power generationplant in Japan, is operated in the town of • Tomamae in Hokkaido. • DBJ investigated risks of the plant fromaspects of wind volume, Japan’s wind • characteristics and natural disaster risks. • Finally DBJ provided a loan to thecompany, utilizing a project finance scheme, and supported the plant construction.

10. Example 2 Environmental Finance: Case 02; Waste Management • DBJ provided a loan to a waste management company, Ichihara New Energy, K.K. • With the DBJ loan, Ichihara New Energy constructed a waste thermal power generation plant Ichihara New Energy • Ichihara New Energy constructed a waste thermal power generation plant in Ichihara City, Chiba Prefecture. • The plant has a capacity of 1,950kW ofpower generation and generates electricity by incinerating wastes from construction sites and medical institutions. • DBJ evaluated its feasibility of business and profitability, and provided a long-termloan for construction of the plant. Finance for Clean Energy: Case 01 Finance for Clean Energy: Case 01 Finance for Clean Energy: Case 01

11. Example 3 Greenhouse-gas Reduction • DBJ provided a loan for accelerating the Kyoto Protocol Achievement Plan • With the finance, Nishi Ikebukuro NetsuKyokyu K.K. introduced energy-efficient AC Nishi Ikebukuro Thermal Supply Co., Ltd • DBJ provided Nishi Ikebukuro Netsu • Kyokyu K.K. with a loan for introducing • energy-efficient air conditioning, which • reduces CO2 emission by 9.0% compared • with business as usual. • The company conducts thermal supplies • for hotels, railway stations and • merchandizing stores in the western • Ikebukuro area, Tokyo. • The newly introduced air conditioner supports the western Ikebukuro area’s urban design to develop a low-carbon community.

12. Example 4-1: Carbon fund (1) • JGRF (Japan Greenhouse-gas Reduction Fund) was established in December 2004. • JGRF acquires carbon credits through the operating company, Japan Carbon Finance (JCF). • Investors acquire carbon credits in accordance with their percentages of investment. JGRF Structure Investors CDM/JIProjects ERPAs SERPAs JCF (operating company) JGRF (fund) $141.5m Credits Credits Credits Payment Payment Payment Operational Manager Shareholder 12

13. Example 4-2: Carbon fund (2)Investors The JGRF is invested in by two governmental banks and 29 Japanese companies, covering all the major compliance buyers in Japan. Non-operational investors 13

14. What we have learned • Financial tools may be effective in promoting environmentally-friendly projects. • Especially so in encouraging new (and modern) factories, large-scale changein energy source, epoch-making technologies etc.) • However, they are not a panacea, of course. • After all, you cannot finance projects unless businesses see enough profitability to give them the will to do so. • Effective in some fields, but not so in others • Directed credit may be effective in promoting eco-friendly buildings, cars etc., but what about appliances, business processes, etc.? • How can you encourage such areas where finance alone may not be effective?

15. Additional tools • Building new (and modern) factories, entailing large-scale energy-switching and epoch-making technologies, is critical. But the key to realization of a low-carbon economy is accumulation of companies’ steady KAIZEN-type efforts. • The point is how to give companies enough incentives for those efforts. Finance can play an important role in this by providing effective review and monitoring.

16. How money encourages “environmental” actions in businesses Business entities Financial institutions, Investors, Suppliers Etc. Ccc Buyers, Consumers Info Products, Service Development and Production Plan Sell Pushing the Environmental Actions Forward “Environmental” money Eco loans Eco deposits Rating Understanding and Accepting Eco ETF, Eco bonds

17. Financing based on environmental ratings Environmental rating–based financing • Preferential interest rates on financing available according to an organization's environmental rating (environmentally responsible management evaluation) • Evaluation with a screening sheet containing 120 questions developed based on the exchange of information with the United Nations Environment Program (UNEP) Finance Initiative and Japan's Ministry of the Environment(Conducted through interviews) • Extensive evaluation experience: More than 100 ratings conducted since introducing the system in 2004 • Expertise with a wide range of clients, includingmanufacturers and non-manufacturers from medium-sized companies with close regional ties to mega corporations • Benefits • Through interviews conducted during the process of acquiring environmental ratings, clients receive objective evaluations, providing them the following benefits: • Incentive to employ additionalimproved environmental measures • Clear explanation of environmental measures to stakeholders Evaluate company credit risk, collateral and other factors Environmental rating is also considered in setting interest rates. Application Conduct environmental screening Financing (Ineligible) 17

18. Financial measures toward a low-carbon economy (2) Can be encouraged by environmental rating–based finance

19. （billion yen） 100 200 80 150 60 100 192 40 149 116 50 20 40 -289 0 0 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 Expansion of environmental rating–based loans Cf . SRI Funds net increase per year （billion yen） 協調行 ? DBJ （単独＋協調） By DBJ

20. Regional expansion through coordination with regional banks Regional Enterprises DBJ Group DBJrating Ministry of the Environment Bigger Environmental rating subsidy Support Regional Banks SMEs Rating supportedby DBJ Support Smaller Local Government

21. Concluding remarks • Financial tools can be effective in promoting environmentally-friendly projects in areas where private risk money is insufficient to achieve policy targets, with less demand on the government’s revenue. • …….. as long as clear policy, expertise, and transparency of operation are assured. • This supports the case for policy intervention and directed credit in promotion of a low-carbon economy. • Innovative scheme design, based on each country’s specific situations, • is expected to play a key role in supplementing traditional loans and investments, which have limitations. • International cooperation, such as the sharing of views and experiences • (like through this forum) and the provision of technical assistance in the finance area, will be increasingly important.