Green sector bond could unlock climate funding: IETA

COLOGNE (Reuters) - A new green sector bond mechanism could help stimulate capital market investment in climate change, the International Emissions Trading Association (IETA) said on Friday at a carbon conference.

Green sector bonds could help drive financing to ensure large capital investment flows into low-carbon technologies in developing countries, IETA said in a draft document seen by Reuters.

"We are seeing consolidation and a rapid pullout because the private sector cannot deal with political uncertainty post-2012," said Imtiaz Ahmed, executive director at Morgan Stanley and IETA member, referring to when the U.N.'s Kyoto Protocol agreement expires.

"Clean technology has not seen a surge in finance. Money is going into traditional fossil fuels. This mechanism ensures scaling up and provides a bridge between the public and private sector."

Under IETA's proposal, green sector bonds should be issued with the approval of an international body, which would administer the mechanism.

The oversight body would apply standards to the bond, which should remain unchanged for a certain period of time, after which they could be reviewed, IETA said.

Host countries would then issue the bonds with credit support by one or more international financial institutions.

They would be issued with a low-coupon rate and a stream of carbon credits to be split between the investor and the project sponsor. They should be designed to be fully tradable.

Holders of the bond could be offered special tax advantages to provide additional support, IETA added.

If emissions reduction targets are not met, the bond issuer would have to pay a cash equivalent to holders. If a sector covered by the bond failed to deliver agreed emissions cuts, carbon credits would not be issued to bondholders.

If reductions failed to happen for a pre-defined number of subsequent years, the bond issuer or host country would have to make an early payback of the bond, IETA proposed.

(Editing by James Jukwey)