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The potential market size for certified emission reductions
(CERs) from CDM projects is
enormous; an estimated amount of about 430 million tonnes
of CO2 must be reduced
globally in order to meet the Kyoto Protocol's emission reduction
targets (CERES 2004). A significant quantum of this target
will be met through CDM projects in the developing countries.
Consequently, the financial sector will have to play a vital
role-to provide project financing, and/or insurance coverage
for CDM projects.
The design of a CDM project has a major bearing on its success.
Though there is increased interest in CDM projects in the
industry, the current level of interest by banks and insurers
is low. At present, the activities in the CDM market are dominated
by multilateral institutions (e.g., World Bank) and national
governments, which have to meet different risk/return requirements
compared to corporate players. Clearly, the low level of engagement
is due to the risk structure of CDM projects, institutional
barriers, and the complexity and uncertainty in implementing
CDM projects.
Conventionally, projects that qualify for CDM investments
have been making use of the following standard financial instruments
offered by banks and FIIs:
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