Ireland eyes share of REDD investment following tax breaks
February 15, 2012
Ireland is hoping to attract a growing share of investment in a nascent forest carbon market after the government earlier this month recognised forest-based credits in its tax code, enabling banks and asset managers to offer them as financial instruments.
Dublin’s International Financial Services Centre (IFSC) said the favourable treatment now given to forest-based credits could mean Ireland would play a major role in the securitisation of future financial products generated through Reducing Emissions from Deforestation and Forest Degradation (REDD).
“The changes to Ireland’s tax code enable companies to include carbon credits in a securitised situation and make it more tax efficient,” said Paul Harris, head of natural resource risk management with Bank of Ireland and a participant in ‘Green IFSC’, that aims to promote Dublin as a cluster for carbon and environmental finance.
Credits from different forest-based projects could be packaged as a single product to make the sector more attractive to institutional investors, Harris said, providing another area of expertise for Ireland’s financial sector, which has been seeking out new markets in the wake of the 2008 global financial crisis.
However, avoided deforestation projects haven’t yet been fully recognised in an international climate regime, meaning analysts have to guess the extent of future demand, while financial institutions lack a forward price on which to base projections of future returns.
“We’re not expecting financial institutions to pump large amounts of cash into the sector immediately, but it’s important for Ireland to be well placed to take advantage of new opportunities,” Harris said.
U.N. climate talks at the end of last year agreed that markets should play a role in funding efforts to slow the rate of deforestation.
But negotiators have yet to map out in detail how such an initiative would work in practice, meaning investors are having to study REDD schemes in the voluntary carbon markets in order to predict how a U.N.-administered scheme would evolve.
The U.N. Environment Programme estimates that $17-33 billion a year is needed for developing countries to slow down and eradicate deforestation, an activity said to be responsible for 15-20 percent of global greenhouse gas emissions.
The move to build up expertise in REDD-related finance is the latest initiative by the IFSC to widen into fast-growing markets such as Islamic finance, commodities trading and airline finance.
Last year, Ireland’s government gave favourable tax treatment to financial products derived from voluntary carbon credits in addition to the earlier inclusion of offsets generated through the Clean Development Mechanism (CDM) and EU Allowances.
At least one large asset management firm could launch a specialist forest-based carbon finance product this year, Harris said, while law firms, consultants and accountants would also benefit if the Irish finance sector was to be a centre for forest carbon trading, said Garry Ferguson, a partner with law firm Walkers.
“Giving preferential status to sectors such as carbon trading creates employment and taxes on those new jobs, it also adds to the existing regulatory and taxation infrastructure that helps Ireland compete with other financial centres that specialise in asset management and investment, such as Luxembourg, Netherlands, Hong Kong and Singapore” he added.
Besides providing securitised investment products based on carbon credits, early last year Ireland’s government said the country’s finance sector should take a leading role in raising capital for cleaner energy projects, climate bonds, investment funds and private equity.
By John McGarrity