Investors in "green" assets hope that upcoming U.N. climate talks in Mexico will salvage a deal to cut greenhouse gas emissions in 2011, and in the meantime widen and simplify existing carbon markets.
The U.N. process could boost the private sector if it builds trust in global climate action and so increases overall ambitions, such as to deploy renewable energy technologies.
The negotiations are supposed to agree in 2011 on a global successor to the Kyoto Protocol, whose present round expires in 2012.
A Copenhagen summit last year failed to do that, and the focus now is on restoring momentum, especially for agreement next year in South Africa on new, more ambitious carbon caps.
One particular private sector focus at the Nov. 29-Dec. 10 talks in Cancun will be on the carbon markets.
Kyoto capped emissions by industrialised countries through 2012, driving them to invest in clean energy projects in developing countries to earn carbon tradable offsets, which would help them meet their limits.
"A commitment from Kyoto countries to extend the protocol for another period would prompt some positive (market) reactions," said Matteo Mazzoni, an analyst at Italy`s Nomisma Energia.
While Cancun will not achieve a broad climate deal, rich countries may agree to insert their existing, national emissions targets to 2020 under an extended Kyoto Protocol in a wider deal to be finalised next year.
But that is an unlikely step, because it would hinge on similar agreement by China and the United States.
The United States did not ratify the original protocol, which does not bind the emissions of developing countries.
The carbon market also wants progress on simpler rules governing trade in carbon offsets under the so-called clean development mechanism (CDM), worth about $20 billion last year.
Businesses as well as governments largely accept that the U.N. process is the best way to drive action.
"What`s become clear this year is that there`s no credible alternative. What the international process does is help build confidence," said Nick Robins at HSBC.
Cancun may deliver agreement on a deal to widen the CDM to include rainforests, which would allow investors to earn offsets from protecting forests, which store carbon in the trunks of trees and in the soil.
But some environmental groups are sceptical of progress on such a deal to reduce emissions from deforestation and degradation (REDD), saying details are few and so any decision in Cancun would carry little weight.
"There`s no funding attached and details are up in the air," said Simon Counsell, director of the Rainforest Foundation UK.
Counsell said that REDD might become a bargaining chip in a wider deal, given that it could direct rich country funds to tropical nations, many of which are demanding that the United States take a more ambitious stance in the overall talks.
"There are huge issues of governance; it`ll probably take some years," he added, referring to continuing corruption and illegal logging in some tropical countries.
Beyond carbon markets, the private sector is looking to possible opportunities in bilateral deals among countries on the fringes of the U.N. process, but these lack details so far.
The Cancun talks should clarify where climate aid would come from, under targets agreed in last year`s Copenhagen Accord, said the ratings agency Standard & Poor`s Ratings Services on Wednesday, suggesting both carbon markets and bilateral deals.
"Although this role for private finance has been clearly identified, there`s still a lot of work to create the products," British climate change minister Greg Barker told reporters on Wednesday, referring to the role of capital markets.