Ben Aris in London -

Distracted by the immediate problems of an imminent meltdown of the global financial system, global warming and the problem of rising carbon emissions has fallen off the radar for most governments, but not for the European Bank for Reconstruction and Development (EBRD).

Carbon-reduction investments have grown to just under a third of the bank's entire investment portfolio, Jose Tanaka, head of the EBRD's division that deals with the issue, said at the EBRD's annual meeting in May. "The time to act is now, but where is the action?" he told journalists at a press briefing. "The problem is not going to go away."

Since 2006, the bank has launched over 450 carbon-reduction projects that range from the large - focused on stopping Russian and Kazakh companies from flaring gas - to the small, such as putting heating insulation in "granny flats" as Tanaka calls them. "If we were only concerned with bringing down the overall levels of carbon emissions, then we would concentrate all our efforts on working with a couple of energy companies flaring gas, where the reductions can be counted in the million parts per metre for each project. But we need to take a more balanced approach if we are going to change attitudes and make people aware of the problem," said Tanaka.

And the EBRD is having an impact. Its energy efficiency programme aimed at improving the use of energy at places like bakeries has already reduced the level of emissions by the equivalent of Serbia's entire annual emission levels of 46m tonnes of carbon. But even that is not enough; the International Atomic Energy Agency (IAEA) reported last year that the overall levels of carbon emissions continues to climb strongly, up 38% between 2006 and 2011 to 389 parts per million.

Now the bank is stepping up the pace. In 2011, the EBRD contributed $9bn of investment in 380 projects that have a total investment of $29.5bn, which means carbon reduction and energy efficiency made up 29% of the bank's entire investment portfolio.

Baking hot

Part of the reason for the bank's push is that energy efficiency and carbon reduction investments work especially well in emerging markets, says Tanaka. Widely seen as a rich world's problem, in developing markets issues like the cost of energy and pollution actually impact the poor more directly than in the West. Efficient energy and clean power producers bring much more immediate health benefits, plus they save money for the government that is badly needed for other things like social services and infrastructure investment. The trick is covering the high capital costs associated with these types of investment.

Here a second problem comes in. As part of the drive to finance a transition to more responsible energy production following the Kyoto Protocol and then the climate conference in Copenhagen, a system of carbon credits was introduced that was supposed to allow countries with carbon surpluses to sell allocations, but the system has failed to take off. Of the $9bn the EBRD contributed to a total value of $29.5bn of projects, only $100m-$120m of the financing was raised in the form of carbon credits.

Ironically, despite being a notorious polluter, Russia has one of the world's biggest surpluses of carbon credits (because of its continent-wide forests). In January, the state-owned Sberbank said it would offer 100m carbon credits for sale worth approximately $500m, four times as many as the year before, but perhaps predictably, nothing happened.

Part of the problem is the Russian government has made Sberbank the exclusive agent for Russian carbon credits (buyers of the credits have to pay the bank a fee on each deal). Secondly, the enormous volume of Russian credits potentially available - over 6m credits say experts - would be enough to swamp the European market and destroy the still-uncertain price for carbon credits and so destroy the market at its inception. "Six years ago, we were expecting carbon credits to be a major source of financing, but it is not - it has proven to be exceptionally difficult to develop," says Tanaka. "Where is the price of carbon now? The impact of the international economic and financial crisis means there is a difficult situation and the market that was supposed to be given an indication on the price of carbon is not. We need to continue to work on developing this market, but we are clearly at the bottom of the cycle now."