In part 1 of this interview, Andrew Pidden and Anthony Wilkinson of CLSA's Clean Resources Asia Fund spoke about their fund strategy. In part 2 they now discuss misconceptions about the environment in Asia.

Chinese cities constitute three-quarters of the worldÆs top 20 dirtiest cities ranked by pollution. If China doesnÆt clean itself up, then all the environmental work done elsewhere wonÆt mean much, will it?

Pidden: The cost to China of being polluted is much higher than the cost of cleaning it up. To clean up the pollution China created in 2004 would cost $136 billion.

It didnÆt clean it up, so it didnÆt spend that money, but that doesnÆt mean it isnÆt paying for it in terms of lost working days. It canÆt possibly progress as an economic powerhouse in the form it has evolved to. It is actually a net gain for a country to clean-up properly. Failure to address it condemns you to a lack of economic opportunity.

How does the Kyoto Protocol work?

Pidden: The way that the Kyoto Protocol was done was based on the idea that rich countries should be able to start addressing these problems more quickly than the poorer countries, who in turn would be able to develop further down the track.

The poorer countries, the annex two signatories to the Kyoto Protocol, would still participate, by having clean energy plants built for them by rich countries. There isnÆt much point pulling down a coal-fired power station in the UK and putting up a wind farm, if over in China they are building gazillions of coal-fired stations.

The idea behind Kyoto, is that rather than pull down the coal-fired stations in developing countries. Developed countries would help fund clean energy development in poorer countries who were desperate for power infrastructure, thus displacing the building of new polluting power stations. Rich countries could then take the carbon credits for that and offset their existing carbon emissions. The next level of Kyoto, from 2012 onwards, envisaged that poorer countries, having benefited from being Annex 2 signatories, would then become Annex 1 signatories.

However, as a result of its response, the US torpedoed any moral suasion that the developed world might have over the Kyoto Protocol.

Who issues Carbon Credits? Where do you have to go and get your carbon documents stamped before you can start trading it?

Pidden: The United Nations verifies them, so what happens is that you build your clean energy plant somewhere like China, next you go through the documentation process and then go back to the UN and say, æThis qualifies.Æ They then have an approval process.

Wilkinson: The World Bank effectively operates as broker. It is becoming easier as the documentation becomes standardized, but youÆre still talking about six months to register your carbon emission rights. The big elephant in the room remains the United States, as they are the largest emitters of carbon dioxide in the world.

What weÆre expecting, driven by changes at the State level in the USA, is that the States will pull together in an initiative, so we hope that before President Bush leaves the White House there will be a material change in the US policy towards carbon emissions. His pronouncement on ethanol could attract other developed countries and that could prove to be one of the biggest upcoming changes in the next few years.

Older rainforests donÆt qualify for carbon credits do they?

Pidden: Correct, mature forests are normally regarded as carbon saturated as trees only absorb when they are growing aggressively. It is not clear they would reward such activity but it would be a fault of the system if they would.

Nevertheless, that doesnÆt mean we can forget about the rainforests. Losing them would have a massive effect on the climate, as rainforests generate their own rainfall. So no rainforest equals scrubby desert and a great deal less growth. The rainforest is never completely mature and does absorb carbon whilst releasing oxygen. it is just not as strong an effect as new growth.

Doesn't the Earth itself, its volcanoes and animals produce a massive amount of CO2?

Pidden: The earth as a planet creates and releases a huge amount of CO2 and methane, and you do get spike events occurring naturally, for example, volcanic eruptions.

For four-and-a-half billion years though, the world has coped with this. The rate of change in those emissions has been sufficient to permit the Earth to react to it, perhaps by stimulating more plant growth, which sucks out carbon dioxide.

WeÆre talking about the marginal effect of the human race, whose carbon emissions push that balance in such a short period of time, a century, a blink of an eye for the world, which consequently is unable to cope via creating new mechanisms to absorb that carbon dioxide, and the result is that weÆve pushed it well beyond the usual parameters that it can deal with and not given it sufficient time to react.

If you looked at biodiversity and asked why so many species are threatened with extinction due to carbon emissions, it would be because they donÆt have the time to move to different latitudes in order to find new habitats, because such a move would normally take place over a long period of time.

You include nuclear energy within your æclean energyÆ strategy. CanÆt nuclear energy be extremely hazardous?

Pidden: The way to look at it is that nuclear energy is carbon free and weÆre talking about clean energy that doesnÆt use carbon dioxide or methane. There is plenty of scientific and political debate right now about nuclear energy. The best science says that global warming is of immediate concern and if you want to generate electricity for a national grid, then you need some sort of energy that you can turn on and off, rather than rely on wind profiles or sunshine.

Typically that electricity now comes from coal, which is the most carbon-intensive fossil fuel and if you want to replace that with a carbon-free version then nuclear offers that option. We are seeing quite a lot of acknowledgement that the immediacy of the problem is leading sustainability funds to re-consider nuclear as a potential component of an investable energy universe.

ArenÆt chlorofluorocarbons (CFCs) far worse pollutants than carbon emissions?

Pidden: CFCÆs are nothing to do with carbon dioxide. CFCs deplete the ozone layer, and that was a problem that was basically addressed by the Montreal Protocol. It was fortunate for the world that there did exist some easily substitutable refrigerant chemicals available, that had been developed around the same time, without regard to the fact that CFCs were ozone depleting. So it wasnÆt a big ask to move the production over.

The ozone layer has an effect on what comes into the earthÆs atmosphere from the sun. Carbon dioxide, the greenhouse effect, affects what then escapes from the Earth. So what comes in, goes through the ozone layer, through the atmosphere, and hits the Earth. A large part of it bounces off the earth and goes back out again.

If we were on the Moon, with no atmosphere, then everything would bounce straight off and you wouldnÆt retain any heat. When the sun goes down there, you freeze. The greenhouse gases, principally carbon dioxide and methane re-capture some of that bounce off and refract it down again at a different wavelength, thus creating an atmosphere that is warmer than it would otherwise be, particularly at night, when we retain more heat.

The ozone layer has a different effect û on what comes in, and thatÆs nothing to do with global warming. It is exactly like a greenhouse in a garden, whose job it is to stop the heat escaping. Hence the name ôGreenhouse EffectÆ.

If you double-glaze your garden greenhouse, a lot more stays in and the temperature increases dramatically. The ozone layer is closing up again. It will take a long time. CFCs are nasty, but that problem is not out of control. Carbon dioxide is a problem, that is out of control.

If youÆre an industrialist or an investor, and can make vastly-increased profits by pumping your effluence into a nearby river, ethics aside, what is the attraction for being environment-friendly, assuming you can avoid the penalties?

Wilkinson: In China, businessmen have taken a very cynical view towards the environmental protection agency (EPA). It is changing though, and our conversations with, for example, executives in the water industry in China, we see the approach of factory mangers changing towards visits by the EPA.

Whilst before they would turn off the taps, then turn them on again afterwards after they had left, taking the approach you were suggesting. Now with closures of factories for pollution reasons, that sends a very clear message that they have to start cleaning up their act.

WeÆre seeing the start of an aggressive move by Beijing to create more stringent environmental legislation, whether air, water or land-based. ChinaÆs emission standards are already more stringent than AmericaÆs, and in fact you canÆt sell American cars in China, because they donÆt qualify to the environmental standard. We think weÆre at the early stages of an environmental legislation ramp-up in Asia, focusing on China, which is obviously the biggest polluter in Asia.

If you build a wind farm with thousands of turbines and windmills, which might replace a power station, doesnÆt that still have an impact, both visually and given the materials needed to build them?

Pidden: Nobody in the world of renewable energy sector thinks that you can displace all the coal, gas or nuclear generation with windmills and solar panels. Wind-power however uses just a fraction of the worldÆs resources. Yes, you still have to build the base and tower using concrete. Strangely, people who question the visual impact of hundreds of windmills, seem to overlook the impact of huge electricity pylons, or the problems of de-commissioning a nuclear power station, or all those oil rigs sitting out to sea.

Questioning the visual impact of windmills is a very ænew ageÆ way of looking at an alternative form of power generation. If you can accept that wind can perhaps reduce 5-10% of a country's electricity baseload, then it helps a nation become more self-sufficient in energy, meaning that it doesnÆt have to invade some other country to get at their fossil fuels. ItÆs a small step towards future energy security.

What getting into wind farms or solar generation does, is move countries to accept that energy needs to be clean. Whether that involves spending money cleaning up smokestacks for coal, or sequestering the carbon out before you burn it, it is an acknowledgment that by-products of electrical power is not something that we can go on expelling into the atmosphere.

If we took nuclear energy as another example and noted that the latest research suggests that if you freeze nuclear waste you can reduce its half-life from a thousand years to potentially just a few years. If that research became commercially applicable, you would find there is no good reason not to generate every single megawatt of electricity by nuclear power, save that uranium itself might become scarce. You could drop coal and oil generation very aggressively.

WeÆre not saying that is going to happen, but that the drive for clean energy has created a new world of research and development focused on these areas. The world is going to experience policy panic when the next inter-governmental report on climate change due out next year, is likely to point out that things arenÆt just bad, but very bad, and is starting to trigger some very nasty side effects.