— Seven Countries on a Fast-Track Energy Transition Will Boost Demand For Compliance AND Voluntary Carbon Credits

—Agribusiness and Mining Companies Can Tap Even Cheaper Loans if They Buy UN, Gold Standard and Other Carbon Credits

By Mathew Carr

Oct. 20, 2020 — LONDON — A $1 billion finance package to help cut emissions in seven emerging countries has been structured also to stoke demand in struggling carbon markets.

It shows how at least some governments are inclined to try new types of relationships with industrial companies, development institutions and private banks to win finance that will speed up the transition to cleaner economies.

The program by the European Bank for Reconstruction and Development will grant discounted loans to companies — including those in mining and agribusiness — if they cut emissions while scaling up use of carbon markets.

Armenia, Jordan, Kazakhstan, Morocco, Serbia, Tunisia and Uzbekistan make up the program initially, which is designed to be repeated and expanded so more and more economies around the world begin including the cost of greenhouse gases in their business plans.

The program nearly didn’t make it off the ground. Developing countries, which are not the main cause of climate change, are suspicious of carbon-market finance being offered by richer countries — after years of broken promises. The value of existing UN credits plunged to near zero because of weak demand, as the U.S., Japan and Russia pulled out of the system partly because the 2012 and 2020 targets turned out to be weak.

The EBRD measure did eventually get signed off in August by the Green Climate Fund board, after some wrangling. “It finally got approved, a bit begrudgingly,’’ on the last day of a multi-day board meeting, said Margaret-Ann Splawn, executive director of the Climate Markets & Investment Association, who observed the process. “There was a division of perspectives” between the people sitting on the GCF board, which is made up equally of representatives from richer and emerging countries, she said last week at a GCF event.

The fund has been created under the guise of UN climate talks to help developing countries curb emissions and adapt to climate change, funnelling money from richer nations.

Now, following its signoff, the “Accelerated Option” in the EBRD’s “High Impact Programme for the Corporate Sector” in the seven nations means an emitting company can speed its qualification for a discounted loan “any time beginning when the loan agreement is signed until the agreed operational start” of the project by buying the carbon credits, according to the 58-page funding proposal published last month.

See:
https://www.greenclimate.fund/sites/default/files/document/funding-proposal-fp140.pdf

The complexity of EBRD’s proposal is one reason why the emerging nations on the GCF board hesitated to approve it.

“These projects can be tricky to understand and people proposing them need to communicate as simply as possible,’’ CMIA’s Splawn said in an interview.

See this screenshot, which shows just how complicated the program is, as it attempts to encourage green investment and ensure funds are not wasted; there are multiple measureables and milestones:

EBRD officials were not immediately available to comment on how the program will work.

There are plenty of loans on offer. The program will provide total financing of about $1 billion, with $252.5 million concessional finance and a $5.5 million grant from the GCF.  Alongside concessional financing, co-financiers will offer $757.5 million to corporates through loans.

Accelerated discounts on funding costs “can be achieved by buying and cancelling qualifying carbon credits in the amount equal to the average annual emission reductions that the project expects to generate, but over the duration of the construction period of the project.”

Eligible types of credits are: UN Framework Convention on Climate Change credits; Gold Standard; Voluntary Carbon Standard; Regulated domestic offsets/carbon credits and /or allowances – e.g. Kazakhstan’s Emissions Trading Scheme.

This structure, should it be repeated across the globe, may tend to push the many disparate carbon prices around the world nearer to one level. It also provides some reward for the early movers in the climate fight, the investors who have already spent real money on emission-cutting projects before this year.

The EBRD program is designed to bend emissions down in countries where climate protection isn’t yet part of everyday business decisions. It also encourages companies to include shadow carbon pricing in their expansion plans, reducing the chance of investments that will lock in dangerous levels of climate change.

Shadow carbon prices are future levels assumed by companies and investors, as it seems inevitable politicians will indeed react to the climate crisis, even if they are not immediately doing so.

Many carbon markets are plagued by weak demand because governments are not setting strict emission targets that would force countries and companies to buy.

Under the Paris climate deal, nations are meant to boost the ambitiousness of their targets this year, but they have their hands full with the coronavirus pandemic. Still, banks and investors are now beginning to ration capital to starve all but the most necessary fossil-fuel projects of a future life.

“Support from the GCF will introduce an innovative funding mechanism that is not currently available to private companies in the participating countries,’’ the proposal said. “GCF support is, therefore, crucial to enable energy-intensive industrial sectors to shift to a low-carbon gender-responsive pathway.’’

The EBRD structure should help the climate shift by leveraging money earned by European nations from selling allowances to their own factories and power stations. The 20-year program should cut about 20 million tons of carbon dioxide equivalent, so a cost of about $50 a ton (NOTE: the money isn’t just for emission cuts but also for clean industrial expansion), which is about where many economists think carbon prices should be right now.

“In my view carbon transactions are almost like the purest form of climate finance because it’s money going toward reductions,’’ said Jan-Willem van de Ven, head of climate finance and carbon markets at the EBRD, speaking last week at the online GCF event.

(Story updated Tuesday afternoon London time, adding screenshot)