The Game-Changing Carbon Pricing Program That Nearly Didn’t Get Off the Ground (1)

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.


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:

Just two of the many clauses in 58 pages of them: GCF and EBRD; see link above

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)

EU Carbon Allowances Jump Briefly After Parliamentarians Push Nations to Adopt Surprisingly Ambitious 2030 Target (2)

By Mathew Carr

Oct. 7, 2020 — London — European carbon allowances fluctuated after members of the European Parliament voted for the world’s biggest trade block to adopt a 60% emission-reduction target for 2030.

The target, versus 1990 levels, would be 5 points tighter than that proposed by the European Commission.

EU carbon allowances immediately surged more than 4%, then erased the increase by the close of the market at 5pm London time, partly because of concern about Brexit negotiations, according to newsletter Carbon Pulse.

Finland was among nations immediately on board with the higher level of ambition for 2030, and countries will continue to debate the proposed target for at least the next several weeks:

The biggest group in Parliament said it was concerned that the tighter target may threaten jobs, according to Bloomberg News, which wrote:

The 60% target is higher than sought by the European People’s Party, the biggest political group in the EU Parliament. Still, the EPP will not vote against the climate law as amended in the final ballot scheduled for later on Wednesday, said Peter Liese, key German member of the assembly who oversees environment policies for the group.

“We will abstain, because we sincerely dislike the 60% and think it really endangers jobs,” he said on Twitter. “We are very confident that the Council of the EU will take care that we will come back to the Commission’s proposal of net 55%.”

See this link (paywall):

This analyst wasn’t so sure the EPP was right, because the energy transition has already created many jobs and brought in green money to Europe’s governments:

Those countries have benefitted from billions of euros of revenue from selling the right to emit greenhouse gases since the EU carbon market began in 2005.

Having a tighter target for 2030 would mean even higher market prices for emission allowances — and even more revenue for cash-strapped government coffers.

Nations around the world are seen considering carbon pricing as they seek to rebuild their economies after the damage wrought by the coronavirus pandemic.

That’s because carbon taxes and markets, unlike company and payroll taxes, can spur employment as they encourage a shift away from coal, oil and natural gas and toward huge new cleantech investments.

In April, the International Energy Agency said investing in the climate transition would help economies recover and many countries are still finishing their post-Covid-19 recovery plans.

“We believe that by making clean energy an integral part of their plans, governments can deliver jobs and economic growth while also ensuring that their energy systems are modernised, more resilient and less polluting,” the IEA said.

See this for the immediate market reaction to the EU parliament’s vote, announced earlier today:

(This story was updated Wednesday afternoon London time, and again in the evening)

Attempt to Loan Money Against UN Emission Credits Hit by Defaults

Oct. 2, 2020 — London — More money in a small United Nations loan program to encourage renewable energy in developing nations was written off than repaid.

The Clean Development Mechanism Loan Scheme was launched in April 2012. About $1.6 million was written off, while $1.3 million was repaid, according to a report being considered through Monday at a meeting of administrators of the CDM, the UN carbon offsetting market.

A fundamental assumption underpinning the program was that once the CDM projects had achieved registration, the loans would be repaid using the proceeds from selling Certified Emission Reduction credits generated under the CDM by the supported project — the CERs were both the collateral and the source of repayment income.

But there’s barely any market for the CERs. Prices are near zero because global carbon trading rules aren’t set and countries have not adopted ambitious emissions targets, so this strategy didn’t go well.

With the collapse of the CER price in 2012, the assumption that CERs would repay the loans “became invalid, and the business case for many CDM projects also became invalid. This is probably the foremost reason why 40% of the loans had to be written off. The design of the Loan Scheme did not consider any possibility of the market for CERs not being as buoyant as it was when the scheme was designed. In addition, the overly detailed CMP (UN climate talks) decisions on exactly how the loan scheme operated prevented the implementing agency or the secretariat from adapting to these severe market changes in any material way.”

While the program was a first-of-its kind initiative, its problems were not only the result of its design and operation, but were “even more affected by the changing fates of the CDM itself and the markets within which it is operating.”

It provided a much-needed financial life-line to allow project developers to engage experts to help move their CDM projects forward, “but did not in itself improve the conditions for CDM projects in these countries. Considering this, the fact that more than 50% of the approved loans resulted in new CDM project registrations must be seen as a success.”

Related government agencies in each nation should have been underpinned, which could have made the program more successful.

“Mostly due to the difficult conditions in the project countries, a majority of the projects supported by approved loans were delayed, and loan agreements had to be amended repeatedly to avoid breach of the loan contracts. Partly contributing to this were the loan conditions set at CMP level, which reduced the administrative flexibility of the Loan Scheme. A lesson learned in this regard is that development of CDM projects in countries with less favourable conditions typically requires more time than such projects would need in other countries. This could have been foreseen and built into the loan conditions from the outset to avoid the extra administrative burden associated with the delays and contract amendments.”

For the full report, technology types, countries, click: