Oct. 30, 2020 — LONDON — Collapsing climate and plunging employment — the world’s supposedly smartest politicians still don’t seem to get it.
Desperate to deal with a global pandemic that’s shuttered huge chunks of their economies, governments are STILL favoring the fossil fuels that are threatening the future health of their voters and the pleasant existence of the climate as we know it.
This fascinating chart from Wartsila, the Finnish energy-technology company, shows just how dire the situation is:
Don’t get me wrong. I fully realise fossil fuels are needed for years, even decades, to come. Many environmentalists don’t understand that a transition means some support for fossil fuels is still probably needed.
Heck, stock markets may have even marked down some pretty solid old-energy companies a little too much lately. It might even be time to buy them.
But the spending ratios that Wartsila is highlighting just don’t feel right, especially when you think about the employment prospects in clean energy versus old energy.
See this chart:
If politicians argue they are getting it right, it’s time for them to show us the data. I doubt they can, but I’m listening, just in case.
Governments need to urgently start taking heed of business, or they will be voted out. Let’s see what happens to Donald Trump over the next few days (I realise it is not guaranteed). Wartsila is not some sort of lefty, pinko organisation that does not understand economics, market incentives and capital allocation. Indeed, the company has a fossil-fuel arm.
Yet it concludes this:
“The weight of support for the fossil-fuel sector from announced stimulus packages shows the persisting institutional bias in favour of preserving a legacy sector. This is very likely to prove myopic, economically-speaking, and misaligned with G20 countries’ decarbonisation commitments under the Paris climate agreement.”
It’s surely time for the government people being remunerated by the tax-paying mums and dads of the world to wake up.
Oct. 25, 2020 — LONDON — Listen to climate activist Greta Thunberg (and many others), and you’d think the world is way too greedy and selfish to save the climate.
Global cooperation is close to dead, they say.
And until now, I might have agreed … but something’s happening in the world of United Nations climate politics to make me much less certain.
What’s cool is that Switzerland and Peru, for instance, are allowing at least some international — UN level — scrutiny of a trail-blazing carbon-trading arrangement, according to the contract published on the Swiss-government website.
Sure, things are gloomy — the Arctic sea ice isn’t freezing like it usually does at this time of year; Wildfires have been raging in Colorado; Vietnam’s grappling with its worst floods in decades.
But changes to market structures are also accelerating in various nations, meaning commerce is finally getting greener: not just in places like the European Union, where progress on this stuff is pretty much taken for granted.
Indeed, the EU may use international carbon markets to help meet a more-ambitious 2030 emissions reduction target of as much as 60% below 1990 levels, according to people close to international climate negotiations. The current target for that period is for a 40% cut.
EU member state Sweden is preparing to buy emission credits, for instance, potentially from Ethiopia, Nepal and Cambodia.
They are being purchased for domestic targets. But, ultimately, the credits may be used to help the EU meet its tighter Paris target, subject to further negotiations, said Sara Sundberg, head of the international climate cooperation unit at the Swedish Energy Agency.
Trading in these credits might surge as other nations jump on board and perhaps delegate companies to do the buying and selling.
“It’s starting to get there, but still we have the negotiations and we have a lot of work to do before we can actually say whether it’s going to take off, or not,” Sundberg said Monday by phone.
So, climate-protection wizardry is happening in some unlikely places.
Behind the scenes, scores of countries, banks and companies are getting on with it. They are starting to co-operate to solve the world’s biggest threat, despite the coronavirus pandemic.
The United Nations Paris climate deal, five years after it was struck, is starting to grow real teeth. And it’s beginning to use them too. Surprisingly, it’s doing this even though its rule book is not complete — and won’t be until November next year at the earliest. (Continues)
The UN is starting to show rigour, a boost the climate sorely needs. It’s important any climate solution has a global element because otherwise capital will seek out countries where climate rules are lax. The global markets need to eliminate loop holes because emissions trap heat for the whole world, no matter where they are produced.
In many ways, the Paris deal has been disappointingly slow to take hold — humans start to grow teeth BEFORE birth, after all…and they push through our gums about six months after that.
So a five-year delay seems like an age, when Paris’s own structure quite clearly showed that immediate, urgent actions were needed across every economy, back in 2015.
Still, the last five years might not have been wasted as some might think, possibly including Greta.
The Paris deal was never really meant to get off the ground until this year, and it’s true that it has been making some important progress, including spurring a massive downward revaluation of fossil-fuel companies. That’s deterred oil and natural gas exploration.
Now, the Paris agreement seems to be ramping up a notch.
Five days ago, Switzerland and Peru struck a fascinating climate deal.
Who cares what two smallish countries did, I hear you ask? Well, you should, because what they did is surprising amid the one-year delay in climate talks until November 2021.
Under the deal, it seems Switzerland has agreed to buy carbon credits from Peru using the Paris framework to help it meet its 2030 climate target for a 50% emissions reduction versus 1990 levels. Yes, the country is cutting by half, already.
Here’s a little rich country seeking to buy its way out of its climate guilt; it’s probably greenwash, you might think. You’d be wrong, again.
Such deals can have powerful benefits for both sides and they are going against a stark trend this year toward global protectionism during the coronavirus pandemic and Black Lives Matter movement. See this chart from “The Economist.”
While the World Trade Organization is looking into the EU’s plan to link climate and trade policy, Switzerland has realised it can cut its emissions at a faster pace by cooperating with Peru, a country 10,000 kilometres away — that’s about 6,000 miles.
Why? It’s often cheaper to spend money slashing greenhouse gases in a less-developed nation, because much of the low-hanging fruit has already been plucked in the wealthier nations. The deal may provide loans to small and medium factories in Peru to modernise and boost their competitiveness. A no brainer, really, because it will help Peru get a leg up in the economic stats.
So, Switzerland will pay Peru to cut emissions at a lower cost, saving money as it uses the South American nation’s emission credits to comply with its target.
This will also help Switzerland, which would probably otherwise have to pay a fortune immediately to switch the way it heats most of its houses — about two thirds of them are heated by heating oil, natural gas and wood. Having to make such a shift rapidly could also be damaging politically.
The money saved could be used instead for the higher volume of greenhouse-gas cuts in Peru. For the planet, the speed of cuts is crucial because the atmosphere is stuffed almost full with heat-trapping gas, as Greta usefully keeps reminding us.
So what’s cool is the cooperative nature of the deal. Switzerland and Peru are using Article 6.2 of Paris for their agreement, a section that arguably allows loosely regulated bilateral cooperation between nations.
Crucially, the two countries seem happy for the UN to play a role, according to my reading of the contract. The deal will be subject to rules still being put together by the UN process, including the establishment of a Paris agreement compliance committee. If either Switzerland or Peru get criticized by that committee, the other side of the deal could “suspend” the transfer of the credits.
Such a structure may limit the chance for “carbon cowboys” to profiteer unfairly from carbon markets 2.0. The markets under the Kyoto Protocol surged for a while earlier this century, but suffered (sometimes unfair) criticism for allowing super-normal earnings (even though the transparency of carbon markets was and is better than almost every other market on earth).
Now, digitization might make the market even more transparent, efficient and secure, see this UN report:
Paris’s planned compliance committee, “expert-based and facilitative in nature,’’ is meant to operate in a way that’s “transparent, non adversarial and non punitive” and pay attention to the capability of the parties, according the Paris agreement’s text.
Time will tell exactly what that means, but the wording of the Swiss-Peru deal does not seem to portend the beginning of a “free-for-all” global carbon market. Alluding to the compliance committee does not appear to be the action of two countries doing a quick bilateral deal in a reckless move to make money and save costs while burnishing green credentials.
The Swiss-Peru deal seems to tick some other crucial boxes. Peru seems to agree that once it sells credits, it will make its domestic target tighter. This “corresponding adjustment” ensures both nations don’t both simultaneously try to claim the emission reductions as their own.
Further, the contract stipulates that the money sent by Switzerland to pay for the carbon credits, assuming that is the way the money flows, is not “double counted” as climate support.
Still, the Swiss-Peru deal’s credibility will depend on progress at UN level in the next 12 months to finish rules of the Paris agreement, according to people close to those negotiations.
Without that credible UN stamp and more hard negotiations, there’s still a risk that the new era of carbon markets – the “free-for-all” — will emerge …and that would be a huge missed opportunity because it would fail to help achieve the Paris climate targets and result in an even worse climate catastrophe.
For Europe, the council of EU nations will consider the European Parliament’s plan to go for a 60% cut as it debates a tightening of its 2030 target over the next few months, said Jos Cozijnsen, a strategic consulting attorney at Climate Neutral Group in the Netherlands.
The most logical step is for the EU to mull international carbon trading as part of that, because it will spur more ambition among emerging countries and boost the levels of international “solidarity,” he said by phone.
“This is an offer for the council as they talk about this through the end of the year.”
Oct. 20, 2020 — LONDON — Rich countries’ preference for offering climate finance via loans and carbon markets is seen getting in the way of an ambitious global climate deal next year.
When developed nations promised in 2009 to pay $100 billion of climate assistance a year by 2020 to developing countries, the emerging nations mostly expected to get the money in the form of grants, Tracy Carty, senior policy adviser, climate change, at charity Oxfam, said in an interview.
Instead, the true value of money provided by developed countries to help developing nations respond to the climate crisis may be just one fifth of the amount promised, once loan repayments, interest and other forms of over-reporting are stripped out, according to Oxfam estimates published today.
The lack of support by nations that are most responsible for climate change may block an ambitious deal when United Nations climate envoys meet in November 2021 to seek to finalise rules of the Paris climate agreement. That meeting, already delayed a year because of the coronavirus pandemic, is known as the 26th conference of the parties.
“Climate finance is a cornerstone of global co-operation on climate change — to avoid this getting in the way of an ambitious deal at COP26, developed countries must agree to put an end to unfair reporting practices and agree robust common accounting rules for climate finance,’’ Carty said. “They also need to commit to providing far more climate finance as grants not loans, and to adaptation and vulnerable countries”.
Wealthy countries counter, saying that leveraging grants in the form of concessional loans makes the available money go a lot further — that is, more emissions can be cut once the funding is leveraged and made via concessional and non-concessional loans. And it’s the pace of emission reductions that matter, because greenhouse gases in the atmosphere can trap heat there for decades.
A recent example of a European Bank for Reconstruction and Development program approved by the Green Climate Fund demonstrates where climate finance is probably headed. The fund, built to help developing countries curb emissions and adapt to climate change, is managed by a panel of rich and poor-nation representatives.
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 the business plans of private-sector companies, which produce most emissions damaging the climate.
The program, based on carbon pricing and emission credits, nearly didn’t make it off the ground. Developing countries are suspicious of carbon-market finance being offered by richer countries — after years of broken promises. The value of existing UN credits created by poor nations plunged to near zero because of weak demand, as the U.S., Japan and Russia pulled out of the system partly because the relevant 2012 and 2020 targets turned out to be weak.
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 accelerate its qualification for a discounted loan “any time beginning when the loan agreement is signed until the agreed operational start” of the emissions-cutting project by buying carbon credits, according to the 58-page funding proposal published last month.
The program will provide total financing of about $1 billion over 20 years, 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.
The EBRD structure should help the climate shift by leveraging money earned by European nations from selling carbon 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 green-industrial expansion, allowing emerging countries to leap frog richer countries), which is about where many economists estimate 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, said last week at a GCF online event.
Oxfam’s Climate Finance Shadow Report 2020 estimates that donors reported $59.5 billion per year on average in 2017 and 2018 – the latest years for which figures are available. But the true value of support for climate action may be as little as $19-22.5 billion per year once loan repayments, interest and other forms of over-reporting are stripped out. Oxfam’s analysis is being released ahead of a report by the Organisation for Economic Co-operation and Development (OECD) on developed countries’ progress towards the goal of providing $100 billion in climate finance per year by 2020.
An astonishing 80 percent ($47 billion) of all reported public climate finance was not provided in the form of grants – but mostly as loans. Around half of this ($24 billion) was non-concessional, offered on ungenerous terms requiring higher repayments from poor countries. Oxfam calculated that the ‘grant equivalent’ – the true value of the loans once repayments and interest are deducted – was less than half of the amount reported.
Oct. 13, 2020 — LONDON: The future of energy and climate policy around the world is still hazy, but it’s coming into much sharper focus.
That’s a relief for investors, who are pushing politicians and industry leaders to become more brave and more ambitious as they consider climate action. A global template is beginning to fall into place.
Politicians in Europe have used a mix of policies to achieve big reductions in emissions the past few decades.
Germany subsidised solar power, while Britain supported offshore wind generation.
While this government assistance was indeed costly, those forms of electricity have become largely cheaper than coal and natural gas, as power networks favour clean options.
Private money is flowing decisively into clean technology, with about 1 trillion euros of clean projects set to make financial close within two years in the EU, according to consulting firm EY.
One of the keys to Europe’s economic model is carbon pricing, which has increased to a level that’s probably high enough to deter a “brown bounce back” after the coronavirus pandemic. Politicians are seeking to direct coronavirus economic support to green initiatives so economic activity is cleaner after the health crisis and less focussed on dirty (or brown) fossil fuels.
So far the economic rebound has been patchy, according to the IMF, with China leading the charge (story continues below):
Carbon pricing simply hasn’t threatened Europe’s economy like it was feared it might when the region began its carbon market near the beginning of the century. Carbon pricing is slowly taking hold across the world and a national carbon market has not been ruled out by Joe Biden as he runs to become U.S. president.
Ten years ago, it was expected Europe might need a carbon price above 200 euros a ton to push the electricity industry to solar from coal. That would have boosted the region’s economic costs substantially.
“That’s not how we did it,’’ says Mark Lewis, chief sustainability strategist at BNP Paribas Asset Management. What Europe did, specifically Germany for solar and the U.K. for offshore wind, is drive down the cost of renewables using targeted subsidies, including feed-in tariffs, and mandatory levels of clean power. Costs are now still falling.
“It’s almost impossible for fossil fuels to compete any more with that very strong deflationary dynamic,’’ Lewis told an online OECD green finance event Oct. 9.
Because renewable power is now so cheap, Europe can protect its energy shift using much lower carbon prices — below 30 euros a ton. That’s probably enough to prevent a resurgent coal and natural gas industry.
“The risk is that if there is a near-term brown bounce back, investors will very much regret it, because they will be looking inevitably at stranded assets only a few years down the line, as the renewable energy revolution continues — the costs are still falling, that’s the point,’’ Lewis said.
With the power grid much cleaner, Europe’s now turning to heavy industry like steel and cement as it seeks even more ambitious decarbonization. In those industries, electricity can’t readily provide the high temperatures needed for production.
Hydrogen is seen as the probable answer because it can produce the needed heat and — as costs fall — renewables can probably produce it with no greenhouse gases closer to 2030.
The cost of producing green hydrogen (from renewables) today is about 5 or 6 euros per kilogram, Lewis said. That’s more than triple of the price of grey hydrogen (from fossil fuels) at 1.50 euros per kg. Europe’s in the process of using subsidies, mandates and research support to get the price of green hydrogen down to about 2.50 euros a kg within a few years.
“There comes a point where the capital costs of these new technologies – exactly what we’ve seen with renewable energy – allows the carbon price then to come in once the new technology is — let’s say — within the firing range of the incumbent fossil fuel,’’ Lewis said.
So, instead of needing carbon prices of several hundred euros to incentivize the shift to hydrogen, carbon prices around 90 euros a ton might do it (closer to the end of this decade), he said. That’s still more than triple today’s level in Europe’s carbon market, where prices are still below 30 euros a ton.
Europe wants to reach net zero emissions by 2050 and it’s linking climate and trade policy to protect its own low-carbon industries.
“You can’t get to net zero without green hydrogen scaling up to 10% to 15% to 20% of the European energy mix. You can’t get to that outcome without green hydrogen first displacing grey hydrogen as an industrial feed stock,” Lewis said.
With carbon prices protecting the region from a reverse shift, private investors will be confident they can dramatically boost spending on clean tech, including hydrogen technology. Politicians can be more confident to bring in policies, knowing they won’t substantially hurt industry and employment. Carbon trading can provide nations with flexibility to hit emission targets without boosting economic costs.
Europe’s “glide path” to fewer greenhouse gas emissions might represent something that can be adopted in Asia, said Michael Liebreich, founder of Liebreich Associates and consultancy New Energy Finance (now owned by Bloomberg LP).
“There are regulatory or investment interventions and then you get a carbon price that’s not ridiculous and that brings in the private capital, that allows people to then invest” and doesn’t always need to be matched by public support, Liebreich said.
This cuts cost and risk for governments, plus they get new revenue from selling carbon allowances. Low gas prices, such as those in the U.S., are also a risk-cutting benefit.
Gas prices have also dropped in Asia, where most of the world’s population lives. That region is beginning to understand that climate protection and better global trade rules represent a considerable financial and employment opportunity, according to Ahmed Saeed, a vice president at the Asia Development Bank.
China, which is implementing a national carbon price, is now targeting net zero emissions by 2060, only 10 years later than Europe.
Asia may be winding back its rhetoric on climate change, where it has historically blamed rich countries for the problem.
The region is beginning to leapfrog the west on its cleantech shift, Saeed told the OECD event, citing battery projects in Mongolia and a surge in spending on windpower, solar and street lighting in India.
“They recognise increasingly that they do have a systemic responsibility, and not just a responsibility for their own countries,’’ he said of unspecified leading Asian nations. Japan and Australia also have hydrogen strategies.
“I’ve seen this slight shift emerge over the last year or so as we confront various issues, where traditional sources of leadership may not be present,” said Saeed, who has worked for private banks and the U.S. Treasury.
“That awareness that they are beneficiaries of the global trading system — they feel that what’s good for global trade is good for them, what’s good for global climate is good for them, so they have this sense of commitment to what is in the best interests of the planet.’’
(Updated Tuesday afternoon with IMF chart showing patchy recovery from the pandemic, Lewis’s Tweet added Wednesday)
SHORT REPORT: Oct. 9, 2020 – London – The European Union has about 1 trillion euros of “shovel ready” green projects in its pipeline that could reach financial close within two years, according to a survey by management and accounting firm EY.
The survey covered respondents including about a quarter of the top 30 European construction companies and demonstrates the opportunity available to politicians and investors from the coronavirus pandemic recovery: Climate & Strategy Chief Executive Peter Sweatman, speaking at an online OECD green finance event on Friday about the EY study.
The EU is seeking to shift away from fossil fuels as it beds down a plan to recover from the pandemic. Technology cost reductions, green finance and policy frameworks are seen crucial to get that shift to include a boost to employment. Other regions, including Asia, are seen following similar economic strategies, according to speakers at the OECD event.
Here is a slide from Sweatman’s presentation; the EY report covered 1,000 green projects seen as the tip of the iceberg:
The report dated last month found “all and more of the 12 million full-time workers lost to Covid-19” could possibly be returned into “green and productive” employment if the recovery plan is set right.
Some political groups are worried factories will cut back on EU capacity and output, should the region shift too quickly away from fossil fuels, boosting economic costs versus other regions of the world.
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%.”
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)
Oct. 7, 2020 — London — Traders are making record bets on North American carbon and renewable futures, as Joe Biden leads in polls ahead of next month’s presidential vote.
Open interest, a measure of trades that have not yet been closed, is at record levels for the time of year, according to data from ICE, the exchange group with most environmental business.
See this snip of a chart on ICE’s website:
The chart shows open positions and trading volume for California carbon allowances, Regional Greenhouse Gas Initiative contracts and Renewable Energy Certificates, by month.
While the August “open interest” figure is slightly lower than previous months this year, it’s the highest ever for August. September data will be published soon.
Biden has an ambitious plan to tackle climate change in the U.S., which is the single country most to blame for the global problem. Near-record greenhouse gas emissions are trapping heat in the atmosphere, which is boosting wildfire, drought, storm and flooding costs around the world.
China, which has overtaken the U.S. as the world’s biggest emitter, has set a target to become carbon neutral by 2060.
With a bigger economy, but much smaller population, the U.S. would seek to achieve a 100% clean energy economy and net-zero emissions no later than 2050, Biden has said (should he win office). He wants to enact legislation in the first year of his presidency that establishes an enforcement mechanism to achieve the 2050 goal, including a target no later than the end of his first term in 2025.
Polls put Biden in the lead to beat incumbent Donald Trump, after the latter was hospitalised for the #coronavirus.
(Updated Thursday Oct. 8 to add details of Biden’s climate plan)
Oct. 6, 2020 — London: The panel overseeing the main United Nations carbon market delayed key decisions that would have overcome a potential gap in the market’s operation at the end of the year.
The Clean Development Mechanism Executive Board considered the implications of the postponement of UN climate talks to November next year because of the coronavirus pandemic, it said in a report detailing the outcome of meetings that took place during the past two weeks in Bonn and virtually.
The panel would further consider at a meeting scheduled through Dec. 14 whether emission credits generated “on or after” Jan. 1 can be approved in the first 10 months of next year, it said.
The market has suffered weak demand for years and now the one-year delay in the global climate talks in Glasgow to November 2021 is causing further complications for the regulators. The impact of the virus means the market may have to halt at least some of its operations. Investors and project developers face rising uncertainty on what will happen to their projects for those months.
The panel did provide some certainty that pre-2021 emission reductions could still be processed.
Audit firms handling requests from emission-reduction projects in the market will continue as “provisionally designated,” until November next year, when further guidance may be provided by the Glasgow talks, it said. Requirements by regulators of the firms “would remain the same.”
“The submission and processing of requests for issuance related to emission reductions or removals achieved before or on 31 December 2020 will continue in accordance with the current CDM requirements.”
REPORT SHORT: 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: