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.

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:

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)

Rich World Seen on Notice to Justify its Frugal Climate-Finance Habit

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.

Photo: Oxfam: Pastoralist communities in the Somali region have been suffering 4 years of erratic rains and droughts and millions have lost their animals and livelihoods. Crops have been decimated and communities that still have access to water and pastures are in a dire situation since those resources are not enough to cover their basic needs.

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

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 report:

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.

Europe Has About 1 Trillion Euros of Green Projects Ready to Go Within Two Years: EY (2)

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.

For the full EY report ( eg p5) … see this link:
https://assets.ey.com/content/dam/ey-sites/ey-com/es_es/news/2020/09/ey-summary-report-green-recovery.pdf?download

(Updated early Saturday with context in final paragraphs. Earlier version corrected Sweatman’s title – he was a member of the project steering board.)