Focusing on projects that involve carbon trading could help the GCF boost its pipeline of investments. Carbon markets are back in the spotlight. This time it's the fragmented, opaque voluntary markets making its way onto centre stage as evidenced by the newly formed Taskforce on Scaling Voluntary Carbon Markets, launched by Mark Carney, UN Special Envoy for Climate Action and Finance Advisor to UK Prime Minister Boris Johnson for COP26, and chaired by Bill Winters, Group Chief Executive at Standard Chartered.
The Taskforce has written a consultation document aimed at identifying the infrastructure solutions necessary to scale voluntary carbon markets, and it opened a consultation survey on the 10 of November. The goal is to achieve a large, transparent, verifiable and robust voluntary carbon market.
Compliance and voluntary offsets have cohabited for many years, joined together by common law verbiage 'carbon markets', yet each fulfilling a different purpose. However, the lines between the two began to blur when voluntary offsets were identified for use in compliance regimes, such as ICAO's Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), and now the Taskforce on Scaling Voluntary Carbon Markets has developed a roadmap to creating a single carbon market.
The GCF Private Investment for Climate Conference 2020 (GPIC) concluded a few weeks ago and this third GPIC, which ran from 14-16 October and was the first to be held on a virtual platform, was designed to bring together the public and private sectors to catalyse actions to help developing countries maintain climate ambition in the era of Covid-19.
At the GPIC, I was invited onto a panel session on Catalysing Market Mechanisms: Carbon pricing as a tool to finance the green and just recovery and was asked my opinion on the most appropriate and impactful ways the GCF can support this aim of catalysing carbon pricing and market mechanisms.
Given the structure of the fund, how it functions as an operating entity of the Financial Mechanism of the UNFCCC, and based on the investment criteria applied to GCF projects, especially that of paradigm shifting potential, the logical pathway of reasoning is that the GCF has the potential to assist carbon pricing and market development in developing countries, I argued.
However, the GCF board struggled to approve a funding proposal at their board meeting in August (B.26) that had carbon markets embedded into it.
Submitted by Accredited Entity (AE) European Bank for Development and Reconstruction (EBRD), this multi-country High Impact Programme for the Corporate Sector funding proposal was marred with controversy as a select group of board members lobbied primarily against the programmatic approach to stop large-scale projects being approved. There is no formal GCF policy for programmatic approaches.
The private sector project submitted by EBRD for $258 million of GCF funding has a programme design based on the innovation of linking climate investments and technical assistance packages at a project level with the uptake of long-term, climate-considered, corporate governance performance improvements that are supported by the adoption of sectoral low-carbon trajectories.
This large-scale, cross-country, ambitious programme is designed to help investments and prepare corporates for low-carbon technology change and carbon pricing mechanisms in Armenia, Jordan, Kazakhstan, Morocco, Serbia, Tunisia and Uzbekistan.
For the most part, corporate players from high emitting sectors in these countries do not understand the carbon pricing theme. Still, carbon pricing is on the horizon in most developing countries and corporates in these countries are not anticipating it, nor adequately preparing for it.
"The GCF has a unique opportunity to support high emitting sectors in developing countries that are often not anticipating and adequately preparing for a price to be set on their emissions"
The programme fosters the uptake of new, low-carbon technologies and adoption of corporate climate-related behavioural changes across energy-intensive industries, mining companies (non-fossil energy), agribusinesses and agribusiness value chains.
The programme is comprised of three interrelated components. The first addresses the technical barriers faced by manufacturing industries, mining and agribusiness sectors.
The second introduces an innovative concessional financing mechanism to facilitate the uptake of high-impact climate technologies in addition to promoting the uptake of corporate climate governance practices. The financing mechanism offered links the interest rate to financial performance, with the innovation being the link to climate and corporate governance performance.
The third component promotes private-public sector dialogue in policy formulation at the sectoral level to create an enabling environment for climate-related investments by supporting the development of sector-level decarbonisation roadmaps.
This programme, spanning seven countries, seeks to transform the hard-to-abate sectors that require manageable transition pathways. What's creative and innovative is that the programme provides solutions combining the twin goals of low carbon technological change and climate-related corporate behavioural change.
Also, the programme promotes an accelerated option for corporates to qualify for a discount from when the loan agreement is signed until the operational start of the project by using carbon markets as an entry point solution. Corporates will be able to buy and cancel qualifying carbon credits in the amount equal to the average annual emission reductions that the project expects to generate. The support is only available during the duration of the construction period of the project.
This accelerated option will provide a real learning-by-doing exercise because it will get corporates, who otherwise wouldn't do it, to understand what it means to set a price on GHG emissions. Carbon pricing and markets provide price signals to emitters and offer flexibility to help support transition pathways and introduce new management practices aligned with good corporate governance.
EBRD's funding proposal met with a mixed bag of responses. Jan-Willem van de Ven, EBRD's Head of Climate Finance and Carbon Markets, patiently answered questions about the programme with clear, concise answers about the programmatic approach and the potential for corporates to use carbon market offsets in the programme as an accelerated option.
Eventually the programme was approved on the last day of B.26.
"Carbon pricing is an important driver for sound corporate climate governance, which is to grow and last beyond the immediate GCF–EBRD investment," said Jan-Willem. "Here we bring the elements that underpin low-carbon business, which eventually should transition to net zero".
Opportunity for the GCF to make an impact
There is an implicit opportunity for the GCF to establish projects, in the face of the economic downturn and pandemic, that support carbon pricing and market development, as they did by finally approving the EBRD project.
The GCF can be used to deploy technologies and facilitate respective investments to enable regulatory environments, but its reach and influence can also extend to carbon pricing mechanisms and carbon markets.
The GCF has a unique opportunity to support high emitting sectors in developing countries that are often not anticipating and adequately preparing for a price to be set on their emissions, so not only can GCF projects provide concessional finance for low carbon investments, as they will through EBRD's programme, they can also provide technical assistance and capacity building for carbon pricing moving forward.
The EBRD's High Impact Programme for the Corporate Sector project is the first of its kind in the GCF pipeline and could be replicable in other countries, according to the EBRD's Jan-Willem, who stated: "Growing climate markets, for which I include carbon markets, green capital markets (under emerging guidelines like TCFD and green finance taxonomies) and standardised green procurement along value chains, are the areas to focus on to mobilise private sector finance".
Carbon pricing schemes can raise significant revenues
Let's sum this up by considering three distinct features of the GCF: balanced portfolio, country ownership and unlocking private finance.
The notion of country ownership is to ensure that GCF activities are in harmony with national priorities. Developing countries can use carbon pricing as a policy tool, and a lot of countries that the GCF works with have not yet implemented carbon pricing.
Governments raised more than $45 billion from carbon pricing in 2019. These revenues can be redistributed to protect the poor and those vulnerable to the effects of the transition, as well as to achieve a climate-resilient, green economic recovery in the aftermath of Covid-19.
Carbon revenues can also be used to boost investment in sustainable infrastructure and public goods, such as education and health, along with providing social safety nets, thereby easing the political feasibility and addressing equity.
While carbon pricing has been criticised as inequitable, this doesn't have to be the case if it is complemented by appropriate revenue recycling. The focus on the revenue-raising potential of carbon pricing and its potential use for broader social objectives is a key focus that the GCF, and policymakers in general, can use to foster buy-in for these schemes. Gaining public acceptability of carbon pricing through the appropriate use of the revenues raised is one way to build market mechanisms that can be used on top of, and not instead of, broader climate action.
Carbon pricing initiatives continue to grow, and this represents an opportunity to boost GCF investments in mitigation projects. Support for carbon pricing and markets can be structured as technical assistance activities, supporting the development of capacity of National Designated Authorities around creating national policies on carbon pricing as well as encouraging AE's to embed carbon pricing and markets into their project proposals.