Voluntary Carbon Market Needs Course Correction

Policy Pulse – 28 September 2022 – Veritas Global

Photo by AbsolutVision on Unsplash

The Integrity Council for the Voluntary Carbon Market (ICVCM) is an independent governance body for the voluntary carbon market. It recently launched a consultation on how the voluntary carbon market can accelerate climate action. In response to the public consultation, Veritas Global made a submission highlighting that the approach proposed by ICVCM needs a course correction. The substance of our submission is provided below.

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We are deeply concerned with the approach proposed by ICVCM as outlined in the draft for public consultation published in July 2022. The proposed ICVCM approach would effectively put the voluntary carbon market in a straitjacket. If implemented, it would result in subdued finance flows for climate action and would be bad for the planet.

Rather than limiting the types of climate actions that can be supported through the voluntary carbon market, we see ICVCM’s role as developing harmonized standards that support enhanced transparency and advancing efforts to promote greater clarity on accounting.

On transparency, the work of ICVCM could entail developing standards that help codify a set of classifications for carbon unit types and carbon target types. The carbon unit type classifications (supply side standardization) need not be mutually exclusive in nature, reflecting the ability of certain carbon unit types to fit within multiple classifications. For example, one classification type could be whether a carbon unit has been reviewed by a third party while another classification type could be whether the carbon unit was aligned with supporting a transition towards net-zero emissions. If a carbon unit fits both classification criteria, it would have both classifications. The purpose of these classifications would be to add greater transparency to the voluntary market. Such classifications should not be used to limit or disqualify voluntary climate actions taken but rather classifications should serve to codify actions taken. Adherence to the relevant classifications could be monitored at the program level (at the level of programs such as Verra, Gold Standard, etc.). Furthermore, the global classification standards should not impede the ability of voluntary programs to differentiate their product offerings in terms of the carbon units they develop. Similarly, development of standardized voluntary carbon target types (demand side standardization) can also greatly advance transparency.

On accounting, a harmonized approach is needed either in the form of a global registry or equivalent authentication mechanism to ensure avoidance of unintended double counting, crediting, and claiming in voluntary carbon markets. This is most urgently needed for international mitigation outcomes that will be issued without corresponding adjustments to national GHG inventories. For example, corporations may wish to be recognized for the international mitigation outcomes that they supported voluntarily even if such actions are part of the effort in achieving nationally determined contributions and have not undergone a corresponding adjustment. Ensuring globally harmonized methods that appropriately account for voluntary international mitigation outcomes is essential for scaling-up support to climate action and for ensuring the effective functioning of the voluntary carbon market.

Veritas Global submission on the future of the voluntary carbon market - ICVCM Consultation

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About Veritas Global: Our vision is to have a positive impact on the world through truthful advice informed by robust analysis. We are a premier provider of tailored solutions on climate change, international conflict economics and infrastructure.

Methodology used to critique OECD estimates of climate finance

Policy Pulse – 4 November 2021 – George Anjaparidze and Vicente Paolo Yu

Photo by Crissy Jarvis on Unsplash

On 26 October 2021, Veritas Global published analysis: OECD inflates climate finance estimates ahead of COP 26. Our analysis shows that the OECD overestimated the scale of climate finance in 2019.

In total, the OECD 2021 Climate Finance Report overestimated the amount of climate finance provided and mobilized by developed countries in 2019 by US$ 46.9 billion – of which US$ 20.3 billion is due to overestimation in bilateral public climate finance and US$ 26.6 billion is due to overestimation for multilateral public climate finance.

The level of climate finance provided by developed countries points to a significant shortfall in following through on climate finance commitments. Developed countries committed to provide US$ 100 billion in climate finance by 2020 to address the needs of developing countries in the context of meaningful mitigation actions and transparency on implementation. Making good on developed country climate finance commitments under the UN Climate Convention and its Paris Agreement can help crowd-in much needed capital for scaling-up climate action in developing countries.

This paper makes public the methodology used by Veritas Global to critique the OECD 2021 Climate Finance Report – Climate Finance Provided and Mobilized by Developed Countries – Aggregate trends updated with 2019 data.

I. Critique of bilateral public climate finance estimates

Context

To estimate the bilateral public climate finance, the OECD 2021 Climate Finance Report aggregated data from the fourth biennial reports submitted to the UNFCCC by developed countries. The report did not use data sources available to the OECD to adjust the reported data and correct for overestimation. It is important to note that for assessing other climate finance components (multilateral public, export credits and mobilized private) the OECD uses its own data sources (OECD DAC and OECD ESG) to estimate these components. In the methodology below, we explain how the Rio-markers contained in the OECD-DAC database could be used to assess the scale of overestimation of bilateral public climate finance in the OECD 2021 Climate Finance Report.

Data considerations

Despite originating from different sources, the data tagged through the Rio-markers and aggregated in the OECD 2021 Climate Finance Report have significant overlaps. This is perhaps not surprising because almost all major developed countries use the Rio-markers methodology to, in part or in full, report on their climate finance contributions under the UNFCCC, which have subsequently been aggregated in the OECD 2021 Climate Finance Report. The developed countries that did not make a reference to the Rio-markers in their Fourth Biennial Report constituted about 8% of the climate finance tagged as climate relevant through the Rio-markers methodology in 2018.

From the major bilateral public finance contributors, only the United States and Canada did not make any reference to the use of Rio-markers in their Fourth Biennial Reports under the UNFCCC. The United Kingdom has made a reference to Rio-markers in past reports but has not explicitly referenced Rio-markers in its Fourth Biennial Report. However, the United Kingdom has developed accounting practices for climate finance that build on and go beyond the Rio-markers methods.

The similarity in data sets is also revealed when comparing aggregates on bilateral public climate finance reported in the OECD 2021 Climate Finance Report and the climate-relevant OECD Rio-markers reporting. Between 2013 to 2018, about 91% of the reported data is estimated to overlap (or at least correlate) between these sources (see chart below).

According to the Rio-markers methodology, a project that has climate change as a secondary objective is tagged as climate “secondary/significant,” even if the share of finance supporting climate-specific activities is negligible. Once a project is tagged as climate “secondary/significant” most OECD countries report the finance based on a predetermined share (usually between 30% and 100%) as climate finance. This accounting practice leads to vastly overestimating the scale of bilateral climate finance. Therefore, we consider that it is inappropriate to count “secondary” projects as part of climate finance until a more robust methodology is developed for estimating the proportion of finance that really supports climate activities. To illustrate overestimation, we present an example of a project supported by the Ministry of Foreign Affairs of Iceland. The Buikwe District project in Uganda supports implementation of a program that improves access to water, sanitation and hygiene services, however, the program also has secondary climate change related objectives. Climate change related issues are only one of several activities being financed. Nevertheless, since Iceland uses a predetermined share of 100% to report finance of “secondary” projects towards climate finance, all financial support reported for this project was tagged as climate finance. This clearly leads to over-reporting of climate finance.

Some countries, such as the United Kingdom and Finland have developed more robust methods and report coefficients on a project-by-project basis for Rio-marked activities, including for projects that have climate change as their “principal” or “secondary” objective. In the future it may be appropriate to base estimations for “secondary” projects on these more robust methods but crucially there needs to be a coherent approach across developed countries.

Given the significant (about 91%) overlap or at least correlation in the data sets, we can estimate the proportion of the data in the OECD 2021 Climate Finance Report that corresponds to “principal” and “secondary” activities based on what has been tagged through Rio-markers. Using this approach implies a margin of error of about 10%, which we consider to be reasonable and more accurate than the current practice at OECD.

By not filtering out the finance associated with “secondary” projects from its assessment, the OECD 2021 Climate Finance Report has overestimated the total bilateral climate finance. We used the steps described below to estimate the amount by which the report has overestimated bilateral public climate finance of developed countries in 2019.

Steps to quantifying OECD overestimation

Step 1: Estimate share of bilateral public climate finance reported attributable to activities where climate change is a “secondary” objective.

To estimate the share of finance that supports projects where climate change is a secondary objective, we calculate the proportion of finance for “secondary” projects compared to total finance for “principal” and “secondary” projects in 2018. (The 2018 ratio is used as a proxy for the 2019 ratio. The 2019 ratio was not used because at the time of preparing our analysis the 2019 ratio was not available to us.)

Formula:

ShareOfSecondary2018 = ($RMSecondary2018) / ($RMPrincipal2018 + $RMSecondary2018)

Where,

• ShareOfSecondary2018 is the share of finance for projects where climate change is a “secondary” objective compared to total finance reported for climate “principal” and “secondary” projects in 2018

• $RMSecondary2018 is US$ amount of reported climate finance in 2018 for activities where climate change is a secondary objective as reported through the Rio-markers of OECD DAC

• $RMPrincipal2018 is US$ amount of reported climate finance in 2018 for activities where climate change is a “principal” focus as reported through the Rio-markers of OECD DAC

Based on the above approach, the share of “secondary” projects was estimated at 70% in 2018.

Step 2: Estimate amount of bilateral public climate finance reported by OECD that corresponds with “secondary” projects

To estimate the amount of finance that is attributable to secondary projects, we apply the “ShareOfSecondary” derived in step 1 to the total bilateral climate finance reported for 2019 in the OECD 2021 Climate Finance Report.

Formula:

$EstSecondary2019 = $TotalBilateralPublicCF2019 x ShareOfSecondary2018

Where,

• $EstSecondary2019 is the estimated US$ reported climate finance for 2019 for activities where climate change is a secondary objective

• $TotalBilateralPublicCF2019 is the US$ total bilateral public climate finance reported in 2019 as aggregated in the OECD 2021 Climate Finance Report

• ShareOfSecondary2018 is the share of finance for projects where climate change is a “secondary” objective compared to total finance reported for climate “principal” and “secondary” projects in 2018 (calculated in Step 1)

The amount US$ estimated for secondary projects in 2019 is equal to the amount by which the OECD 2021 Climate Finance Report has overestimated total bilateral public climate finance for 2019.

Results for bilateral public climate finance

Based on the above calculations, the OECD 2021 Climate Finance Report overestimated the scale of bilateral public climate finance in 2019 by about US$ 20.3 billion.

II. Critique of multilateral public climate finance estimates

Context

The OECD 2021 Climate Finance Report quantified multilateral public climate finance estimates using the OECD DAC database. The quantification includes both the annual contributions of developed countries to climate finance through multilateral channels as well as funding raised by the multilateral institutions themselves. For climate finance raised by multilateral institutions themselves, the OECD 2021 Climate Finance Report attributes this finance in proportion of the developed country share capital. However, since the US$100 billion climate finance target is focused specifically on the finance provided and mobilized by developed countries (it is an outflow measure) it is not appropriate to count the funds raised by multilateral institutions towards the developed country annual climate finance target. (For more context and information on climate finance see Veritas Global analysis from 21 April 2021: Climate Finance is the Key to Success).

To be clear, the funds raised by multilateral institutions themselves should be reported and tracked as per the accounting modalities agreed at COP 24 because these resources are part of the climate finance ecosystem. However, resources raised by multilateral institutions themselves should not be counted towards the achievement of the US$100 billion climate finance target of developed countries. Only direct contributions from developed countries to developing countries through multilateral channels should be counted towards the US$100 billion climate finance target. In the methodology below we explain our approach to assessing the estimates of multilateral public climate finance in the OECD 2021 Climate Finance Report.

Data considerations

There are no specific data considerations. The same data sources used by the OECD 2021 Climate Finance Report are used for purposes of undertaking this analysis. Data for assessing the multilateral public climate finance is sourced from the OECD DAC database. For calculating attribution shares, the OECD 2021 Climate Finance Report uses the multilateral institutions’ annual reports.

The difference in conclusions between the OECD 2021 Climate Finance Report and our analysis is entirely explained by definitions on what is eligible to be counted towards the US$ 100 billion climate finance target. By counting the funds raised by the multilateral institutions themselves towards the US$ 100 billion target the OECD 2021 Climate Finance Report overestimated the finance provided by developed countries. We used the steps described below to estimate the amount by which the report has overestimated multilateral public climate finance of developed countries in 2019.

Steps to quantifying OECD overestimation

Step 1. Estimate the share of multilateral public climate finance that corresponds to the funding raised by the multilateral institutions themselves.

Using the OECD-DAC data (provider perspective), we filter out data based on imputed multilateral contribution of developed countries for 2018 – which was equal to about US$ 6.5 billion. We subsequently calculate the share of imputed multilateral contributions compared to total attributed multilateral public climate finance in 2018 (US$ 29.6 billion) as estimated by OECD. (Note, the 2018 ratio is used as a proxy for the 2019 ratio. The 2019 ratio was not used because at the time of preparing our analysis the 2019 ratio was not available to us.) Based on this assessment, we estimate that about 78% of the multilateral public climate finance in 2018 was overestimated.

Step 2. Estimate amount of multilateral public climate finance reported by OECD that does not correspond to imputed multilateral contribution of developed countries for 2019.

We multiply the OECD estimate for total multilateral public climate finance in 2019 by the overestimated share (78%) calculated in step 1 to obtain the amount overestimated.

Results for multilateral public climate finance

Based on these calculations, the OECD 2021 Climate Finance Report overestimated the scale of multilateral public climate finance in 2019 by about US$ 26.6 billion.

For media queries: contact@veritasglobal.ch

Briefing prepared by:

About Veritas Global: Our vision is to have a positive impact on the world through truthful advice informed by robust analysis. We are a premier provider of tailored solutions on climate change, international conflict economics and infrastructure.

OECD inflates climate finance estimates ahead of COP26

Policy Pulse – 26 October 2021 – George Anjaparidze and Vicente Paolo Yu

Photo by Pascal Weiland on Unsplash

Key messages:

• The OECD has overestimated the 2019 climate finance provided and mobilized by developed countries by $46.9 billion.

• The total shortfall in reaching the $100 billion target is about $67.4 billion, meaning that only $32.6 billion of climate finance has supported developing countries.

• To avoid failure at COP 26, developed countries need to address the shortcoming in climate finance contributions by announcing a new pledge of $67.4 billion aimed at bridging the shortfall of the previous target.

Background on climate finance targets

Developed countries committed to provide $100 billion in climate finance by 2020 to address the needs of developing countries in the context of meaningful mitigation actions and transparency on implementation. This commitment was first made by developed countries in December 2009 in Copenhagen under the Copenhagen Accord that was noted by the Parties at COP15. The target was subsequently reiterated through various annual decisions under the UNFCCC beginning in 2010 in Cancun at COP16. This commitment of $100 billion annually has been extended under the Paris Agreement upon its adoption in 2015 to the post-2020 period up to 2025. The finance targets are seen as key enablers for scaling-up climate action in developing countries and more broadly as confidence building measures. (For more context and information on climate finance see Veritas Global analysis from 21 April 2021: Climate Finance is the Key to Success).

OECD overestimates climate finance provided by developed countries

Measuring progress against climate finance targets is not straightforward. The lack of internationally agreed metrics for measuring performance against the $100 billion target makes it difficult to definitively estimate climate finance flows. However, the methodology used by the OECD secretariat to estimate climate finance flows leads to overestimation.

The OECD secretariat estimated that in 2019 the climate finance provided and mobilized by developed countries was equal to $79.6 billion. The OECD figures overestimate climate finance provided by $46.9 billion in 2019. When adjusted for overestimating, the climate finance provided and mobilized by developed countries is about $32.9 billion in 2019. Meaning there is a shortfall of $67.4 billion in reaching the climate finance target. (See chart). There are two main drivers for OECD overestimation:

1. Bilateral climate finance flows are overestimated by $20.3 billion in 2019. For bilateral climate finance, the OECD secretariat includes aggregation of projects that do not have climate change as the principal focus. A project that has climate change as a secondary objective is tagged as climate “significant”, even if the share of finance flowing to support climate specific activities is negligible. Once a project or program is tagged as climate “significant” most OECD countries report the finance based on a predetermined share (usually between 30% and 100%) as climate finance. This accounting practice of “climatewashing” bilateral assistance leads to significantly overestimating the scale of bilateral climate finance reported.

2. Multilateral climate finance flows are overestimated by $26.6 billion in 2019. For climate finance that flows through multilateral channels, the OECD secretariat includes both the annual contributions of developed countries to climate finance through multilateral channels as well as funding raised by the multilateral institutions themselves. However, since the $100 billion climate finance target is focused specifically on the finance provided and mobilized by developed countries (it is an outflow measure) it is not appropriate to count the resources mobilized by multilateral institutions towards the developed country annual climate finance target. Only direct contributions from developed countries to multilateral channels should be counted.

Implications for COP 26 and beyond

There is an urgent need to address the shortcoming in developed country climate finance contributions. As explained above, climate finance targets are key enablers for scaling-up climate action in developing countries and more broadly are confidence building measures.

As an immediate step, at COP 26, developed countries need to recognize that the previous climate finance targets have not been met and pledge to make-up for the shortfall. A new pledge, specifically targeting to close the previous shortfall, of $67.4 billion should be made at COP 26. A significant share of this finance should be pledged to flow through the Green Climate Fund. Developed countries should also show progress towards a post 2025 climate finance goal that is based on financial needs for climate action as expressed by developing countries in their NDCs.

In the medium term, there is a critical need to address the shortcomings of the current climate finance system. Improving the metrics and transparency of how developed countries meet their climate finance targets will be critical to restoring confidence of developing countries. Without better metrics and enhanced transparency, there is a risk that future climate finance targets will not be credible. As negotiators start to discuss setting new climate finance goals for 2025 and beyond, they will need to ensure that the approach meets expectations of developing countries with respect to additionality, adequacy, and predictability, and complies with long-standing commitments by developed countries under the UN Climate Convention and its Paris Agreement.

African Ministers of Environment called on the Glasgow COP to “set a new post 2025 climate finance mobilization goal with developed countries committing to mobilize jointly at least USD 1.3 trillion per year by 2030, of which 50% for mitigation and 50% for adaptation and a significant percentage on grant basis from a floor of USD 100 billion, taking into account the needs and priorities of developing countries and in particular the special circumstances of Africa.” The first Needs Determination Report, adopted at the 26th meeting of the Standing Committee on Finance, noted that the costed needs of developing countries up to 2030 amounted to about USD 5.9 trillion (summarized in Table 2 of the executive summary of the report). These estimates offer relevant benchmarks for the scale of the new climate finance commitments that developed countries should pledge.

For media queries: contact@veritasglobal.ch

Briefing prepared by:

About Veritas Global: Our vision is to have a positive impact on the world through truthful advice informed by robust analysis. We are a premier provider of tailored solutions on climate change, international conflict economics and infrastructure.