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.

Considerations for Net Zero Targets in Climate Change Policy: The Good, the Bad, and the Ugly

Policy Pulse – 6 July 2022 – Veritas Global

Photos by Gabor Koszegi, Chris LeBoutillier, and Dulana Kodithuwakku on Unsplash

Key points

Considerations for net zero emission targets in climate change policy:

• The good: targets are conceptually easy to grasp by policy makers, appropriate for technology modeling and suitable for signaling long-term policy intention

• The bad: sectoral targets risk being less cost-effective if they do not allow the use of carbon offsets from other sectors; when targets are narrowly applied, they can crowd-out investments that help reduce emissions

• The ugly: in the absence of scaled-up access to climate finance, targets risk condemning the poor to poverty for longer or at the other extreme poorer countries may pull out of climate protection programs leading to collapse of the global climate agenda

Context

Net zero emission targets have become an increasingly popular means through which to communicate climate policy ambition. According to the latest available global data, 134 countries covering 83% of emissions, 91% of economic activity, and 80% of the population have pledged to achieve net zero emissions this century. While private sector actors also actively use net zero targets as part of their climate strategies, the focus of this brief is on national and global emission targets.

The good

Net zero emission targets are conceptually easy to grasp by policy makers and the broader public. They offer a relatable benchmark against which to measure success and are a useful reference point for the scale of action required to achieve temperature goals. The Intergovernmental Panel on Climate Change (IPCC) has used net zero metrics to explain the link between greenhouse gas (GHG) emission trajectories and Paris Agreement temperature goals. In its 2018 Special Report on 1.5°C, the IPCC highlighted that limiting global warming to 1.5°C implied achieving net zero emissions globally by around 2050 whereas limiting global warming to 2°C implied achieving net zero emissions globally by around 2070.

Net zero emission targets can be used in modeling to identify climate-friendly technology roadmaps in specific sectors. Such roadmaps are particularly useful for design of technology innovation policy. For example, modeling done by the International Energy Agency (IEA) on roadmaps for the energy and heavy industry sectors can help identify specific research and development interventions to support technology innovation in these sectors.

More broadly, having net zero emission targets in place offers greater certainty on future intended trajectory of climate mitigation policy. There are many different policy options and means through which to achieve net zero emission targets. Therefore, to reduce uncertainty, a clear policy framework is needed that supports achievement of net zero emissions. Nevertheless, even in the absence of a detailed policy framework for implementation, net zero targets can offer some certainty on the overall intended policy trajectory.

The bad

Sectoral net zero emission targets risk focusing on measures that are less cost-effective if they do not allow the use of carbon offsets from other sectors. The cost of reducing one metric ton of carbon dioxide varies significantly from sector to sector. The midpoint estimate in the latest IPCC report indicates that agriculture, forestry, and other sectors, can generate about 40% of the global mitigation potential under $100 per metric ton of carbon dioxide in 2030 (see chart below), with carbon sequestration actions making-up a significant portion of these measures. Meaning that the midpoint expectation is that carbon sequestration activities offer significant cost-effective opportunities for neutralizing emissions from other sectors. Therefore, to be cost-effective, net zero emission targets for a sector (such as energy and heavy industry) should allow trading of mitigation actions with other sectors.

Some scenarios considered by the IPCC, expect that as much as 1221 Gt of CO2 (about 80% of all CO2 emitted by human activity since 1750), may be sequestered from the atmosphere in this century through carbon dioxide removal methods. However, these estimates are highly uncertain. Given the uncertainty, it is critical to use technology neutral policy instruments to incentivize desired investments. Carbon pricing policies can be designed in a technology neutral way and are generally more efficient instruments than engineered technology-based emission trajectories. Carbon pricing is not a panacea and is most effective when combined with a broader policy mix. Nevertheless, in general, a price signal on carbon ensures that the most cost-effective emission reductions are prioritized not only within a sector but also across sectors.

In this context, the net zero emission trajectories developed by the IEA for the energy and heavy industry sectors do not reflect the most cost-effective trajectories because they do not appropriately incorporate carbon trading opportunities for sourcing offsets from agriculture and forestry sectors and more broadly from carbon dioxide removal. Furthermore, it is unclear whether the IEA approach allocated the mitigation burden across developed and developing countries in a manner that is acceptable to the global community. For these reasons, IEA modeled scenarios should not be used in determining whether investments or activities are aligned with Paris Agreement temperature goals.

Requiring the use of IEA net zero emission trajectories in screening for Paris Agreement alignment as a condition for accessing international public finance will have adverse consequences. First, doing so risks mis-prioritizing investments and channeling resources to less cost-effective climate actions. Second, it could make it harder for project developers to access technologies that are climate-friendly, which help reduce emissions but might not eliminate them. Third, project developers could instead seek financing from non-OECD sources that are less aware of Paris Agreement alignment considerations. The increasing role of non-OECD countries serving as creditors makes this a real possibility. The share of external public debt held by non-OECD creditors grew from about 25% in 2006 to about 65% in 2020 in countries eligible for the Debt Service Suspension Initiative. Therefore, a common understanding, across diverse creditors and borrowers, on how to align investments with the Paris Agreement, needs to be developed in a transparent and inclusive manner. In this respect, the announcement by G7 leaders on 28 June 2022 to take a transparent and inclusive approach to creating a global climate club, for addressing GHG emissions from heavy industry, should be welcomed. Experience from designing the global scheme for addressing emissions from international aviation demonstrates the importance of taking a transparent and inclusive approach.

Narrowly applied net zero emission targets can crowd-out investments that reduce emissions and help fight climate change. Europe has already fallen victim to narrow application of net zero emission targets. For years, European policy makers postponed strategically important decisions to invest in diversifying natural gas supply, in large part because of misplaced climate concerns. For example, projects that would have brought pipeline natural gas from the Caspian to Europe were not sufficiently supported. In part because of this indecision, coal is making a strong comeback in Europe. In 2021 power generated from coal increased by about 20%. Generating electricity from unabated coal emits about twice the amount of carbon dioxide compared to conventional natural gas. European reliance on coal has intensified further in 2022, as the Russian invasion of Ukraine and its consequences uncloaked the pitfalls of having poorly diversified energy supply.

Europe has an immediate need to strengthen energy security by enhancing access to Caspian energy resources, in particular to diversify its natural gas supply. Natural gas can play an important role in enabling greater renewable energy deployment by offering a viable solution for balancing capacity to manage fluctuations in renewable energy supply. In addition to being an immediately deployable low-carbon alternative to coal, natural gas can be used in a way that has its emissions neutralized through carbon capture and storage, carbon offsets, or increasingly cost-competitive direct air carbon capture processes. Meaning that when a broader perspective is considered, use of natural gas can be fully compatible with EU’s 2050 net zero emission target.

The ugly

In the absence of scaled-up access to climate finance, net zero emission targets risk condemning socioeconomically vulnerable groups to poverty for longer. Net zero targets can lock-in more costly development trajectories and slow economic growth. In developing countries, especially where access to modern energy remains a challenge and poverty rates are high, access to scaled-up climate finance is critical to limit the adverse effects of more costly development.

However, even inflated estimates of climate finance, where systematic overestimation has been documented, confirm that developed countries have not provided the promised $100 billion per year. Realistic assessments suggest that less than half of the committed amount has materialized. There is an immediate need for developed countries to meet existing climate finance commitments. In the longer-term, further scaled-up access to climate finance will be critical for ensuring that the transition to net zero emissions does not slow the rate of poverty eradication and subdue economic growth in developing countries.

Developing countries with a significant proportion of population in poverty should not be faced with the choice of either taking climate mitigation action or reducing poverty. If faced with this choice, poorer countries are likely to pull out of climate protection programs, which may lead to a collapse of the global climate agenda.

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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.

Implementing climate finance commitments in 2022 will make-or-break climate policy

Policy Pulse – 26 January 2022 – George Anjaparidze

Key messages:

• Implementing climate finance commitments in 2022 and scaling-up flows from developed to developing countries will make-or-break international climate policy

• For future mitigation plans to be more ambitious, current climate finance flows from developed to developing countries need to scale-up

• Making good on developed countries’ climate finance commitment of $100 billion has the potential to crowd-in an additional $600 billion in financing per year from other sources

Photo by Visual Stories || Micheile on Unsplash

The upbeat tone in our last year’s 2021 outlook on international climate policy proved to be justified. The UK COP 26 presidency delivered a successful outcome at last year’s annual UN Climate Conference as part of both formal negotiations and momentum building initiatives organized on the side-lines. Crucially, COP 26 also agreed on rules on how countries can cooperate across borders to achieve Paris Agreement goals (also known as Article 6 negotiations). Having Egypt as the COP 27 incoming presidency bodes well for the negotiations process in the year ahead. Egypt has the trust and confidence from a broad range of countries combined with very strong capacity and excellent knowledge of climate negotiations, especially on climate finance issues.

We expect the focus of international climate policy in 2022 to be on implementation. There will of course continue to be calls by some to focus on policy development, for example to scale-up mitigation pledges as the gap between individual actions and collective ambition persists. However, given that the exercise of updating Nationally Determined Commitments (NDCs) was just completed at COP 26, we think a focus on further scaling-up of individual mitigation plans in 2022 is not productive. Instead, the focus will need to shift to implementation of climate policies at the national level but also on implementation of existing international commitments. Particularly pressing is the need to achieve the existing target on climate finance flows from developed to developing countries.

Climate finance is essential for enabling greater climate action in developing countries. Developed countries did not meet their existing commitment 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. The climate finance gap is much larger than officially reported by OECD because of flawed accounting methods used for reporting climate finance. The shortfall in reaching the $100 billion target is about $67.4 billion, meaning that in 2019 only $32.6 billion of climate finance has supported developing countries.

The $32.6 billion figure includes climate finance provided for adaptation. If we remove adaptation specific finance but retain mitigation and cross-cutting support, we estimate that only $27.2 billion of climate finance was provided by developed countries in the context of meaningful mitigation actions and transparency. (Technical note: the $27.2 billion estimate is generated by subtracting the proportion of finance provided specifically for adaptation from total climate finance, the calculation is performed based on the ratio of adaptation specific finance in principal climate finance activities reported under the bilateral channel for 2019.)

As demonstrated in the chart below, the shortfall in the ambition of NDCs mirrors the shortfall in climate finance. The chart presents the status of communicated NDCs as reflected in the latest UNFCCC synthesis report from 17 September 2021. Some additional abatement measures were announced at COP 26 that are not reflected in the figures presented in the chart and it is important to note that the abatement target corresponds to both developed and developing countries. Nevertheless, the analysis presented in the chart captures well the correlation between globally planned emission reductions and delivered climate finance from developed to developing countries.

To have a realistic chance for the next round of updated NDCs to be significantly more ambitious, current climate finance flows need to scale-up. While new and more ambitious climate finance targets will also be necessary, there is an urgent need for developed countries to meet existing commitments and scale-up delivery of climate finance.

Climate finance is also critically important for meeting Sustainable Development Goal (SDG) 7 which aims to ensure access to affordable, reliable, sustainable, and modern energy for all. The overall additional financing required to meet SDG 7 is estimated at $1.3 trillion to $1.4 trillion per year, but current financing is approximately $514 billion. However, much of this gap could have been filled if developed countries had met their climate finance commitments. Making good on their climate finance commitment of $100 billion per year has the potential to crowd-in an additional $600 billion in financing per year from other sources, assuming leverage ratios of existing channels for climate finance. However, some mitigation actions will not fall within the scope of SDG 7, and hence, additional financing will be needed for SDG 7.

Below is a list of events in 2022 that could potentially serve as opportunities for developed countries to announce how they intend to follow through on their existing climate finance commitments:

• 2-3 June 2022: Stockholm, Sweden Stockholm+50 https://www.stockholm50.global

• 26-28 June 2022: Elmau Castle, Germany G7 Heads of State https://www.g7germany

• 30-31 October 2022: Bali, Indonesia, G20 Summit https://g20.org

• 7-18 November 2022: Sharm El-Sheikh, Egypt UNFCCC COP 27 https://unfccc.int

Other key policy trends to watch in 2022:

• Carbon pricing initiatives are likely to continue to gain momentum in 2022. The best mechanisms will create fiscal space, support the post-pandemic recovery while simultaneously set long-term development incentives in a climate conscious way.

• Private sector financiers are increasingly mainstreaming climate change related considerations into business decision making. There is growing evidence that corporations that have adopted more environmentally conscious practices (particularly as it relates to corporate reporting) have been able to command a higher price for their stocks. Key developments to watch in 2022 relate to the regulatory interventions and voluntary actions that may be taken to make it attractive for capital providers to support climate friendly investments at sufficient scale.

• The EU proposed Carbon Border Adjustment Mechanism targets heavy industry importers and will continue to be a focus of attention in 2022. Sectoral approaches can play an important role in scaling-up climate action. However, appropriate representation of stakeholders from industry and government is critical for ensuring schemes have the needed buy-in and impact. In 2022, it will be important to see whether the World Trade Organization could potentially create the space for deliberation on sectoral initiatives, for example those launched through bilateral and plurilateral approaches, to feed back into the multilateral system.

• Due to travel restriction linked with the pandemic, the aviation industry had another difficult year in 2021. The year ahead is also filled with uncertainty. Despite the challenging business conditions, in 2021 the airline industry continued to show climate leadership by committing to net-zero CO2 emissions by 2050. For the target to be operationalized it will require development of a global scheme through building on the existing Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). Moving from an existing net-carbon neutral growth target to a net-zero carbon emissions target will require technical recalibration of the scheme design, some of these aspects are highlighted in the concluding section of the Policy Brief from the Harvard Project on Climate Agreement. If the sector starts to recover to its pre-pandemic levels in 2022, it will become a target for environment taxes and climate change related restrictions. Therefore, elaborating on how the sector will operationalize its new climate targets is likely to become increasingly urgent.

• Important elements will also advance in 2022 under the UNFCCC, both through the inter-governmental process and the work program of the secretariat. In the context of the inter-governmental process the ministerial dialogue on climate finance, workshop of on loss and damage and activities related to fully operationalizing Article 6 will be some of the key developments to monitor in the year ahead. The work coordinated by the secretariat also promises to support greater transparency on how the convention is implemented.

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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.