Like many, I welcomed the announcement by COP26 that the “rulebook” for the Paris Agreement holding back carbon markets had finally been approved. Two decades after the Kyoto protocol first set out the clean development mechanism (CDM) for steering vital funding to carbon reduction and removal projects, this lack of consensus delayed our urgent mission of keeping global warming below 1.5ºC.
One key difference between the Paris Agreement and Kyoto Protocol is that developing countries are now also committed to their nationally determined contributions (NDCs). The newly passed Article 6 of Paris Agreement established a cross-border system similar to CDM but puts greater burden on developing nations when they try to achieve their own NDCs while selling carbon credits to developed countries.
It would be beneficial to have an additional mechanism to support multinational corporations (MNC) to purchase carbon credits from developing countries, allowing those nations to achieve their NDCs instead of helping the country where the MNC is based to meet its NDCs without reducing emissions. Current NDC commitments given by countries – if met in full – would still lead to a 2.4ºC heat increase, well above the 1.5º needed to prevent catastrophe. Utilizing the voluntary markets in this way would drive much-needed capital from those large corporations to finance green mitigation projects in vulnerable communities and speed up the world’s decarbonization effort.
Unfortunately, countries chose to exclude a mandatory share of proceeds to be allocated to the UN’s Adaptation Fund, set up expressly to help developing nations most at risk from climate change to adapt. Despite being set at a minimum annual fund size of $100bn by 2020, it never reached that number. “We are not there yet,” conceded UN secretary-general António Guterres, although the final figure is unknown.
Depending whether calculations were based on wealth, past emissions, or population, The World Resources Institute estimated that the US’s “fair share” contribution would be 40-47% of that total. The US contributed less than 8%.
Experts had called for a 50:50 split on the Fund allocation to mitigation projects and adaptation. Sadly, most funds were allocated as loans to reduce carbon emissions in middle-income countries; these are profit-making ventures that could likely have found private funding without this financing. Adaptation projects in low-income countries, by contrast, received little funding and are unlikely to attract “traditional capital.”
The International Energy Agency estimates annual funding of US$2.6tn-4.6tn needed to low-income nations for adaptation and mitigation. That figure is eye-wateringly high for any single country to consider – and significantly larger than the ~$80bn the Adaptation Fund was managing to gather. Turning our lens away from national governments and towards the private sector may offer some light.
Mark Carney, asset manager and UN Special Envoy for Climate Action and Finance, announced the Glasgow Financial Alliance for Net Zero (Gfanz) – a coalition of 450 financial institutions pledging a combined USD 130tn and net-zero pledges. An impressive headline-grabbing figure, even if they missed the opportunity to commit to fossil fuel divestment and offer specific roadmaps to decarbonization. Faith in the climate philanthropy of legacy institutions may understandably be wearing thin after failing to deliver the previous US$100bn figure agreed in Paris.
The private sector includes the original architects of the climate crisis wanting business as usual, as well as the innovative technologies emerging through new entrepreneurs to offer solutions for the future. In a recent event discussing decarbonization with the Bank of England’s Michael Sheren and environmental economist Dr. Ma Jun, several institutions raised questions about maintaining environmental integrity and the risk of perversion or interference. Whether operating privately in the voluntary markets or on national mandatory carbon markets for regulated industries, the highest standards must be maintained to ensure emission reduction remains the primary motivator.
“There is no shortage of money worldwide, but it is not finding its way to where it is most needed.” – Dr. Fatih Birol, International Energy Agency
Excluding per capita or past emissions figures, China is currently the worst emitter of greenhouse gases (GHG). Goldman Sachs estimates China would need US$16tn of green finance to achieve its net-zero ambitions. If the global community truly wants to achieve decarbonization, we would be wise to spend our money where the greatest impact for change can be made.
Last week, Indonesia announced new rules for their own cap-and-trade system for trading carbon to help raise capital for green projects. The reduced 2060 deadline for net-zero came with fine print that they could achieve it sooner if international finance supports with investment into the forestry and energy sectors. Below, I outline an example of how Singapore’s Cyberdyne Tech Exchange uses decentralized ledger technologies (DLT) to address the integrity and regulatory concerns surrounding cross-border carbon trading between companies and countries to finance such projects in Asia.
Company A in Indonesia restores carbon-absorbing peatlands, then certifies and registers the resulting emissions reduction in its national carbon registry. When Company A plans to sell the carbon credits to a company in the USA – for the sake of this example, let’s say my former employer Goldman Sachs – so that Goldman Sachs can use it to offset its own carbon footprint. With the assistance of enhanced traceability by digital technology such as blockchain as well as a global, interconnected carbon registry, Company A can choose whether such transferred carbon credit unit contains Nationally Determined Contributions (NDC) transferability or not.
Suppose such transferred carbon unit contains the NDC transferability, which is required to be approved by Indonesia pursuant to the text of Article 6 of the Paris Agreement. In that case, Goldman Sachs can use the purchased carbon credit to offset its own emission and at the same time help the USA in its NDC reporting. As this carbon credit is already transferred out of Indonesia, Indonesia can no longer count it for its NDC.
If such transferred carbon unit excludes the NDC transferability, it essentially becomes a digital depository receipt (similar to American Depository Receipts) of such carbon credit. Goldman Sachs can use it for voluntary carbon neutrality efforts while still counting as the NDC of Indonesia. Goldman Sachs can achieve a net-zero effect from a global perspective as its pollution is reliably offset by carbon offset somewhere in the world. However, Goldman Sachs’s purchase cannot count toward USA’s NDC. In this case, Indonesia reduced its emissions in line with their NDC pledges, financed indirectly by Goldman Sachs using carbon trading mechanisms.
There is no shortage of money worldwide, but it is not finding its way to where it is most needed. We must use all the tools in our arsenal if we are to get off what Prime Minister Mia Mottley of Barbados described in her speech as “the path of greed and selfishness.” While COP26 was yet another blow to developing countries, it’s now up to global financial institutions and multinational corporations to rise to the occasion and help those most vulnerable.
Dr. Bai Bo is the Executive Chairman of Cyberdyne Tech Exchange and Asia Green Fund.
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