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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Catalyzing Stakeholder Action for Affordable and Clean Energy for All

Policy Pulse - 24 May 2021 - Kapil Narula and George Anjaparidze

This article was first published on 13 May 2021 by Development Asia under the title Catalyzing Stakeholder Action to Achieve Affordable and Clean Energy for All. Development Asia is the Asian Development Bank's knowledge collaboration platform for sharing development experience and expertise, best practices, and technologies relevant to the Sustainable Development Goals.

Introduction

Sustainable energy is key to economic development and a better quality of life. Goal 7 of the Sustainable Development Goals (SDGs), which is to ensure access to affordable and clean energy, and its five targets are critical for meeting the SDGs by 2030.

Despite multiple efforts at the international level, about 800 million people still do not have access to electricity, while 2.8 billion do not have access to clean cooking (2018). Energy efficiency improved by 1.7% but lags behind the 3% target, and the share of renewables in the global energy mix is only 17% (2018) and needs to increase substantially to meet long-term climate goals. Hence, consistent effort for scaling up action is essential.

Challenges

Many countries have adopted a cautious approach, prioritizing economic growth over aggressive action toward SDG 7. Low-income countries however simply do not have the natural, human, and financial resources to undertake the transition to clean energy on their own. National action plans look good on paper but are fragmented, and there is lack of accountability. Actions are often uncoordinated, inadequate to fulfil commitments, not backed by a legal framework, and lack citizen engagement.

International cooperation on clean energy, which is restricted by technology transfer issues, is proving to be challenging. Development of clean energy infrastructure in several low- and middle-income countries continues to be plagued by lack of finance and technology. There has been a further setback because of the coronavirus disease (COVID-19) pandemic as governments turn their attention to more pressing public health issues.

Global Momentum for Action

In 2012, the United Nations (UN) declared 2014–2024 as the Decade of Sustainable Energy for All. In 2018, 46 countries presented their progress by undertaking voluntary reviews at the High-Level Political Forum (HLPF) on Sustainable Development. In 2019, a mid-point review was undertaken for accelerating SDG 7, which was informed by various policy briefs. Key outcomes pointed to the need for catalytic actions that address interlinkages between energy and inequality and for strengthening cooperation. Recommendations included strong political commitment in the form of updated nationally determined contributions (NDCs), stepping up private financing and fiscal incentives, use of innovative tracking instruments, such as a multi-tier framework (MTF) for energy access and digitalization.

To further accelerate action on SDG 7, the UN General Assembly resolved to hold a high-level dialogue on energy in September 2021. This is the second time such an event is being convened after 1981, which signifies the importance of SDG 7. It is structured around three main themes: “energy access, energy transition, and enabling SDGs through inclusive, just energy transitions,” and supported by "innovation, technology and data," and "finance and investment" as cross-cutting themes. Within these themes, issues, such as access to clean energy services, energy system decarbonization, inclusive transition, application of big data and digitalization, research and capacity building measures, integrated energy policy making, regulation, mobilizing finance, fossil fuel subsidy reforms, climate proofing investments, risk management, and multi-sectoral interventions, will be addressed.

The preparatory process has started to prepare a global roadmap for scaling up efforts and developing concrete actions. This consists of three main initiatives: ministerial-level thematic forums, technical working groups and a stakeholder e-consultation process. For each theme, five to 10 countries act as global champions and are represented at the ministerial level. Thirty to 50 technical experts were identified for each of the five themes and have co-leads from multilateral development agencies. The groups have prepared annotated outlines that identify several gaps in their initial meetings and will hold cross-cutting discussions. They will present a final thematic report containing substantive recommendations to the ministerial thematic forum in June 2021. To mobilize citizen engagement and participation, stakeholders were invited to provide technical inputs, recommendations, and actionable examples. An inter-agency report will also be prepared as substantive background for the high-level dialogue.

The Need for Voluntary Stakeholder Action

Although national governments are the primary actors with the responsibility of setting the targets and providing an ecosystem for a clean energy transition, other stakeholders must contribute to the effort by undertaking voluntary actions. Sub-national actors, such as states, cities, and municipalities, must commit to take decentralized action, depending on their capabilities. Many cities have formulated a sustainable climate and energy action plan under the European Union Covenant of Mayors, and such efforts need to be globalized. Private businesses also need to contribute by undertaking commitments, such as participating in the UN Global Compact, a voluntary sustainability grouping of more than 12,000 companies. Lastly, citizens need to personally commit to a sustainable environmental footprint as behavioral changes supported by technology are essential for long-term changes.

There are several factors driving voluntary actions in the private sector. There is the realization that clean energy is the way ahead and makes business sense. Businesses earn mileage from projecting a green image, which can boost share prices. Shareholders also demand improved environmental, social, and governance (ESG) performance. These drivers are behind the steady increase in the volume of voluntary carbon markets.

Voluntary action by companies to purchase clean energy results is a market pull factor resulting in increased investment for renewable electricity production. For example, Google, which pledges to become carbon-free 24/7 by 2030, is financing the construction of new wind and solar plants and energy storage solutions so it can procure clean electricity from a nearby grid.

To step up voluntary actions, Energy Compacts are being formed as part of the UN high-level dialogue to get complementary commitments and amplify additional actions, key outcomes, implementation timelines, and tracking frameworks toward achieving SDG 7. Introductory and deep-dive workshops from April to June 2021 facilitate knowledge exchange and encourage member states, cities, businesses and citizen groups to register their voluntary commitments. Self-reporting is planned, and a web-based tool will be used to showcase the efforts of signatories.

Filling the Financing Gap

The overall financing requirement 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 ($800 billion) could have been filled if developed countries had met their commitments to mobilize $100 billion in climate finance annually by 2020 to cover the needs of developing countries under the Paris Agreement. This target for 2020 has been extended up to 2025. In the meantime, the annual shortfall is estimated at $67.1 billion.

Making good on this commitment has the potential to crowd in $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.

One way is to channel pension funds to finance renewable energy projects as in the case of the Government Pension Fund Global of Norway, which has $1 trillion in assets. It divested $8 billion from oil and gas companies and is investing $5 billion in renewables. Removing consumer and producer fossil fuel subsidies, estimated at $500 billion globally (2017), can also bring fresh funds for clean energy access. Such actions are particularly important at an early stage while oversight provisions on aligning finance flows with climate goals are still being developed.

Revenues from carbon credits can support SDG 7 by aligning incentives for deploying clean energy. A well-functioning international carbon market can also ensure that opportunities are pursued where they are most cost-effective.

Private and public finance hold the key for catalyzing action, and innovative low-interest financing models for clean energy entrepreneurs need to be developed.

Meanwhile, other voluntary actions for accelerating SDG 7 include peer-to-peer trading of decentralized electricity generated from rooftop solar PV, self-generation by industries, and producing electricity from biomass.

For the more challenging SDG 7 target of universal access to clean cooking, sustainable solutions include smart solar PV or hydropowered microgrids using electric induction cooking and biogas for clean cooking, and integrated business models that sell both cookstoves and clean fuel. These ensure recurring revenue streams for companies and make clean fuel easily available to customers. “Pay as you go” financing models, micro lending, and community participation have also proven to be successful for de-risking investment.

Conclusion

Global momentum on energy action is building up as part of the UN high-level dialogue on energy. Apart from governments, it is important that businesses, communities, and individuals contribute to this effort. Energy compacts offer stakeholders an opportunity to participate in effecting widespread change. Financing remains key to achieving SDG 7 by 2030 and needs to be mobilized at scale.

Resources

A. Bhattacharya et al. 2020. Delivering on the $100 Billion Climate Finance Commitment and Transforming Climate Finance. The Independent Expert Group on Climate Finance.

United Nations. 2019. Accelerating SDG 7 Achievement. Policy Briefs.

United Nations. High-Level Dialogue on Energy 2021.

George Anjaparidze is managing partner of Veritas Global, a company in Geneva, Switzerland that provides economics and strategy advisory services worldwide with expertise in climate change, infrastructure and international development.

Kapil Narula is a senior researcher at the University of Geneva, Switzerland. He holds a PhD in Development Studies with a focus on energy, economics, sustainability, and policy. He has more than 18 years of work experience in the government, industry, academics and research.