U.S. Announce New Public-Private Effort to Unlock Finance to Accelerate the Energy Transition

The US announced today a plan ("Energy Transition Accelerator") to develop a new carbon credits market to finance the decommissioning of coal and accelerate clean energy in developing countries.

U.S. Special Presidential Envoy for Climate John Kerry, The Rockefeller Foundation, and the Bezos Earth Fund announced a partnership today to work toward the creation of an Energy Transition Accelerator (ETA) intended to catalyze private capital to accelerate the clean energy transition in developing countries.

At the launch event, John Kerry, US Special Presidential Envoy for Climate, stated: "Our intention is to put the carbon market to work to deploy capital to speed the transition from dirty to clean power, specifically for two purposes - to retire unabated coal fired power and accelerate renewables.

Yet in its current shape, the plan lacks integrity and risks undermining the work being done on Just Energy Transition Partnerships (JETPs), Article 6 and the UN High Level Expert Group on Net Zero. Developing countries have been clear that the focus of the finance negotiations at this COP needs to be on grant and concessional finance to overcome the structural barriers for the energy transition - this plan risks being a distraction from that work, giving corporations in the Global North access to yet another scheme to delay reducing emissions now.

Key highlights

POLITICAL PRIORITIES

The priority - especially on Finance Day at COP27 - is mobilising more real finance.

● The work that has been done by developing countries with the financial reform agenda and through the Just Energy Transition Partnerships has been very clear on the fact that there needs to be additional grant and concessional finance, as well as real public finance.

● There are other priorities where the US has the chance to make significant structural changes. For instance, the US can significantly influence the reform of the Capital Adequacy Framework for MDBs, which would allow banks to leverage a trillion in concessional finance. With the G20 meetings coming up, the priority should be on driving this agenda forward.

● These proposals are distinct from the Just Energy Transition Partnerships, the success of which is predicated on sufficient grant and concessional finance being mobilised to leverage the hundreds of billions in private finance needed. Any capital mobilised through carbon markets would need to be additional to this grant and concessional finance.

PARTICIPATING COMPANIES

The plan states that the programme will only be open to "companies committed to achieving net zero no later than 2050 and science-based interim targets".

● But we know that commitments are not enough - most corporate 2050 net zero commitments are not underpinned by plans to reduce emissions rapidly enough. 75% of "climate leading" companies in the Climate Action 100+ have a target of net zero by 2050, but only 10% have plans compatible with the Paris Agreement.

● The Science-Based Targets Initiative (SBTi) has come under criticism by scientists for lack of oversight and transparency as a net zero accreditor.

CARBON CREDITS

The plan states that "companies could use credits to support mitigation above and beyond their interim targets, to contribute to climate finance or other voluntary goals, or to contribute to a host country's NDC achievement. Another approach to be explored is the use of some credits to address a limited portion of Scope 3 emissions within a company's near-term target, in which case companies would be required to pay for additional credits solely to magnify the ETA's financial and climate benefits."

● While the proposal includes a statement on the use of credits "above and beyond interim targets", it will still allow offsetting of an undefined portion of scope emissions, which account for 80% to 90% of emissions from the private sector

● Even SBTi, which has limitations as a net zero accreditor, limits the use of high

quality carbon removals to less than 10% of corporate transition plans for residual

emissions The history of carbon credits shows that there are a lot of issues around credibility

and integrity of being additional. Initiatives such as ICVCM and VCMI are working to

address this but these proposals do not yet have teeth. See here for a critique of

previous attempts to scale up the voluntary market

● Yesterday's release of the UN recommendations on integrity for net zero show that

only high-integrity credits should be used after real emissions reductions are done,

and this plan risks being a distraction for companies investing in cutting actual

emissions.

PRICING

● The plan proposes a "fixed price" for advanced purchase agreements for energy

transition, but doesn't specify how this will be determined. If fixed prices are too low,

this potentially creates the same unintended consequence as in existing carbon

offset markets where the cheapest offsets are also the least additional or meaningful.

● This could further the problem of carbon colonialism.

INCENTIVISING PRIVATE FINANCE

This is a problematic proposal to use carbon credits to incentivise private investment to de-

risk investments in developing nations which also does little to address the integrity issue

around carbon offsetting.

● The barriers to investment in developing countries are not simply financial but

institutional and political (see table outlined below). Simply offering carbon offsets will

do little to address existing barriers for investment.

● Private finance seeks low risk opportunities where investment opportunities are

profitable and financially sustainable. It is difficult to imagine a scenario where the

offer to exchange carbon offsets will be attractive enough to lower the investment

barrier to developing nations.

● For example, 96% of private finance mobilised through blended finance flows to

countries with a sovereign credit rating, which most low income countries do not have.

There is a systemic barrier for Low-income countries who typically have smaller economies with poor investment climates and a lack of investible opportunities. The demand for finance is there, but often not the systems in place to scale investment opportunities. Whereas Private finance measures success by the volume of transactions. This means bigger deals in developed markets are more attractive.

Ulka Kelkar, Director, Climate Change Programme, World Resources Institute (India) said:

"What developing countries need is predictable finance - not offset markets. The proposed

initiative cannot make up for the United States' failure to provide its fair share of climate

finance - an estimated $40 billion of the unmet goal of $100 billion a year. It also should not

substitute for deep decarbonization needed within the United States and other industrialized

countries. For developing countries like India, who have been raising their climate ambition,

the first priority would be to meet their own targets and not provide offsets for reductions in

developed nations."

Vibhuti Garg, Director, South Asia at Institute for Energy Economics and Financial Analysis (IEEFA)

"To achieve climate goals, there is a huge requirement of finance especially by the

developing countries. Public capital alone cannot meet these requirements and thus

private capital has a pivotal role to play. Energy Transition Accelerator is a good platform

to get the required private capital. However, availability of this capital will be at market

rates which the developing countries can access otherwise also. What they need is

concessional capital. How this mechanism will ensure availability of finance at

concessional rates is something not very clear. Moreover, there should be clarity in terms of which projects can qualify as part of this fund and having established a proper

taxonomy in place or else there is fear of greenwashing."