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A wake for carbon offsets – but will lessons be learned for climate finance?

by Oscar Reyes on .

Barcelona Standing Committee on Finance ForumThe dress code was the first striking about the Forum of the Standing Committee on Finance in Barcelona: only a finance meeting or a funeral gathers so many sombre suits. As it turned out, the UN climate change finance talk shop was a little of both.

The corpse being displayed was the UN’s Clean Development Mechanism (CDM), the main international carbon offsetting mechanism. It hasn’t officially been buried yet, but most investors have declared it dead. Carbon credits have crashed to less than half a dollar per ton (€0.35). Trading desks at major investment houses are shutting down, credit purchase agreements have been unilaterally torn up, and numerous CDM projects risk default.

Hugh Sealy of the CDM Executive Board, which oversees the scheme, reported that fewer than two new projects are now being registered every week – compared to more than 80 at its peak.. “We’re losing the market infrastructure,” he said. “The private sector capacity is being redeployed.”

Sealy says the problem is a lack of demand for credits. But Marc Stuart, co-founder of carbon trading firm but now  a “refugee from the carbon market,” claims the problems run deeper. “We learnt from the CDM that… trying to create an environmental commodity and shove it through a black box in [UN climate negotiations in] Bonn is a very unstable way to build investment.”

Participants at the UN forum – which took place on the fringes of Carbon Expo, a trade fair co-organized by the World Bank and the lobby group International Emissions Trading Association (IETA) – grappled with the fate of carbon markets, the investors stranded within them, and those looking for money-making ways out.

One goal of the Forum was to convince any members of the financial sector present that there was still money to be made in addressing climate change. But as IETA head Dirk Forrister put it bluntly: “Most investors would see this as a UN-yawn thing with not enough of anything investable.”

Several speakers at the meeting also sought to persuade policy makers that private investment was needed to plug the funding gap from developed countries unwilling to meet their financial obligations under the UN Climate Convention.

Some of the proposals revolved around creating yet more carbon markets. Vikram Widge, head of climate finance at the International Finance Corporation, claimed that we should expect to see new regional markets trading “different asset classes.”

With carbon trading systems emerging in California, South Korea and Australia, amongst others, there is pressure to accept the allowances generated by these national and sub-national schemes as part of a post-2020 international climate regime. But according to Sealy, a long-standing member of the CDM Executive Board, with each trading system adopting a different definition of what counts as “a ton of carbon”, it would be impossible to ensure the environmental integrity of a unified scheme.

Participants also offered additional ways to “leverage” private sector finance. Abyd Karmali, a managing director of Bank of America Merrill Lynch, defined the key obstacle to attracting private money as one of balancing “risk and return,” a theme that many speakers concurred upon. Heargued that funds like the Green Climate Fund (GCF) should offer a wide range of financial instruments designed to entice capital market investors, including “green bonds” that could securitize (parcel out) risk and be traded by banks and “institutional investors” (like pension funds) alike.

Karmali added that financial instruments shouldn’t necessarily be directly climate-related, noting that “investment-grade policy” should cover macro-economic risks like interest rate and foreign exchange fluctuations. Expect to see some very surprising activities passing themselves off as “climate finance” if this framing of the issue takes root.

But Karmali also offered reasons to think that the financial sector could be far less interested in climate finance than some policy makers – and NGO cheerleaders – would like. New Basel III banking regulations, he pointed out, are already leading to banks withdrawing project finance from “low-carbon” projects (even as Bank of America and others continue to use these projects as PR gloss to cover their  fossil fuel investments).

Barbara Buchner, Senior Director of the Climate Policy Initiative, whose “spaghetti diagram” is widely used to justify claims that climate funds must court capital markets, was forced to admit that institutional investors are “only very marginally investing” in climate-related projects. Targeting them to provide much needed finance for climate projects could be an exercise in chasing shadows, unless subsidies and incentives to produce ever more fossil fuels are reined in.

Adaptation financing was a major theme of the Forum, but no number of presentations could shake free of the evidence that the financial sector shows little interest in projects that could really make a difference in helping communities cope with the impacts of climate change. It’s an area with too few profit opportunities, and too much risk. One approach has been to indirectly finance adaptation through carbon market revenues, most notably in the case of a 2 per cent levy on CDM credits that was meant to fund the UN Adaptation Fund. But several speakers noted that the collapse in carbon prices has so deprived the Adaptation Fund of income that it is now risks closure unless other sources are found.

Only in the opening plenary session were voices heard urging caution about the rush to the private sector’s doorstep. Mariama Williams, an economist with the South Center, offered a timely reminder that climate finance is woefully inadequate to meeting the needs of millions of people already facing the effects of climate change, as well as being a legal obligation arising from the responsibility of developed countries. Grants and concessional loans – the only instruments currently considered “climate finance” under the UN Climate Change Convention – should be scaled up to replace the “inadequate, arbitrary, fragmented and donor-driven” provisions seen so far.

Paul Oquist, Minister and Private Secretary for National Policies to the President of Nicaragua, also attacked the lack of ambition shown by developed countries in meeting even the inadequate $100 billion climate financing goal they have set themselves.

Lamenting a “lost decade” in international negotiations, and noting that the Green Climate Fund has yet to receive any developed country pledges, he asked where the finance for this “fund without funds” would come from? Rather than seeking to leverage help from capital markets, however, Oquist saw an over-reliance on the financial sector as an “unsustainable model” that has undermined the stability of global economies and has contributed to the current funding gap. It was an unheeded wake up call at a meeting that often felt more like a wake than a call to action.

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