Category: Carbon Markets

Framing the Differences Between Green Finance and Energy Transition Finance

Representation of Different Finance Needs vs. Time and Green vs. Phase-Down Comparison
Key Points: A thought piece published last month by Meridian Economics nicely summarizes green vs. “phase-down” finance. Phase-down finance is provided to emitters on condition of a well-defined decarbonization commitment, with concessions given/value offered to compensate for the lost financial return of retiring emitting assets early.

Meridian Economics (ME) is considering this in the context of South Africa’s Eskom. ME, an economics advisory group, has been an active force in the refinancing efforts for South Africa’s utility Eskom via a proposed (and still being capitalized) Just Transition Transaction (JTT). In JTT, which is an expression of Phase-Down finance (finance type #2 in the left box above), Eskom is to receive approximately US$10-15 Billion in long term (20 year) debt. Eskom is to use the JTT in part to close (inefficient) coal facilities to both meet emissions reductions commitments (required to earn concessionary rates on the debt) and lower the utility’s operating costs to help further strengthen its financial position. For discussion on the JTT please see the Payne Institute’s recent podcast with the Energy for Growth Hub and a recent dedicated piece from ME.

Phase-Down has to work in tandem with green financing to replace power and Just Transition to provide socio-economic support. As ME’s focus is at the institutional/country level, closing down coal plants can only happen in conjunction with Green Finance — adding renewable sources of power in order not to lose energy access (finance type #4 above). Similarly, the phasing out of coal plants must coincide with a ramping up of resources to support affected workers and communities (Just Transition programming, finance type #3 above).

Although phase down applies to entities, it can be applied at the asset level. As ME notes, Phase-Down finance is done at the entity level, because the finance is not being put toward a new project. Yet as existing (e.g. Ratepayer-Backed Securities in the U.S.) and proposed (e.g., Energy Transition Mechanism being trialed in Asia) financing vehicles illustrate, the entity can be as small as a single emitting asset. Concessionary finance is still contingent on retiring these assets, be it in the form of cheaper debt or, as has been argued in these pages, creating carbon avoidance offsets that can be sold on carbon markets.

Phase-down has found expression in public markets largely in Sustainability-linked debt. Sustainability-linked debt (loans and bonds) grew to $481 Billion in 2021 from $139 Billion in 2020 per Bloomberg. This debt is not purely related to decarbonization, but illustrates market appetite for issuance to entities that aren’t “green” per se but are willing to commit to a path to lower emissions.

3/4/2022

Voluntary Carbon Markets to Exceed >US$1B in 2021

Proportion of Value of VCM transactions by Project Category, 2021E

Key Points: Growth of at least 30% year-over-year in 2021 in voluntary carbon trading reflects increased demand for carbon offsets from corporations. Volume, at just under 300 Million tons of CO2-equivalent, marks progress towards the Taskforce on Scaling Voluntary Carbon Market’s view that 1 Gigaton of offsets is needed by 2030 to support Net Zero Pathway progress. Voluntary offsets remain inexpensive at an average below $3.50/ton.

Voluntary carbon trading transactions to exceed US$1 Billion for the first time in 2021, as compiled by Ecosystem Marketplace (EM). Transactions of $1.0B, which will end up higher as responses were received in November, rose 30% year-over-year, split relatively evenly between volume, which was ~300 Million tons of CO2 equivalent for the year, and price gains.

Forestry and Land Use dominates the totals and is more highly valued. By Project Category, Forestry and Land Use (primarily REDD+) led credits on a volume basis (54%¹) and carried above average pricing (~$5/ton). Renewable Energy followed on a volume basis but carried significantly below average pricing (36% of volume at ~$1.30/ton). This preference for Forestry/land Use is expressed even more strongly in select markets. For example the Nature-Based Global Emissions Offset™, traded on the CBL, which meets Verra climate standards, traded as high as $15/ton in the last two months of 2021 following its launch in August.

For reference, mandatory markets have consistently higher prices, led by European Union Allowances (~$60/ton average in 2021 and current price is just under $100/ton).

Details about the voluntary carbon market data. The Ecosystem Marketplace (EM) data reflects responses from 180 participants across 14 exchanges. Founded in 2005, EM’s Global Carbon Hub claims to be the only independent international voluntary carbon offset tracking and reporting mechanism.

2/2/2022