Opinion: It’s Time for Multinationals to Step Up in the Carbon Markets

Twenty years ago, the Kyoto Protocol set out a Clean Development Mechanism (CDM) by which finance could be steered toward clean development projects by trading carbon credits earned through reducing emissions. Two decades on, we are still not making full use of our options.

Like many in the green finance space, I welcomed the announcement by COP26 that the Paris Agreement “rulebook” on carbon markets had been approved. The lack of consensus had been holding back vital funding to carbon projects, and delaying the urgent mission of keeping global warming below 1.5℃.

One key difference between the Paris Agreement and the Kyoto Protocol is that developing countries are now also committed to their nationally determined contributions (NDCs). The newly passed Article 6 of the Paris Agreement established a cross-border system similar to the CDM but with a greater burden placed on developing nations to achieve their own NDCs by selling carbon credits to developed countries.

It would be beneficial to have an additional mechanism to help multinational corporations (MNC) purchase carbon credits from developing countries, allowing those nations to achieve their own NDCs instead of helping the country where the MNC is based to meet its NDCs without reducing emissions. Utilizing the voluntary markets in this way would drive much-needed capital from large MNCs to finance green mitigation projects in vulnerable communities and speed up the world’s decarbonization effort.

Mobilizing green finance

Unfortunately, countries chose to exclude a mandatory share of proceeds to be allocated to the UN's Adaptation Fund, set up expressly to help the developing nations most at risk from climate change to adapt. Despite being set at a minimum annual fund size of US$100bn by 2020, it never reached that number. "We are not there yet," conceded U.N. secretary-general António Guterres, although the final figure is unknown.

Experts had called for a 50:50 split of 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 such financing. Adaptation projects in low-income countries, by contrast, received little funding and are unlikely to attract "traditional capital."

The IEA estimates annual funding of US$2.6-4.6 trillion is needed by low-income nations for adaptation and mitigation. That figure is eye-wateringly high for any single country to consider — and significantly larger than the approximately US$80bn the Adaptation Fund managing to gather. Turning our lens away from national governments and toward the private sector may offer some light.

Mark Carney, asset manager and U.N. 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 US$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 it has failed 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 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 should be maintained to ensure emission reduction is the primary motivator.

Financing global decarbonization

Excluding per capita or past emissions figures, China is currently the largest 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.

At the Caixin Summit last Friday, the Deputy Prime Minister of Singapore praised the positive developments in China-US relations on climate commitments while noting that further investment in the area and more economically integrated global trading systems are needed. Singapore has already declared its ambitions to be a global trading hub for carbon, driving finance to the area. Earlier this year, Singaporean-based Cyberdyne Tech Exchange used decentralized ledger technologies (DLT) to facilitate secure cross-border carbon trading between companies and countries to finance carbon projects in China, by selling carbon credits generated in China to private companies on the international exchange.

Suppose a company in Myanmar plants a carbon-absorbing mangrove forest, registering the emission reduction on the national carbon registry, the resulting credit can be sold to MNCs such as Goldman Sachs to neutralize their portfolio without removing the NDC contributions from Myanmar. In this case, Myanmar reduced its emissions in line with their NDC pledges, financed indirectly by Goldman Sachs using carbon trading mechanisms supported by enhanced traceability using advanced technologies on exchanges and international registries. The company achieves net-zero while the country and communities in need get the help needed. It is this type of movement of green capital to the Global South that was intended when the Kyoto Protocol was established.

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 for developing countries, now it’s 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.

The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.

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