Last month we reported how weak commitments by some EU states were putting a successful transition at risk. Marcela Scarpellini of right. based on science focuses on how this confusion impacts the funding of the transition, and the essential role of private investment. $16.5 trillion needs to be put into energy efficiency and low-carbon technologies by 2030 to hold the temperature increase below 2°C by 2050, says the IEA. Governments alone cannot afford this. Private investors are needed too, especially if we are now targeting 1.5°C, but they won’t take the risk if governments continue to change their minds over what the binding targets are.
Germany has stepped back from its long established climate goals by stating the impossibility of reaching its 2020 targets. Because of this declaration, a complaint, led by Greenpeace Germany, has been filed against the German Federal Government asking the Administrative Court to make a decision on the binding character of nationally established climate targets, alleging that constitutional rights will be encroached upon if such targets fail to be met.
“Rules” aren’t enough. Change the law
This case might find some answers once the German Climate Protection Law (Klimaschutzgesetz) is implemented. This law, which is expected to come into force early in early 2019, will try to establish the binding character of climate targets. Following the adoption of binding climate protection rules at the COP 24 in Katowice (Poland), Germany’s Federal Environment Minister Svenja Schulze (SPD) requested that
“we now need greater commitment to climate protection in Germany as well, so that we can really implement the international concession.”
However, much debate has arisen regarding the sufficiency of an ordinary law for declaring the binding character of a governmental commitment carried out via administrative acts. Without diminishing the step forward that this law might have, many argue that only a constitutional reform which clearly establishes pathways for protecting the climate, will ensure that government climate targets are made binding. The attainment of such goals is so politically dependent, that an ordinary law might not suffice for coercing the German Government to comply with its commitments.
Private investors need Articles 6 and 7 of the Paris Agreement strengthened
The law and claim previously referred to come at a critical time, and their result will hopefully tip the scale towards pressuring governments to reach their targets, especially taking into account the lack of progress made in the international arena specifically during COP 24 in Katowice, Poland. The Rule Book implementing the provisions of the Paris Agreement was expected to be finalised and provide more clarity for financial flows and mechanisms. Articles 6 and 7 are specially relevant for private financiers, seeking to place their money in environmentally and economically safer projects, and at the same time potentially support governments in reaching their established targets.
What remains to be defined, and what private investors were looking for, was the rules establishing how private investors could participate in these collaboration mechanisms. But this expectation from the financial community was unfortunately not met, leading to two different scenarios. In one scenario, countries and companies can decide to lead the way individually via voluntary measures even if not all Rules are clearly defined. In a second scenario, we could see laws, litigation, citizen´s mobilisation and shareholder pressure increase as a way for making companies and countries fulfil their commitments towards existing targets, and not accepting as an excuse that the Rules need to be perfectly defined before action is taken.
Article 6 establishes different mechanisms which can be disposed of by countries, towards reaching their Nationally Determined Contributions (NDCs).
Article 6.2 presents Internationally Transferable Determined Mitigation Outcomes (ITMOS), which consist of bilateral or plurilateral transfer of emission reductions.
Article 6.4 deals with a new market mechanism, referred to as “Sustainable Development Mechanism”, which is expected to operate similarly to Clean Development Mechanism established in the Kyoto Protocol.
Article 7 deals with different means for financing adaptation measures.
Nationally Determined Contributions (NDCs) are currently a long way from becoming directly binding for companies. Regardless of this, the Paris Agreement might bring interesting business opportunities, seeing that countries might turn to companies for either technical or financial collaboration for reaching established targets. They might do so, by looking to any of the collaboration mechanisms established in Article 6, which might either take place during future market mechanisms built by countries in the context of Article 6.2 or through the centrally governed market mechanism established under Article 6.4.
The current level of detail of Articles 6 and 7 is yet too vague to figure out existing mechanisms in which collaborations might be established. Nonetheless, understanding that private sector involvement is almost inevitable from a financial perspective for reaching the NDCs, companies could benefit from exploring options to develop emission reduction activities which could be eligible under Article 6.
$16.5tn is needed up to 2030, one third from private investors
The seriousness with which countries take their established targets is particularly relevant to private investors, who hold about 1/3 of the funds required to reach global NDC´s. According to the International Energy Agency (IEA), 16.5 trillion USD are required until 2030 in energy efficiency and low-carbon technologies for holding the temperature increase below 2°C. Considering that current funding towards existing climate pledges seems insufficient, national governments are bound to turn to private finance to fill the gaps towards fulfilling their commitments. Private investors seem to be well aware of the role they play in the attainment of climate targets. Even if many are interested in providing capital towards this end, they have established as preconditions for their funding to be dispensed, that rules on financing must be clearly stipulated. They have also demanded political certainty about how serious governments will take their present and future targets.
At the expense of losing money due to intermittent political progress and consequent market fluctuations, investors are being very wary about providing finance in such uncertain conditions. This makes cases such as Germany´s and other plaintiffs of climate lawsuits much more relevant, considering the amount of legislative and political activity taking place at an EU Level, destined to encourage the flow of finance for “climate friendly” investments. If big leaders’ commitment towards climate goals becomes flaky, will there be enough incentive for individual financial institutions to support global goals?
Climate impact webinar
A first step for determining the appropriateness of measures proposed consists on having a solid understanding of the specific contributions countries, sectors and companies’ emissions have on global warming. If you are interested in understanding how individual companies contribute to specific increases in global temperatures, feel free to join our upcoming Webinar, on January 22, in which we will be calculating, how much one specific energy company contributes to climate change. For calculating this number we will be using our science-based climate model, the X-Degree Compatibility Model (XDC), which you can have a glimpse into by looking at our XDC webApplication.
Marcela Scarpellini studied law at the Universidad Católica Andrés Bello in Caracas (Venezuela) and has an LL.M. from the University of Stockholm (Sweden) in the field of environmental law. Within right.based on science (“right.”) she works at providing the legal context upon which right.´s X-Degree Compatibility (“XDC”) model and other metrics are developed.
right. based on science is a data provider founded in August 2016, which measures a single economic entity’s contribution, be that of e.g. a company or a lending project, to manmade climate change. With a team of experts with backgrounds in law, science, economics, psychology and mathematics, right. is devoted to the development of the XDC Model, which calculates science-based climate metrics on the basis of latest climate research and regulatory requirements, in order to deduct an entity’s X-Degree Compatibility.