By Doug Miller
The next era of climate finance and industrial decarbonization is taking shape as many of the regulations and market frameworks are evolving in real time. These evolutions—which sat at the center of discussions among policymakers, corporations, investors, standard setters, nonprofits, startups, and other stakeholders last week at Renewable Energy Markets (REM) 2023 in Washington, DC and Climate Week in New York City—place private sector decision makers at a crossroads. There is luckily a path forward.
A Crossroads
On the regulatory front, new European Union climate-related financial disclosures and anti-greenwashing regulations are broadening the pool of companies that must begin to grapple with their greenhouse gas emissions and pursue actions to mitigate their emissions in attributable, verifiable ways for reporting needs. Similar regulatory developments are underway in the United States (including at the U.S. state level in California), United Kingdom, and elsewhere. In voluntary markets, where companies voluntarily set and report progress toward organizational climate targets, there is active debate, particularly with regard to the Greenhouse Gas Protocol, about what package of market instruments, data, and evidence can create the greatest impact in decarbonizing the power, mobility, shipping, aviation, industrial, and buildings sectors.
These regulatory and market developments put investors and companies in a challenging position. How do investors and companies make major strategic, operational, and financial decisions when there are so many unknowns and risks about the direction of the market? While many firms are eager to integrate climate goals more directly into their investments and procurement processes, they have serious concerns about enacting policies and implementing practices that may be insufficient, misguided, or mistimed. Many, in addition, are wrestling with how to effectively communicate with confidence the positive environmental and wider social impact of their investments and procurement.
This dilemma creates a barrier for making progress towards solving the wider climate finance gap, despite recognition that investments in renewable energy must triple in order to reach our climate targets and where only 2% of the $3 trillion invested globally in renewable energy in the past decade went to Africa.
While policymakers have the important task of setting and implementing policies that realign the rules of the economic game with decarbonization goals, investors and companies play a critical role in operationalizing these market evolutions and adopting new practices and investments that will help decarbonize the global economy. By implementing these climate-aligned actions, investors and companies can better demonstrate real progress toward their public commitments, differentiate themselves with customers, and help manage the increasingly visible threats of climate change that present a material risk to their longer-term success. If investors and companies hesitate to move faster, this will further stifle the wider system of climate finance.
Furthermore, it is critical that market stakeholders, from policymakers to nonprofits and standards bodies, strengthen climate-aligned incentive structures as soon as possible. With stronger and clearer incentives—meaning that voluntary climate action counts for something real and valuable to companies—investors and companies can secure the internal approvals, budgets, and support to deploy more investments and procurement to help bridge the climate finance gap.
An Opportunity
Currently, approximately 675 million people worldwide live without electricity access, primarily in countries that see limited climate finance and investment. Yet under the current rules for carbon accounting, namely the Greenhouse Gas Protocol, a company cannot apply procurement toward its market-based greenhouse gas inventory if there is a geographic mismatch between the location of its electricity use (or its value chain partners’ electricity use) and renewable energy procurement, even though the resulting emissions know no borders. This means a company cannot apply its renewable energy procurement from a new project that helps a community gain first-time or expanded electricity access in a country where that company does not have a facility or value chain partner. So, if a company procured renewable energy from a project in this scenario, then it would not show up in that company’s greenhouse gas accounting. This critical climate-aligned support—where the additional revenue from this transaction helps make the project bankable—would thereby remain invisible in that company’s greenhouse gas accounting, disincentivizing corporate procurement in these scenarios.
Let’s imagine a future with new incentives. In this new reality, companies can now “count” in their annual greenhouse gas inventories any high impact renewable energy procurement from countries and certain sub-national contexts where they do not have a physical footprint, at least up to some threshold, if the projects directly expand energy access in unserved or underserved communities. Companies would, similar to any other procurement, have to provide the evidence of their procurement and associated claims with energy attribute certificates. In other words, imagine a future where renewable energy procurement without a geographic match can count if it delivers significant and observable human benefits—ranging from first time electricity access to enhanced local health, educational, and economic resources—in vulnerable communities.
Mechanisms already exist that can deliver these kinds of benefits. For example, Energy Peace Partners (EPP) has developed the Peace Renewable Energy Credit (P-REC) to support high-impact renewable energy projects in fragile, conflict and climate affected regions. Imagine a new incentive structure that would encourage companies to procure mechanisms like P-RECs from projects in countries with the greatest need, even if these companies do not have operations or value chain partners in these settings, and that these would count towards their greenhouse gas accounting. A P-REC can deliver verifiable support for impactful new renewable energy mini-grids and community impact projects with public benefits, such as public street lighting, hospital and school solar electrification, and productive use hubs.
New incentive structures like this would help unlock new financing for these unserved or underserved communities to, respectively, gain first-time or expanded electricity access and the resulting benefits, by creating a pathway to attract corporate procurement and deliver critical additional revenue that makes renewable energy projects in these communities bankable. It would enable investors and companies to better prioritize, secure approvals, and chip away at polluting energy sources across the globe in the most impactful, equitable way, while supporting emerging markets chart a green path forward
There is a path forward to move through the present crossroads and to solve the climate finance gap. This path requires aligning the next era of policy and market-driven incentives with the investment and procurement decisions that are optimized for decarbonization, social impact, and energy access for all. EPP is working diligently to generate positive momentum to build a greener and more prosperous future for all.