Finance was the theme at COP27 on Wednesday, and scrutiny was levelled at the issue of how undeveloped nations will fund mitigation and adaptation to the effects of climate change.
Climate finance is a key issue at COP this year, as tensions rise between developed and undeveloped nations about climate funding.
Additionally and perhaps most controversially, loss and damage funding has made its way onto the agenda for the first time, as the result of growing pressure from developing countries and NGOs.
Finance is the cornerstone for implementing climate actions and scaling up ambition. At the Opening Ceremony for #FinanceDay at #COP27, eminent leaders and stakeholders came together to address several aspects of the climate finance ecosystem. #TogetherForImplementation pic.twitter.com/XvNWIIZPBj
— COP27 (@COP27P) November 9, 2022
Undeveloped nations are calling for reparations from the developed world for the toll that climate change has taken on their societies. Poorer nations have contributed less to climate change than wealthier nations but continue to be disproportionately affected by it.
“Finance Day” at COP27 allowed governments, industries, and institutions alike to take a moment to examine the global landscape of climate finance. One nation stands out for its controversially innovative approach: Switzerland.
What is Switzerland doing differently to reduce emissions?
The touchy subject of money at COP is a good opportunity to shed renewed light on Switzerland’s unique approach to the issue. Since 2020, Switzerland has formed country-to-country cooperation pacts for offsetting carbon emissions with eight countries.
These partnerships work differently with each country, but as of March, Switzerland has partnered with the United Nations Development Program (UNDP) to put some of these cooperation pacts into action.
Switzerland will reduce its greenhouse gas emissions by using Internationally Transferable Mitigation Outcomes (ITMOs) — the units for the new market mechanism that allows Parties to the Paris Agreement to trade emissions — to indirectly pay for projects that both reduce emissions and improve development in poorer countries.
This “pay-for-results collaboration” allows Switzerland to write a check to the UNDP, which then implements projects that will advance progress on the Sustainable Development Goals (SDGs) while generating emissions reductions for Switzerland.
These pacts allow Switzerland to fund climate projects in poorer nations: Peru, Ghana, Senegal, Georgia, Vanuatu, Dominica, Thailand and Ukraine. Then, Switzerland can take the credit for the resulting reduction of emissions by counting it towards their own emissions reduction targets.
Currently, Switzerland is planning to invest in making homes in Georgia more energy-efficient, to support energy access through solar power in Vanuatu, and to fund climate-smart agriculture in Ghana.
Innovative Cooperation or Carbon Capitalism?
According to the Swiss Agency for Development and Cooperation, an office within Switzerland’s federal government:
“Switzerland is active in climate change mitigation and adaptation internationally and aims for its funding for developing countries to be deployed effectively. It takes into account the challenges its partner countries face and anchors its own measures in a long-term strategy to reduce poverty worldwide.”
At COP26, President Luis Arce of Bolivia called the idea tantamount to “carbon capitalism.”
The 2015 Paris Agreement tentatively allowed countries to cooperate in reducing their greenhouse gas emissions. Nations have since made progress in laying down some of the rules at global talks. These include guidance to make sure that emissions reductions are not counted twice.
Offsets have so far enjoyed wide support from governments and industry as a cheaper way to cut pollution than absolute cuts.
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This approach is beginning to draw criticism, as countries continue to submit Nationally Determined Contributes (NDCs) that lack the necessary ambition and commitment to limit warming to the 1.5°C benchmark set out by the Paris Agreement.
Even the updated NDCs required by the beginning of the Paris Agreement’s second phrase have been disappointing; emissions have not been cut to the desired extent, and everyone, including Switzerland, is behind their announced intentions.
Un effort concerté entre nous tous est indispensable pour limiter le changement climatique & ses conséquences dévastatrices. La #Suisse 🇨🇭 est prête à apporter sa contribution en faveur du #développementdurable 🌏🌱
— Ignazio Cassis (@ignaziocassis) November 7, 2022
Switzerland’s approach is part of a trend that’s seeing both governments and private businesses find increasingly creative ways to market products and projects as “net-zero” by relying heavily on the idea of carbon offsets rather than working to reduce absolute emissions.
For example, Etihad Airways unveiled a “net-zero” flight to COP this year that was entirely powered by fossil-based jet fuel. The flight was “net-zero” because Etihad paid for the amount of Sustainable Aviation Fuel equivalent to powering a flight to Egypt to be used on other flights.
Secretary-General of the United Nations António Guterres created a UN “high-level expert group” in March to advise on rules to improve integrity and transparency in net-zero commitments by industry, regions and cities.
The report was backed by Laurence Tubiana, the chief executive of the European Climate Foundation and, as France’s Climate Change Ambassador and Special Representative for COP21 in Paris, one of the architects of the Paris agreement.
At a COP27 panel discussing the group’s final report, she said that living up to that deal demanded drawing “a clear line on true net zero – what it really means and requires, and what is simply greenwashing.” (bolding added)
“We can’t afford creative accounting. I urge all actors – including cities, regions, businesses, investors, alliances, countries, and regulators to take these recommendations seriously and embed them with urgency.”
Guterres chimed in as well to say:
“A growing number of governments and [companies] are pledging to be carbon free – and that’s good news. The problem is that the criteria and benchmarks for these net zero commitments have varying levels of rigour and loopholes wide enough to drive a diesel truck through. We must have zero tolerance for net zero greenwashing.”
This arrangement, whereby Switzerland finances projects abroad, had been called “implementation of low-hanging fruit climate change mitigation.”
There is concern that by using its own capital to fund projects, rather than granting or lending it to these nations for them to use, Switzerland will have first pickings for projects that will cost relatively little and result in the highest emissions reduction value. This will leave only the more complicated and costly projects available for the nations themselves to implement to work towards their own targets.
Another concern regards whether these deals will allow wealthier nations to simply fund projects that were already being planned. For example, Georgia was already intending to make its homes more efficient, which means that Switzerland will receive credit for emissions cuts that would have happened anyway. Rather than generating innovative ways to reduce emissions, which is one of the key purposes of an Emissions Trading Scheme, these deals might simply give countries a license to write a check to offset their emissions elsewhere.
Do Switzerland’s current emissions compare to those of its partners?
Using data from the World Bank, one finds that Switzerland produces 4.4 metric tons of carbon annually per capita. The range of carbon produced annually per capita in the countries with whom Switzerland has partnered runs from 3.7 metric tons at the high end (Ukraine) to 0.7 metric tons (Senegal, Vanuatu, and Ghana).
Although Switzerland’s emissions per capita are higher than any of its partner nations, it would likely still be less expensive to fund infrastructure changes in developing countries that would create an emissions reduction value equivalent to a more costly project in already developed Switzerland.
However, one must ask whether the scheme will help reduce the level of emissions globally or will simply “gain time” for the world while those eight countries continue to develop and grow, increasing their overall carbon footprint as a result.
Meanwhile Switzerland is setting itself firmly on a path to net zero. It submitted its updated NDC to the UNFCCC on Dec. 9, 2020, and now aims to cut its greenhouse gas emissions to net zero by 2050. Switzerland already generates most of its electricity using renewable energy, specifically hydroelectric and nuclear power. Thanks to this, it should have a strong foundation for achieving its net-zero target.
However, Switzerland, aware since 2020 that it is missing its emissions targets, has been explicit that it cannot reach its emissions reduction targets on its own, and that it needs to look for at least a third of its cuts elsewhere.
This is a strategy followed by other rich nations: Japan and Sweden have said they intend to pursue similar arrangements.
Because the targets used in NDCs often operate on a proportional metric, the countries that had made headway decarbonising their systems before the Paris Agreement are struggling to find further ways to reduce absolute emissions.
Switzerland’s climate finance policy has been rated “highly insufficient” by Climate Action Tracker. According to an analysis by the Overseas Development Institute, Switzerland’s contributions to global climate funding fall almost 40% short of what would be their share of an internationally agreed target of $100 billion a year.
Only two sub-national governments in Switzerland, Kanton Basel-Stadt and Stadt Zurich, are members of ICLEI, a network of global cities and regions that are working together to reach targets set out by their nations’ NDCs. For comparison, there are nine sub-national member governments in ICLEI from Sweden, four from Austria, and four from Denmark.
Is this the first step towards an international emissions trading scheme?
As more countries place prices on emissions, carbon has become a currency with its own emerging market.
In places like New Zealand that have a well-established emissions trading scheme (ETS), companies can buy emissions credits from other companies. If one business finds it easier to fund a different company to reduce its emissions than to reduce its emissions on its own, it can do that and receive the same emissions credits.
The system operates on the premise that, if a market value is placed on emissions reductions, businesses will have a financial incentive to reduce emissions and will actively seek out ways to do so.
An ETS also helps reduce total carbon emissions because the system encourages businesses to seek innovative ways to reduce emissions: It transfers the onus of carbon-cutting from the public to the private sector.
Switzerland has chosen to scale this idea to an international level through the global emissions market that is emerging as a result of increasingly ambitious (if not ambitious enough) NDCs in the second phase of the Paris Agreement.
However, the idea only works if carbon emissions are counted as “net” rather than “absolute,” but the global climate conversation is already beginning to change its definition of carbon reduction. Governments and institutes will not always be able to trade carbon offsets for gross emissions reductions.
At some point, the choice will have to be made to scale back development along with a multitude of other carbon-heavy activities. However, nobody wants to give up on the promise of “economic growth,” since it is still seen as the only way for developing countries to climb out of poverty.
Everyone on planet Earth yearns for a dignified life and has a right to it; to allow hunger and poverty to endure unnecessarily would be a moral and humanitarian failure of the developed world.
But what constitutes a “dignified life”? Does it include TV, computers, and smartphones? Should everyone expect to own a personal car? Who decides if hot water at home is a necessity or a luxury?
Now that social media has infiltrated the furthest corners of the world, billions of people are able to witness but unable to access the standard of living in the developed world. That standard continues to be seen as a worthwhile goal for those living in poverty.
How the world will navigate the balance between the needs of the poor and the needs of the environment is an ongoing and contentious conversation.
The goal of the Paris Agreement cannot change; it is true that “net” or overall carbon emissions must be cut if climate change is to be curbed. Continually shifting the burden of action from one group of countries to another is not the way forward, unless it can be done the way Switzerland is attempting, or is it?
Because that raises another question:
Would an ETS between countries allow them to motivate each other to reduce emissions or simply to shunt their carbon-cutting goals onto poorer nations?
On the face of it, a “normal” ETS works by encouraging businesses to find ways to cut their own emissions within their own business environment and at a national level.
By contrast, the ETS being trialed by Switzerland, thanks to the cooperation from the UNDP, works by selecting and financing carbon-cutting development projects for poor countries.
For example, the UNDP Solar Project will let Vanuatu gain the economic growth it seeks through renewable energy instead of through fossil fuels. In return, Switzerland will gain a “proportional right” to continue to emit that particular amount of carbon without having to cut back on its economic activities and thus its living standard.
What is the net result of this transaction? Arguably, the world as a whole has not increased or reduced the amount of carbon produced, but economic growth has occurred. That makes for a win, if not a full step forward.
If this type of ETS were applied systematically around the world, developing countries would be able to get the financing and resultant economic growth they need without further accelerating climate change. Developed countries would also have the incentive to provide that financing. It’s perhaps a short-term win-win for everyone, because the question of gross emissions reduction will be addressed sooner than later.
Most importantly, this could only be a win-win if the scheme were extended worldwide without any loopholes.
Too much to ask for?
Editor’s Note: The opinions expressed here by Impakter.com columnists are their own, not those of Impakter.com — In the Featured Photo: A dam in Marion County, Oregon, US, June 26, 2019. Photo Credit: Dan Meyers.