Sustainability Newsletter – November 2023

CIBC’s inaugural Carbon Summit took place in Toronto on October 26, 2023. The event discussed key issues affecting the carbon markets, attracting a diverse mix of stakeholders across the carbon credit value chain, including project developers, standard setters, investors and financiers, and corporate buyers.

Key takeaways include:

• Carbon markets are at an inflection point where high quality and transparency initiatives, including by the Voluntary Carbon Markets Integrity Initiative (VCMI) and the Integrity Council for Voluntary Carbon Markets (ICVCM), will support market growth
• Some advocates are suggesting to discontinue the term “offsets” and refer to removals, reductions and avoidance
• There is a plethora of technologies focused on carbon removal. With deployment will come lower costs – 15% cost reduction with each doubling of deployment
• There are a wide variety of business models – from licensing technology and hardware as a service, to varying scales of individual project development. The complexities of each approach requires investors to dive deep into due diligence before deciding how to allocate investment dollars into the sector
• Policy support has created price certainty for project developers and the US is leading the way. Canada is playing catch up but taking a different approach. Further clarity on policy incentives in Canada is needed to encourage price certainty for developers, such as Carbon Contracts for Difference (CCFDs) or other alternative solutions
• The importance of infrastructure, like carbon hubs and pipelines, in unlocking projects
• Community consultation is sometimes perceived a lesser priority than the technology or the financing, but recent cancelled projects demonstrate how central consultation is to the realization of any project
• Active offtakers and funders are having an outsized impact on the market, and the hope is for more widespread participation going forward
• Supply is being appropriately addressed via policy support. But what of demand? How do we get it off the sidelines?
• Despite all the recent negative press about carbon reduction and removal, the summit helped to ‘pull back the curtain’ on where investment dollars are going in the race to both reduce and remove carbon emissions to achieve net-zero.

Listen to our podcast episode which provides further insights into the key takeaways from summit. Additionally, CIBC’s ESG Analyst, Shaz Merwat, published an in-depth report on the summit including notable takeaways, and a recent report on how to instill integrity into the voluntary carbon markets. Please contact your CIBC representative for a copy of these reports

The International Energy Agency (IEA) released its World Energy Outlook 2023 report, providing an authoritative projection of our global energy system in 2030.

Key projections include a tenfold increase in electric cars on the road worldwide, solar photovoltaic (PV) outpacing total current US power generation, renewables contributing nearly 50% to the global electricity mix (up from 30% today), electric heating systems surpassing fossil fuel boilers, and a threefold surge in offshore wind investments compared to coal and gas-fired power plants.

These projections are based on existing policies but could accelerate with stronger measures. Nonetheless, global emissions remain high, jeopardizing the goal of limiting global warming to 1.5°C.

What will it take to keep 1.5°C alive? The report presents a five-pillar strategy: 1) Tripling renewable capacity, 2) Doubling the rate of energy efficiency improvements, 3) Reducing methane emissions from fossil fuels by 75%, 4) Increasing financing for clean energy threefold, and 5) Phasing out fossil fuels. The report also discusses evolving energy security, natural gas market changes, and China’s shifting energy demand, underlining the need for global cooperation and adaptation to these emerging trends.

Chart: Global solar module manufacturing and solar PV capacity additions in the STEPS, 2010-2030

Carbon Direct released its 2023 State of the Voluntary Carbon Market (VCM) report, revealing four key trends in 2022 and the first three quarters of 2023:

1. Quality challenges: Less than 10% of VCM projects analyzed meet high-quality standards.
2. Shift in credit sources: REDD+ and renewable energy credits have declined from 72% in 2021 to 53% in 2023 due to buyer skepticism and scrutiny.
3. Quality-focused purchasing: Growing trend towards quality-focused, removal-centered procurement, increasing fivefold from 2021 to Q3 2023.
4. Market leadership: Companies like Microsoft and Airbus are driving growth, representing over 80% of high-durability carbon removal purchases.

Notably, the report highlights an emerging bifurcation in VCM between a ‘reduction and avoidance’ market that is stagnating amidst public scrutiny, and a ‘high-quality removals-focused’ market which is growing quickly. Although the latter currently accounts for a minority (3%) of VCM credits, this market is being driven by a growing set of motivated buyers.

The emergence of two markets may ultimately lead buyers to confidently utilize credit purchases to meet their climate goals.

New research published by Ecosystem Marketplace (a Forest Trends Initiative) indicates that companies participating in the voluntary carbon market (VCM) are actively addressing climate change throughout their operations and value chains, outperforming those that do not buy carbon credits.

The study, based on corporate disclosures to CDP, analyzed 7,415 organizations. It shows VCM participants reduce their own emissions faster than their peers, being 1.8 times more likely to decarbonize year-over-year. They are also 1.3 times more likely to have supplier engagement strategies, reflecting active efforts to address climate impacts throughout their value chains, they invest three times more in emission reduction activities within their value chain, and are 3.4 times more likely to have approved science-based climate targets.

While carbon credits purchased represent a small share of total emissions (2%), they are integral to comprehensive climate strategies. The findings underscore the importance of VCM as a credible component of holistic decarbonization strategies and corporate leaders are encouraged to be transparent and proactive in their carbon market strategies.

Chart: Investment into emissions reduction activities, share of voluntary carbon buyers and non-voluntary carbon buyers

A new report by Carbon Market Watch titled Poor framing: the role of negative emissions technologies in existing climate policy frameworks, analyzes the role and implementation of carbon dioxide removals (CDR) in climate policies across 20 global frameworks, including the EU, UK, U.S., and well as Article 6 of the Paris Agreement, CORSIA and others.

The analysis for each jurisdiction considers four core environmental criteria: 1) A clear vision for CDR’s role, 2) Separate legally binding CDR targets, 3) A robust definition of CDR, and 4) Stringent accounting and verification rules.

The findings reveal that existing policy frameworks fall short in addressing CDR to achieve climate goals. None of the frameworks analyzed set comprehensive, separate and legally binding targets for CDR, and that CDR is being utilized to alleviate pressure on the need to reduce emissions.

Recommendations include the creation of dedicated, robust governance frameworks for CDR with legally binding targets, a clear role for CDR as a supplementary measure, and a strong definition, with accounting, measurement, reporting and verification (MRV), and sustainability requirements to ensure the credibility and effectiveness of CDR efforts. There is opportunity for carbon market participants to raise advocacy and collaborate with policy makers on addressing this gap.

The Rocky Mountain Institute (RMI) and the US Green Building Council (USGBC) jointly released a report on Driving Action on Embodied Carbon in Buildings. The report underscores the increasing importance of reducing embodied carbon within the construction industry.

Embodied carbon encompasses carbon emissions throughout the lifecycle of building materials, from raw material extraction to disposal. It’s worth noting that the building sector is responsible for about 30% of energy-related emissions, according to the International Energy Agency, while embodied carbon alone accounts for 11% of global energy-related emissions, according to the World Green Building Council.

The report outlines 11 key actions, including to prioritize both operational and embodied carbon reduction, promote material reuse, dematerialization, and substitution with low-embodied carbon alternatives, and to consider buildings as potential carbon storage solutions. It also emphasizes the significance of whole-building life-cycle assessments and environmental product declarations in understanding and mitigating embodied carbon.

Stakeholders such as building owners, designers, builders, and policymakers must take collective action towards more sustainable and climate-positive building practices, and can capitalize on available tools, guidance, and policy support to cut emissions.

Chart: Embodied carbon learning curve

The Science Based Targets initiative (SBTi) launched a public consultation on a draft interim 1.5°C target-setting pathway for automakers and Original Equipment Manufacturers (OEMs). The consultation will be available until November 10, 2023.

Carbon emissions from road vehicles totaled 5.87 gigatons in 2022, according to the International Energy Agency. The most significant portion of these emissions come from scope 3, category 11, which are direct ‘use phase’ emissions of sold products. In 2022, SBTi temporarily paused target validation for automakers until a 1.5°C pathway for scope 3 ‘use-phase’ emissions are established.

Following the public consultation, SBTi will develop an operational interim pathway that will allow automakers and OEMs to set science-based targets for scopes 1, 2, and 3, category 11 emissions. This pathway will be utilized until the SBTi updates its Transport Guidance.

Automakers and OEMs with commitments expiring within six months of the operational interim pathway’s release must submit new targets to remain compliant. Existing validated targets will be reviewed every five years. Companies are encouraged to align their targets with this goal.

Cleantech Group’s annual Cleantech 50 to Watch report recognizes companies across 15 sectors dedicated to environmental solutions. 

The 2023 edition highlights the increasing focus on “deep” tech for sustainability, including advanced geothermal power, silicon anodes for batteries, and electro fuels for aviation. Despite economic challenges and high interest rates, investments in deep cleantech are growing, reflecting a shift away from the traditional “asset-light, highly scalable” model.

Younger innovators are driving cleantech, with seed investments on the rise. Global innovation is expanding, with countries beyond traditional hubs making significant contributions. Incubators and accelerators are gaining global influence, and venture-building practices are shaping the industry.

The report identifies notable trends such as the emergence of regional innovation hubs and the impact of programs like Breakthrough Energy Fellows, encouraging collaboration within the network to combat climate change.

The World Economic Forum (WEF) posted two practical summaries emphasizing the importance of carbon dioxide removal (CDR) to achieve net-zero carbon emissions by 2050. 

In 5 ways to remove carbon and tackle the climate crisis, this short primer on nature-based and tech-based CDR solutions provides a useful overview of available methods: 1) Afforestation and reforestation (such as planting new trees or restoring existing forests), 2) Farming and soil sequestration (techniques like no-till farming, cover cropping, and agroforestry), 3) Ocean-based removal and Blue Carbon Ecosystems (carbon uptake by marine and coastal ecosystems), 4) Direct Air Capture (DAC), and 5) Carbon mineralization (converting carbon dioxide into solid minerals).

While CDR is critical to meeting net-zero ambitions, challenges in deployment include complexity in integrating technologies, social and economic systems, and political support.

In Direct air capture: How to accelerate this technology to limit global warming, the challenges in scaling-up DAC include its high capital and energy costs – being about two to six times higher than the desired cost, according to research in ScienceDirect. Increasing manufacturing scale, improving energy efficiency, and using clean energy sources are essential to move DAC down the cost curve.

The article advocates for a dedicated ‘DAC fund’, supported by governments and multilateral agencies to help attract private investment and infuse public capital to enhance technology development; and a vibrant carbon market, backed by prudent climate policies, can promote DAC technology, potentially making Carbon Removal as a Service (CRaaS) a viable business opportunity.

The European Commission has adopted the remaining components of its ‘Fit for 55’ legislative package, making a pivotal stride toward realizing the EU’s 2030 climate objectives. 

The package encompasses a broad range of measures, including the establishment of legally binding emissions reduction targets spanning all key sectors, support for natural carbon sinks, an updated emissions trading system, and the implementation of a Carbon Border Adjustment Mechanism. It also introduces robust renewable energy targets, aiming for a minimum of 42.5% by 2030, and places an increased emphasis on energy efficiency. Additionally, it promotes the transition to zero-emission transportation, requiring all new vehicles registered in Europe to be emissions-free by 2035.

Notably, the legislation mandates a reduction in greenhouse gas emissions by at least 55% by 2030, and it is expected to exceed this target by achieving a 57% reduction. This legislative framework reinforces Europe’s leadership in global climate action, highlighting its commitment to sustainability and the green transition. With these regulations in place, the focus now shifts to member state implementation and continued negotiations to further strengthen the pillars of the European Green Deal.

The UK’s Transition Plan Taskforce (TPT) published its final Disclosure Framework following extensive public consultation. The framework sets out good practice for organizations to develop and disclose robust and credible climate transition plans, which will equip investors with the information they need to finance the transition at speed and scale.

The framework is guided by principles of ambition, action, and accountability, and organized across five key elements: 1) Foundations relating to the organization’s strategic ambitions, 2) Implementation Strategy within its business operations, products and services, 3) Engagement Strategy across its value chain, industry, peers and others, 4) Metrics and Targets, and 5) Governance. A further 19 sub-elements provide recommendations, denoting essential disclosures and optional information.

UK-listed issuers, asset managers, and asset owners under the Financial Conduct Authority’s (FCA) scope have already been expected to outline their low-carbon transition plans since January 2022. The FCA is planning to enhance these requirements based on TPT’s framework with the new standards expected to be enforced from January 2025, and initial reporting commencing in 2026. The UK government is considering similar requirements for the largest public and private companies. TPT represents another step towards building a common language and approach for transition planning.

The Climate Bonds Initiative (CBI) published The role of fossil fuels in taxonomies: Canada case study, weighing-in on how Canada should structure its future green and transition taxonomy.

A key question is whether fossil fuels, particularly fossil gas, should be considered in the decarbonization process or phased out entirely in Canada’s future taxonomy, which is being developed by the Sustainable Finance Action Council (SFAC).

While most global green taxonomies exclude fossil fuel-related activities, science-based transitional taxonomies allow some flexibility in fossil gas generation but with strict limitations and phase-out dates. International taxonomies now emphasize the evaluation of emissions from fossil gas on a lifecycle basis rather than relying solely on scopes 1 and 2 emissions for assessment.

According to the CBI, an estimated CAD115 billion will be needed annually to implement decarbonization policies. This will necessitate an effective taxonomy to attract private capital and foreign direct investment and should align with internationally recognized definitions and criteria for classifying activities as green, transitional, or sustainable.

As 2030 approaches, countries will become increasingly strict on domestic fossil fuel producers and importers, to ensure emissions reduction targets are met.

“Unlocking Québec’s Lithium Opportunity” is an article written by Dominique Barker, CFO and Head of Sustainability at Lithium Royalty Corp and published by the World Climate Foundation, which highlights Québec’s potential to become an attractive player in the global electric vehicle (EV) battery manufacturing value chain. 

The article underscores Québec’s lithium production capabilities, boasting abundant lithium resources, robust mining infrastructure, zero-emission electricity grid, and supportive government as an appealing destination for companies seeking to diversify their supply chains.

Additionally, Québec is well-positioned to lead the EV value chain in battery manufacturing and assembly, by leveraging its strong manufacturing history, skilled labor force, and access to raw materials. With recent investments in the province’s EV infrastructure, the City of Bécancour emerging as a significant battery hub, and the Port of Saguenay is expected to follow suit.

As Québec continues to develop constructive relationships with Indigenous stakeholders, and work with the Canadian federal government to streamline permitting processes, companies in the North American and global EV battery value chain should take note to follow these developments closely.

Investment trends as a share of global GDP by scenario, 2023-2050

Note:

1. Stated Policies Scenario (STEPS): provides an outlook based on the latest policy settings, including energy, climate and related industrial policies
2. Announced Pledges Scenario (APS): assumes all national energy and climate targets made by governments are met in full and on time
3. Net-Zero Emissions by 2050 Scenario (NZE): limits global warming to 1.5 °C (with at least 50% probability), in line with emissions reductions assessed in the Intergovernmental Panel on Climate Change (IPCC)’S Sixth Assessment Report

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