Sustainability Newsletter – June 2024

The world reached over 30% renewable electricity for the first time in 2023, driven by solar and wind power, according to Ember’s flagship report, Global Electricity Review 2024. This growth also signals the beginning of falling fossil generation in 2024.

Quick recap: Global electricity demand rose to a new record high of 29,471 TWh in 2023, increasing by 2.2% (+627 TWh) since 2022, which is equivalent to adding the entire demand of Canada (+607 TWh). More than half of the electricity demand increase was from five technologies: electric vehicles (EVs), heat pumps, electrolysers, air conditioning and data centres. In particular, wind and solar power rose by 513 TWh to meet 82% of the 2023 global electricity demand growth, compared to 77% in 2022. While global demand growth in 2024 is projected to be higher (+968 TWh), clean generation growth is forecast to be even greater (+1300 TWh), leading to a projected 2% fall in global fossil generation (-333 TWh).

Additionally, the report finds that continuing cost reductions for solar and wind power, battery storage, electric vehicles and other technologies support a rapid transition, bringing added benefits such as air quality, jobs, and energy sovereignty, while reducing the risk of stranded fossil fuel assets – affirming the transition to clean electricity is ‘irrevocable’.

Why is this interesting? While the global forecast for clean generation remains robust, a new report by Wood Mackenzie posits how the energy transition could decelerate in the US. Factors such as US tensions with China, rising budget deficits, and the possibility of a Trump re-election, could significantly alter US policy support for low-carbon energy leading to a potential delayed transition scenario where fossil fuel demand could peak at least 10 years later than in base case scenarios.

The US Federal Energy Regulatory Commission (FERC) issued a landmark grid transmission planning and cost allocation rule that will require transmission operators to set long-range regional transmission plans and will give states a more pivotal role in the planning process.

Quick recap: The rule, known as Order No. 1920, requires transmission providers to produce a regional transmission plan over a 20-year horizon and to consider forward-looking factors, such as utility resource plans, state energy goals, corporate energy procurement commitments and interconnection queues. Among the requirements: operators must undertake long-term planning at least once every five years; apply certain specific criteria and benefits when planning new transmission projects; and identify opportunities to modify in-kind replacement of existing transmission facilities to increase their transfer capability (known as “right-sizing”). The rule also expands states’ role throughout the process of planning, selecting, and determining how to pay for transmission facilities. It is the first time in more than a decade that FERC addresses regional transmission policy – and the first time it has ever addressed the need for long-term transmission planning.

Why is this interesting? The US is experiencing significant load growth just as the power supply mix is changing and extreme weather is straining grid infrastructure. A newly published report by the Brattle Group on Electricity Demand Growth and Forecasting in a Time of Change explores the rapidly evolving load forecasting landscape in the US. It finds a wide spectrum in how electric power utilities and system operators recognize and account for new types of load drivers – from large data centers and industrial processes, to more localized EV charging and electric heating. While traditional load forecasting methods typically assume that loads are inelastic, these new load drivers create more uncertainty for advanced planning.

The International Energy Agency (IEA) published its latest Global Critical Minerals Outlook 2024. While last year’s significant drop in critical mineral prices helped to drive lower battery costs, investment in mine exploration and development also slowed – leading to a mixed outlook for 2035 supply scenarios.

Quick recap: In 2023, prices for the minerals used to manufacture low- and zero carbon technologies fell sharply. For instance, lithium prices fell by 75%, and cobalt, nickel and graphite prices fell by between 30% and 45% – contributing to 14% lower battery costs and became a boon for consumer affordability. While prices for certain minerals like copper and nickel have since increased in 2024, last year’s lower prices caused a headwind for new investment. In 2023, investment in critical minerals mining grew by only 10% and exploration spending rose by 15% – much slower than in 2022. While the IEA’s net zero scenario forecasts 3x demand for critical minerals by 2030 and 4x by 2040, announced projects globally are only sufficient to meet 70% of copper and 50% of lithium needs in 2035 in a scenario in which countries worldwide meet their national climate goals. Supply scenarios for graphite and rare earth elements appear more balanced if projects progress as scheduled. Between now and 2030, the geographical concentration of mining operations is also set to remain high, demonstrating limited progress in supply growth diversification.

Why is this interesting? The Government of Canada just announced the first Canada-US co-investments in strategically important critical mineral projects. Two Canadian companies are receiving funding for projects that include the conversion of flake graphite into battery-grade materials, and the development of a domestic refinery for cobalt, copper, bismuth, and gold. The co-investments are made under the Canada-U.S. Joint Action Plan on Critical Minerals Collaboration and the Canada-U.S. Energy Transformation Task Force, which aim to accelerate cooperation on critical clean energy opportunities and reliable supply chains in North America.

The World Bank released its 11th annual State and Trends of Carbon Pricing report, highlighting that global carbon pricing revenues reached a record USD $104 billion in 2023. While attitudes and policies for carbon pricing vary by jurisdiction, coverage is expected to expand globally to achieve further emissions reduction.

Quick recap: Currently, 75 carbon pricing instruments are in operation worldwide, covering 24% of global emissions – up from 7% when the World Bank first released their inaugural report. While direct carbon pricing and emissions trading systems (ETS) have dominated traditional sectors like power and industry, there is increasing consideration for new sectors such as maritime, transport and waste. The EU’s Carbon Border Adjustment Mechanism (CBAM) is also encouraging governments to consider carbon pricing for sectors such iron and steel, aluminum, cement, fertilizers, and electricity. The report finds that more global emissions, almost 30%, could be covered by new carbon taxes and ETSs being proposed, but will require strong political commitment.

In the voluntary carbon markets (VCM), the report finds that prices have been mixed but remain more resilient across carbon removal projects and in over-the-counter transactions which allow buyers to pursue specific purchasing strategies. Much focus has also been put into initiatives to rebuild integrity and credibility for both supply and demand side that could scale the market further.

Why is this interesting? The UK Emissions Trading Scheme (UK ETS) is currently consulting on a proposed expansion of its system, initially launched in 2021, to include energy-from-waste and waste incineration sectors, as well as how to integrate carbon removal technologies such as direct air capture (DAC). The UK ETS is also separately contemplating future coverage of the domestic maritime sector, and integrating non-pipeline methods for moving captured CO2 into storage, including by road, rail or shipping.

The Biden Administration announced new high-integrity principles for responsible participation in the voluntary carbon markets (VCM). The move underscores the US’ commitment to ensuring VCMs fulfill their intended purpose to drive much needed private capital toward climate goals.

Quick recap: VCMs can deliver steady, reliable revenue streams to a range of decarbonization projects and programs. Yet concerns have persisted over crediting methodologies that might not reliably produce the decarbonization outcomes they claim – holding back market growth. The latest government action recognizes the importance of ‘well-functioning’ VCMs, and the need to develop clear incentives and guardrails. The high-integrity principles, which aim to help restore market certainty that credit purchases will deliver verifiable decarbonization, include: ensuring that credit-generating projects represent real CO2 reductions that wouldn’t have occurred otherwise, and that results are verified by accredited third parties; ensuring projects share benefits and don’t harm local communities; and that corporate buyers should prioritize measurable emissions cuts from within their own value chains.

The statement was followed by co-announcements from the US Department of Energy on updates to its Carbon Dioxide Removal (CDR) Purchase Pilot Prize in which they intend to purchase CDR credits directly from sellers, and from the US Department of Agriculture on next steps in its plan to lower VCM participation barriers for farmers, ranchers and forest owners.

Why is this interesting? VCMs have received a lot of oversight attention in the past year with 2024 seen as an inflection point. In March 2023, the Integrity Council for the Voluntary Carbon Markets (ICVCM) launched its Core Carbon Principles as a global benchmark for high-integrity crediting programs. In June 2023, the Voluntary Carbon Markets Initiative (VCMI) finalized its Claims Code of Practice to provide guidance on the use of high-quality credits. In December 2023, the US Commodity Futures Trading Commission (CFTC) announced proposed guidance regarding the listing of voluntary carbon credit derivative contracts which is expected to launch in the next six months.

The Climate Bonds Initiative (CBI) released a white paper on Navigating Corporate Transitions: a tool for financial institutions, offering guidance to harmonize the way financial institutions assess corporate investees and borrowers by their transition credibility and maturity.

Quick recap: Many asset managers, asset owners and banks have committed to decarbonizing their corporate lending and investment portfolios, which has led to a variety of strategies and frameworks on what constitutes a credible corporate transition plan. Building on prior collaborative research with various investor groups and the Glasgow Financial Alliance for Net-Zero (GFANZ), the CBI’s methodology proposes a new, common system to classify companies into five levels of decarbonization transition maturity, and the indicators associated with each level. A robust, common approach would help financial institutions orient their corporate portfolios more consistently with those frameworks and ultimately help to accelerate the transition of the real economy. The proposed methodology, which aligns with credible science-based benchmarks, such as the Science-Based Targets Initiative (SBTi), will undergo further consultation and pilot testing with a number of stakeholders. Future research may also extend to developing an equivalent classification for non-corporate entities.

Why is this interesting? SBTi announced it is undergoing a major revision to its Corporate Net-Zero Standard. Key goals for the review include updating and aligning with the latest science-based data and best practices; addressing challenges related to scope 3 target-setting and implementation; and enhancing interoperability with other SBTi and relevant external frameworks and standards. As part of the revision, SBTi will also assess the effectiveness of Environmental Attribute Certificates (EACs) in corporate climate targets. In April, SBTi was criticized for announcing the use of EACs, including voluntary carbon credits, for scope 3 abatement purposes, and then retracting the statement.

The UK Government updated its next steps for a package of Sustainability Disclosure Requirements (SDR) – comprising of sustainability reporting standards, transition plan disclosures, investment labels regime and green taxonomy – and sets out how industry can engage in the development of these different components.

Quick recap: SDR was first proposed in 2021 to facilitate and streamline the flow of decision-useful information between corporates and investors. SDR builds on the International Sustainability Standards Board (ISSB)’s voluntary global baseline launched in 2023, which offers national governments and regulators the opportunity to consider how to best apply these standards locally. In this context, the UK Government announced plans to make UK-endorsed ISSB standards – called the ‘UK Sustainability Reporting Standards’ – available in Q1 2025. If an endorsement decision is positive, and following a consultation process, the Financial Conduct Authority (FCA) will introduce requirements for UK-listed companies to report sustainability-related information, with implementation not expected before January 2026.

The FCA is also consulting on how the UK’s largest companies can disclose their transition plans effectively and align expectations between ISSB’s standards and the UK Transition Plan Taskforce (TPT)’s Disclosure Framework. Additionally, a UK-based funds label regime, with rules on fund naming, marketing, and anti-greenwashing, will be phased-in throughout 2024 and over the next two years, with further consultation on the inclusion of funds under the Overseas Funds Regime. The UK Government also continues to develop a Green Taxonomy, announcing that once finalized, they intend to have a voluntary testing period for at least two years before making disclosures mandatory.

Why is this interesting? In April 2024, TPT published its final set of transition plan resources to help businesses unlock finance for net-zero. The materials include 8 sector-specific guidance, transition planning for emerging and developing countries, and advisory pieces on adaptation, nature, just transition and more. TPT intends to publish final pathway guidance (and conclusion of its work) in summer/fall 2024.

A ‘groundbreaking’ centre of expertise on nature-based solutions and biodiversity finance will be established in Montreal, Quebec, elevating Canada’s financial sector expertise in the international development of financial instruments to channel funds towards biodiversity conversation and restoration.

Quick recap: Finance Montreal, an industry body representing Quebec’s financial services, announced it will establish a research centre to develop and promote biodiversity finance to help scale investments for nature-based solutions. The centre will be tasked with facilitating knowledge-sharing and partnership-building on innovative financial mechanisms, such as biodiversity bonds, biodiversity credits and other impact investment models. It also aims to catalyze solutions on an international scale, and influence and strengthen the capacity of policymakers, financial institutions and businesses to bridge the global biodiversity financing gap currently estimated at $700 billion a year between now and 2030. Finance Montreal has partnered with the UN Environment Programme Finance Initiative (UNEP FI) to provide technical support for the centre, which is expected to officially launch in the coming months.

Why is this interesting? In 2022, the 15th UN Biodiversity Conference (COP15), which convened in Montreal, hosted a first-of-its kind Finance Day jointly organized by UNEP FI, to recognize the important role of the capital markets in accelerating investment flows towards nature positive projects. In October 2024, public and private sector leaders will convene again at COP16 in Colombia, which is set to shine a bigger spotlight on trade as a catalyst for biodiversity conservation. A recently announced COP16 ‘Trade Day’ will be inaugurated, jointly organized by UN Trade and Development (UNCTAD), the World Trade Organization (WTO) and other organizations.

In line with our commitment to make sustainability a reality for our clients and the communities we serve, CIBC Capital Markets led significant client deals as part of a focused objective to help our clients become global leaders in environmental stewardship and sustainability.

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