Sustainability Newsletter – September 2024

The U.S. Department of Energy (DOE) released a new report that shows clean energy jobs grew at more than twice the rate of overall U.S. employment in 2023. The report’s release followed the two-year anniversary of the Inflation Reduction Act, which has spurred historic investment into clean energy technologies.

Quick recap: According to the DOE’s 2024 U.S. Energy and Employment Report (USEER), U.S. energy sector employment increased by over 250,000 jobs, from 8.10 million in 2022 to 8.35 million in 2023. Of this increase, clean energy jobs accounted for more than half (56% or 142,000) growing at a rate of 4.2% between 2022 and 2023, and significantly outpacing the rate of overall U.S. employment of 2% for the same period. The employment boon is attributed to the growth of clean technologies, such as zero-emission vehicles and renewable energy, as well as transmission, distribution, and storage, critical to enabling the U.S’ transition to 100% clean electricity by 2035. The report also revealed that unionization rates of 12.4% in the clean energy sector has surpassed the average rate of 11% in traditional energy employment for the first time. This was due to rapid growth in unionized construction (particularly of transmission and distribution systems) and utilities industries. The report suggests that unionization has not only helped to improve jobs for workers but has also helped employers who reported significantly less difficulty hiring qualified workers than the year prior.

Why is this interesting? The report’s release followed the two-year anniversary of the U.S. Inflation Reduction Act (IRA) which was signed into law in August 2022. In a statement by the current Administration, the IRA has, to date, catalyzed over US$265 billion in company announcements in new clean energy investments across almost every state in the nation. It also highlighted that Treasury guidance is now available for nearly all the IRA’s clean energy tax provisions, and nearly two thirds of the IRA’s funding has been awarded.

The Rocky Mountain Institute (RMI) published The Business Case for Reducing Embodied Carbon. It recommends a set of nine strategies aimed at commercial real estate developers to help create sustainable business value and future-proof against quickly-evolving government regulation.

Quick recap:  Embodied carbon, the climate pollution associated with material production and construction activities, is responsible for an estimated 11% of global emissions. According to RMI, tackling embodied carbon carries challenges, but also holds potential economic, competitive, and environmental advantages for developers, asset managers, and other market actors. RMI outlines nine strategies for developers to reduce embodied carbon and create business value. The recommended strategies are organized into two broad categories:

1. Building strategies deployed at the asset level:
   • Save upfront costs by using less material
   • Increase building utilization, maximizing embodied carbon spent to meet functional needs
   • Switch to low-carbon materials and showcase these as a market differentiator
   • Plan for component reuse and design for disassembly
2. Corporate strategies that inform portfolio-wide initiatives:
   • Institutionalize embodied carbon reduction practices to achieve cost efficiencies
   • Adopt a retrofit-first approach to create value
   • Market your wins achieved by implementing best practices
   • Report embodied carbon emissions in Scope 3 climate disclosures
   • Join buyer coalitions and enter into offtake agreements to purchase deeply decarbonized materials

Why is this interesting?  According to RMI, high embodied carbon construction practices are increasingly being disincentivized by more responsible investor capital allocation decisions, tenant leasing preferences, and government regulations. The landscape of embodied carbon regulations is also evolving quickly with a number of new requirements in jurisdictions from California to Vancouver, and Boston to Los Angeles – all of which have been passed in the last year. For commercial real estate developers, reducing embodied carbon can increase access to investment dollars, attract tenants, and future-proof business practices against government regulation. 

According to CDR.fyi, durable carbon dioxide removal (CDR) transaction volumes reached 4.8 million tonnes in Q2 2024, the highest quarterly record to date. Additionally, Microsoft dominated the demand-side leaderboard raising questions on what it means for the market to have such a dominant buyer. 

Quick recap:  In Q2 2024, 4.8 million tonnes of CDR volume was transacted, pushing the first half of 2024 to over 5.3 million tonnes – 18% higher than the total volume recorded in full year 2023. CDR projects in bioenergy with carbon capture and storage (BECCS) represented 90% of the CDR sold in the quarter. On the demand-side, Microsoft continued to strengthen its leadership having purchased 4.3 million tonnes of CDR which accounted 91% of the total transaction volume in the quarter, far ahead of other buyers (almost 30 times the volume purchased by Frontier Buyers in second place). As of the end of Q2 2024, Microsoft’s purchases now represent around 75% of the all-time volume of contracted durable CDR. 

According to CDR.fyi, the dominance of a single buyer in the market is analogous to the early semiconductor industry in the 1960s, when the US Department of Defense served as the dominant buyer to accelerate market development. Most current government support for CDR, like the US 45Q tax credit for carbon sequestration, still rely on a corporate buyer. Even the US Department of Energy’s small direct procurement program represents only a fraction of Microsoft’s purchases.

Why is this interesting?  Buyers like Microsoft and Frontier are helping to stimulate early CDR innovation and demand signals. For instance, Frontier recently open-sourced its carbon removal offtake agreement template to help catalyze early-stage projects. It highlights that most standardized contracts that exist today, for things like renewable energy or commodities, are designed to support technologies that are technically mature and already have a large market. Whereas, carbon removal is still nascent, and offtake agreements need to be designed to manage more risks and unknowns than existing contracts contemplate.

The Word Bank recently issued its largest and most unique outcome bond to date. The US$225 million Amazon Reforestation-Linked Bond links investors’ financial return to the sale of carbon removal units (CRUs), differing from previous World Bank outcome bonds linked to the sale of carbon credits from avoided emissions.

Quick recap: The transaction mobilized approximately US$36 million for Mombak, a Brazilian based carbon removal project developer. Mombak will use the funds to partner with landowners in the Amazon region to reforest land with native tree species critical for sequestering carbon, supporting biodiversity, and promoting socioeconomic development in local communities. The CRUs, each representing the removal of one ton of carbon dioxide equivalent (CO2e) achieved by the projects, will be sold to Microsoft pursuant to a purchase agreement with Mombak. The structure allows investors to earn a fixed guaranteed coupon and a variable coupon linked to the number of CRUs (if any) generated and sold by the projects.

Why is this interesting? Carbon removal projects, like reforestation, can generate potential future revenue from CRU sales, but often lack the financing required to get off the ground or to scale. Outcome bonds can help such projects raise needed funding from the capital markets by securitizing future carbon credit sales revenue. For instance, the World Bank’s series of outcome bonds blend project risk with triple-A principal protection, and are listed, tradable securities of a size large enough to interest institutional investors. Demand for CRU assets will only continue to grow in global carbon markets as private entities seek these out for the purpose of complying with voluntary climate change mitigation commitments.

440 Megatonnes, a project of the Canadian Climate Institute, in collaboration with the Canadian Climate Policy Partnership (C2P2), launched a new interactive database that tracks the state of climate policies in Canada. The dataset shows that most of the 327 climate policies across Canadian federal, provincial, and territorial governments, are ‘carrots’ rather than ‘sticks’.

Quick recap: The Canadian Climate Policy Inventory is a compilation of climate mitigation policies implemented in Canada between November 2022 and July 2024. The dataset tallied 327 climate policies categorized across 3 approaches in how they reduce emissions: 1) Abatement support policies which incentivize voluntary action (e.g. policy “carrots” such as efficiency rebates for homeowners) accounting for 71.5% of the policy mix; 2) Mandatory policies requiring compliance (e.g. policy “sticks” like the federal fuel charge) making-up a 22% share; and 3) Indirect policies that allow for, but don’t require or directly enable, emissions reductions (such as British Columbia’s Energy Step Code for Buildings and Nunavut’s EnergyWise program) making-up a 7% share. The dataset also highlights a sectoral breakdown, with most mitigation policies aimed at transportation (24%) and buildings (21%), while oil and gas represented just 6%. Multi-sector policies (such as the federal fuel charge and output-based pricing system) make-up 23% of the total policy count.

Since the responsibility for regulating emissions is shared across different levels of governments, the inventory seeks to provide researchers, policymakers, and businesses with the transparency they need to enhance coordination and efficiency on emissions reduction efforts.

Why is this interesting? According to 440 Megatonnes, governments have focused more on abatement support policies which are often more tailored to a specific technology, than on broader mandatory policies, given the political challenges and lengthy processes associated with implementing them. In a new study of the world’s climate policies that achieved major emissions reduction over the past 25 years, researchers have uncovered that a mix of carrots and sticks tend to work better than single policies, such as incentives, carbon pricing or regulation alone.

The World Economic Forum (WEF) published its review of the UN’s upcoming 29th annual climate conference (COP29) priorities. It highlighted that this year’s agenda will focus on creative climate finance solutions, including from the private sector, in what many are calling the ‘finance COP’.

Quick recap: In a first official letter to the conference’s parties and constituencies, COP29’s President-Designate outlined key priorities, including advancing the New Collective Quantified Goal (NCQG) which seeks to fill persistent gaps in climate finance. Key to this year’s discussions will be to develop a new climate finance goal, building on the US$100 billion annual target and to provide a more realistic and ambitious financial framework. But certain climate finance mechanisms still remain challenged, such as finalizing the operationalization of an Article 6 carbon market (including reaching agreement on definition and content; project eligibility and review processes); and growing the Loss and Damage Fund (including decisions around new sources of non-public and alternative finance). Other priorities will include closing the adaptation finance gap and fully mobilizing business and philanthropy (blended finance) for climate action.

Why is this interesting?  While a focus on market- and investment-based solutions to the climate finance problem is critical, WEF noted that many prior COP-climate schemes have been devised by making assumptions about the behaviour of private capital, some of which have not been accurate. WEF is calling for more private sector input on the pre-requisites for private finance to flow. Similarly, in a recent filing to the UN, the U.S. suggested that the NCQG requires a consensus on a finance target that is “fit-for-purpose”. It outlined a potential two-layer approach, involving a Global Investment Goal (an “outer layer” comprising all sources of funding – public and private) and a Support Goal (an “inner layer” comprising more achievable Nationally Determined Contributions).

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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