The Climate Bonds Initiative has published a consultation paper on a planned standard for green bonds in the field of bioenergy. This is an important moment. Capital markets participants must engage their brains and respond.
The green bond market has grown rapidly in recent years, mainly as a way for development banks, companies and local governments to advertise the green projects they are doing, and attract investment from investors eager to finance the transition to a low-carbon economy.
So far, while market participants have developed standards – such as the Green Bond Principles – of best practice for the transparency of green bonds, they have stopped short of trying to define what is green.
Instead, green bond issuers are encouraged to seek second party opinions from independent consultancies or academic bodies, prepared to vouch for the environmental, social and governance credibility of the proposed investments.
Quest to define green
Meanwhile, the Climate Bonds Initiative, a London NGO, has for years been striving to promote a global climate bond market, as a way to raise the hundreds of billions of investment dollars that will be needed to finance the transformation of the world’s economy. The CBI believes that a system of labelling or agreed standards is needed, to badge certain bonds as climate bonds. This, it believes, will enable investors to know they are investing in something green – and could be used by governments as a test for according tax or other subsidies to such investments.
The CBI’s goal is to make climate bonds into a mass market with the heft to tackle the enormous investments needed.
But the labelling or standards approach brings risks. If standards are set too tightly, projects with a green contribution to make could be starved of investment. If standards are too permissive, projects that are not genuinely green could be promoted.
The latter risk is the greater. First, because weakly green projects shunned by the Climate Bonds standard can still find investment from ordinary sources. And second, because they could easily be embraced by the standard later, if the standard-setter can be persuaded to change its mind.
Making a move in the other direction – to expel an investment earlier judged green – would be much more difficult; and it would also be too late. By then, the project would have gone ahead.
Bio battle
This debate was always going to come to a head when the Climate Bonds Initiative got round to creating a standard for bioenergy.
Along with nuclear power, this is the most controversial area of green energy policy. Is nuclear green? Are biofuels? There is no settled answer to these questions.
What there are, unfortunately, are enormous vested interests and whole libraries full of misleading reports and documentation.
Bioenergy covers a great variety of practices, from distilling ethanol from sugarcane or corn to burning wood pellets, as at the Drax power station in the UK, to burning wood waste to drive paper mills.
Concerns include displacing agricultural production for food, the risk of natural, biodiverse forests being cleared to make way for fuel plantations, and the energy required to process and transport biofuels.
The variety of techniques and issues can be bewildering, and proponents often acknowledge the weaknesses of some biofuel business models, while promoting their own as better.
CH + O2 => energy + CO2 + H2O
But what all biofuels have in common is burning organic matter – turning it into energy, carbon dioxide and water vapour. This is the same process as when coal or natural gas are burnt.
How, then, can biofuels be green? They might be, if the efficiency of energy output per tonne of CO2 emitted was greater. But that would be an advantage of degree, rather than putting them in a different, greener category from fossil fuels. And in practice, biofuels are not promoted as more efficient.
The central claim made for them is that the CO2 emissions from the chimney do not count, because the carbon emitted was previously absorbed from the atmosphere when the plants grew.
This is highly, and dangerously, misleading. If a certain biofuel power plant is built, and begins to burn biomass, the world’s carbon emissions are increased – a new engine or furnace is burning vegetable matter.
Those emissions only “do not count” to the extent that there has been a corresponding increase, relative to what existed before, in growth of vegetation which extracts carbon from the atmosphere.
Yet in virtually all biomass business models, the carbon-extracting growing of plants was happening beforehand, anyway. Iowa’s fields were producing corn before that corn was used to make ethanol to burn in cars. So, in the main, were Brazil’s sugarcane fields.
So in most cases, no extra carbon is being sucked out of the air, to compensate for what is now being burnt. The only change the atmosphere will feel is more carbon being pumped into it.
Deserts blooming?
If bioenergy production genuinely leads to new cultivation of deserts or empty, waste land – great. But there tends not to be much fertile agricultural land lying around barren. Any that is genuinely left alone tends to gather plants.
The argument that waste wood from forest floors or paper mills is a green energy source is equally flimsy. The biomass was being generated anyway – it is not newly created because someone decides to use it for fuel. Left unburnt, that waste would keep carbon locked up for many years. If the material is burnt, its carbon flies into the atmosphere in seconds.
One area of bioenergy that could have promise is the capture and combustion of waste methane, for example from sewage – because that gas would otherwise escape into the air and act as a greenhouse gas.
But the policy frameworks that have grown up in many countries to promote bioenergy have ignored such basic distinctions. Faced with the need to do something green, those in authority have simply let their eyes glaze over, surrendered to “the experts” and let Big Agriculture and subsidy-hunting entrepreneurs lead them by the nose.
The result is that, according to the International Energy Agency, in the 40 years between 1973 and 2012, the share of world total primary energy supply that came from sources other than burning hydrocarbons grew only from 2.8% to 8.3% – and 70% of that expansion was by nuclear. Meanwhile, total energy consumption has more than doubled.
Keep thought bio-diverse
The danger now is that the capital markets could make the same mistake.
The Climate Bonds Initiative has approached the issue of setting a bioenergy standard with admirable seriousness. But it will not itself attempt to define what sustainable bioenergy is. Instead, it will recommend that the Climate Bond label be granted to investments that comply with various existing industry voluntary or legislative certification standards.
Yet some of these standards perpetuate the basically fallacious comparison that underlies the biofuel industry: plant growth “counts” against CO2 emissions when the plants are used for biofuels, but not otherwise.
If bioenergy initiatives can make agricultural land or forests better, denser stores of carbon, it ought to be possible to measure, and credit, this change.
But today, the forests or plantations turned to biofuel use are counted when measuring the biofuel emissions, but, although they were there all along, are not counted when measuring the oil or coal emissions biofuels are claimed to replace.
The Climate Bonds Initiative nobly intends climate bond-funded bioenergy projects to reduce greenhouse gas emissions by 60% or 70%. But it needs to look very carefully indeed at the claims made for such projects, to see if a reduction is genuinely achieved.
Highly complex official standards full of impressive-looking equations are no substitute for independently applying common sense.
And that is the danger of the CBI’s drive to create standards for green bonds. If investors think for themselves about what is green, all their collective intelligence is applied, and this can foster competing solutions.
If they outsource the decision to an omniscient green church, diversity of thought will be stifled and grossly erroneous policies can fester unchallenged.
If you don’t believe that could happen, ask yourself – with biofuels, has it not happened already?
