Peter Weisberg, The Climate Trust
Weekly Policy and Finance Update – May 29, 2017
California’s stringent methane reduction requirements at dairies, combined with the significant public resources it’s preparing to dedicate to accomplish this mitigation without harming the dairy industry, present an enormous opportunity to apply new thinking in climate finance to leverage private capital.
At the kick off meeting for the Dairy and Livestock Greenhouse Gas Reduction Working Group, Dairy Cares (a representative of the dairy industry) estimated 200 new digesters will need to be built; California currently has 11 operational digesters. The Air Resources Board estimates roughly $1.7 billion will need to be invested to meet these reduction requirements. To catalyze this capital, CalRecycle and California Department of Food and Agriculture (CDFA) estimate direct state investments or incentives of $100 million per year for five years is needed. Excitingly, California has the potential to provide this level of public support because of the revenue raised through its cap and trade system it reinvests in climate mitigation. (To date, $11 million has been distributed as upfront grants to projects; this year’s budget allocated another $50 million in funds the California Department of Food and Agriculture is preparing to again grant upfront, mostly to digester projects.)
Given the scale of reductions required and still limited public funding, upfront grants are a very risky method to achieve methane reductions. These funds should instead be spent under a pay for performance framework—in which California enters into long-term contracts with projects to purchase verified methane reductions at a fixed price. Under pay for performance, Californian’s know their dollars are being spent on actual, not projected, reductions.
To maximize the leverage associated with these funds, instead of directly purchasing verified methane reductions, California has an opportunity to go one step further and use its public funding as a buyer of last resort (which gives project developers the right, but not the obligation, to sell California Carbon Offsets or Low Carbon Fuel Standard credit to the public buyer at a minimum price). With price assurance in hand, project developers can assure lenders and investors to value the long-term revenue that these emerging environmental markets generate over long-periods. The state can mitigate risk, and likely not spend any public dollars, to catalyze project development.
Intelligent and efficient use of these funds will build public trust in the reinvestment process to mitigate climate change, increasing the political will to follow California’s model in other jurisdictions. Let’s hold the investment of these dollars to a high standard and demonstrate public funds can be leveraged to accomplish the enormous investment challenge ahead of us to meet stringent climate goals.
Short-Lived Climate Pollutant Reduction Strategy
California Air Resources Board, March 2017
Pay for Success Strategies for Western States
Environmental Incentives, 2016
Demand rebounds for California pollution permits
Sacramento Bee, May 24, 2017
Carbon markets remain poised to fill the pre-2020 climate action gap
Ecosystem Marketplace, May 25, 2017
Using auctions to support climate and development outcomes
Scott Cantor and Caroline Ott, World Bank Group, Dec 12, 2016
Image credit: Flickr/Bemep
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