India has announced aggressive goals to increase the share of electricity generated from solar PV. As a latecomer to the renewable energy game, India can in principle learn from a host of policies implemented by governments around the world. What are the key lessons Indian policymakers can learn from China, Germany, and the United States? What factors may affect the ability of policymakers to implement such policy lessons imported from abroad?
In 2014, India set a target of achieving 175 GW of renewable energy capacity by the end of 2022.[1] They met only 69% of that goal with the government blaming the shortfall on the tepid uptake of rooftop solar power.[2] With an original goal of 40 GW of rooftop solar, the actual capacity deployed was around 6 GW.[3] In order for India to reach their even more ambitious target of 500 GW of non-fossil fuel-based energy by 2030 on the way to fully reaching net-zero by 2070[4], the country will need to overcome several obstacles that are limiting the growth of rooftop solar (RTS).
A few of the most prominent barriers include improving access to consumer financing, simplifying the incentives and remuneration process for residential and small commercial customers, and incentivizing utilities to support RTS deployment.[5] Luckily, India has a wealth of knowledge it can use from the United States, Germany, and China who leveraged a number of policy tools to take on these same challenges and have emerged as the countries with the highest capacity of solar PV globally.[6]
Lesson from the U.S. – Leveraging Public-Private Co-Financing for Less Creditworthy Consumers
India’s RTS deployment to date has followed two models: a consumer-owned capital expenditure model (Capex) or a project developer-owned operational expenditure (Opex). In the Capex model, consumers are responsible for purchasing the PV system upfront but save on their electricity bills by selling back excess power to the utility also known as a distribution company (DISCOM). The Capex model has high upfront costs with consumers incurring the risks for system installation, performance, and maintenance.
In the Opex model, customers lease their roof to a third-party vendor who installs and owns the PV system and is responsible for its maintenance. The consumer then pays off the system cost through a monthly charge to the vendor, typically sourced from revenue earned by selling power to the DISCOM or savings on their monthly electricity bill. While it is easier for consumers to use the Opex model because it requires a lower upfront cost, installers are more selective about which rooftops they are willing to install on and there are restrictions on using this model imposed by various state governments.[7]
As a result, Indian policymakers have sought to create support mechanisms for the Capex model through subsidies and low-interest loans through the Reserve Bank of India.[8] Unfortunately, the uptake of these incentives has been primarily incurred by large commercial and industrial consumers because they are able to meet the credit and minimum amount requirements. This has left a gap in access to RTS financing for smaller consumers who lack as robust a credit history.
In the United States, several states have developed innovative public-private co-financing models to overcome the barriers of creditworthiness for residential and small commercial consumers, including:
Loan loss reserve: The New York state government created a reserve fund which guarantees up to 90% of eligible losses on a loan in case of a borrower’s default, allowing financial institutions to approve loans for a wider set of rooftop solar customers with attractive terms.[9]
Subordinated debt program: The Connecticut state government established a Green Bank to facilitate a solar lease program, forming partnerships with private lenders providing subordinated loans at reduced interest rates to absorb first losses in case of default.[10]
Interest rate buy-down: The Massachusetts state government launched a solar program where the government covered part of the interest rate offered by the private lender, resulting in lower rates, longer tenors, and higher availability of loans.[11]
The challenges for India to adopt these structures to enhance the Capex model are that the political and financial institutions still suffer from long due diligence and dispute resolution processes, a lack of clear standards and key performance indicators for RTS projects, and limited awareness and experience of branch-level loan officers on these various loan product offerings for RTS done in coordination with regional and state governments.[12]
Lesson from Germany – Simplifying the Re-numeration Process Through a Feed-in-Tariff
India’s RTS deployment has also struggled with simplifying and streamlining various incentives, re-numeration policies, and regulatory pricing requirements. Consumers are presented with a dizzying array of national and state incentives spanning net and gross metering schemes, low-interest loans, tax exemptions, etc. This has required them to interface with various DISCOMs, banks, and installers to take advantage of all applicable incentives – dissuading many who don’t have the time or institutional savviness to navigate this ecosystem.[13]
To simplify the process, India could adopt a national feed-in-tariff (FIT) like was done in Germany. In 1990, the German government passed its flagship feed-in-law, the Stromeinspeisungsgesetz (StrEG), with further refinement of the policy under the passage of the Erneuerbare-Energien-Gesetz (EEG) in 2000.[14]
Germany’s FIT obligated the nation’s utilities to purchase clean power at above market rates under fixed contracts lasting up to 20 years. Before the law, market prices for electricity (which largely came from coal and nuclear) were around 12 cents per kilowatt-hour (kWh). Under the FIT, utilities had to purchase electricity from renewables like solar for as much as 60 cents per kWh.[15] The higher costs were passed on to all ratepayers through monthly surcharges.
The result of the FIT was an explosion in rooftop solar installations, leading Germany to have by far the largest installed solar PV capacity in the world by 2013 with the majority owned by private individuals.[16],[17]. The costs for installing solar PV systems dropped by 70% between 2000 and 2007[18]. Because this policy served as a one-stop-shop for renumeration subsuming all previous incentives for renewable energy at the state and municipal level, one analysis found the FIT could have reduced installation costs by 20% just by preempting bureaucratic paperwork and administrative filings alone.[19]
In India, there has never been a national FIT, though it was experimented with at the state level in Gujurat in 2010 with the procurement of 968 MW of solar PV at ₹ 15/kWh for the first 15 years. No other government agencies have tried to use a FIT to procure solar PV since then.[20]
A national FIT in India for all RTS installations up to a certain capacity threshold could effectively simplify the litany of other incentives, subsidies, and guidelines across states by positioning DISCOM’s as a single entity for the RTS investment process. According to the International Energy Agency an Indian national FIT could achieve a payback period of RTS investment within 5 years and could also boost commercial lending efforts to consumers as they incur stable, long-term revenue streams from FIT payments, boosting their credit worthiness.[21] This would be further enhanced if India’s public agencies provided guarantees for FIT payments in case the DISCOMS do not provide timely renumeration to consumers.
One major challenge to adapt a German-style FIT in India is the risk and impact of higher electricity prices. Germany pays some of the highest electricity prices in the world, though it is misleading to claim it is solely due to the generous support given to renewable projects through surcharges on ratepayers. The exemption of industrial customers from the renewables levy along with bespoke taxes and fees (e.g. liquidity reserves and market premiums) would have resulted in high power rates regardless of the FIT.[22]
Nevertheless, an ambitious program of this kind would be an expensive prospect and still have an impact on retail electricity prices even if not at the same margins as Germany. This could be a difficult sell politically in India given it has a much larger share of the population at or near poverty levels, popular protests and backlash have followed previous hikes in electricity prices, and the nation already faces significant challenges in proper electricity bill collection.[23] For example, in Uttar Pradesh, only 39% of consumers were metered, billed, and paid their bills at the full amount.[24] Thus, keeping a national FIT solvent in an Indian context would be a significant challenge.
Lesson from China – Incentivizing Utilities to Support RTS Through Demand Aggregation
While a national FIT would be a significant step for renewable energy in India, overcoming the reluctance of DISCOMs themselves to encourage RTS is one of the principal challenges to scaling solar PV. DISCOMs have not been very enthusiastic about RTS because many of them are already in poor financial condition, and they fear the loss of revenue that comes from consumers demanding less energy. In addition, they are hesitant to continue subsidizing large commercial and industrial consumers who are their biggest revenue sources.[25]
One solution to this problem is a utility-driven demand aggregation model. In this approach, the DISCOM acts as a market-maker by aggregating rooftop owners within their jurisdiction and impanels a developer who installs, owns, and operates the PV systems across the rooftops.[26] The electricity is sold to the DISCOM’s at a fixed rate over a period of time in some models. Figure 4 in the Appendix outlines the various benefits of this approach for consumers, project developers, utilities, financial institutions, and governments.
In particular, utilities stand to benefit from demand aggregation by offsetting any revenue loss through facilitation fees paid by project developers, greater control over RTS deployment so they can be catered to preferred consumer categories, larger economies of scales from aggregated capacity results leading to a better tariff[27], and reduced transmission and distribution losses.[28]
In September 2021, China began a pilot of a demand aggregation model by facilitating partnerships between local governments and solar developers to pool together smaller rooftop projects into larger orders.[29] By the end of 2023, the goal is to cover 50% of government buildings, 40% of schools and hospitals, 30% of industrial and commercial buildings, and 20% of rural households with RTS.[30]
Since the launch of the demand aggregation pilot, China has seen a blistering growth in RTS. In the first five months of 2022, installed solar capacity was at 24 GW – a 140% year-on-year growth.[31] In fact, one-in-five solar panels installed worldwide in 2022 was mounted on a Chinese roof.[32] One analysis expects the pilot to deliver 100 GW of capacity, and if rolled out nationally, up to 600 GW.[33]
The challenge for India in replicating this model is that in China, the project developers are primarily state-owned enterprises (SOEs) at the national and provincial level. Large players like State Grid and China Southern Grid have been able to leverage their large balance sheets and access to diverse geographies to facilitate massive rooftop aggregation and capital expenditure.[34] This is true not just in solar, for example 90% of China’s wind developers are state-owned enterprises also.[35] By contrast, in India most of the RTS developers are startup companies with limited access to finance.[36] Establishing larger, better capitalized project developers will be a critical step for India to scale a demand aggregation model.
Conclusion
As India embarks on its ambitious journey of achieving 500 GW of non-fossil energy within the decade, it will need to learn and adapt from its failure to reach its previous target due to the lackluster uptake of rooftop solar. The primary obstacles to overcome include limited access to consumer financing for residential and small business consumers, a cumbersome process for consumers to interface with multiple actors to receive RTS incentives and overcoming the hesitation of utilities to promote RTS.
From the United States, India can adopt various public-private co-financing structures like loan loss reserves, subordinated debt programs, and interest rate buy-downs to make the Capex model for non-creditworthy consumers more accessible. From Germany, India can adopt a national feed-in-tariff policy which will both make investment in RTS financially attractive while simplifying the disparate set of incentives, subsidies and guidelines for consumers and reduce the cost of bureaucratic overhead. Lastly, India can adopt China’s demand aggregation model to position utilities to benefit from RTS through economies of scale and reduced transmission and distribution losses, thus incentivizing them to promote RTS uptake more actively.
Even though there are challenges for transposing international experiments to India, policymakers will have to be creative in tailoring them to be successful in a local context to share in the successful growth of RTS seen around the world.
[11] Maria Blas Costello (2020), “The Mass Solar Loan Program: Bringing Solar Ownership to Low-Income Homeowners,” Clean Energy States Alliance, August 7th, 2020, https://www.cesa.org/the-mass-solar-loan-program/
[14] Christoph Stefes (2016), “Critical Junctures and the German Energiewende” in Germany’s Energy Transition: A Comparative Perspective, edited by Carol Hager, Christoph H. Stefes. New York, NY: Palgrave Macmillan
[35] Michael, Davidson, Fredrich Kahrl, and Valerie Karplus (2016). Towards a political economy framework for wind power: Does China break the mould? UNU-WIDER Research Paper. World Institute for Development Economic Research (UNU-WIDER), 2016.
A global renaissance is underway to tackle climate change. 127 countries, representing 80% of the world population[i], and more than a third of the world’s largest publicly traded companies have set net-zero targets.[ii] Many of these governments and corporations are relying on the voluntary carbon markets (VCM) to reach these goals, covering potentially 2 billion tCO2e by the end of 2040.[iii] In this paper, I argue that the coming demand for carbon markets could be a boon for Latin American countries who are a hotspot for high-quality nature-based solutions (NbS).
After analyzing the existing landscape of carbon market financing of NbS in Latin America, I provide recommendations on how policymakers can drive carbon market investment towards “blue carbon” and “green-grey” infrastructure projects through the use of natural capital accounting and regulatory policies that embed NbS in new infrastructure.
Introduction
Latin America is considered a “biodiversity powerhouse”, with more than 40% of the world’s biodiversity, 10% of its coral reefs, 12% of its mangrove forests, and the largest expanse of wetlands.[iv] At the same time, it lost more tropical primary forest than any other region as recently as 2019. Given that the region’s economy is uniquely reliant on natural resources, “nature-based solutions” are seen as a ripe opportunity to both combat climate change, enhance resilience against extreme weather impacts, and improve economic and community growth.
What are nature-based solutions (NbS)? They were defined by the United Nations Environment Assembly in 2022 as “actions to protect, conserve, restore, sustainably use and manage natural or modified terrestrial, freshwater, coastal and marine ecosystems which address social, economic and environmental challenges effectively and adaptively, while simultaneously providing human well-being, ecosystem services, resilience and biodiversity benefits”.[v]
According to the UN Environment Programme, approximately $133 billion is currently flowing into NbS projects annually, 86% coming from public funds and 14% from private funds.[vi] As shown in Figure 1, of the $18 billion in private funds, about $5 billion comes through biodiversity offsets with an additional $221 million a year through voluntary carbon markets. Although carbon markets and offsets currently make up a small portion of the NbS financing pie, they are expected to explode over the coming decades. The 2021 report of the Taskforce on Scaling the Voluntary Carbon Market estimates that “demand for carbon credits could increase by a factor of 15 or more by 2030 and by a factor of up to 100 by 2050”.[vii] By 2030, the market for carbon credits could reach more than $50 billion with nearly two-thirds expected to flow towards NbS.[viii] More than 1,500 companies have committed to net-zero emissions by 2050[ix] with corporate actors pledging more than $4 billion towards NbS in 2021.[x]
Figure 1 – Source: UNEP, 2021
In light of the expected boom in the use of carbon markets to finance NbS, this paper does a landscape analysis on what this could look like in Latin America. Section I provides an overview of what nature-based solutions entail, the various ways that carbon markets finance and verify these projects, and the challenges with the current approach. Section II contextualizes this for Latin American countries who are currently getting NbS projects off the ground, exploring how “blue carbon” projects and “green-grey” infrastructure represent promising paths to tap into global and regional carbon market financing. Lastly, Section III provides recommendations for policymakers on how blue carbon and green-grey projects can be made more attractive to carbon markets and overcome existing challenges to NbS financing and the credibility of carbon credits.
Section I – Defining and Financing Nature-Based Solutions
Background on NbS: Benefits and Challenges
NbS can be conceptualized and implemented across three different domains: (1) the type of ecosystem – terrestrial, freshwater, and coastal/marine, (2) the type of work – conservation, restoration, protection, and management, and (3) the solution-orientation of the project ranging from climate change, disaster resilience, land degradation, inequality, unemployment, etc. [xi]
NbS can be used to address a range of social, economic, and environmental challenges, depending on the ecosystem that projects are delivered in. Terrestrial projects are implemented in farmlands, forests, peatlands, mountains, deserts, grasslands, and high lands. Freshwater projects are done in lakes, rivers, wetlands, marshes, streams, ponds, and floodplains. Coastal/marine projects are often done in mangrove forests, seagrass beds, coral and oyster reefs, estuaries, salt marshes, sandy beaches, and dunes.[xii]
By enhancing these ecosystems, NbS offers co-benefits to a broader symbiotic relationship between the planet and humans known as “ecosystem services”. These ecosystem services come in four categories as defined by the U.N.’s Millennium Ecosystem Assessment[xiii]:
Provisioning services, such as food, water, building materials, medicinal benefits, and sustainable employment opportunities as half of the world’s labor force is comprised of agriculturally based households which rely on healthy ecosystems.[xiv]
Regulating services, which moderate natural phenomena, like air quality, water purification, erosion and flood control, pollination, as well as carbon storage and climate regulation which increased vegetation plays a critical role in maintaining.
Cultural services like recreation, eco-tourism, spiritual activities and cultural heritage, and aesthetic beauty that comes from wild places.
Supporting services, including nutrient retention and recycling, habitats for keystone species, and the soil and water cycles which allow the planet to support life altogether.
Despite the immensely valuable potential of NbS, several concerns have been raised, including[xv]:
Infringing on the rights of indigenous peoples and local communities: Previous NbS projects have led to backlash from indigenous communities as a form of “land grabbing”, raising concerns about the security of land rights as well as access to natural resources. [xvi]
Distracting from decarbonization: Some consider NbS as detracting from or a substitute to the primary goal which is reducing the production of GHG emissions.
Misinterpretation and misuse of NbS: Given its recency as a concept, NbS can and has been misinterpreted by different stakeholders. There are several frameworks and standards that could be applied to different NbS projects, complicating implementation and integrity efforts. The few that have been institutionalized are the IUCN Global Standard and the UNFCCC requirements for Reducing Emissions from Deforestation and Forest Degradation (REDD+), which require expertise and local knowledge to properly implement. The UN Environment Programme argues there will never be a globally agreed upon set of standards and safeguards for NbS due to the wide range of actions and sectors it encompasses which are covered by several international conventions.
Skepticism about the effectiveness: Due to the lack of standards, measuring the effectiveness and benefits of NbS has been notoriously difficult, though the evidence has been growing stronger[xvii],[xviii],[xix],[xx]. As a result, skepticism remains about the suitability and likelihood of success for NbS as well as untangling the complexities of attribution when NbS is combined with other efforts to tackle multiple issues.
Financing Nature-Based Solutions Through Carbon Markets
The terms “carbon credit” and “carbon offset” are often used interchangeably. They differ slightly, but both refer to a verifiable metric tonne of CO2-equivalent of greenhouse gas removal issued by a carbon crediting program[xxi],[xxii]. Each credit or offset has a unique serial number which is issued, tracked, and then retired so it cannot be sold again. NbS has great promise for removing GHGs through the restoration and conservation of forests and other ecosystems. However, because of the lack of standardization and measurement for NbS, ensuring the integrity of carbon credits remains one of the primary obstacles to scaling up carbon markets to finance NbS. The table below lays out the principal barriers to credible carbon credits today.
Concern
Description/Example
Leakage
Protecting a forest results in logging to occur in a different forested area
Permanence
A forest fire burns down a protected area, releasing GHGs back into the atmosphere
Additionality
A wetland was going to be protected anyway without the incentive of a carbon credit
Accuracy of measurement
Unable to determine exactly how many GHGs were removed by restoring a peatland
Social safeguards
A river restoration project harms indigenous communities who fish in the area
Double counting
A carbon credit is issued twice for protecting the same mangrove area
Inflated baselines
Asserting that 30% of a forest would have been deforested were it not for the carbon credit when historical averages may be below that
To incentivize corporate investment in NbS through carbon markets, organizations will expect carbon credits of the highest quality that are certified with credible standards, transparent accounting, and robust calculations. The four largest standard setters in carbon markets are the Verified Carbon Standard from Verra, the American Carbon Registry (ACR), Climate Action Reserve (CAR) and the Gold Standard (GS)[xxiii]. For NbS projects specifically the three leading standards for verification are: Verra’s Jurisdictional and Nested REDD+ (JNR), the Architecture for REDD+ Transactions’ The REDD+ Environmental Excellence Standard (ART/TREES), and the World Bank’s Forest Carbon Partnership Facility (FCPF) Carbon Fund.[xxiv] The World Resources Institute found the ART/TREES standard to be the most robust of the three to ensure environmental and social integrity. Most importantly, it would certify NbS credits generated at a jurisdictional scale rather than a project-scale which all NbS projects on the voluntary market so far have operated under. [xxv]
Lastly, a critical dimension of carbon markets facilitating investment into NbS going forward is through the Paris Agreement Article 6 process.[xxvi] Article 6 provide a framework for countries to be able to buy and sell GHG reductions through a Global Carbon Market Mechanism (GCMM). The Article 6 rulebook was formalized at COP26 in Glasgow, with finer points of detail still being hammered out at Sharm El-Sheikh in COP27 and beyond. One of those is Article 6.4 which established a new type of carbon credit known as mitigation contribution emission reduction (MCER). MCERs could also represent carbon removals as well as “other international mitigation purposes”. [xxvii]
Observers believe the inclusion of “other international mitigation purposes” in the governing text indicates a willingness to include private sector buyers purchasing carbon credits in the voluntary market – even though the Paris Agreement has no jurisdiction over it.[xxviii] This opens the potential for private sector actors to finance NbS and have those reductions be traded in the Article 6 carbon market as well as the voluntary market. Given that nearly half of the Nationally Determined Contributions (NDCs) include the use of international cooperation through carbon markets[xxix], Article 6 could see substantial public and private financial flows go into NbS as the carbon market rules become final.
Section II – Nature-Based Solutions in Latin America
Landscape of NbS Projects in Latin America
A study between the World Resources Institute (WRI) and the Inter-American Development Bank tracked more than 156 NbS projects currently underway in Latin America. The countries with the most projects are Mexico (31), Colombia (21), and Brazil and Peru (17).[xxx] Roughly 72% of the projects aim to serve the water and sanitation sectors, following by housing and urban development, transportation, and energy. Per Figure 2 and Figure 3 the overarching objectives for most NbS projects in the region are water quantity, water quality, urban flooding, coastal flooding and erosion, landslide risk, and river flooding with forests being the primary sector of investment.
Figure 4 details the opportunities for Latin American countries to leverage NbS to improve drinking water quality and riverine and storm water flood mitigation, finding that cities in Colombia, Venezuela, and Brazil would benefit the most from NbS, as well as showing. The primary challenge though is a lack of financing. 60% of current NbS projects in Latin America are still actively seeking funding or investment with three quarters of the projects relying on government grants as a key part of the funding model.[xxxi] Here, carbon markets could play a vital role to scale up finance for NbS.
Figure 4 – Source: WRI, 2021
Carbon Markets in Latin America as a Catalyst for NbS Finance
After Europe, Latin America has the highest number of sub-national jurisdictions that have pledged to reach net-zero – spanning five regions and 209 cities.[xxxii] Achieving these goals has seen the region experiment with both compliance and voluntary carbon markets, as shown in Figure 5. Colombia, Chile, Mexico, and Argentina are the region’s leaders in developing carbon markets with carbon taxes and a voluntary carbon market at the national level. Colombia has a mandate to develop an emissions trading system, while Brazil is in the process of deliberating on legislation to institute carbon pricing instruments, in particular a voluntary carbon market.[xxxiii]
Figure 5 – Source: IETA, 2021
Carbon taxes have been a popular instrument in the region due to the revenues generated which are used for numerous social projects. There are also several pilots under Article 6 of the Paris Agreement, including between Switzerland and Norway with Peru, Canada and Sweden with Chile, and Japan with Mexico, Costa Rica and Chile under the Joint Crediting Mechanism.[xxxiv]
In the voluntary carbon markets, Latin America is the second largest provider of carbon credits with around 20% of the global supply coming from the region between 2020 and 2021. More than 80% of those credits come from Peru, Brazil and Colombia representing 71 megatons of CO2e. [xxxv] Projects certified by Verra represent 70% of those credits, largely under REDD+ forest projects, followed by the Gold Standard at around 15%. A recent analysis found that NbS projects are poised for the most “significant and lasting growth” within voluntary and compliance carbon markets in Latin America.[xxxvi] Even though current prices for carbon credits are in the $3-5 range per tonne of CO2e, NbS has the prospect of attracting higher prices because of the additional benefits through the form of ecosystem services.
Two promising venues to scale NbS through carbon markets in Latin America is through “blue carbon” and “green-grey” projects. Blue carbon projects entail the management of three types of coastal ecosystems: mangroves, saltmarshes, and seagrasses. These three ecosystems are the most carbon-dense on the planet, removing ten times more carbon from the atmosphere than terrestrial forests.[xxxvii],[xxxviii] Green-grey projects combine the conservation and restoration of ecosystems with traditional “grey” infrastructure to enhance climate resilience, including flood mitigation, stormwater management, and water quality.[xxxix]
As carbon markets seek out high-integrity and high-value projects, blue carbon represents a ripe opportunity for Latin American countries to become investment destinations. One example of this is Colombia’s Blue Carbon Cispatá Project, known as “Vida Manglar,” to preserve mangrove forests along the Caribbean coast. This was the first blue carbon credit project approved for a voluntary carbon market, with participation from Apple, Conservation International, and Verra to calculate the carbon content above water, in the roots, and soil.[xl]
The project found that Cispatá Bay’s 27,000-acre mangrove forest would sequester nearly 1 million metric tons of CO2 over a 30-year horizon, verified by Verra’s Verified Carbon Standard and the Climate, Community, & Biodiversity Standard.[xli] This has established a precedent for a new carbon measuring methodology to create scalable blue carbon investment across the region. Further, 92% of the income from carbon credit revenues of this project was invested back into the project itself, a higher percentage than most carbon credit projects. This will fund training and equipment for local communities to assist in monitoring, data collection, and conservation.[xlii]
Colombia’s government is looking to replicate this effort to six other locations along the Caribbean coast while Conservation International is also looking to scale this model by conducting feasibility studies around Latin America including Brazil, Chile, and Mexico.[xliii] Other countries in the region are taking notice, including Belize and the Dominican Republic who are looking to stand up blue carbon projects for coastal wetlands[xliv].
Green-grey projects also present similarly promising opportunities. Roughly half of NbS projects underway in Latin America fall within the green-grey category with the implementation of nature-based solutions alongside or incorporated with traditional infrastructure. One example is an urban drainage system in Mérida, Mexico that includes a bioswale – a vegetated channel that soaks in and filters stormwater runoff.[xlv]
To date, the carbon markets have not been significantly used as a funding vehicle for these types of projects even though infrastructure expenses are expected to skyrocket over the next decade. Projections show the region needs to invest between $179 – 313 billion annually to maintain and build new infrastructure to prepare for the impacts of climate change.[xlvi] Traditional grey infrastructure alone (e.g. dams, seawalls, pipes, water/sewage treatment facilities, etc) would not only make these projects more expensive but may fail to be resilient to climate change.
NbS can help, like natural shoreline stabilization in conjunction with levees and sea walls to buffer storm surges and greening urban areas and homes to cool cities from extreme heat. NbS components incorporated into these infrastructure projects could generate carbon credit revenue which can help finance these expenditures. In addition, the revenues from the existing compliance markets across Latin America could go towards greening infrastructure. This would set off a virtuous cycle of generating even more revenue from carbon markets, while also reducing costs on infrastructure construction and repair.
Predictive studies reveal impressive potential cost-effectiveness by implementing green-grey NbS solutions. For example, forested buffers near roadways at risk of landslides in Colombia would be 16 times more cost effective than repairing damages. Revegetation to reduce siltation in the Panama Canal would be five times more cost-effective than dredging and restoring forests around Rio de Janeiro, Brazil could avoid $79 million in water treatment costs over 30 years and reduce the use of chemical products by as much as 4 million tons.[xlvii]
Section III – Recommendations for Policy Makers
Recommendation #1: Infuse Natural Capital Accounting into Blue Carbon Projects
Blue carbon projects are relative newcomers to the carbon markets compared with land-based sequestration but are expected to have great potential moving forward. There has especially been interest in the tourism and marine transport sectors to purchase blue carbon offsets[xlviii] and Conservation international is planning to lead a global coalition on blue carbon with the Governments of France, Costa Rica, and Colombia, along with, non-profits, multilaterals, and financial institutions like AXA, Bank of America, Climate Asset Management, IUCN, the Voluntary Carbon Markets Integrity Initiative, IOC-Unesco, HSBC, and Verra.[xlix]
However, the international demand for blue carbon projects far outstrips the supply.[l] While Colombia’s Cispatá project has built confidence and demonstrated the value of blue carbon credits, it is one of only five projects launched under approved methodologies as of 2020 and that too with fairly small carbon reductions compared to other NbS projects as per Figure 6. In order for the pipeline of projects to grow, blue carbon credits need to both encompass a wider variety of ecosystems and be robustly verified with the full range of services they provide so the pricing mechanism accurately reflects their benefits.
Figure 6 – Source: McKinsey & Company, 2022
For example, mangroves have been the primary focus of blue carbon endeavors because they have some of the best scientific understanding of carbon flows and restoration techniques. Salt marshes and seagrasses, and even more emerging blue carbon stocks like kelp forests, seaweed farming, and bottom trawling[li], are relatively poorly understood, limiting their investment potential. [lii] Because investors are heavily dependent on reliable quantitative information, the broad range of services from various blue carbon systems needs to be quantified to achieve results-based monetization in carbon markets. Natural capital accounting could be a solution.
Natural capital accounting (NCA) refers to the use of accounting frameworks to measure the stocks and flows of natural capital which are the “renewable and non-renewable natural resources (e.g., plants, animals, air, water, soils, minerals) that combine to provide benefits to people.”[liii] These benefits include the ecosystem services defined in Section I. The premise of NCA is to recognize the assets that nature provides to the economy and to quantify it so that it can be integrated into frameworks like the System of National Accounts which helps define economic variables like GDP.
The System of Environmental-Economic Accounting (SEEA) is considered the international standard for natural capital accounting, adopted by the UN Statistical Commission in 2012, by bringing together “economic and environmental information in an internationally agreed set of standard concepts, definitions, classifications, accounting rules and tables to produce internationally comparable statistics.”[liv]
Their Ecosystem Accounting tool encompasses five accounts, as indicated in Figure 7: Ecosystem Extent, Ecosystem Condition, Ecosystem Services, and Monetary Ecosystem Asset[lv]. These five accounts collectively record the condition of ecosystem assets in terms of specific characteristics to measure overall health at different points of time, with examples[lvi] shown in Figure 8, as well as record the supply of ecosystem services and their consumption by economic units.
Australia leveraged the SEAA framework for a blue carbon bonds project in 2021 in partnership with The Nature Conservancy and HSBC. SEAA metrics were used to identify how NbS on the mid-north New South Wales coast would improve livelihoods, biodiversity and climate change mitigation outcomes, quantifying the economic and environmental contribution of marine ecosystems.[lvii] In the context of carbon markets, leveraging natural capital data can help put a premium price on a carbon credit by linking projects not just to tons of CO2 but to broader ecosystem services making clear all the stakeholders that would benefit from restoration or protection. While SEEA focuses mostly on national level data, because its foundation is geospatial data it can be utilized to any spatial scale which is ideal for blue carbon projects whose scales can differ significantly.
Unfortunately, NCA is lacking in two-thirds of Latin American and Caribbean nations. According to the 2022 SEEA global assessment report, only ten Latin American and Caribbean have compiled at least one SEAA account in the past five years out of 33 nations in the region (Brazil, Colombia, Costa Rica, Dominican Republic, Ecuador, Guatemala, Mexico, Panama, Peru, and Uruguay)[lviii].
Of these, only half are regularly compiling and disseminating NCA data (Brazil, Colombia, Costa Rica, Ecuador, and Mexico). All remaining countries in the region should begin standing up SEAA accounts as mechanisms to incentivize voluntary carbon market investments in blue carbon projects. Those with compliance carbon pricing systems, like Chile and Argentina, would benefit enormously by incorporating NCA as an additional tool to more accurately price domestic carbon removal projects aimed at meeting emission requirements.
Recommendation #2: Regulate Carbon Disclosure of Green-Grey Infrastructure
Of the 156 NbS projects currently underway in Latin America, roughly half involve green-grey infrastructure projects with most reliant on grant funding and are actively seeking new sources of funding and investment. Carbon markets could present themselves as an attractive funding source for green-grey infrastructure. The key challenge is two-fold.[lix] The first being the ability of projects to generate a sufficient quantity of carbon credits that would justify the cost of certification.
The second is the ability of the project developers to be able to parse out the “green” components of the infrastructure from the “grey” parts to calculate how many metric tons of CO2 are being avoided. Here, the traditional challenges with scaling up carbon markets present themselves like permanence (how long will the green infrastructure stay/sequester carbon), accuracy of measurement (can we determine exactly how much CO2 is sequestered), and social safeguards (does this infrastructure project displace or harm local communities).
National and sub-national governments can play an important role in tackling these challenges. First, governments can condition grant-funding on reporting requirements detailing the CO2 impact of the “green” part of the infrastructure. This can provide a stable, reliable source of data for corporates and other investors looking for high quality carbon credits. Second, there is a role for governments to play in providing sovereign guarantees to investors which help make NbS investments more financially viable.[lx] As part of these sovereign guarantees, governments can require project developers to enact social safeguards to ensure the projects aren’t disrupting indigenous populations or vulnerable groups. Third, cities and local municipalities can wield several tax and fee levers on NbS projects in ways that encourage verified data collection and maximizing the “greening” of infrastructure. Fourth, countries with established carbon pricing systems, like Chile, Mexico, Colombia, and Argentina, can require a portion of carbon tax revenue to go towards green-grey projects to reduce costs.
Infrastructure service providers are relatively new to the practice of constructing green-grey infrastructure. Building capacity within their teams to incorporate NbS into traditional infrastructure projects will be critical so that they eventually become routinized in the planning and design of new infrastructure. These firms could explore apprenticeship, fellowship, or rotational programs for academics and non-profit/NGO workers to bring subject matter expertise in conservation, ecology, and restoration to be at the table to maximize the potential of carbon sequestration and ecosystem services for any green-grey infrastructure project. Government policy can play are role here as well by requiring new infrastructure projects to incorporate green components. Peru and Colombia are two such examples, passing national policies requiring utilities to set aside specific funds to incorporate NbS into future projects.[lxi]
Lastly, development banks play an important role in the adoption of NbS practices. Institutions like the Caribbean Development Bank, Inter-American Development Bank, and World Bank have been pioneers in providing lending and technical assistance for bankable green-grey infrastructure projects. In Latin America, development banks are financing roughly 14% of all NbS efforts.[lxii] They can leverage their concessionary capital and project preparation support to ensure green-grey projects rigorously measure and maximize carbon sequestration potential to make them attractive to carbon markets.
Conclusion
With pressure on countries and corporations to meet their net zero goals the market for carbon credits could be worth upward of $50 billion in 2030. This paper explores how carbon markets could more effectively finance nature-based solutions in Latin America. Nature is critical for the functioning of the global economy and its degradation poses severe threats to our ability to combat climate change. By leveraging natural capital accounting and national regulation on infrastructure providers, Latin American countries have an opportunity to channel billions of dollars of resources towards nature-based solutions which restore and protect ecosystem services in the region. Two future areas of research would be unpacking how natural capital accounting systems could seamlessly integrate into carbon credit verification schemes and compiling verified metrics of CO2 sequestration from completed green-grey infrastructure projects underway globally. Successfully implementing these policy tools can help overcome several legacy challenges in carbon markets ranging from accuracy of measurement, permanence, and scale of projects, ultimately unleashing billions in climate investment.
Hou Jones, Xiaoting et. al. (2021). “Nature-based solutions in action: lessons from the frontline”. International Institute for Environment and Development. https://www.iied.org/20451g
China is the world’s largest consumer of energy and emitter of CO2 emissions – more than all developed nations combined (BBC, 2021). As a result, China is under intense pressure to reduce its emissions and achieve its net zero pledge by 2060. To help accomplish this, the Chinese Communist Party (CCP) issued binding directives in its 14th Five-Year Plan for 2021-2025 to shrink carbon emission intensity by 18%, increase forest coverage by 24.1%, and have “good air quality” for 87.5% of the year (Murphy, 2021).
Some argue that China’s authoritarian structure makes these binding directives straightforward because of the central government’s ability to compel businesses and citizens to comply with top-down mandates (Gilley, 2012). I argue that the picture is more complicated – China’s model of “fragmented authoritarianism” (Lieberthal, 1995) presents both political and financial disincentives for local leaders to implement environmental mandates. This paper aims to analyze the nature of these disincentives and provide recommendations for how the central government can overcome them to attain the environmental targets in the latest Five Year Plan and reach net zero by 2060.
Setting the stage: Fragmented authoritarianism and policy implementation in China
While China might appear to have a top-down, hierarchical command-and-control government, fragmentation of authority is actually at the heart of China’s political system (Lieberthal, 1995). Through the lens of government revenues and expenditures, China is the most decentralized country in the world (Wingender, 2018). With 31 provinces, 334 prefecture units, 2,850 county-level administrative units, and more than 40,000 township-level units, these subnational governments have significant autonomy in governing the world’s largest population.
Accordingly, policies that are formulated by the central government are broad aspirations that are largely interpreted and implemented at the discretion of a sprawling network of county and municipal level bureaucracies staffed by “cadres” – CCP members who fulfill a range of civil-service type roles. In particular, Party secretaries and mayors hold significant authority in implementing national directives.
Cadres are expected to rotate to different posts in different regions after a set term. The rotation system was originally designed in the post-Mao reform era as a way to enhance the Party’s monitoring and control of their cadres but has widened its utility as a way of reducing regional administrative disparities, improving training, diffusing policy innovations, and bridging administrative and regional hierarchies (Eaton and Kostka, 2014). This cadre rotation system has unfortunately acted as a roadblock to achieving China’s environmental objectives.
High cadre turnover: Short timelines for cadre rotation result in the prioritization of career advancement with a focus on short-term results and economic growth.
Most cadres and those in government leadership positions are expected to serve for a term of five years before rotating. However, a growing body of evidence shows that very few are serving the full length of their term. One analysis between 2002 and 2011 found that average tenure was 3.3 years and less than 14% stayed beyond 5 years. Another analysis found average tenure among 2,058 municipal mayors was just 2.5 years (Eaton and Kostka, 2014).
The result of these faster rotations is a shifting prioritization of what cadres want to accomplish when they are in the post so that they can get promoted to higher positions. The Cadres Performance Evaluation System (CPES) is the primary institutional mechanism set by the central government to measure performance and incentivize the behavior of cadres. They are consistently evaluated on five key characteristics: morality, capability, diligence, performance, and probity (Ran, 2013).
Some local governments have added specific quantitative targets on top of CPES. In 2007 the Ying Kou Economic and Technological Development Zone (YKETDZ) added six quantitative measurement categories (Ran, 2013):
economic development
social stability
development of education, science and technology, culture, health, and sports
environment protection and population control
public security
adherence to the Party’s ideology
Though environmental protection is included on this list, interviews with government leaders found that it was loosely regulated and considered a “soft target”. For example, failing to reduce sulfur dioxide emissions was not formally punished, nor would receiving that reduction result in political rewards (YKETDZ People’s Government, 2007).
In contrast, the quantitative targets related to economic growth, like GDP growth rate and revenue collection, or social stability, like a reduction in “mass incidents” or “petitions” were considered “hard targets” that had to be met. Failure to meet them could doom promotions and negate any other positive accomplishments in their evaluation (Ran, 2013).
Because of the promotion pressure and selective evaluation incentives from local governments, cadres focus their energies on projects which they expect will advance their careers. These projects have tended to be those that are highly visible, can be quickly delivered, and generate economic growth, like extravagant construction projects (Eaton and Kostka, 2014).
Environmental priorities not only have much longer horizons for the benefits to materialize (e.g. reforestation efforts could take several years to mature), but in some instances, they involve direct trade-offs with hard targets like economic growth or personal enrichment. For example, in the Datong municipality, local leaders ignored national mandates to restructure coal-mining operations to be less environmentally damaging because they received bribes from coal bosses (Eaton and Kostka, 2014). In other circumstances, environmental mandates which call on local governments to “green” their industrial plants impose high costs leading to layoffs and reductions in employment.
Unfortunately, the solution is not as simple as incorporating environmental protection as a hard target. An analysis in the Nantong prefecture found that when environmental goals were set as hard targets in cadre evaluation, many cadres resorted to fabricating statistical data (Ran, 2013). Part of the reason they can get away with this is that the central government doesn’t have an effective way of verifying the data submitted by cadres. For example, the measurement of energy intensity doesn’t have a national standard and local officials can use any method they like (Ran, 2013). As a result, until the achievement of environmental goals more directly results in promotion potential, can be similarly enriching, and whose completion is tamper-proof, local cadres will continue to prioritize other projects which guarantee their career advancement.
Weak bureaucracies with conflicting interests: Local bureaucracies with the most responsibility for implementing environmental mandates have the least authority to do so while also serving conflicting goals.
It is not only cadres who are insufficiently incentivized to carry out environmental edicts, the bureaucratic agencies responsible for implementation at an institutional level are not empowered to do. Typically the local Environmental Protection Bureau should have the highest responsibility and authority for the environment but in reality, it’s restricted by a weak position with its responsibility broken up among more than 10 different actors (Jahiel, 1997; Lo & Tang, 2006). Some of these actors include the Water Resources Bureau, Agriculture Bureau, and the Development and Reform Committee. However, these additional actors are not just advancing environmental objectives, but other goals as well which often come in conflict with each other.
For example, a Water Resources Department should oversee the protection of water resources, but its bureaucratic mandate also includes the development of water resources for hydropower, reservoirs, and dams which are often harmful to the environment (Mertha, 2008). As another example, the Development and Reform Committee is tasked with leading on energy and climate issues, but its primary interest is around economic planning and promoting heavy industry which ends up conflicting with its climate mandate since industry businesses are highly polluting.
Because of this mismatch in the power/responsibility dynamic along with conflicting mandates, fully implementing environmental policy is stymied by bureaucratic institutions themselves which don’t find themselves fully incentivized or empowered to do so.
Lack of financial resources: Local governments are responsible for financing the majority of environmental expenditures without sufficient support from the central government.
In addition to a lack of empowerment and conflicting goals, local bureaucracies often lack the finances to see through ambitious environmental programs. In fact, not implementing environmental programs could result in more money – as was seen in the cadre example.
Funding for local bureaucracies comes from four primary channels: the central government’s budget, the local government’s budget, loans from banks, industry investment, and foreign aid/NGOs (Ran, 2013). One analysis found that among those four sources, the central government provided only 10% of all funding for environmental protection between 2006 to 2010 (People’s Daily, 2011).
Part of the reason is that it’s incredibly cumbersome for local governments to obtain funding. It requires negotiation and paperwork through five administrative levels of government with intermediate actors that provide varying levels of cooperation, often requiring guanxi, or personal relationships and trust with key players in order to advance funding requests.
One example of this happened in the city of Shihezi where the Tianye Company sought funding for a recycling project but was only able to get 0.4 billion RMB from the National Development and Reform Committee after they convinced top leaders from Beijing to visit the company a few times (Ran, 2013). Another project in Shihezi to plant trees to combat desertification wasn’t able to be done during the summer, the best time to plant, because the funding from the central government became too delayed and didn’t arrive on time.
Because of these hurdles, local governments tend to finance the majority of their environmental projects from their own budgets. However, in some instances the financially prudent option is non-implementation. For example, environmental regulations are loosely applied in some areas that rely heavily on heavy industry for economic growth.
In Shihezi, the Tianye chemical plant refused to pay 2 million RMB in pollution fees for two years because they contributed 30% of the local GDP. Local government officials felt that was more important to appease the plant owners for providing jobs and economic growth than punishing them for flouting environmental standards (Ran, 2013). Further, if other industrial businesses came to know that the local officials here were not enforcing environmental fees, then they may be incentivized to relocate their operations there.
Conclusion and Recommendations
To reach net zero by 2060 and attain the environmental targets set out in the latest Five-Year Plan, the Chinese central government has to overcome the implementation gap of environmental policy at the local level. Doing so will require tackling the misincentives for action in the cadre evaluation process, empowering local bureaucracies to prioritize environmental action, and providing financial resources to execute projects. Two ways the central government could do this, include:
Strengthening the weight of environmental protection and five-year tenure durations in the CPES, in addition to establishing national standards for environmental targets with robust measurement, reporting, and verification tools.
In the current CPES methodology, cadres and local governments perceive environmental objectives to be “soft targets” compared to economic objectives while also not being penalized for rotating out of their terms earlier than five years. A re-weighting of the CPES to confer greater career advancement prospects if environmental mandates are met would help cadres and bureaucracies prioritize these tasks over catering to heavy industry and other polluting industries. In addition, by penalizing rotations before the end of 5-year terms in the CPES evaluation, cadres would look more favorably on environmental projects which may have a lengthier time horizon to implement since they are obligated to stay longer (Eaton and Kostka, 2014).
Lastly, given the known challenges of data fabrication by cadres due to loose national standards on environmental metrics, the central government will have to invest substantially in tightening the reporting process. This could include new digital tools or physical hardware that cadres are required to use to measure certain environmental metrics like atmospheric concentration of greenhouse gases, soil moisture content, tree coverage, etc. Establishing national standards and baselines with a consensus methodology and reporting criteria would also help counter efforts by cadres to fabricate information or inflate their accomplishments.
Opening China’s national emissions trading system to foreign investors can boost FDI for local governments to invest in environmental protection and reduce emissions.
In 2013, China launched seven provincial and municipal carbon emissions trading system (ETS) pilots in preparation for the rollout of a nationwide ETS in 2020. China now boasts the world’s largest carbon market – three times bigger than that of the 27-member European Union (Busch, 2022). Unfortunately, the national ETS only covers “onshore covered entities” and foreign investors are not allowed to finance carbon offsets in the ETS-linked voluntary market, which they were allowed to do in the 2013 pilot (Mazzochi et. al., 2022).
The NDRC estimated that over 139 trillion RMB in investment will be needed to reach China’s emissions goals (Zhang and Jialu, 2023). It is virtually impossible for local governments to raise this volume of capital on their own. Allowing access to offshore investors into the carbon market would help immensely in this effort to channel finance towards environmental goals. One study examining the 2013 ETS pilot found a positive correlation between provinces that rolled out the ETS and foreign direct investment in their region (Shao et. al., 2022). Specifically, FDI increased in areas that had tighter environmental regulations and lower energy consumption.
Boosting FDI is a national priority for President Xi. At the Boao Forum in 2018, he announced that China’s door would open “wider and wider” to foreign investment as he sought to make China the top destination for foreign investors (Li, 2019). Liberalizing access to the national carbon market could play a critical role in facilitating increased FDI as well as channeling significant sums of money to local governments who are currently struggling to finance China’s ambitious target of peaking emissions this decade and reaching net zero by 2060.
Gilley, Bruce (2012). “Authoritarian environmentalism and China’s response to climate change.”, Environmental Politics 21(2), 287–307 (cited in Eaton and Kostka, 2014)
Jahiel, A. R. (1997). “The contradictory impact of reform on environmental protection in China”, China Quarterly, (149), pp. 81–103 (cited in Ran, 2013)
Li, Xiaojun (2019). “Regulating China’s Inward FDI: Changes, Challenges, and the Future”, in Jacques deLisle and Avery Goldstein (eds.) To Get Rich Is Glorious: Challenges Facing China’s Economic Reform and Opening at Forty (2019), Washington DC: Brookings Institution Press
Lo, Carlos Wing-Hung & Tang, Shui-Yan (2006). “Institutional reform, economic changes, and local environmental management in China: The case of Guangdong province”, Environmental Politics, 15(2), pp. 190–210. (cited in Ran, 2013)
Mertha, Andrew (2008). “China’s Water Warriors: Citizen Action and Policy Change”, Ithaca, NY, Cornell University Press (cited in Ran, 2013)
People’s Daily (2011). “Shiyiwu Qijian Huanbao Touru Dafu Tigao [The Environmental Protection Investment Jumped during the 11th FYP Period]”, January 14, 2011, edition 16 (cited in Ran, 2013)
Ran, Ran (2013). “Perverse Incentive Structure and Policy Implementation Gap in China’s Local Environmental Politics”, Journal of Environmental Policy & Planning, 15:1, 17-39, DOI: 10.1080/1523908X.2012.752186
YKETDZ People’s Government (2007). “Yingkou Kaifaqu Lingdao Ganbu Zonghe Kaohe Pingjia Zhibiao Tixi [YKETDZ Cadres Comprehensive Evaluation Indicators System]”, Internal document collected in the fieldwork. (cited in Ran, 2013)
Murphy, Ben (2021). “Outline of the People’s Republic of China 14th Five-Year Plan for National Economic and Social Development and Long-Range Objectives for 2035”, Georgetown Center for Security and Emerging Technology (CSET), May 12th, 2021, https://cset.georgetown.edu/wp-content/uploads/t0284_14th_Five_Year_Plan_EN.pdf
Shao, Wei et. al. (2022). “Does the Carbon Emission Trading Policy Promote Foreign Direct Investment?: A Quasi-Experiment From China”. Front. Environ. Sci., 17 January 2022 Sec. Environmental Economics and Management, https://doi.org/10.3389/fenvs.2021.798438
For more than a century, utilities have held a monopoly on generating, transmitting, and delivering electricity to power the American economy. However, the rise of distributed solar power with battery storage systems has fundamentally transformed the electricity system.
One analysis has found that solar plus storage costs will reach grid parity well within the next 20 years.[1] The costs will only further come down as the Inflation Reduction Act and Bipartisan infrastructure law unleash billions of dollars in incentives for consumers to install rooftop solar.[2] Combined with rising electricity prices and improvements in energy efficiency, as indicated in Figure 6, millions of customers will find it cheaper to simply defect from the grid, spelling the end of the utility business model.
The lynchpin of the existing business model is cost-of-service regulation. The way utilities make money is by investing in grid infrastructure like transmission lines and power plants and charging consumers to cover those costs to make a regulated profit margin. As more consumers opt for rooftop solar, fewer customers are paying utilities for their infrastructure investments which causes electricity prices to go up on everyone else to make up for the shortfall. This will only incentivize more consumers to leave, spiraling the trend of grid defections and higher prices for whomever remains connected to the grid.
The utility death spiral is a real and serious threat, with nearly 100 GW of centralized generation expected to be displaced by 2030 and 300 GW by 2050.[3] This will disincentivize the large infrastructure investments needed to ensure universal access to electricity. The same problem was seen in the telecom industry with the demise of landline service and customers opting for wireless plans.[4]
Rather than fighting the transition, utilities need to transform their business away from the cost-of-service model to incentivize rooftop solar customers to remain connected to the grid. Two paths are promising and already being experimented with: platform-service revenues and new value-add services.
Platform service revenues work to leverage the utility’s role as a distribution service provider by charging for services like bundled communication offerings, sharing information across distributed energy resource (DER) providers, or facilitating partnerships with third parties to finance energy efficiency technologies and DERs.[5] New York serves as a case study for an electricity market leading this approach by charging fees for data analysis on electricity use and engineering services for microgrids.[6]
Taking a look at the future, the uptake of DERs and economy-wide electrification will dramatically shift load estimates across the 5-10 year horizon. Utilities can use their platform to charge for services like distribution planning at hourly resolutions and power optimization during changing peaks and multidirectional flows which will be immensely valuable to consumers who stay grid-connected.[7]
New value-add services entails charging customers for expanded system capabilities. For example, Green Mountain Power (GMP) in Vermont offers customers a Tesla Powerwall battery with a bidirectional inverter for $15 a month in exchange for GMP being able to control the battery during peak power usage. In addition, GMP builds electric vehicle charging infrastructure and offers unlimited off-peak charging for residential customers for $29.99 a month. Other states are following with similar programs, like Oregon, Washington, and California allowing utility ownership of energy storage and Massachusetts, New York, New Jersey, and Connecticut implementing microgrid pilots.[8]
Ultimately, utilities will have to innovate their legacy business models in order to remain solvent amidst the DER revolution. Rather than continuing to rely on cost-of-service model, states are pioneering new revenue generating policies like platform-service revenues and value-add service which can create a new role for utilities to act as a market maker on a more competitive distribution network.
[3] Eric O’Shaughnessy and Monisha Shah, “The Demand-Side Opportunity: The Roles of Distributed Solar and Building Energy Systems in a Decarbonized Grid,”, National Renewable Energy Laboratory, September 2021, https://www.nrel.gov/docs/fy21osti/80527.pdf
[4] Richard W. Caperton, “The Electrical Divide: New Energy Technologies and Avoiding an Electric Service Gap”, Center for American Progress, July 2013
Biofuel holds the promise to revolutionize the aviation sector in the face of growing concerns regarding greenhouse gas (GHG) emissions and climate change. Sustainable aviation fuel (SAF) is an umbrella term referring to several biofuel pathways which have been touted to be much cleaner than conventional kerosene jet fuel and can be “dropped in” to existing aircraft engines without having to re-design them. However, SAFs face several challenges in order to significantly decarbonize air travel. What are the primary barriers to scaling up SAF and how can they be overcome?
The aviation sector is considered one of the hardest to decarbonize from a technological and economic standpoint.[i] Aviation generates roughly 2.4% of CO2 emissions from all human activity, and about 12% of all transportation related emissions.[ii] Projections show that the sector could grow by 3.6% annually till 2050 as rising prosperity in the developing world opens up opportunity to air travel for millions. A 2022 analysis from the International Civil Aviation Organization found that SAFs could deliver 55% of the CO2 reductions needed from the sector in order to reach net-zero.[iii] Unless SAFs are able to be commercialized at scale it’s estimated that 12.5% of the remaining carbon budget will be used up by aviation.[iv]
Not all biofuels are created equal. Some are more carbon-intensive than traditional jet fuel, while others have competing uses and inelastic supply.
There are five major feedstocks for biofuels: Vegetable oil and fat, sugar and starch, lignocellulose, algae, and waste and residues. Based on Figure 2, each has unique biological, chemical, and thermal processing pathways to become SAFs which are certified under the ASTM standard to be used on a plane.[v]Lignocellulosic and waste & residue feedstocks provide the highest emission reductions while sugar and starch, algae, and vegetable oil and fat-based feedstocks can emit more GHGs than conventional fuel.[vi]
The aviation industry has often reported that SAFs can save up to 80% of GHGs compared to convention fuel, but this statistic reflects a minority of feedstocks and processing pathways and under certain life-cycle assessment methodologies. One needs to factor in emissions from the manufacturing process as well as land-use changes and indirect land-use changes to access the feedstocks which affect biodiversity, water consumption and pollution. Figure 3 presents the breakdown of the GHG emissions across the five biofuel feedstocks showing that lignocellulosic and waste feedstocks provide the highest emission reductions while vegetable oil and fat-based one can emit several times more GHGs than traditional jet fuel.
The challenge for lignocellulosic and waste & residue feedstocks is that they have competing use in other sectors and are difficult to gain access to in significant quantities. Lignocellulose feedstocks include switchgrass, elephant grass, willow, eucalyptus, and agricultural and forestry resides like wheat chaff, leftover stems and leaves from food crops, and branches from logging. Waste and residue feedstocks include flue gases and municipal solid waste including grass clippings, food scraps, clothes, and newspapers. The challenge with these materials is that they face competition in being used as biomass to generate electricity, biodiesel for road transport, having a variable quantity of supply, and being limited by global land area. For example, lignocellulose can only have limited amount harvested without undue adverse impact on the environment.[vii]
SAFs suffer from high costs which prevent commercialization.
Jet fuel accounts for up to 40% of airlines’ operating costs and production costs of SAFs are nowhere near as commercially competitive with conventual jet fuel. [viii] A literature review from the International Council on Clean Transportation found that lignocellulosic biofuels on average cost $1,000–8,000/tonne, sugar and starch is $800–4,800/tonne and vegetable oil at $1,000–2,000/tonne. By comparison, conventional jet fuel costs $470–860/tonne.
Commercialization is harder to achieve for lignocellulose and waste biofuels because they are more technically complex to transform into SAFs. Lignocellulose has an expensive process of hydrolyzation into simpler sugars or syngas while waste has the highest processing requirement because of the nature of the feedstock. In contrast, vegetable oil and fats, which are the least clean, are less expensive to process because the triglyceride molecules are more similar to the final hydrocarbons in jet fuel.[ix]
Conclusion:
Transitioning the aviation industry towards net-zero solutions is imperative to reach global climate targets. Unfortunately, sustainable aviation fuels represent less than 1% of total global jet fuel used today[x]. In order to scale SAFs, I recommend two mechanisms for policymakers to help bring down the cost of commercialization as well as ensure that the biofuels chosen result in fewer emissions than conventional jet fuel.
Direct project investment and R&D support to biofuel manufacturing as well as leveraging the tax code to incentivize use of lignocellulose and waste fuel feedstocks.
Tax breaks for lignocellulose and waste fuel projects will help lower end-user costs over biomass-fired electricity or bio-diesel for cars, helping increase feedstock availability. Viable, commercial alternatives exist for the power sector through renewable energy and electrification of vehicles, thus using the feedstock for the cleanest SAFs should take precedence.
Investment in R&D will be critical to reducing the cost of the hydrolysis, gasification, and pyrolysis processes to breakdown lignocellulose and waste fuels which resulting in exorbitant costs. The Inflation Reduction Act is a good start by only providing funding to SAFs which have a 50% reduction in lifecycle emissions compared to conventional fuel.[xi]
Implement of a global sustainability standard for the certification of SAFs under the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).
CORSIA represents the first carbon market to offset the impact of GHG emissions in the aviation sector. Instituting a performance requirement through a GHG reduction threshold for SAFs to quality under CORSIA will help ensure that markets incentivize commercialization of biofuels which result in lower GHG emissions over their lifecycle compared to the status quo. Without issuing a GHG limit on SAFs, then the cheapest ones will be invested in (e.g. vegetable oil and fats) which will not result in overall lower emissions.
A certification standard can also include requirements for biofuels not to compete with food stocks, which would help promote “energy crop” feedstocks like the camelina plant which is used as a cover crop when wheat fields are fallow or the jatropha plant which is toxic to humans and animals.[xii]
[viii] Brooks, K. P., Snowden-Swan, L. J., Jones, S. B., Butcher, M. G., Lee, G.-S. J. Anderson, D. M., Frye, J. G, Shonnard, D. (2016). “Chapter 6—Low-carbon aviation fuel through the alcohol to jet pathway”, In Biofuels for Aviation, C. J. Chuck (Ed.), pp. 109–150. London, UK: Academic Press., https://digitalcommons.mtu.edu/michigantech-p/15433/
[ix] Diederichs, G. W., Mandegari, M. A., Farzad, S., & Görgens, J. F. (2016). Techno-economic comparison of biojet fuel production from lignocellulose, vegetable oil and sugar cane juice. Bioresource Technology, 216, 331–339. https://pubmed.ncbi.nlm.nih.gov/27259188/
More than half of the world’s lithium reserves lie in a geographic triangle between northern Argentina, northern Chile, and southern Bolivia.
As the entire world pivots towards the clean energy transition simultaneously, an immense amount of political and financial interest is descending upon the region to develop electric vehicle batteries and energy storage technologies. The coming lithium boom will radically impact these countries in three specific ways.
First, the water-intensive lithium extraction process will endanger indigenous communities in the region through water pollution and scarcity causing political blowback and disruption to projects.
Second, these countries will find themselves caught in a larger great power rivalry between China and the United States as the two jockey for influence to access lithium.
Lastly, the three countries will have to grapple with institutional and regulatory barriers that have prevented an investment-friendly environment for private capital to finance extraction.
Increased lithium extraction will negatively affect water quality and availability for indigenous communities, causing political blowback.
To extract one ton of lithium requires roughly half a million gallons of water.[1] The geological formation of the lithium in South America is in dry salt deserts which require millions of gallons of water containing the metal to be extracted from underground briny lakes to evaporate on the surface.[2] For example, at Sales de Jujuy in Argentina, wells pump more than 2 million gallons of water a day.[3]
The water supply of indigenous communities is both being depleted and contaminated from lithium extraction. For example, the work at Chile’s Salar de Atacama has consumed 65% of the region’s water supply, starving local communities of drinking water and being able to conduct agricultural activities.[4] Indigenous communities around the Salta and Catamarca provinces in Argentina report that lithium operations have contaminated the streams used by people, livestock, and for crop irrigation.[5] These issues will only escalate as more and more lithium mining occurs in the region, already leading to protests and disruption of mining projects.
The energy transition will further entrench China’s role in the clean tech supply chain due to substantial Chinese investment in the Lithium Triangle.
The Chinese government and lithium companies have been aggressively investing in the region. Ganfeng Lithium has become the majority stakeholder in Argentina’s Caucharí-Olaroz site which is expected to be become one of the world’s biggest lithium mines.[6] Tianqi Lithium has become the second-biggest shareholder in SQM, Chile’s largest lithium mining company. Ganfeng and Tianqi Lithium are now two of the three biggest lithium mining companies in the world.[7]
Finally, in February 2023, Bolivia’s state lithium company, Yacimientos de Litio Bolivianos (YLB), signed a $1 billion agreement with Chinese firms CATL, BRUNP, and CMOC for lithium extraction, battery recycling, and metal mining.[8] Additional Chinese investment is expected as the Argentinian government is planning to formally partner with the Chinese government through the Belt and Road Initiative.[9]
The U.S. has good lithium relations with Chile and Argentina, but not Bolivia. Bolivia’s Morales government expelled the U.S. Ambassador and U.S. law enforcement agencies in 2008 and USAID in 2013 for allegedly working against the government.[10],[11] The new Arce government was not invited to the Biden administration’s 2021 Summit for Democracy and tensions remain high.
Lithium triangle countries will struggle to increase output and attract private capital due to a confusing and onerous regulatory and investment environment.
Chile has made it difficult for foreign companies to be able to gain concessions from the government with a high tax scheme. Only two companies, Chilean-owned SQM and American owned Albemarle area allowed to extract lithium in the country, and they must pay a 40% sales tax on revenues collected, disincentivizing investment.[12]
Bolivia has historically been hostile to foreign investors as the government nationalized lithium in 2008 and the Morales government barred foreign companies from having a controlling stake in any lithium extraction,[13]
Argentina lacks a national lithium strategy and has been unable to articulate a broader vision to coordinate amongst various interested stakeholders who would like to invest in the region. Moreso, severe budget constraints have prevented more substantive investments in lithium extraction and coordination with provinces which are small and poor and don’t have the resources to properly regulate operations in order to disincentivize companies from reducing water use or disposal protocols.[14]
Conclusion
Chile, Argentina, and Bolivia will be pivotal for the clean energy transition as global economies seek to re-orient industries around greener technologies. In light of this, several challenges are on the horizon for these countries, including contamination of water resources which disproportionately affect indigenous communities who may disrupt future development plans as well as a hostile private investment environment through burdensome and uncoordinated regulatory frameworks. However, the most pressing challenge for the U.S. is the deep relationships and influence China has in the region. The U.S. could combat this in two ways to ensure future access to a critical raw material.
Share or license direct lithium extraction (DLE) technology which reduces the environmental impact around mining communities. Novel DLE technologies can extract lithium from the brine without evaporation pools and would preserve over 98% of the water used in the process – limiting the effects on nearby indigenous communities. The technology is still nascent and being researched at the U.S. Dept of Energy. [15]
Invest in local innovation, industrialization and workforce training, especially Bolivia. All three countries would like the development of lithium to contribute to economic development in a deeper way than at present, which feels more like resource colonialism. Bolivia in particular wants to build up a high-skill domestic labor force to contribute more higher value-add activities in lithium processing.[16] This presents an opportunity for the Biden administration to invest in capacity building for human capital development in Bolivia, and the region broadly, helping upskill indigenous communities through partnerships with American companies as a way to strengthen bilateral ties.
[2] Rodrigues, Bernardo Salgado, and Raphael Padula. “Lithium Geopolitics in the 21st Century.” Austral: Brazilian Journal of Strategy & International Relations 6.11, https://seer.ufrgs.br/austral/article/view/66687
The American manufacturing industry was once the core of America’s economic strength but has been hollowed out. The share of American workers in the manufacturing sector plummeted from 32% in 1955 to 8% in 2019.[1] Roughly 64,000 manufacturing plants closed between 2000 and 2013, and overall manufacturing productivity and growth rank 10th and 17th around the world, respectively.[2]
Against this backdrop, the passage of the Inflation Reduction Act (IRA) seeks to revive American manufacturing through a “green growth” strategy – leveraging climate change mitigation policy to create economic opportunity by making the U.S. a leading producer of clean energy technologies.[3]
In total, the IRA provides roughly $216 billion in tax incentives for clean energy manufacturing.[4] The three most important provisions are (1) the advanced manufacturing production credit (AMPC) to produce eligible clean tech components in the U.S, (2) an increased production and investment tax credit (PTC and ITC) for energy projects whose equipment meets domestic content requirements, and (3) an electric vehicle credit if a percentage of the battery’s minerals and assembly come from the U.S. or from a country with a free-trade agreement with the U.S.
Unfortunately, these incentives alone will not be able to overcome more than fifty years of industrial policy neglect. While it could certainly carry specific sectors into profitability, like wind energy, the U.S. does not have the production expertise, access to raw materials, or material and labor cost advantage to actualize a renaissance in American manufacturing across the clean tech value chain.
In 2021, roughly 85% of solar photovoltaic (PV) cells, 78% of lithium-ion batteries[5], and 70% of wind turbine powertrains came from China.[6] In comparison, U.S. manufacturers met just 2% of the demand for PV modules, 7% for batteries, and 0% of wind powertrains.[7] Moreso, China processed nearly 90% of the rare earth minerals that are critical to each of these technologies.[8]
This is a race which has already been run, and it took China nearly two decades to run it. From the late 1990s, China began to invest in mining projects, mineral processing, and developing unique in-house engineering capabilities. They have gone beyond optimizing fabrication and assembly to fundamentally changing product designs, enabling mass production and staggeringly low costs.[9]
The U.S. does not have these specialized capabilities or resources at scale and has until 2032 to acquire them before the credits expire. Making matters worse, the U.S. has lost the workforce needed to operationalize these goals. The investments needed for new vocational training and workforce development programs are a small part of the IRA and could take even longer to come to fruition[10].
As a result, the U.S. manufacturing faces a significant labor and material cost disadvantage in the clean tech race. A recent analysis from energy research group Wood Mackenzie finds that meeting the domestic content requirements for an electric vehicle battery cell and utility scale PV project would increase total equipment costs by 13% and 27% respectively.[11] The AMPC will offset that cost by a certain amount before the thresholds become uneconomical. Add to it the bottlenecks and disruptions in today’s supply chain, the incentive structures have the potential to unravel completely.
The one area where the IRA could immediately make U.S. manufacturing competitive is in wind energy. Major components like turbine nacelles, steel towers, and monopiles face significant shipping costs and tariffs – enough that the AMPC and PTC can bring domestic manufacturing below simple cost parity.[12] Building on this, American manufacturing could find its footing again within the clean energy supply chain, provided that a trained workforce comes available.
Although the IRA represents a serious attempt to get back in the game, it could take up to a decade to catch up to China in solar, EV batteries, and minerals – at which point dangerous climate tipping points may have already crossed. Absent transformational changes in American workforce capabilities and construction timelines, the IRA’s manufacturing renaissance may be too little too late.
[3]John Zysman and Mark Huberty, “Can Green Sustain Growth? From the Religion to the Reality of Sustainable Prosperity”, Stanford University Press, 2013. Page 7. https://www.jstor.org/stable/j.ctvqr1czp
Climate change is an existential threat to the planet. In the summer of 2021, one in three Americans experienced a climate disaster – whether from a heatwave, flash flood, wildfire, or drought[1]. Globally, more than 85% of the world’s population and four-fifths of the world’s landmass has suffered from extreme weather events linked to human-induced warming[2]. Tackling this problem requires significant, and rapid, international cooperation. The highlight of such cooperation to date has been the 2015 Paris Climate Agreement.
Adopted by 195 countries on December 12th, 2015, the Paris Agreement marks the first truly global effort to rein in greenhouse gas (GHG) emissions, making it the most important international instrument in the fight against climate change. The primary goals of the agreement are to (1) “hold the increase in the global average temperature to well below 2°C above pre-industrial levels and limit the temperature increase to 1.5°C”, (2) “adapt to the adverse impacts of climate change and foster climate resilience”, and (3) make “finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development”.[3] Since the Paris Agreement came into force in November 2016, national policy, international business, and financial flows into technology and foreign investments are informed by these three goals. At the COP27 U.N. climate summit in Egypt last month, the key discussions primarily surrounded how nations are building upon their commitments in the Paris Agreement.[4]
How did the world arrive at such a landmark agreement? The history of climate negotiations has been littered with failures leading up to this moment, including the unwillingness of the U.S. to ratify the Kyoto Protocol in the early 2000s, and the collapse of the Copenhagen climate summit in 2009.[5] Nations have been uniquely reluctant to cooperate on climate change due to concerns of hindering their own economic development, perceived long time horizon to take action, free riders who incur benefits of other nations cutting emissions, and divides between developed and developing nations on who is obligated to do more/less.[6]
The surprise success at Paris can be attributed to the two most powerful nations, and largest carbon dioxide emitters, coming together – the United States and China. Indeed, many analysts and insiders have argued Paris was only possible because of a bilateral agreement between the U.S. and China, without which no global, multilateral deal would have been able to go through.[7] This makes the Paris Agreement an ideal setting to test competing theories of international relations that can explain the behavior of states. Though the two nations are locked in a great power rivalry, they were able to compromise on a global climate deal. Understanding how and why great power cooperation is possible in the realm of climate change can help inform the conditions of success for future climate negotiations and other transnational challenges. The two theories I will test are Kenneth Waltz’s defensive realism and G. John Ikenberry’s liberalism. I will outline each theory’s assumptions, causal logic, and observable implications to predict how and why the U.S. and China agreed to form the Paris Agreement and the kind of mechanism we should expect to see in the evidence if the theory is correct.
Waltz’s Defensive Realism: Theory and Observable Implications
In Waltz’s defensive realist worldview, states are the main actors in a world whose current structure is that of anarchy. This anarchy encourages states to adopt moderate and restrained strategies in a quest to ensure their survival, not to maximize their own power. This is because attempts to maximize power would cause other states to be insecure and form counter-alliances against a rising threat.[8] Moreso, Waltz assumes that nation-states will always seek maintain their self-interests regardless of the consequences of their actions on other states. For this reason, realists are skeptical of inter-state cooperation because one state often seeks to gain more than the other. This is known as the issue of relative gains, making states wary of cooperation for fear that they will end up relatively weaker than those they are cooperating with.[9] Waltz, however, doesn’t see the challenge of relative gains hampering cooperation in all instances, arguing that states will likely cooperate when the gains are large, and a state faces an external security threat it cannot manage on its own.[10] For defensive realists, cooperation can also help manage the security dilemma – where an increase in one state’s security causes another state to perceive it as an aggressive act which decreases their security and answers in kind, causing a vicious spiral.[11] This security dilemma draws its roots in states being unsure of one another’s intentions, which can be resolved through increased cooperation and collaboration.
Under a defensive realist lens, what could we expect to see in Chinese and American behavior leading up to and at the Paris Climate summit? As great powers, we could expect that both perceive climate change as a potential threat to their survival and as a result they are coming together out of a desire to maximize their survival, not their power. Statements or declarations framing climate change as a security threat will help confirm this. Given the scale of the challenge, they may also decide that they need to rise above their self-interests and fear of relative gains to counterbalance against the rising threat of climate change through cooperation. Evidence of this could be found in looking at the structure of the Paris Agreement to see if the United States or China allows one or the other to achieve relative gains in order for higher absolute gains through global collaboration. Lastly, to avoid a security dilemma they may engage in a number of consultations to better understand each other’s intentions and expectations leading up to the Paris summit. Here, I will look to see how frequently and to what extent the U.S. and China engaged in diplomatic talks to hash out specific positions before the summit.
Waltz’s Defensive Realism: Testing Hypotheses and Findings
First,China and America should both perceive climate change as a threat to their security prompting them to take action to maximize their chance of survival. Here, the evidence is overwhelming. At the 2015 State of the Union, President Obama declared that “No challenge poses a greater threat to future generations than climate change”[12]. A few months later in a speech to the U.S. Coast Guard, Obama went further, saying, “climate change constitutes a serious threat to global security, an immediate risk to our national security. And make no mistake, it will impact how our military defends our country.”[13]China framed the challenge in similarly dire ways. In a 900-page scientific assessment released in the weeks before the Paris Summit, China found that climate change will trigger international disputes within their borders due to conflicts over water resources and transnational migration. It even found that potentially every piece of infrastructure built on China’s coast is vulnerable.[14] China’s top weather scientist said climate change will have “huge impact” and China would emphasize “climate security.”[15]
Second, China and the U.S. should have sought to counterbalance against the rising, external threat of climate change through cooperation – conceding relative gains in the name of combatting a more formidable challenge that neither can solve alone. One example of this was the Paris Agreement stipulation that developed countries would contribute $100 billion annually to help vulnerable countries adapt and mitigate against climate change.[16] This decision, agreed to by the U.S., demonstrates a willingness by the U.S. concede financial gains in exchange for climate action. The strongest evidence, though, was China willing to give up, partially, the “common, but differentiated” responsibilities framework that had guided the last 20 years of climate negotiations. In 1995, the world gathered in Berlin to operationalize the United Nations Framework Convention on Climate Change (UNFCCC). Here, they arrived at the “Berlin Mandate” which declared that any emission cuts would primarily be borne by developed countries – like the U.S. and E.U. – excusing developing countries, like China, from any emission reduction targets.[17] In the years that followed, developing countries held strongly to this framework out of self-interest because they were highly suspicious of climate negotiations being used as a tool of developed countries to stymie their economic growth and development.[18]
Before the Paris Agreement, China still echoed its belief that “common, but differentiated responsibilities” should be the organizing principle of climate negotiations. Here, China was certainly acting in its own self-interests even though it had already become the world’s largest CO2 emitter by 2007. [19] However, China agreed to make emission cuts of its own for the first time in Paris – including peaking its CO2 emissions by 2030, increasing non-fossil fuels in its energy mix to 20%, reforesting 4.5 billion cubic meters of land, and lowering its CO2 emissions per unit of GDP by 60 to 65 percent.[20] This could reflect a decision calculus of defensive realism – China recognized the size and scope of an emerging threat and decided to forgo its self-interest of unhampered economic development, look past the relative gains that emission cuts would give its rivals, and collaborate with the developed countries to slow the impacts of climate change.
Third, China and the U.S. should have sought to limit the security dilemma by better understanding each other’s perspectives and intentions before Paris. There was ample evidence of the two nations carving out climate as a space to make common progress even while the two jostled for military and economic influence in the Indo-Pacific. For example, in 2013 the two established the U.S.-China Climate Change Working Group to cooperate on topics like energy efficiency, heavy industries, and sharing emissions data. [21] Xi and Obama both met two months before the Paris Summit hashing out a number of climate positions and declaring jointly that both nations would “strengthen bilateral coordination and cooperation…to promote sustainable development and the transition to green, low-carbon, and climate-resilient economies.”[22]
Ikenberry’s Liberalism: Theory and Observable Implications
In opposition to defensive realism, G. John Ikenberry defines the world order not as an anarchic fight for survival and power, but as a set of “governing arrangements between states, including its fundamental rules, principles, and institutions” whereby institutional arrangements create a political process which ensures that various states in the order remain “linked and engaged with each other.”[23] Liberalism’s core beliefs are that the spread of democracy and economic interdependence through international institutions and arrangements will strengthen peace. Its theorists see a “slow but inexorable journey away from the anarchic world” as commerce and institutions bind nations together.[24] What are the characteristics of these institutions and the states that form them? Ikenberry argues that a leading state will want to create a constitutional settlement whereby they get weaker states to agree to be bound to a “set of rules and institutions” now and in the future. [25] In return, the leading power also offers to limit its own autonomy and arbitrary exercise of power. From the vantage point of the weaker states, they need assurances that the leading state will actually abide by its commitments and is credibly restrained, otherwise they will balance against them.[26]
In order for both sides to maximally gain this assurance, Ikenberry suggests a “binding institutional settlement” that locks in countries within an institution. The highest form of this is when institutional agreements are formally ratified as treaties. Ikenberry argues that treaties contain the authority and force of legal agreements and embed them “in a wider legal and political framework that reinforces the likelihood that it will have some continuing force as state policy.”[27] Ikenberry goes on to suggest that leading states have more incentives to build the world order around binding institutions, and in particular democracies are better able and more willing to create them because of their openness and decentralization.[28]
Under the lens of Ikenberry’s liberalism, the most significant observational implication we should expect is the United States as the leading state and China as the secondary state to come to Paris looking to create a binding institutional agreement to tackle climate change. I will look for evidence whereby the Paris Agreement was structured such that both countries would become locked into a set rules that endures beyond the existing power dynamic between the two of them, and where the United States gives up some freedom as the leading state in exchange for China coming on board. We should expect the United States as a democratic leading state to advocate for a treaty-based architecture with the force of legal authority to create a maximally “sticky” institution to shape and constrain state action from its rival well into the future.
Ikenberry’s Liberalism: Testing Hypotheses and Findings
In reality, U.S. did not come into Paris seeking to arrive at a binding international climate treaty structure. Instead, the U.S. advocated for a voluntary-based approach where countries would be able to set their own emission reduction goals, called Nationally Determined Contributions (NDC), which are submitted to the UNFCCC.[29] There is no legally binding mechanism to stick to those goals, instead reputational and peer pressure is exerted for countries to meet and “ratchet up” its targets over time.[30] The Paris Agreement itself has little legal enforcement as it does not impose any fees for penalties for violations of its terms and there is no governing body with authority to enforce compliance.[31] But as a creative workaround, negotiators made the need to issue an NDC as legally binding but did not impose a legal obligation to meet it. Some argue this hybrid structure is precisely why 195 countries joined.[32]
The structure of the Paris Agreement hardly follows Ikenberry’s prescription, particularly for a leading state that is a democracy. In fact, the U.S. specifically advocated this structure because it would not require Congressional approval since the U.S. was not to be held legally accountable for any specific targets. The Paris Agreement’s voluntary structure seems to fail Ikenberry’s position that the U.S. would want to bind its nearest peer rival, China, into an agreement that would ensure its compliance and action in the future, rather focusing on limiting the constraints to its own self-interests while still advancing climate action.
Conclusion
After examining the formation of the Paris Agreement through the lens of Kenneth Waltz’s defensive realism and G. John Ikenberry’s liberalism, I find that defensive realism has a stronger explanatory force for how the U.S. and China ultimately came to the table. Both recognized that climate change was a security threat to its position in the system and felt compelled to put aside their self-interest and fear of relative gains to balance against the threat. The scholarly implications are more damning for Ikenberry’s liberalism which could not explain why the U.S. did not seek to create a legally binding structure to credibly restrain either itself or China. In fact, I would argue that constructivism could better explain the treaty structure since meeting the Paris goals is based on peer pressure, values, and norms motivating climate action.[33]
The policy implications are that further climate action remains possible as long as the security threat remains, and the great powers in the system have a forum to collaborate and come to an understanding to take action. The era of binding international agreements for climate are seemingly over and liberalist approaches will not define the negotiations in the near-to-medium term. This is an avenue of future research to understand under what conditions the U.S. and China might be willing to explore binding commitments. A limitation of this research is that it only looks at publicly available documents whereas interviews with key negotiators could reveal what dimensions of the climate issue could be pressing enough to push the great powers into a legally binding architecture that enhances the durability of the Paris agreement.
[9] Robert Powell, “Absolute and Relative Gains in International Relations Theory,” The American Political Science Review, Vol. 85, No. 4 (Dec., 1991), pp. 1303-132, https://www.jstor.org/stable/1963947
[11] Robert Jervis, “Realism, Neoliberalism, and Cooperation: Understanding the Debate,” International Security, Vol. 24, No. 1 (Summer, 1999), pp. 42-63, https://www.jstor.org/stable/2539347
[23] G. John Ikenberry, “After Victory: Institutions, Strategic Restraint, and the Rebuilding of Order After Major Wars”, Princeton University Press, 2001. https://www.jstor.org/stable/j.ctv3znx0v
[33] John Boli and George Thomas, “Constructing World Culture: International Non-Governmental Organizations Since 1875, Stanford University Press, 1999, https://catalogue.nla.gov.au/Record/1308948
On March 11th, 2011, the largest earthquake in Japan’s history set off a tsunami which breached the Fukushima Daiichi nuclear power plant. The flooding destroyed the plant’s power generators preventing cool water from cycling to the hot nuclear core. Fearing a meltdown, Japan’s prime minister declared a nuclear emergency and ordered the evacuation of 150,000 residents living within a few mile radius.[1]
Nearly 6,000 miles away, Chancellor Angela Merkel watched on in horror. Only three days after the Fukushima incident, on March 14th, 2011, she made the decision to set Germany on the path to become atomfrei – non-nuclear.[2] At the time, nuclear power supplied nearly a quarter of Germany’s electricity.[3]
The legacy of Merkel’s decision to phase out Germany’s nuclear power fleet casts a long shadow on Europe’s largest economy today. The German’s are in the midst of an energy crisis as Russian gas flows have been cut off raising electricity prices by 60% from 2020[4], prompting industrial slowdowns, layoffs, and nationwide economic contraction. Making matters worse, Germany’s 2045 net-zero pledge is in jeopardy as greenhouse gas emissions have increased nearly 5%, the most in 30 years[5], due to the increased use of coal to fill the energy gap.[6]
More than 10 years later, this consequential decision is ripe for analysis. Did Merkel act too abruptly without sufficiently considering the pros and cons, or did she make the right decision with the information she had at the time? The process of coming to a decision on the nuclear phaseout reveals a number of strengths and weaknesses about Merkel as a leader and the range of leadership styles she employed.
Strengths of the Decision-Making Process
Leveraging Expert Power
The first strength was that Merkel leaned in on a skills-based leadership approach because she had a Ph.D. in physics.[7] Unlike her contemporaries, like Barack Obama, David Cameron, and Nicolas Sarkozy, who had backgrounds primarily in law, she was an actual scientist who wrote her dissertation on quantum chemistry and was thus able to understand and speak the technical language around nuclear power. Recently, she said, “you know from me that with my training as a physicist, I of course apportion a great deal of weight to academic advice and use it myself.” [8]
She was able to exercise her credentials as a form of “expert power” where her decision on weighing the safety of nuclear power had more credibility. Others in the government deferred to her expert power with Martin Faulstich, chairman of the German Advisory Council on the Environment, saying at the time, “As a scientist, Merkel understood climate change and the dangers of nuclear power.”[9] A prominent journalist covering her at the time, noted “Her years of research instilled in her the conviction that she has a very good sense of how likely events are, not only in physics but also in politics.”[10]
Being Flexible in Policies and Beliefs
The second strength was that she decided to pursue a policy that had popular support even though it meant flip-flopping on her and her party’s previous support of nuclear power – this underscored the seriousness and gravity of the issue that Fukushima raised. The German anti-nuclear movement has existed for decades beginning in the 1970s. It gained broader public support following the Chernobyl meltdown in 1986 resulting in a “nuclear consensus” with Germany’s large utilities that the country’s nuclear power stations would not operate beyond 32 years, leading to a full phaseout by 2022.[11]
When Merkel’s party, the Christian Democratic Union, regained power in 2009 she helped push through a reversal of the nuclear phaseout, extending the operating life of Germany’s 17 nuclear power plants for an average of 12 years. This was a deeply unpopular decision with the public resulting in tens of thousands taking to the streets in nationwide protests in the fall of 2010. A survey from the newspaper Die Zeit at the time found that nearly 50% of the population was against any extension of Germany’s nuclear power plants. Just a few months later, Fukushima unfolded, prompting Merkel to turn her back on nuclear saying, ““Fukushima changed my attitude towards nuclear energy.”[12]
While this was portrayed as a U-turn that was done by Merkel to shift to wherever the prevailing political winds were, those close to her describe the decision as closer to a genuine “awakening”.[13] In contrast to her carefully calculated response to the Eurozone crisis, she demonstrated little hesitation in reversing her previous position from just a few months ago and taking on her party and the powerful utility industry. This displayed an acute sense of self-awareness and self-regulation not to be locked into an ideological or policy position, but to be open to change and recognize the moods, emotions, and drives of the nation around her in the moment.
Visionary Leadership
The third strength was demonstrating transformational leadership by articulating a vision for a sustainable Germany that would become the leader in renewable energy to replace the need for nuclear power. “We want to end the use of nuclear energy and reach the age of renewable energy as fast as possible,” Merkel said as she announced the nuclear moratorium.[14] To do so, Merkel called upon to Germans to lead an Energiewende, an “energy turn” or “energy transition”, through a long-term societal and economic transformation to create a climate-neutral energy system by 2045.[15] She laid out a bold vision with an ambitious series of targets to double the share of renewable energy from ~16%[16] at the time to 35% of electricity generation by 2020, 50% in 2030, 65% in 2040, and more than 80% by 2050.[17]
Merkel seized the national fear around nuclear power to inspire the nation to become a renewable energy powerhouse instead, thus staking her credibility on a multi-decade energy transition. In rallying her supporters, she proclaimed, “If we succeed, [the Energiewende] – and I’m convinced of it – will become another German export hit. And I’m also convinced that if any country can succeed with this Energiewende, then it’s Germany.”[18]
Weaknesses of the Decision-Making Process
Insular Process Without Sufficiently Consulting Key Experts
Merkel’s decision-making process was not without its flaws. The biggest weakness was an insular decision-making team that didn’t involve key experts. As a result, a number of faulty assumptions were made about the vulnerability of German nuclear power plants. During the pivotal days after the Fukushima incident, it was reported that Merkel “reached the momentous decision to phase out nuclear power by 2022 after discussing it one night over red wine with her husband, Joachim Sauer, a physicist and university professor, at their apartment in central Berlin.”[19]
Coming to such a serious decision over just consultations with one’s spouse hardly seems like the ideal process. Indeed, as a result some erroneous assumptions were made about the true risk that Germany’s nuclear power plants posed. Merkel and her party were supportive of nuclear power in the wake of Chernobyl because they believed the nuclear safety, transparency, and technology standards in the Soviet Union were poor – vulnerabilities that German safety standards and technologies would not succumb to.[20] Fukushima changed that perception. Merkel remarked, “we couldn’t help but take notice that, even in a technologically advanced country like Japan, the risks of nuclear energy cannot be securely controlled.”[21]
However, this was a faulty assumption – Japan did in fact did have lower nuclear safety standards. For example, Japan’s nuclear emergency planners were relying on a century-old plan for how to prevent flooding in response to an earthquake or tsunami. By comparison, German nuclear plants were designed to withstand 10,000-year floods.[22] Merkel’s rationale that if a nuclear accident can happen in Japan, it could also happen in Germany was too simplistic. As one observer noted, “had she consulted her own experts, her concerns could easily have been dispelled.”[23]
Interestingly, it appears Merkel did convene some experts after her initial announcement. After announcing the three-month moratorium on extending the life of ten of Germany’s nuclear plants, she ordered a safety check of all existing nuclear plants and established the Reactor Safety Commission to advise the government on the technical and operational safety of the nuclear fleet in light of what was seen in Fukushima.
The Reactor Safety Commission report was issued in May 2011 and concluded that the safety standards in Germany were quite high, but the seven oldest plants were not designed to withstand a plane crash. This ended up becoming the justification for shutting down the oldest reactors. In July 2011, the Bundestag, Germany’s federal parliament, took up Merkel’s proposal and used the commission’s report to vote overwhelmingly to shut down all of Germany’s nuclear plants by 2022.[24]
Given the high nuclear safety standards and relatively unlikeliness of a 9/11-style attack on nuclear plants, why move forward with the phaseout? This leads to the second major weakness of Merkel’s decision-making process – potentially over-emphasizing the political dynamics of the nuclear phaseout compared to longer term economic, climate, and security-related implications.
Prioritizing Domestic Politics over Economics and Energy Security
At the time that Fukushima happened, it coincided with a critically important campaign period in the bell-weather state of Baden-Württemberg which was highly influential to national German politics. Merkel’s party had been in power there for nearly 60 years and was under threat by the Green Party, which was staunchly anti-nuclear. As she went to go campaign there in March, she was greeted by throngs of anti-nuclear protestors chanting “Shut them down!”.[25] A poll released by news channel N-TV at the time showed that 88% of Germans wanted the nuclear plants to shut sooner rather than later.[26]
Although it is difficult to know how much politics played a role in her final decision, she was undoubtedly sensitive to the implications. That same sensitivity, however, did not seem to be granted to the other stakeholders that would be impacted – including German industries, utilities, and national security advisors.
Germany is one of the world’s largest producers of cars, chemicals, and heavy machinery, requiring a stable and continuous flow of electricity. Pulling the plug on a quarter of electricity generation was met with heavy criticism from the Federal Association or German Industry, known as BDI. It’s president Hans-Peter Keitel wrote a letter to Merkel warning her about the consequences this would have for German industrial businesses which drove two-thirds of the German economy.[27] Germany’s four major utilities, E.ON, RWE, Vatenfall, and enBW, issued similar warnings – arguing that nuclear energy was a critical part of a stable electricity supply and it would be cheaper and cleaner than dirtier alternatives which would inevitably fill the gap.[28]
Lastly, Merkel turned a blind eye to the geopolitical implications of the nuclear phaseout. At time of the decision, Germany was Europe’s second largest importer of Russian gas, which provided almost 40% of all of Germany’s natural gas.[29] The day after the Bundestag formalized Merkel’s nuclear phase out, German Economy Minister Philipp Roesler went to Russia to discuss their energy relationship and gas exports.
Merkel was warned by her national security advisors that the nuclear phaseout would result in Germany becoming more dependent on Russian natural gas.[30] Analysts and officials also forebode that the phaseout could embolden Russia and “spell trouble in the long run” because of Germany’s reliance on Russian energy. This was already an explicit calculation on the Russian side. In summer of 2011, Russian President Dmitry Medvedev was reportedly “looking to secure closer access to consumers in Germany…after Berlin’s recent announcement that it would phase out of nuclear power by 2022 increased its need for alternatives.”[31]
Decision Outcomes
Eleven years since Merkel’s decision, how has the nuclear phaseout fared for both its detractors and supporters?
Renewable energy has grown exponentially in the German energy mix and is on track to reach Merkel’s stated goal. Germany generated around 120 terawatt hours (TWh) of renewable power in 2011, going up to 238 TWh in 2021.[32] As a result, renewable power has gone from around 16% of total German power generation to around 40% today – the goal was 35% by 2020 and 50% by 2050.
However, the growth in renewables has not fully closed the gap left by nuclear. In turn, Germany has ramped up its coal production to provide the baseload generation that nuclear power previously did. At least 20 coal plants have been brought back online or had their lifetimes extended.[33] The result has been an increase in annual CO2 emissions by 36 megatons, with an estimated 1,000 additional deaths from air pollution. [34] This has put Merkel’s 2030 emissions reduction target out of reach until potentially 2046.[35]
Along with the increase in emissions, the political savviness of Merkel’s decision has not aged well. German perceptions of the Energiewende are much less positive now than at the time. Today, nearly 82% of Germans believe the country needs to either delay closure of their remaining nuclear plants or they should be used in the long term – virtually a 180-degree reversal from the sentiment in 2011.[36]
This could be attributed to the fact that electricity prices have skyrocketed by an average of 60% which is driving inflation to nearly 10% year over year.[37] Energy costs for one German factory are expected to go up by 600% next year.[38] As a result, Germany is in fact keeping two of its three last nuclear plants on a “standby” status until April 2023 rather than completing the closure by the end of 2022 like Merkel had pledged.[39]
The decision to extend the nuclear plants has its roots in a fear that Merkel’s foreign policy advisors had back in 2011 – that Russia would not be a reliable energy partner. Indeed, since the invasion of Ukraine has Russia has throttled gas flows through the Nord Stream 1 pipeline down to 20% of its capacity[40], including completely halting gas flows for supposed “maintenance purposes”[41]. Wholesale gas prices in Germany have shot up 400%.[42]
Ultimately, Merkel’s nuclear phaseout achieved some of its goals, but largely ended up proving its detractors correct. While renewable energy has scaled impressively, overall Germany’s energy security and environmental footprint has deteriorated. The COVID-19 pandemic followed by Russia’s invasion of Ukraine have acted as twin shocks to the German economy and energy prices which have resulted in Germans seeking to extend the few nuclear plants that have yet to go offline and ultimately popular opinion reverting to support of nuclear power, regardless of any perceived risks.
Recommendations
In re-casting of Angela Merkel’s consequential decision to phase out Germany’s nuclear fleet, there are several ways the decision could have been more effective and executed more strategically. Here, I define a strategic decision as one that would have addressed the concerns around nuclear safety while also strengthening Germany’s economic and energy security. A more effective decision I define as one with a more robust decision-making process that better reflects the expert consensus on nuclear power along with the will of the people.
1. To make a more effective decision, Angela Merkel should have engaged in a more robust, and drawn-out consultative process with key nuclear power experts, energy industry leaders, foreign policy staff, and the Christian Democratic Union party leadership.
From the publicly available reporting, it appears as though Merkel was convinced to backtrack on nuclear while watching footage from Fukushima and ultimately made the final decision over dinner with her husband. The fact that the decision of this magnitude was made merely three days after Fukushima, while it was still occurring and all the details had not fully come out, and with her husband who was not a government employee, reflects a deficient consultation process with key experts in the relevant domain areas.
Putting ourselves in Merkel’s shoes on March 11th, 2011, as Fukushima was unfolding, a more effective approach would be to start from a standpoint of whether any action needed to be taken at all. Determining this answer would involve immediate engagement with the Federal Ministry for Environment, Nature Conservation and Nuclear Safety (known as BMUV). It appears that Merkel only went to BMUV and the Reactor Safety Commission after the initial moratorium was announced which effectively set the political decision in motion. As was discussed earlier, there was a vast difference between Japanese and German nuclear safety standards and there were few if any parallels between what happened in Japan and what could happen in Germany – a fact which Merkel could have found out before announcing the moratorium if she had consulted with them.
If she was still resolved to move forward, she should have convened a Nuclear Transition Council with a six-month mandate to come to a decision on the scope and timeline of a nuclear phaseout. This council would be represented by key energy industry leaders including the four largest utilities – E.ON, RWE, Vatenfall, and enBW – as well as national security staff focused on energy security and Russia, and her political party’s (Christian Democratic Union) campaign arm, equivalent to our DNC or RNC. This council would have been able to provide a holistic perspective on how a nuclear phase out would affect electricity prices, CO2 emissions, the relationship with Russia, and political ramifications. By taking an integrated, expert-driven approach, Merkel would have avoided blindsiding any particular constituency and would more likely execute a policy that satisfied a broader swath of affected stakeholders.
Critics may argue that Merkel did not have time to convene such a council, or that she did consult with these experts at the time. However, it was clear from the timeline that the thrust of the decision was made between March 11th and March 14th – three days was hardly enough time for an in-depth analysis of the situation on the ground in Japan and the impact of phasing out a quarter of the electricity supply in Germany forever. In addition, Merkel reportedly “sidelined foreign policy and security experts who warned her against seeing Russia as a reliable partner in trade” and moved forward with the phaseout.[43] To suggest that she did not have time to engage in this process would presume that she made the decision with a political clock in mind, in particular the Baden-Württemberg elections at the end of March. If this were the case and Merkel did not have six months to let this consultative dialogue play out, then recommendation number two could have let her make a more strategic play.
2. To make a more strategic decision, Angela Merkel should have sought to bolster the safety of Germany’s oldest nuclear plants while still advocating for Energiewende – the energy transition – to create an alternate German political economy which shed dependence on Russian energy.
The most strategic outcome for Merkel would have been one where she could present herself as genuinely responding to the concerns of German citizens regarding nuclear safety while putting the country on a path to a clean energy future that would also be independent of Russian energy supplies. How could she have done this?
First, in response to Fukushima, Merkel should have immediately ordered a review of the nuclear safety status, codes, and regulations for all seventeen of Germany’s nuclear reactors and order retrofitting or retiring of the oldest/most vulnerable reactors based on that review. This would have given her the flexibility to partially phase out nuclear power, or not at all, based on an evidenced-based approach that brought in the relevant experts while also appearing sensitive to German consternation about the safety of nuclear power – a message that could have also played well politically.
Second, in tandem with this decision, Merkel should have announced the Energiewende as geopolitical move, not one to compensate the loss of nuclear power. Making Germany a global powerhouse in the renewable power industry would strengthen its foreign policy. Rather than give an opening to Russia to further tighten their screws on German energy dependence, it would have forced them on a backfoot to look for alternative markets as German baseload power would be sustained by nuclear in the short to medium term. Although this could not have completely prevented the impacts of COVID-19, it could possibly have deterred the Russian invasion of Ukraine which was emboldened by their belief that Europe would not mount a coordinated response, in part because of German reliance on Russian energy.[44]
Ultimately, Chancellor Angela Merkel’s tenure will forever be marked by her decision to phase out German nuclear power. While there were certainly admirable traits in her courage and political savviness to make such a consequential decision, I believe it will be remembered as a hastily conceived and executed plan without the right experts or political constituencies to make Germany’s energy transformation successful in the long term. Indeed, as Germans were told by their former finance minister Wolfgang Schäuble in October to “stop whining” and “just put on a sweater, or maybe a second sweater” in the event of energy blackouts this winter[45] – one can’t help but wonder whether Merkel’s unplugging of the country’s nuclear power is responsible for putting them in this situation.
Chetan Hebbale 