Idea: CDM. No, not the old one (Clean Development Mechanism) but a new one, Carbon Dividend Matching.

First a brief explanation. The head of COP28 had a line on climate finance yesterday that hits at the raisson d’etre of this idea. Dr. Al Jaber said, “The Global Climate Finance Centre will support the delivery of the Declaration by driving fit-for-purpose financial policies and project pipelines to unlock funds at unprecedented scale.”

What always gets me in these kinds of statements is “project pipelines” (full disclosure, I advise Argonne National Lab on Net Zero World, but this Substack is wholly my own and not theirs).

As a finance person, I observe the liquidity in real asset markets like solar panels and wind turbines. In emerging markets, gigawatt-size reverse auctions are attracting aggressive bids (sometimes too aggressive). Per IEA this week, “annual spending on solar PV and wind projects has risen by more than USD 300 billion in the last five years, and now accounts for one-third of the total USD 1.8 trillion that we expect to go to clean energy investments in 2023.” Energy transition is not easy, of course, but developing countries can add PV or wind capacity quite easily. Yet they still need financial support (concessionary debt, blended finance, and the like).

The problem I see is that this support is typically asset-based. Hence “project pipelines”. Rich countries and MDBs very often analyze and approve support on a project-by-project basis. This is slow. Really slow. Why is this still done when gigawatt size utility-scale capacity can be quickly initiated by reverse auction? EMDEs need auction pipelines, not project pipelines (and they’re doing those, see India lately). Do we actually have “radiative forcing time” for project-by-project aid for EMDE transition? And isn’t it better to let markets develop projects rather than governments (except transmission and the like)?

Why not have a club of rich countries create a fund to match some percentage of any pro-rata carbon dividends paid to citizens for some time period? Point of regulation? Any. Sectors covered? Don’t care. Tax versus cap & trade? Up to you. Receiving government’s use of matching proceeds? Whatever they wish. If you are a poorer country and you take transition seriously enough to price carbon at a level necessitating dividends to citizens - then we will support it. Can EMDEs game the system? Sure. Set a higher price on carbon, cover more sectors, and you get more aid. And carbon dividends should be quite easy to audit, keeping transaction costs low.

Motivating Carbon Dividend Matching for me is the fact that so many (see IMF, MIT Global Change, Nick Stern, IEA, others) insist that well below 2 degrees alongside an efficient global economy ultimately needs carbon pricing - so why not amp that up instead of perpetuating the analysis paralysis of “project pipelines”?

Climate geeks will quickly see one huge impediment to this construct - the world’s biggest economy, whose companies represent 60% of global market capitalization, does not price carbon nationally (invention of cap & trade notwithstanding) and does not look to be an imminent climate club joiner.

Nonetheless, maybe Carbon Dividend Matching can be an “arrow in the net zero quiver”. The planet will need plenty of those long past COP28.