In November 2022, U.S. Special Presidential Envoy for Climate Change John Kerry, the Rockefeller Foundation, and the Bezos Earth Fund announced plans to create the Energy Transition Accelerator (ETA). The ETA is aimed at catalyzing private capital to accelerate the clean energy transition in developing countries.
With support from the Rockefeller Foundation, Climate Advisers, a climate policy consultancy working to strengthen global climate action, has sought to estimate the potential impact of the ETA. Specifically, we analyzed the following three key questions: How much funding could this initiative mobilize for developing countries? What impact would this initiative have on global climate ambition? What funding would be generated for international adaptation?
The U.S. government and participating charitable foundations have stated that they intend to consult with countries, companies, and advocates in 2023 before finalizing the terms of the ETA. To be able to model the potential impact of the ETA, however, we had to make certain assumptions about how the ETA might work in practice, as described below. Based on these assumptions, which include widespread participation by eligible companies, we found that the ETA could dramatically accelerate the financing of renewable energy and the associated decommissioning of fossil fuel power plants in developing nations through new, large-scale private sector investments. Under what we called a transformative scenario, the ETA could mobilize $77-139 billion in funds through 2030 and mitigate an additional 1.3-2.3 billion tons of climate pollution, the upper limit of which is roughly equivalent to annual emissions from India. The ETA could also generate $3.8-6.9 billion for international climate adaptation in this transformative scenario, 11 to 19 times the record $356 million in funding raised for the international adaptation fund at COP26. We also examined another scenario in which the ETA would operate more at the scale of recent public-private partnerships aimed at financing climate action in developing nations. Under these more modest assumptions, the ETA would still mobilize $4-8 billion for energy transitions in developing countries and result in an additional 64-128 million tons of emissions mitigation through 2030, while generating $200-400 million for international adaptation. These results are summarized below in Figure 1.
As the ETA has yet to be fully designed and private sector participation is still unclear, Climate Advisers is currently unable to assess the comparative likelihood of either outcome. The structure of our analysis and the findings are explained below.
Scenarios
The press release announcing the ETA suggests that companies with science-based climate targets might participate in the ETA to receive limited and partial credit toward corporate net zero emission targets. For purposes of this analysis, we assumed this would be the primary reason that companies would join the program and invest financial resources at scale. Since the sponsoring organizations have stressed that participating companies would need to make deep emission reductions independent of the ETA, we assumed that the companies could only count emission reductions financed via the ETA toward corporate commitments to reduce Scope 3 emissions. This includes value chain emissions from suppliers and end users. Scope 1 and Scope 2 emissions generated from a company’s operating activities and energy usage are not included in our analysis. We also assumed that participating companies would only receive credit for up to 50 percent, and possibly far less, of their targeted Scope 3 emission reductions through 2030, the earliest announced end date of the ETA. Finally, we assumed that ETA rules would prohibit the participation of major fossil fuel producers or that such companies would not initially participate in the ETA.
While the actual terms of corporate participation in the ETA might differ when announced in 2023, these assumptions provide a useful basis today for estimating the ETA’s potential impact. Estimating how much credit companies might receive toward their Scope 3 emissions is one of the two most important factors influencing the impact of the ETA, alongside the extent of private sector participation in the program. As the ETA will be a voluntary initiative, it is difficult to predict now, before the terms of the program are finalized, how many companies will participate. Companies that participate will also have to make While the actual terms of corporate participation in the ETA might differ when announced in 2023, these assumptions provide a useful basis for understanding the ETA’s potential impact. Estimating how much credit companies might receive toward their Scope 3 emissions is one of the two most important factors influencing the impact of the ETA, alongside the extent of private sector participation in the program. As the ETA will be a voluntary initiative, it is difficult to predict how many companies will participate and their total level of investment in the ETA before the terms of the program are finalized. Participating companies could choose to finance only a portion of their targeted Scope 3 emission reductions permitted under the ETA, either because these companies have other, potentially more direct, ways to achieve Scope 3 emissions mitigation or because the companies lack the political will to fully implement their net zero commitments.
To model the potential impact of the ETA in the face of these uncertainties, we considered two potential scenarios:
- The transformative scenario takes an expansive perspective. It assumes that the ETA becomes a central feature in the international climate finance landscape, that many eligible companies participate, and that these companies are given significant latitude to receive credit for emission reductions financed via the ETA. This scenario should be seen as the upper range of what the ETA could achieve. The transformative scenario assumes that those designing the ETA ultimately allow companies to receive credit for up to 50 percent of their targeted Scope 3 emission reductions, in accordance with the draft guidance from the Voluntary Carbon Markets Integrity (VCMI) initiative’s “bronze” crediting category. The transformative scenario, moreover, assumes that if companies make the ETA investments needed to do so, developing nations can provide an abundant and affordable supply of verified emission reductions from the power sector. Finally, this optimistic scenario assumes that 10 to 20 of the largest eligible companies in each sector participate in the program, totaling between 100-200 companies through 2030.
- The modest scenario assumes that the ETA would initially attract fewer companies and that those companies would satisfy a smaller portion of their targeted Scope 3 emission reductions via the program. In the modest scenario, a quarter of Scope 3 emission reductions would be financed through ETA credits, and 1 to 2 of the largest eligible companies in each sector would participate, totaling around 10-20 companies overall. This level of participation would roughly equate to private sector participation in the Lower Emissions by Accelerating Forest finance (LEAF) Coalition, an arguably analogous public-private partnership to reduce emissions from tropical deforestation. Both the ETA and LEAF operate at the level of an entire country or major political subdivision—known in this context as jurisdictions. While jurisdictional approaches offer the potential for greater scale and environmental integrity compared to smaller project-level investments, many companies are unfamiliar with jurisdictional approaches and their interest in financing climate action in that way remains somewhat untested. When LEAF was first announced in April 2021, it initially had nine major corporate participants. Since then, the number of companies participating in LEAF has grown steadily to just shy of 20, and with possible additional growth on the horizon, including at this year’s climate summit in Egypt. The modest scenario for the ETA may offer an illustration of corporate participation in the ETA when launched in late 2023 or 2024, or if the ETA fails to become a primary means for most large emitting companies to reduce their Scope 3 emissions.
The press materials announcing the ETA stated that participating companies might be required to finance additional emissions mitigation to receive credit toward their corporate climate commitments. For this reason, both scenarios assumed that participating companies would finance 1.5 tons of emission reductions for every 1 ton of emission reductions counted toward corporate Scope 3 climate targets. Since the 1.5 multiplier acts as a scaling ratio, our analysis could easily be adjusted to reflect a different multiplier or the absence of one altogether, depending on how the final ETA rules are designed.
Interestingly, real-world outcomes could resemble a combination of our scenarios: ETA participation at the end of 2023 or soon thereafter could resemble the modest scenario, but if corporate, country, and civil society support for the ETA grows, the results in 2030 could mirror the transformative scenario. Climate Advisers currently makes no prediction. This analysis is offered solely to help illustrate the possible impact of the ETA under differing assumptions to inform future discussions about the ETA’s design.
How much funding could this initiative mobilize for developing countries?
To understand the scale of funding that could be mobilized by the ETA, we first estimated the total emission reductions targeted by the largest 2,000 companies globally. Consistent with the assumptions above, we then narrowed that list to include only companies that meet all the following conservative criteria. The companies had to have:
- Strong time-bound, science-based or net zero targets that have already been communicated through corporate strategy, a declaration, or a pledge, with a clear target for 2030 (companies with targets beyond 2030 were included on a partial basis).
- A stated commitment to combatting Scope 3 emissions.
- Enthusiasm toward or openness to purchasing carbon credits.
- Core businesses that did not involve the projection of fossil fuels.
Using these eligibility criteria, we were able to reduce our sample size from 2,000 companies to 249 companies with an estimated 11.6 GtCO2e in combined Scope 3 emissions. We then used the largest 25 companies in each sector to create an average emissions profile of a large, eligible company, to which we applied the parameters outlined in our two concrete scenarios. We also note that while applying our eligibility criteria, we took a conservative approach by excluding companies without fully developed Scope 3 targets or with unclear emission reduction goals. Figure 2 summarizes our company selection process.
Converting the ETA’s emissions abatement potential into an amount of finance the ETA could mobilize for developing country energy transitions, however, requires resolving several additional key questions.
First, one must determine the total cost per tCO2e of energy transitions in developing countries. The International Energy Agency estimates the cost of renewable energy deployment in developing countries to be around $25 to 30 per tCO2e. The cost of decommissioning fossil fuel energy and ensuring a just transition for communities and workers also need to be factored into any total cost estimate. So too do the costs of modernizing and expanding the energy grid and other infrastructure. As these additional costs will vary significantly depending on local conditions, the total cost of the energy transition could be $50-200 per tCO2e depending on the developing country.
The next question is what share of total energy transition costs need to be funded by carbon crediting, as opposed to other sources of funds (including grant, concessional, and non-concessional finance). The next question is what share of total energy transition costs need to be funded by carbon crediting, as opposed to other sources of funds (including grant, concessional, and non-concessional finance). Carbon credit proceeds need not fund the full cost of energy investments in developing nations. Instead, carbon credit revenues can act as grant funds that developed nations use to unlock and leverage a wide range of other funding sources. In a blended finance approach, only a fraction of the total cost would need to come from the ETA. The World Bank has demonstrated that some of its climate programs have leveraged 11 dollars for every dollar the bank invests. Anecdotally, therefore, a cost of around $20 tCO2e via the ETA could prove sufficient to leverage the remaining capital needed for developing country energy transitions. Further research is needed to know what ETA credit price would be effective to abate electricity sector emissions across developing countries. Those designing the ETA should commission research on this topic in 2023.
One must also consider how much companies would be willing to pay to secure credits under the ETA versus other means. Due to the climate ambition multiplier outlined in our assumptions (companies need to buy 1.5 times the number of credits they intend to apply toward their Scope 3 climate targets), the effective cost of a carbon credit for a company would be 1.5 times the cost of emissions mitigation in developing nations. Thus, the effective cost to companies would be $30 per tCO2e if ETA credits are priced at $20 per tCO2e.
One point of reference to determine the reasonableness of that $30 tCO2e effective price for companies would be the cost of high-quality carbon credits from similar jurisdictional programs. The government of Norway has agreed to be a buyer of last resort—at $10 per tCO2e —for certain jurisdiction-level emission reductOne point of reference to determine the reasonableness of a $30 tCO2e effective price for companies would be the cost of high-quality carbon credits from similar jurisdictional programs. The government of Norway has agreed to be a buyer of last resort—at $10 per tCO2e —for certain jurisdiction-level emission reductions achieved under the LEAF program. Norway’s offer is a floor price. The actual market price for LEAF emission reductions paid by companies has yet to be determined since the first transactions under LEAF are still being negotiated. Overall, value of carbon credits is already rising quickly in global markets and prices are expected to climb further. In today’s voluntary market, moreover, it’s already not uncommon for buyers to pay up to $20 plus dollars per ton for high-quality carbon credits, although most transactions are at lower prices. Furthermore, the High-Level Commission on Carbon Prices estimates that to achieve the emission reductions needed to align with the standards set in the Paris Agreement by 2030, companies would need to set an internal carbon price of between $50 and $100 per tCO2e. Compared to those prices, a $30 tCO2e effective cost to companies would be a bargain. More research is needed to determine just how attractive ETA credits would be to companies given the possibility that the ETA would require companies to buy more credits than are needed to meet their climate targets.
Now, armed with our initial $30 tCO2e effective cost estimate for companies, we are finally able to offer an answer to the core question: How much funding would the ETA mobilize? Based on widespread company participation in the transformative scenario, the ETA could mobilize in the range of $77-139 billion in funds through 2030. Even under our more modest scenario with limited company participation, the ETA would still mobilize $4-8 billion for energy transitions in developing countries. These results are summarized in Figure 3.
What impact would this initiative have on global climate ambition?
Having calculated the total expected corporate demand for ETA carbon credits, deriving the program’s impact on raising climate ambition was straightforward. Since the announcement introducing the ETA suggests that participating companies could be required to purchase more credits than they need to satisfy their climate commitments, we assume an ambition multiplier of 1.5—meaning that for every ton Having calculated the total expected corporate demand for ETA carbon credits, deriving the program’s impact on raising climate ambition was straightforward. Since we assume an ambition multiplier of 1.5—meaning that for every ton of emission reductions credited under the program, 0.5 tons or one-third of total ETA emission reductions, would be new and additional compared to what companies originally committed to do in their respective science-based climate targets. That extra one-third of total tons abated under the ETA represents the program’s contribution to increasing global climate ambition. Under the transformative scenario, the ETA could mitigate an additional 1.3-2.3 billion tCO2e, while the modest scenario could result in an additional 64-128 million tCO2e mitigation through 2030. The upper limit of additional emission reductions estimated through the transformative and modest scenarios are roughly equivalent to the annual emissions from India and the Philippines respectively. This increase in ambition is summarized by scenario in Figure 4 below.
Figure 5 below shows the total emissions mitigation financed via the program, including both targeted Scope 3 and additional emission reductions. To the extent that participating companies might have fallen short of Scope 3 emissions mitigation targets without the program, the contribution of the ETA to raising climate ambition could reasonably be said to also include some unknown portion of the Scope 3 emissions, in addition to the emission reductions from the 1.5 ambition multiplier. We did not account for this possibility.
What funds would be generated for adaptation?
The framework announced for the ETA stipulates that 5 percent of funds mobilized via the ETA will be donated as a contribution to international adaptation. The estimated adaptation funding generated through this mechanism is summarized in Figure 6. Under the transformative scenario, the ETA could generate $3.8-6.9 billion for international climate adaptation, 11 to 19 times the record $356 million in funding raised for the international adaptation fund at COP26. Meanwhile, the estimated $200-400 million for international adaptation generated by the modest scenario would still be roughly equivalent to the record COP26 contributions illustrated in Figure 6 below.
How do these estimates compare to the supply of ETAs in developing countries?
At this point, the next logical question is whether developing nations could supply sufficient emission reduction credits from decarbonizing their electricity sectors to meet the demand for ETA credits projected in our illustrations, particularly under the more ambitious transformative scenario. This question falls largely beyond the scope of our analysis today, and we have not yet had the opportunity to conduct an in-depth assessment. However, the following high-level data points may be helpful to contextualize our findings:
- Coal generates approximately 12.3-12.7 GtCO2e per year in non-OECD countries, almost double our highest emissions abatement estimates in the transformative scenario and over 30 times our highest emissions abatement estimates in the modest scenario.
- According to the International Energy Agency, power sector investment in emerging markets needs to rise from an annual average of $240 billion to $1.1 trillion annually by 2030 to be on track to achieve 2050 net zero goals. This $860 billion annual funding gap is over six times our highest estimate of funds mobilized in the transformative scenario and over 100 times our highest estimate of funds mobilized in the modest scenario.
These data points suggest that, at least theoretically, the demand and supply for ETA credits could mesh relatively well. For the ETA to work at the scale implied by the transformative scenario, developing countries would need the political will and technical capacity to decarbonize their power sectors quickly with the financing that the ETA’s carbon credits would generate. This is in addition to leveraging other concessional and non-concessional capital provided in a blended finance context. More work is needed to analyze the feasibility of these assumptions.
Further Work and Data Sources
The results outlined above represent preliminary illustrations of the ETA’s impact based on a representative sample of eligible companies. These are subject to change as more information is shared on the companies that are likely to participate in the ETA and their flexibility to credit ETA emission reductions toward corporate net zero climate targets. Further research is needed to ensure that estimated ETA credit prices are sufficient to achieve decarbonization goals, to better understand demand from companies, and to estimate the scale of future ETA credit supply.
Key data sources used in this analysis include the International Energy Agency, Morgan Stanley, McKinsey & Company, the Energy Information Administration, and publicly available information compiled by Net Zero Tracker.
Conclusion
Estimating the likely impact of the ETA is difficult to do now since its design elements and the level of private sector participation remain uncertain. Nonetheless, if designed well, the ETA could have a highly positive impact on global efforts to mobilize funding for energy transitions in developing nations. Under certain assumptions about widespread company participation, availability of blended finance, and effective implementation of the new program, our findings illustrate that the ETA has the potential to mobilize large-scale funds to finance the shift from fossil fuels to renewable energy, increase global emissions mitigation roughly equivalent to India’s annual emissions, and turbo charge private sector contributions to international adaptation. Under more modest assumptions, the ETA could still make a significant contribution to climate action roughly on the scale of the LEAF coalition, which uses the jurisdictional approach to carbon crediting and is one of the largest public-private climate finance programs to date. Either outcome, if implemented well, would make the ETA one of most promising public-private climate finance partnerships in recent years.
This report was authored by Niamh McCarthy, Director of Climate-Related Risk at Climate Advisers, and Matthew Piotrowski, Senior Director for Policy & Research
