Think-tanks say Bhutan could provide leadership by taking a jurisdictional approach to pricing carbon and setting a target for emission reductions
Bhutan’s global recognition as the world’s first carbon-negative country sets out a considerable potential to position itself as a pioneer in carbon markets, setting an example for pricing carbon and creating incentives from carbon-linked bonds for sustainable development.
During the inaugural Bhutan Innovation Forum (BIF) in Paro last week, the Chairman of Climate Policy, Chairman of Risk Committee, and also a founding partner of Kepos Capital LP, Bob Litterman said, “Carbon-linked bonds offer a promising avenue for stimulating private sector investment in carbon mitigation solutions. By linking bond returns to anticipated carbon prices, these instruments create a market-based incentive for investors to support initiatives that reduce greenhouse gas emissions.”
According to Bob, by issuing carbon-linked bonds, governments can create market-based incentives for reducing carbon emissions and investing in carbon capture technologies. These bonds, backed by government commitments to carbon pricing, offer a promising solution that addresses the immediate pain of traditional carbon pricing while incentivizing long-term investments. Additionally, this bond represents a valuable tool for accelerating the transition to a low-carbon economy.
Carbon-linked bonds are financial instruments like a real return bond, where the interest payments or principal repayment are tied to the price of carbon emissions. This means that the value of the bond is influenced by the cost of carbon pollution, as determined by carbon markets or government regulations.
Sonam Tashi, Director of the Department of Environment and Climate Change (DoECC) and also the country representative for Bhutan at United Nations Framework Convention on Climate Change (UNFCCC) agreed that Bhutan has its basics right. “We levy green tax on vehicles and we are in the process of framing green taxonomy and developing a comprehensive sustainable financing framework. This existing approach presents an opportunity for sustainable development through carbon link bonds in Bhutan.”
He also shared the concern that close to USD14 Billion is needed to finance climate adaptation measures identified through National Adaptation Plan (NAP) for implementation over the next 15 years.
In order to implement the NAP, which identifies threats and lays out climate resilient adaptation approaches, Bhutan would require a great deal of technical as well as financial support.
Max Song, CEO of Carbonbase, the Asia’s first digital native carbon registry said that Bhutan’s unique position as carbon-negative country presents a significant opportunity to leverage carbon credits for sustainable development. “By issuing a carbon-linked bond, it could create an incentive for businesses to come to Bhutan and invest in clean development projects. This could serve as a model for other countries to follow.”
He added, “There is a strong desire in Bhutan to be the global source of green energy. For all its carbon sequestering efforts, Bhutan should be paid the money which can then be invested in green technologies.”
He emphasized Bhutan to take a lead as carbon markets play a crucial role in addressing climate change, with compliance carbon credits demonstrating their effectiveness in reducing emissions.
For instance, the European Union’s Emissions Trading Scheme (ETS) has demonstrated the effectiveness of compliance carbon markets in reducing emissions. However, voluntary carbon credits, which represent voluntary emissions reductions, are often undervalued.
Recognizing the true value of these credits is essential for incentivizing further action and expanding the impact of carbon markets. Moreover, this approach can not only generate revenue for Bhutan but also solidify the country’s reputation as a climate leader and also inspire other nations to follow the lead.
He also points out that humans have been living rent-free on nature for centuries, relying on its resources without fully accounting for their costs. “And currently, people don’t adequately compensate nature for its goods and services, but carbon-linked bonds can offer a comprehensive accounting method for our planet with Bhutan leading the way.”
Chief Economist at Environment Defense Fund, Suzi Kerr said carbon markets and carbon-linked bonds can work together to combat climate change. “As carbon markets allow countries or companies to trade carbon credits, carbon-linked bonds provide financial incentives based on carbon prices. This combination can create a more comprehensive and effective approach to reducing greenhouse gas emissions.”
However, Sonam Tashi emphasized that despite the availability of technical solutions, the success of international climate negotiations hinges on political will and finding common ground between industrialized countries favoring technology-based approaches and developing countries advocating for nature-based solutions.
He opined that while all parties agree on the importance of environmental integrity, disagreements persist on the pathways to achieve this goal. The effective implementation of carbon markets requires a balance between voluntary mechanisms and government oversight to ensure transparency and accountability.
Overall, the panel discussed Bhutan’s unique environmental attributes, such as extensive forests as mandated in constitution that 60% of forest coverage at all times and commitment to sustainability makes Bhutan in a well position to create successful carbon credit projects. Moreover, the discussion realized that implementing effective carbon credit mechanism, Bhutan can significantly contribute to global efforts in combating climate change.
Speakers agreed that if Bhutan can guarantee a forward price or carbon-linked bonds becomes a success story, it will reduce the investment risk and uncertainty for companies, instead, incentivizing companies to come to Bhutan and implement green technology based projects.
In the meantime, Bhutan’s action can create a positive impression that the world is looking for, by demonstrating how a small country can take concrete steps to address climate change through a harmonised carbon pricing approach.
By Maisori Rai, Thimphu
