The Bhutanese Leading the way.
In a recent discussion highlighting Bhutan’s innovative financial strategies to combat climate change, experts examined the potential of carbon-linked bonds (CLBs) as a means to attract private sector investment and bolster the country’s environmental commitments during the final day of Bhutan Innovation Forum. These bonds, linked to future carbon prices, promise to create market-based incentives for businesses to invest in low-carbon solutions, aligning financial interests with climate action.
Bob Litterman, Chairman of Climate Policy and Founding Partner of Kapos Capital LP, introduced CLBs as a modern adaptation of real return bonds. He explained that these bonds link future carbon prices to bond payments, thus fostering expectations around carbon pricing.
He said, “One of the problems is that pollution is a public bad. If you have heard of public goods, that’s something where everyone benefits. A public bad is where everyone suffers the consequences.”
He believes that Bhutan, as a developing country, has the opportunity to lead by example in carbon pricing.
He said, “If you have a developing country like Bhutan who says, No, we’re going to take the lead. We’re going to price carbon over the next whatever, 10 years or 20 years, and this is what we’re going to do,’ that creates a marker.” This approach could incentivize businesses to invest in clean solutions, promising job creation and sustainable development.
With Bhutan’s constitutional mandate for environmental protection, Bhutan presents a unique case for implementing CLBs. Sonam Tashi, Director of the Department of Environment & Climate Change, highlighted the country’s existing framework of green taxes and sustainable financing.
The Director said, “Bhutan has a strong foundation with existing green taxes and sustainable financing frameworks.”
He said that CLBs could play a critical role in addressing the nation’s climate adaptation needs, projected to cost around $14 billion over the coming decades. He pointed out that Bhutan could implement these bonds swiftly, indicating that the finance ministry and central bank could lead efforts, possibly within six months.
Suzi Kerr, Chief Economist at the Environmental Defense Fund, highlighted the potential of international carbon markets to complement Bhutan’s efforts through CLBs. She explained how these markets could facilitate resource transfer from high-emission countries to Bhutan, thus incentivizing further emissions reductions.
“If Bhutan can set an example… that could be incredibly catalytic,” she stated, emphasizing the importance of Bhutan as a credible model for climate compliance.
They said that the Negotiations under Article 6 of the Paris Agreement will be vital in ensuring that both technology-based and nature-based solutions are adequately supported in global carbon markets. Bhutan is actively advocating for the latter, recognizing the significance of its natural resources in combating climate change.
Max Song, CEO of Carbonbase, introduced innovative concepts for Bhutan’s leadership in environmental governance. He proposed that Bhutan could become the place to train executives to represent nature on the boards of international companies, thereby increasing the representation of environmental interests at the corporate governance level.
He also suggested creating bank accounts for nature, allowing for ethical management of global natural capital.
Furthermore, Song emphasized the need for Bhutan to be compensated for its carbon-negative status. He stated, “Bhutan actually should be being paid money for the act of sequestering carbon on behalf of the world, and that money could be the source of an investment fund for new technologies that can actually reduce more CO2.”
The discussion also addressed the urgent need for a robust global financial architecture to support climate initiatives. Sonam Tashi expressed concerns about current systems, and said, “We have to get the basics right globally… we need the old and new industrialized countries to raise the ambition.”
He called for a clear definition of climate finance that ensures genuine support for developing nations like Bhutan.
Sonam Tashi said, “I would like to call out and urge Brussels must allow the import of carbon credits from a country with high environmental integrity. Otherwise, the $500 billion market size we are talking about is an illusion. I urge the European Union to open the market, which they shut down a few years ago, as that has led to a catastrophic crash in the market for carbon credits.”
Suzi Kerr said that there is limited willingness to transfer large amounts of money to developing countries for climate transition, urging rich countries to rethink their priorities. She highlighted the necessity of building trust and accountability in financial transactions.
She said, “It’s incredibly important to get the rules and institutions right. So that the money… is really making a difference.”
In response to questions about corporate practices, Bob Litterman explained that CLBs could help reduce investment risks. He illustrated this with the example of bamboo cultivation and said, “Let’s say one of the examples we’ve talked about is growing bamboo and then using it as construction material so it sequesters that carbon. Bamboo grows very quickly. How do I know what I’m going to get paid? Well, in a market like this, where there’s a forward price, I can say, all right, I’m going to get paid. It reduces the risk and induces the investment.”
As Bhutan continues to explore the potential of CLBs and its role in the global carbon market, there is a blend of optimism and realism among experts. While Bhutan’s environmental commitment is recognized, the necessity for a cooperative international framework and a paradigm shift among developed nations is crucial for meaningful progress in addressing climate change.
Bob Litterman emphasized the need for globally harmonized incentives to reduce emissions. He said, “The fundamental problem we are facing now is we don’t have those incentives. We need to create the expectation that private sector players are going to get paid for those low-carbon solutions.”
Max Song also said, “We need trillions of dollars. And frankly, the source of the money is the existential question, like, where’s this money going to come from?”
