(Bloomberg) -- A global group of about 50 organizations including the Climate Bonds Initiative and the International Energy Agency are working on new guidelines that could enable oil and gas producers seeking to reduce their methane emissions to access transition financing.
The organizations intend to release funding recommendations at the COP29 annual UN climate conference in November and hope to showcase two demonstration deals, according to CBI Chief Executive Officer Sean Kidney. The non-profit, which assesses sustainable debt, would then certify methane reduction projects that meet the criteria.
Those efforts aim to unlock a crucial source of financing to help reduce methane emissions from oil and gas, particularly for state-owned operators in emerging markets. Fossil fuels are responsible for roughly 35% of methane generated from human activity, but received less than 1% of the $13.7 billion annual average directed toward methane mitigation efforts in 2021 and 2022, according to the Climate Policy Initiative.
Transition bonds have been among the fastest-growing subset of sustainable debt, particularly in Asia. Issuance jumped to almost $20 billion already this year, more than four times the amount for all of 2023, according to BloombergNEF. Fossil-fuel companies and institutions typically sell transition bonds to finance emission-abatement efforts.
The working group, which also includes the Environmental Defense Fund and the Atlantic Council, is still considering whether some type of transition bonds, or potentially another kind of security, would be most appropriate to bolster funding of methane mitigation, according to Kidney.
Guidelines will need to be consistent with the IEA’s Net Zero by 2050 roadmap, which forecasts declining oil and gas demand and sets out conditions needed to limit the global temperature rise to 1.5C, he said.
“If you are an investor and you are trying to prioritize your climate investments we want you to know what is important. It’s not just solar and electric vehicles,” said Kidney. “It’s also difficult stuff” like cutting methane emissions from fossil fuels, he said.
Wasted gas lost through flaring and intentional venting in the oil and gas sector generated about 2.7 billion metric tons of carbon dioxide equivalent in 2021, according to the IEA. That’s roughly equal to the annual emissions from India, the world’s third-largest polluter.
To stick to the 1.5C warming threshold, releases of methane from fossil fuels must be slashed by 75% by 2030, according to the IEA.
The IEA estimates that will cost $170 billion through 2030, including $45 billion required in low- and middle-income countries where sources of finance are likely to be more limited.
“Embedding specific emissions reduction targets into a bond contract that adjusts interest rates if commitments are met or missed could be an effective way to reduce emissions,” said Ulf Erlandsson, CEO of the Anthropocene Fixed Income Institute. He declined to comment on the methane task force because he isn’t familiar with it.
Climate experts say distinctions need to be made between projects that upgrade existing equipment to reduce emissions, and the development of new production that adds to them. State-owned oil companies, many of which pledged at COP28 to reduce methane intensity, generate more than half the world’s oil and gas but are responsible for a higher share of methane emissions.
“Investing in new gas fields in the Gulf of Mexico is not going to qualify, let’s be clear about that,” Kidney said. “But investing in getting rid of flaring in Turkmenistan is absolutely going to qualify.”
Despite more favorable policies and economics, the oil and gas sector’s deployment of capital to curb methane isn’t currently sufficient to meet targets, according to Dominic Watson, senior manager, energy transition at EDF. “Financing can play a key role by aligning incentives and ensuring methane mitigation is prioritized,” he said.
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