𝐁𝐡𝐮𝐭𝐚𝐧’𝐬 𝐂𝐚𝐫𝐛𝐨𝐧-𝐋𝐢𝐧𝐤𝐞𝐝 𝐁𝐨𝐧𝐝𝐬: 𝐀 𝐍𝐞𝐰 𝐌𝐨𝐝𝐞𝐥 𝐟𝐨𝐫 𝐒𝐮𝐬𝐭𝐚𝐢𝐧𝐚𝐛𝐥𝐞 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧

…𝗘𝘅𝗽𝗲𝗿𝘁𝘀 𝗲𝘅𝗽𝗹𝗼𝗿𝗲 𝘁𝗵𝗲 𝗶𝗻𝗻𝗼𝘃𝗮𝘁𝗶𝘃𝗲 𝗳𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹 𝘁𝗼𝗼𝗹 𝘁𝗵𝗮𝘁 𝗰𝗼𝘂𝗹𝗱 𝗲𝗻𝗵𝗮𝗻𝗰𝗲 𝗕𝗵𝘂𝘁𝗮𝗻’𝘀 𝗲𝗻𝗲𝗿𝗴𝘆 𝗿𝗲𝘀𝗶𝗹𝗶𝗲𝗻𝗰𝗲 𝗮𝗻𝗱 𝗶𝗻𝘀𝗽𝗶𝗿𝗲 𝗴𝗹𝗼𝗯𝗮𝗹 𝗲𝗳𝗳𝗼𝗿𝘁𝘀 𝘁𝗼 𝗰𝘂𝘁 𝗲𝗺𝗶𝘀𝘀𝗶𝗼𝗻𝘀

By Yeshey Lhadon

A recent panel discussion on carbon finance has ignited conversations about Bhutan’s potential to pioneer carbon-linked bonds, a financial instrument that could significantly accelerate the nation’s transition to renewable energy while helping the world reduce carbon emissions. The Bhutan Innovation Forum (BIF) held a global climate finance discusion, featuring influential figures including Bob Litterman, Chairman of Climate Policy and founding partner of Kapos Capital LP; Suzi Kerr, Chief Economist at the Environmental Defense Fund; Max Song, CEO of Carbonbase; and Sonam Tashi, Director of Bhutan’s Department of Environment and Climate Change.

As Bhutan anticipates a surge in energy demand from 2,500 megawatts to 4,000 megawatts by 2040, carbon-linked bonds are emerging as a potential solution for financing the country’s ambitious green energy projects. Bhutan’s reliance on hydropower poses challenges, particularly with reduced energy production during dry winter months. To address future energy needs, Bhutan aims to generate 20,000 megawatts of renewable energy over the next 15 years, requiring an investment of $26 billion.

Bob Litterman introduced carbon-linked bonds as a revolutionary concept, akin to inflation-linked bonds but connected to carbon pricing. “Although carbon-linked bonds don’t yet exist, they could transform how we finance low-carbon technologies,” he explained. These bonds would tie payments to future carbon prices, creating a forward market for carbon and encouraging private sector investment in sustainable solutions. Litterman emphasized that these bonds could enable financial flows from developed nations to developing countries, which is critical for global climate change mitigation. “Bhutan, with its green reputation, could lead the world by issuing these bonds and setting a precedent for others to follow,” he asserted.

Sonam Tashi echoed Litterman’s optimism, highlighting the urgency for Bhutan to secure funding for its national climate adaptation efforts. “Bhutan’s adaptation plan will need $14 billion over the next few decades, including $1.4 billion in the next five years. Foreign aid alone won’t suffice,” Sonam Tashi said. He pointed out that carbon-linked bonds could provide a market-driven alternative to traditional funding mechanisms, offering a sustainable path for financing Bhutan’s renewable energy goals.

Bhutan’s existing “green tax” on fossil fuels and vehicles could serve as a foundation for carbon pricing, which would support the development of carbon-linked bonds. Sonam Tashi also mentioned that Bhutan has been working on a sustainable financing framework and a green taxonomy, both essential for issuing these bonds.

Max Song of Carbonbase highlighted the importance of private investment in Bhutan’s green energy transition. “Carbon-linked bonds could attract significant private capital by offering returns based on future carbon prices, creating a direct incentive for investment in emissions-reducing technologies,” he stated. Suzi Kerr added that these bonds could not only help meet Bhutan’s energy needs but also contribute to global climate targets by promoting long-term emissions reductions. “If Bhutan can pioneer this financial tool, it could serve as a global model for other nations,” Kerr said.

The panelists unanimously agreed that while carbon-linked bonds are still in the conceptual phase, Bhutan is uniquely positioned to lead their development. With a constitutional mandate to maintain at least 60 percent forest cover, Bhutan has long been a global beacon for environmental sustainability. “By implementing carbon-linked bonds, Bhutan could not only meet its energy goals but also inspire other nations to explore innovative climate financing solutions,” Sonam Tashi remarked.

As the world grapples with increasing pressure to cut carbon emissions, Bhutan’s potential leadership in carbon-linked bonds could mark a pivotal moment for climate finance. This innovative approach could catalyse a new era of sustainable investment, positioning Bhutan at the forefront of global efforts to tackle climate change.

Sonam Tashi expressed optimism about Bhutan’s ability to swiftly develop a carbon framework. “With the right regulatory support, I believe Bhutan could implement carbon-linked bonds within six to twelve months,” he said. He emphasized the need for collaboration between Bhutan’s Ministry of Finance and the Royal Monetary Authority to spearhead the initiative.

Bob Litterman noted that private sector involvement will be crucial for the success of carbon-linked bonds. “By mitigating financial risks and providing clear returns, these bonds could create the ideal environment for private investment in green projects,” he explained.

Suzi Kerr pointed out the broader implications of carbon markets, suggesting that Bhutan’s leadership could influence international carbon finance. “Carbon-linked bonds could complement existing carbon markets by providing both the resources and incentives needed to drive real change,” she said.

As Bhutan continues to assert itself as a leader in climate finance, navigating the complexities of international climate negotiations will be essential. Sonam Tashi acknowledged the challenges of balancing technological solutions favoured by industrialized nations with the nature-based solutions crucial to Bhutan’s ecosystem. “The global market must ensure that countries like Bhutan are not left behind in the push for high-tech solutions,” he stated.

The panel’s insights indicates Bhutan’s potential to be a significant player in the global carbon market, using innovative financial tools like carbon-linked bonds to drive its green energy transition while influencing global climate policy. Bhutan’s next steps in climate finance could not only meet its growing energy demands but also pave the way for a new model of sustainable development, one that other nations may soon follow.

The discussions during the forum also included perspectives from Max Song, Suzi Kerr, and Bob Litterman on the roles that companies and governments must play in combating climate change.

Max Song emphasized that while many companies are interested in sustainability, they often hesitate to commit significant financial resources to address climate change. He pointed out that, although companies and individuals recognize nature’s intrinsic value, they struggle to assign real financial value to it. Song suggested that tools like carbon credits and carbon-linked bonds can re-capitalize and re-financialize the value of nature. He acknowledged the challenge of shifting from a system where nature’s resources have historically been undervalued.

Suzi Kerr highlighted the importance of compliance carbon credit systems, such as the EU’s emissions trading scheme. She underscored the need for government-backed systems with clear enforcement and careful measurement. Despite initial struggles, she noted that systems like the EU’s have evolved to drive significant change, with carbon prices recently reaching USD 100 per ton, forcing industries to adapt and lower emissions.

Bob Litterman raised concerns about inconsistent carbon pricing across countries. While the EU has made strides, other regions, especially petro-states, often incentivize emissions through subsidies, creating a global imbalance. He suggested that smaller countries like Bhutan could lead by adopting strong carbon pricing and jurisdictional approaches to attract businesses. He advocated for a system where companies can be assured of payment for reducing emissions, possibly through innovative methods like bamboo cultivation for construction.

The discussions collectively highlighted Bhutan’s potential to take a leadership role by establishing clear carbon pricing strategies, creating incentives for environmentally friendly corporate practices, and leveraging its carbon-negative status to attract investment. By implementing financial mechanisms like carbon-linked bonds, Bhutan could reinforce its environmental stewardship and provide a model for other nations to emulate.

As Bhutan embarks on this ambitious journey, the world watches closely, hopeful that this small Himalayan kingdom will lead by example, transforming not only its economy but also setting a precedent for global climate finance.