Financing initiative aims to release billions to curb methane leaks

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(Bloomberg) — A global group of about 50 organizations, including the Climate Bonds Initiative and the International Energy Agency, is working on new guidelines that could help oil and gas producers seeking to reduce their methane emissions access transition finance.

The organizations plan to publish financing recommendations at the annual UN climate conference COP29 in November and hope to present two demonstration contracts, said CBI executive director Sean Kidney. The nonprofit, which assesses sustainable debt, would then certify methane reduction projects that meet the criteria.

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These efforts aim to tap into a key source of funding to reduce methane emissions from oil and gas, particularly for state-owned operators in emerging markets. Fossil fuels are responsible for about 35% of the methane produced by human activities but received less than 1% of the average $13.7 billion annually directed toward methane mitigation efforts in 2021 and 2022, according to the Climate Policy Initiative.

Transition bonds are one of the fastest-growing subsets of sustainable debt, especially in Asia, with issuance already rising to nearly $20 billion this year, more than four times the total for 2023, according to BloombergNEF. Fossil fuel companies and institutions typically sell transition bonds to finance emissions reduction efforts.

The working group, which also includes the Environmental Defense Fund and the Atlantic Council, is still examining whether some kind of transition bonds or perhaps another type of securities would be best to bolster financing for methane abatement, according to Kidney.

The policies must be consistent with the IEA's “Net Zero by 2050” roadmap, which forecasts a decline in oil and gas demand and sets out the conditions needed to limit global temperature rise to 1.5 degrees, he said.

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“If you're an investor trying to prioritize your climate investments, we want you to know what's important. It's not just about solar and electric vehicles,” Kidney said. “It's also about hard things,” like reducing methane emissions from fossil fuels, he said.

According to the IEA, gas loss from flaring and deliberate venting in the oil and gas sector in 2021 caused about 2.7 billion tonnes of carbon dioxide equivalent, roughly equivalent to the annual emissions of India, the world's third-largest polluter.

To meet the 1.5 degree warming limit, methane emissions from fossil fuels must be reduced by 75 percent by 2030, according to the IEA.

The IEA estimates that the cost of this will be US$170 billion by 2030. Of this, US$45 billion will be needed in low- and middle-income countries, where financing sources are likely to be more limited.

“Embedding specific emissions reduction targets in a bond contract that adjusts interest rates as 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 is not familiar with it.

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Climate experts say a distinction must be made between projects that upgrade existing plants to reduce emissions and the development of new production facilities that increase emissions. State-owned oil companies, many of which pledged to reduce methane intensity at COP28, produce more than half of the world's oil and gas needs but are responsible for a higher share of methane emissions.

“Investing in new gas fields in the Gulf of Mexico is out of the question, that's important to be clear,” Kidney said. “But investing in eliminating flaring in Turkmenistan is definitely an option.”

Despite a more favourable political and economic environment, the oil and gas sector's capital investment in curbing methane emissions is currently not enough to meet targets, says Dominic Watson, senior manager for energy transition at EDF. “Finance can play a key role by providing incentives and ensuring that methane emissions are prioritised,” he said.

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