Q&A Series #14: Interview with Peter Zaman & Jo Garland

The topic of discussion: Sustainability and Climate Finance

HFW is a leading global law firm in the aerospace, commodities, construction, energy and resources, insurance, and shipping sectors.

The firm has more than 600 lawyers, including 185 partners, based in offices across the Americas, Europe, the Middle East and Asia-Pacific.

HFW prides itself on its deep industry expertise and its entrepreneurial, creative and collaborative culture.

In this article, Global Road Technology caught up with Peter Zaman, Partner at HFW based in Singapore and Jo Garland, Partner at HFW based in Perth, Australia. This co-interview focused on Sustainability and Climate Finance.

1. Can you tell us more about HFW and its contributions to the global net-zero emissions? conversations?

We do a lot of sustainability-related work for our clients around the world. It’s a priority for each of our core sectors: aviation, construction, commodities, energy and resources, insurance, and shipping.

It’s also a major focus for us as a business – we announced a new global sustainability strategy last year and appointed our first sustainability partner. The new strategy comprises three core pillars – clients, environment, and people and projects – and includes an initiative to accurately measure and reduce the firm’s global carbon footprint.

As part of that ongoing focus, we have launched a new ‘sustainability syllabus’. This is a training program for everyone at HFW globally – not just lawyers, but business services too – to ensure that they have the foundational knowledge to help their clients on sustainability-related issues as we all move towards a decarbonized global economy. This is a fast-moving area, so it’s vital to stay up-to-date with the latest developments.

This is part of a wider sustainability-related training program, that also includes more specialist training for our various industry groups that is tailored to clients in their sectors, delivered by our professional support lawyers and others.

2. What is the importance of Article 6 of the Paris Agreement in achieving change and a consistent global climate solutions framework?

Article 6 is about raising global ambition. The idea of the use of market mechanisms is to allow countries with lower costs of carbon abatement to export that cost opportunity to countries that have higher costs of abatement and use the proceeds towards funding the selling country’s higher cost abatement needs. This allows for buying countries to raise their carbon abatement ambitions and for the selling countries to similarly raise their ambitions in the future because the funding lowers the cost of more expensive abatement sectors. Article 6 offers a choice of two mechanisms, the Cooperative Approaches mechanism under Article 6.2 and the sustainable development mechanism under Article 6.4 (the Mechanism). Under the former, Article 6t is catering for bilateral or multilateral arrangements that are designed by the participating countries themselves in a manner that is consistent with the bottom-up nature of the Paris Agreement. Under the latter, the Paris Agreement is adopting a more centralised system similar to that which existed under the Clean Development Mechanism of the Kyoto Protocol.

The bottom-up nature of the Paris Agreement, which allows each country to take its own path towards a decarbonised future, creates fragmented markets with localised pricing and does not, therefore, facilitate a global carbon price. Utilising a multiparty Cooperative Approach or the Mechanism should also allow for the establishment of a global price for carbon that can allow multinational corporations to benchmark their efforts for valuing carbon as part of their decarbonisation decisions.

3. What goes into strategizing and navigating successful energy transition pathways?

One of the key questions for a company is whether the current business model can continue, albeit in a decarbonised way, or if the entire business model needs to change.  The energy transition pathway will evolve once that decision is made.

If the business model can continue in a decarbonised way, the emissions profile of the supply chain needs to be broken down to analyse where the biggest change in emissions can be made for the least cost/business impact.  This may be in power supply, as emissions from power can often account for over 50% of total emissions.  It may be by working with suppliers so that suppliers can provide a decarbonised product.  It may be increasing efficiencies at certain points of the supply chain.  It may be a combination of these and other steps.

If the business model needs to change, it can be a very challenging time for a company.  The company may then consider investing in, or partnering with, a company it views as having the right green credentials, product, customer base or technology. The company may need to look for new markets for a new product, again generally through collaboration or joint ventures to share risk.

4. When the ‘stakes are high’ what are the opportunities and risks of energy transitions?

The opportunities include capturing new markets and being a market leader or fast follower in those markets.  Given the high level of collaboration around new markets and technology, there are opportunities to form strategic partnerships and share in the learnings from new technologies and trials.

The risks go hand in hand with the opportunities.  There is a high level of technology risk and risk that new markets for new products will not evolve as anticipated or another technology will displace the one the company has invested in.  There is the risk with collaboration that partners may take a difference stance to sharing and use of learnings (which is why robust legal documentation is important).

5. How momentous is COP26 for governments and multinationals in the drive to strengthen their cooperation and synergy towards climate solutions?

COP26 is just one more COP meeting. It is only made ‘momentous’ by the absence of a meeting in 2020 due to the pandemic and because of the deadline for peaking of emissions by 2030 getting that much closer. The burden of expectation on COP26 was only because of increased awareness on the climate emergency brought about by greater vocalisation by civil society and the impact of the pandemic as an indicator of what can happen if people fail to recognise threats and act together to address those threats.

The formal decisions of COP26 should be contrasted to a number of announcements that were made in parallel to COP26 (e.g. the US-China announcement on methane reductions). At the level of the COP26 formal decisions, there were no momentous outcomes. The collaboration efforts were mostly centred around the completion of the Paris Agreement rulebook, especially Article 6 and Article 13. The formal introduction into the Paris Agreement text on the winding down of coal was mostly symbolic because commercially coal has increasingly become an un-financeable asset anyway. The commitments to increase climate finance were important but, in the scheme of the overall cost of finance required to fund adaptation and mitigation actions, it remains insignificant. This means it is even more important that private sector finance is used to leverage that financing gap.

6. What are some of the key challenges faced in operationalizing Article 6? 

Speed is the biggest challenge to operationalising Article 6. In the void caused by the delay in implementing Article 6 between COP22-26, the market has gravitated towards a voluntary market in carbon reductions and carbon removals. Significant efforts by notable personalities to champion the voluntary markets has driven a lot of financing investment into these markets already. The longer it takes to operationalise the Article 6 markets, the more the capital would already have been committed to voluntary markets, thereby starving the Article 6 markets at its inception. Over time, we expect voluntary markets to be absorbed by Article 6 markets but that may only be possible from 2025 onwards. So the biggest challenge to Article 6 will be that its markets, particularly that of the Mechanism will have to directly compete with voluntary markets. Countries seeking to rely of Article 6 markets for the purchase of Article 6 credits towards meeting their NDC obligations may find that the cheapest source of carbon abatement has already been captured by the voluntary markets leaving only the expensive abatement opportunities left for the purchasing Paris Agreement countries.

7. What is the trade-off between a ‘common approach’ towards achieving net-zero emissions and staying competitive in a low-carbon world?

The trade-off is necessitated by the absence of a global carbon price. Ultimately, a global carbon price is the most efficient way of comparing the cost of decarbonisation. In the absence of that, the measure of the cost of decarbonisation will vary significantly between various countries in the world. The EU ETS price for carbon at Euro 80 means that goods imported from any other country without a similar carbon price will significantly disadvantage producers of similar goods within the EU. The EU’s response to this will be to introduce a carbon border tax. This will mean that measures like this will be a potential source of trade disputes between nations and multinational corporations, in order to stay competitive, will need to consider whether they wish to shift their target markets or find ways to restructure their business to minimise their carbon cost implications. 

This trade-off is an inevitable consequence of the bottom-up nature of the Paris Agreement. Article 6 can act as a bridge to partially resolve the problem by the establishment of an international carbon price which can then act as a proxy for multinationals to incorporate into their cost of business. However, this would be an imperfect solution because there would be no guarantee that all multinationals would adopt the same carbon price or act in the same way.