Post-COP27 Thoughts on Greening the Cape Town Convention
In June 2022, the governing council of UNIDROIT, a Rome-based intergovernmental organization with the objective to harmonize international private law across countries through uniform rules, discussed proposals for their upcoming work program. It is also debated, whether a new protocol on renewable energy equipment to the 2001 Cape Town Convention on International Interests in Mobile Equipment (CTC) should be pursued with a higher priority. The initiators intend to make private capital for renewable energy projects more accessible, especially in the global south. This blogpost discusses what the proposition is all about and why it is important – especially with a glance at green financing policy on the international stage.
Renewable Energy Projects and the Cost of Capital
The finance of renewable energy projects (wind, solar, hydropower, geothermal, or biomass) is one of the most pressing topics with regard to a global path towards a carbon-neutral economy. Therefore, an unprecedented increase in clean energy spending is required. This requirement poses particular difficulties for countries of the global south, where access to capital is lacking. One legislative approach to solve this issue is the attempt to make the production of green electricity more competitive. The political toolbox to achieve this is vast. In Germany, the Renewable Energy Act initially enabled renewable energy project developers to access the market with fixed, economically lucrative feed-in tariffs. As a result, more than 40% of the electricity produced in Germany each year is green today. But renewable energy projects still have high upfront investment requirements. This approach thus only helps to a limited extent if there is already a lack of overall financial resources. In the podcast episode “Why it’s so hard to invest in clean energy in Africa“, Rebekah Shirley (World Resources Institute Africa) states, that from approximately 600 billion USD of public and private annual finance for a global transition to a low carbon economy, very little is flowing towards the global south. She illustrates that the African continent only received roughly 19 billion USD and, only 2 billion USD were private capital. According to her analysis, among other things, the financing costs – the cost of capital – must be reduced to make public and especially private capital more accessible for renewable energy projects in the global south. As will be shown below, an important contribution to this could be made by a new protocol on renewable energy equipment to the CTC, currently discussed at UNIDROIT.
The CTC and Its Protocols
Legal systems have different approaches to securities, title retention agreements and lease agreements, leading to uncertainty for lending institutions regarding the efficacy of their rights. As a consequence, the flow of capital is disrupted by increasing borrowing costs. The CTC is an international treaty designed by UNIDROIT and ratified by 85 parties today. It aims to create a secured transactions regime, by standardizing transactions involving movable property. Thereby, the problem for creditors to obtain certain and opposable rights to high-value assets, which have no fixed location, is resolved. The CTC creates international standards for the registration of contracts of sale, security interests, leases and conditional sales contracts, and various legal remedies for default in financing agreements. If the execution of the contract takes place within the scope of application of the CTC, legal certainty is improved for creditors in the event of the debtor’s inability to pay. Consequently, the borrowing costs to debtors are reduced, which promotes the granting of credits for the acquisition of assets in the scope of the treaty. Nowadays, the latter includes aircrafts, railway rolling stock, space assets and mining, agricultural and construction equipment by means of four protocols added to the CTC over time (aircraft protocol, rail protocol, space protocol and MAC protocol).
COP27, International Green Finance Policy and Investment Security
Why not expand this framework, through the proposed new protocol and override borrowing costs benefits for the expansion of renewable energy and a global net-zero future? Such a legislative goal would certainly stand in line with the development of international green financing policies. In the context of COP27, in November 2022, more than 35,000 delegates came together in Sharm El Sheikh, Egypt, to take collective action against climate change. Last year’s discussions also focused on how to finance, implement and fulfil countries’ commitments to reduce greenhouse gas emissions and limit global temperature rise to 1.5 degrees. The international community pushes towards a flow of public and private green capital, especially in the direction of the global south. The basic prerequisite for this, the creation of a secure framework in the form of official commitments and agreements, needs to be created. For example, governments agreed to establish a new dedicated fund to assist developing countries in responding to loss and damage (“Loss and Damage” Fund). In addition, a new Just Energy Transition Partnership (JETP) funding deal will mobilize public and private investments to accelerate the expansion of renewable energies in developing countries. Also, the G7 countries want to set up a Global Shield to finance insurance and disaster prevention measures for a group of 58 countries most at risk from the effects of climate change. These assurances on the COP27 stage, even though they are described as rather symbolic and fragmentary, might be nutrients for crucial independent private investments to follow. However, legal certainty in credit granting represents an indispensable breeding ground for the latter.
Obstacles and Benefits from a Legal Perspective
Nevertheless, a prerequisite for the successful implementation of a new protocol on renewable energy equipment to the CTC is that such uniform rules are ratified by the relevant states and accepted by the industry. Ole Böger discusses the flexibility of the CTC for expansion, potential conflicts with national regulations and the added value from an industry perspective. He concludes that there are no real legal obstacles – especially since Article 51(1) CTC broadly allows its extension to objects of other categories through additional protocols (Böger, p 251). Nevertheless, the benefits of a new protocol on renewable energy equipment to the CTC are likely to depend on the specific types of equipment it is applied to (Böger, p 260). The author concludes that real added value can be achieved above all in the re-establishment of international security interests in the area of offshore wind equipment (Böger, p 264). Thus, uncertain conflict-of-law rules would no longer have to be applied. Further, it is important to ensure that the approach to mobile asset financing anchored in the CTC states a pragmatic vehicle for all parties. This approach differs from the project financing structures sometimes applied to (immobile) renewable energy projects (Böger, p 266). If the latter is applied, the author concludes that the availability of an international security for loans through CTC systems could in any case do no harm, but also not bring much additional benefit (Böger, p. 268).
It has been shown that there is a lack of capital, especially in the global south, for the transformation of the energy system towards climate neutrality. The latter is realized on the international stage. Attempts to counteract have so far only been effective to a limited extent. Both public and private capital must be redirected. This debate is reflected in the proposal to UNIDROIT to develop a new protocol on renewable energy installations to the CTC. Even if uncertainties remain as to the effectiveness of such an approach, the efforts would be remarkably in line with green finance policy at the international level and can be seen as part of a foundation for it. Furthermore, a political message for change would be set: Because the CTC has so far mainly stood for benefits for the carbon emitting aircraft (finance) industry – the aircraft protocol has been the most successful CTC addition so far – the proposal also presents itself as an opportunity to emphasize change.