fairness in global climate change finance

8/14/2019 Fairness in Global Climate Change Finance

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FairnessinGlobal

ClimateChangeFinance

ByAndrewPendletonandSimonRetallack

March2009

ippr2009

InstituteforPublicPolicyResearchChallengingideas Changingpolicy

WWW.IPPR.ORG


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ippr|FairnessinGlobalClimateChangeFinance2

Aboutippr ............................................................................................................................. 3

Acknowledgements ............................................................................................................... 3

Summary................................................................................................................................ 4

Listofabbreviations .............................................................................................................. 9

Introduction......................................................................................................................... 10

1.Estimatingcosts .............................................................................................................. 12

2.Financingproposals......................................................................................................... 15

3.BuildingaNorthSouthfinancepackage....................................................................... 22

4.Allocatingfinancialobligations ....................................................................................... 25

Conclusions.......................................................................................................................... 31References ........................................................................................................................... 33

Contents


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TheInstituteforPublicPolicyResearch(ippr)istheUKsleadingprogressivethinktank,producingcutting-edgeresearchandinnovativepolicyideasforajust,democraticand

sustainableworld.Since1988,wehavebeenattheforefrontofprogressivedebateandpolicymakingintheUK.Throughourindependentresearchandanalysiswedefinenewagendasforchangeandprovidepracticalsolutionstochallengesacrossthefullrangeofpublicpolicyissues.

WithofficesinbothLondonandNewcastle,weensureouroutlookisasbroad-basedaspossible,whileourinternationalandmigrationteamsandclimatechangeprogrammeextendourpartnershipsandinfluencebeyondtheUK,givingusatrulyworld-classreputationforhighqualityresearch.

ippr,30-32SouthamptonStreet,LondonWC2E7RA.Tel:+44(0)2074706100

E:[email protected].

RegisteredCharityNo.800065

ThispaperwasfirstpublishedinMarch2009.ippr2009

Aboutippr

ipprwouldliketothanktheHeinrichBllFoundationforitskindfundingandsupportforthisproject.

Acknowledgements


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Itisnowwellestablishedthatactiontoavoiddangerousclimatechangemusttakeplaceaccordingtotheprinciplesofresponsibilityandcapability,andtheUNsFramework

ConventiononClimateChange(UNFCCC)subscribestothisview.Morallyandinpoliticaltermsdevelopedcountriesshouldleadglobalmitigationbymakingsignificantdomesticemissionsreductions.Butinaworldoflimitedfinance,reductionsarguablybeundertakenwherevertheycanbemadeforthelowestcost.

Sinceemissionsreductionsindevelopedcountriesareinsufficienttoresolvetheclimateproblemandareoftenmoreexpensivetomakethanindevelopingcountries,theprinciplesofresponsibilityandcapabilitymightmoreproductivelybeappliedtothefinancing ofglobalreductions:thiswouldmeanthatthehigheracountryslevelofresponsibilityandcapability,thegreateritsshareofglobalclimatefinance.Technically,developedcountriesarealreadyobligedtotransferfinancetodevelopingcountries,undertheUNFCCC,whichstatesthatagreedfullincrementalcostsindevelopingcountriesshouldbemetbyfinanceand

technologyfromdevelopedcountries(Article4.3).

Whetherandhowthatobligationshouldbefulfilledisattheheartofthecurrentinternationalnegotiationsaimedatreachingaglobalpost-2012dealatCopenhageninlate2009.Itisfraughtwithdifficulty,largelybecauseofthesizeofthepotentialfinancialliabilitiesinvolvedandtheunpopularitythatwillarisefromaskingtaxpayersandconsumerstomeetthem.

Estimatingcosts

Thevariousestimatesofincrementalmitigationcostsareunsatisfactory.Whilebeingbasedinmanycasesonrigorousanalysis,especiallyofmitigationopportunitiesindifferentcountries,thereisahighdegreeofuncertaintyoverfuturefactorsthatwillhaveasignificantinfluenceoncosts.Inparticularthebehaviourofgovernments,officialsandpopulationsisdeeplyunpredictable;policycostsmayprovesignificantandthemostcost-effectiveroutetodecarbonisationmaynotalwaysbetheonetaken.

Nevertheless,thereisaconvergenceinthemostrecentcostestimationsataroundUS$100billionto$200billionfordevelopingworldcostsandaround$200billionto$400billionforglobalcostsby2020-2030.Adaptationcostswilladdsignificantlytothesesumsandarenowunavoidable.ItisperhapssignificantthatdevelopingcountriesintheUNnegotiationshavecalledforbetween$200billionand$400billionperannum.

AmorepragmaticandresponsiveapproachmaybetobaseestimatesoffuturefinancingofmitigationindevelopingcountriesonplansforNationallyAppropriateMitigationActions

(NAMAs),verifiedbyaninternationalapprovalprocessaccountabletoUNFCCCsignatories.

Financingproposals

Thesumsquotedaboveareseveraltimeslargerthancurrentclimatechangefinance.Thelargestexistingpoolisthe$6.1billionpledgedin2008bytendevelopedcountriestotheWorldBanksClimateInvestmentFunds(CIFs).Fromwherewouldgreatersumsoffinancecapableofmeetingtheneedsestimatedabovebedrawn?

1.Offsetting

ToincreasetheflowofoffsetfinancethroughtheKyotoProtocolsCleanDevelopmentMechanism(CDM),developedcountriescouldrelaxanylimitsontheproportionofdomestic

reductionsthatcanbeoffsetbypurchasingexternalcreditsorsetmoreambitioustargetstodriveamoreaggressiveoffsetmarket.TheUNFCCCestimatesthatby2020,offsettingcouldyieldupto$40.8billion.Butdevelopingcountriesareunlikelytoacceptanincreaseinoffsetsasasoleorevenmajoritysourceoffinanceforlow-carbondevelopment.

Executivesummary


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2.Leveragedorcompulsoryadditionaloffsetting

ForeverytonneofCO2 offsetindevelopedcountries,severalcouldbereducedina

developingcountryatapricerelatedtothemarketpriceofcarbon.Governmentsindevelopedcountrieswouldfirsthavetoagreetobindingemissionsreductiontargetsand

thentoacorrespondingratioatwhichtoleverageoffsets.Iftheytookonanemissionsreductiontargetof40percentbelow1990levelsby2020andoffsetaroundhalfata2:1ratio,thiscouldyield$130billionperyear.Suchamechanismwouldrequiredevelopedcountrieseithertoacceptdeepdomesticemissionsreductiontargetsortoleverageoffsetsathigherratios.Itwouldreplaceratherthanworkwithinexistingoffsetmechanisms.

3.EmissionsTradingSchemelevies

Thereiscurrentlyalevyof2percentonthesaleofpermitsintheCDM,theproceedsofwhichgototheAdaptationFund.Thelevycouldraise$200to$680millionannuallyin2020.BangladeshandBrazilhavebothproposedincreasesandattheUNFCCCCOP14meetinginPoland,developingcountriesproposedthataCDM-typelevybeappliedtoall

emissionstradingschemes.Theproposalwasblockedbydevelopedcountries.

4.Revenuefromdomesticpermitauctions

Developedcountriesareincreasinglyauctioningpermitstoemitundercap-and-tradeschemesupfront,providingarevenuestreamtogovernments.Aproportionoftheserentscouldbesetasidetosupportdevelopingcountrymitigation(andadaptation).IfallAssignedAmountUnits(AAUs)weresubjecttoregimesinwhichtheycouldbeauctioned,thenpost-2012,upwardof$300billioncouldberaised.Revenuesfromauctioning,however,areuncertainbecausethepricepaidbypollutersdependsondemand.Revenuesarealsocapturedbynationaltreasuriesandmaynotbeusedtofundlow-carbonactivitiesindevelopingcountries.

5.Upstreamauctionrevenue(AAUhold-back)

Norwayhasproposedthat2percentofAAUsareheldbackattheinternationallevelratherthanbeingassignedtocountriesandareauctionedtoraisemoneyforaninternationalfund.Thiswouldraise$15-$25billionperyear.OthershaveproposedthathigherpercentagesofAAUsareheldback.TheprinciplestandsahighchanceofbecomingpartoftheEUsnegotiatingofferforCopenhagen.However,holdingbackhigherpercentagesofAAUsorsettingareservepricemayberesistedbydevelopedcountriesbecausecostswouldbepassedontotheirconsumerswhilerentswouldbecapturedinternationally.USCongressviewsinternationalexpropriationoffinanceasunconstitutional.

6.CreditingNationallyAppropriateMitigationActions(NAMAs)

TheRepublicofKoreahasproposedasystemofcarboncreditsforNAMAstoallowforactionstobetakenearlyandfinancedupfrontagainstafuturesaleofcarboncreditsontheinternationalmarket.Thecreditswouldbepurchasedbydevelopedcountries,wheredeeperreductiontargetswouldbeagreed.ItspotentialvaluewoulddependonthescopeandeffectivenessofNAMAplansandontheavailabilityofdevelopedcountryfinancing.CreditingNAMAs,however,mightassistwiththepoliticsofapost-2012agreementasitcouldhelpfinancealreadyplannedlow-carbonstrategiesindevelopingcountries.

7.Globaltaxation

Switzerlandhasproposedalevyof$2pertonneatthenationallevelinallcountrieswithpercapitalevelsabove1.5tonnes,withcountriesretainingthefundsdependingontheirlevelof

development:40percentinthecaseofdevelopedcountriesand85percentforthepoorest.Thiswouldraiseapredictableleveloffinanceof$48.5billionperyearofwhich$18.4billionwouldbedepositedinaninternationalfund.Butthecostsofaflatcarbonlevywouldfallregressively.


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8.Otherlevy-basedproposals

Leastdevelopedcountries(LDCs)haveproposedaninternationallevyonaviationwhichcouldraisebetween$4and$10billionannuallyandalevyonbunkerfuelsforaviationandshipping,whichcouldraisebetween$4and$15billion.Brazilhashintedata100billion

climatefundinvolvinga10percenttaxonrevenuesfromtheproductionandtradingofoilandcoal.

9.Non-climate-relatedfundingsources

Otherfundingsources,suchasincreasesingeneraloverseasdevelopmentassistance,ataxoncurrencytransactions(TobinTax)ormorebroadlyonfinancialtransactions,revenuefromuntaxedincomeheldoffshoreandtheuseofsovereignwealthfunds,mayallplayafuturerole.Forexample,$11.5trillionofprivateassetscurrentlyheldinoffshorefinancecentreswouldyield$225billionannuallyiftaxedataconservativerate.

10.Frontloadingfinance

Frontloadingfinanceusingbondsraisedagainsttheguaranteeoftaxrevenueindevelopedcountriescouldleverageprivatesectorfinanceintomitigationmeasures.DevelopingcountriesareunderstandablycautiousbuttheEuropeanCommissionhashintedatapropositionwherebydevelopedcountriesguaranteelendingforwell-structureddevelopingcountryprojectsandpolicies.Thisapproachmightalsoremovesomeoftheshort-termpoliticalpressureondevelopedcountrygovernments,whosecontributionstoglobalclimatefinancingmustotherwisebedrawnfromanincreaseincoststotodaystaxpayersorconsumers.

BuildingaNorthSouthfinancepackage

Withinthecurrentstructureofthenegotiations,agreedfinancingislikelytocomeprimarilyfromKyoto-typesources,especiallywhiledevelopedcountriesremaincommittedtoputtinginplaceandlinking-upnationalorregionalcarbonmarkets.Thereforethechoiceisbetweendifferentcombinationsorwedgesofmeasuresthatadduptoanagreedsum.MeasuressuchastheCDMandoffsetleveragingareincompatible(offsetleveragingwouldreplacetheCDM).Others,suchasAAUholdback,canbescaledupbutappearpoliticallylessviablethelargertheybecome.

DevelopedcountrygovernmentsfacesomethingofaHobsonschoiceastheultimatesourceofthefinancingisthesameone:developedcountrypopulations.Thismayproveespeciallytroublesomeatatimeofeconomichardship.IftheKyoto-styleapproachcontinuestopervade,whileasimplerapproachofenhancingonemechanismmaybepreferabletoamorecomplexcollectionofmeasures,itmayprovepoliticallymoreattractivetospreadthecost

acrossanumberofmeasures.Giventhescaleoffinancingrequired(andthelikelyunwillingnessoftaxpayersandconsumersindevelopedcountriestopay),official climatefinancingshouldalsoaccommodateotherfinancialflows,suchasadditional,climate-relatedoverseasdevelopmentassistanceandtheuseofdebt-basedinstrumentssuchasfrontloading.

Thereisalsotheequallypoliticallychargeddiscussionconcerningthestructureandmechanismbywhichthefundingmightbegoverned,allocated,channelled,monitoredandverified.Therearetwochoice.ThefirstisasingleWorldClimateChangeFundapproach,asproposedbyMexico,towhichallcountrieswouldcontributeaccordingtotheirlevelofcumulativeemissions,populationandabilitytopay,butdevelopingcountrieswouldbenetrecipients.ItissupportedbytheEuropeanCommissionbutfacestwopoliticalobstacles:it

requirescontributionsfromdevelopingaswellasdevelopedcountries,somethingtheG77hasstaunchlyresisted,anddevelopedcountriesaretypicallyoftheviewthatanewfundcouldbeinefficient,wastefulandcostly.


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Conclusion

Thecostsofreducingglobalemissionsarelikelytobemet(iftheyaremetatall),forsoundeconomicandinescapablepoliticalreasons,fromavarietyofdifferentsourcesandviadifferentmechanismsandchannels;thismaybeespeciallytrueduringadeep,global

recession.Suchaneclecticpictureofglobalclimatefinancepointstotheneedforaninternationalarbiteroffairnessandgoodpractice:aformallymandatedbodythatwouldsetthestandardsforandverifymitigationactions,policiesandplans,keepaninventoryofdevelopeddevelopingcountryfinancialflows,developedbestpractice,makepolicyrecommendations,andreportbacktotheCommitteeofthePartiestotheUNFCCC.

Designingaclimatefinanceregimethatisdemonstrablyfairandbasedonclearindicatorsofequitycanhelpbothduringthisyearsnegotiationsandinpost-Copenhagendomesticdebatesindevelopedanddevelopingcountriesalike.AnindexofresponsibilityandcapabilityofthetypeusedintheGreenhouseDevelopmentRightsframeworkcanprovideareferenceforobserversandnegotiators,asubstantivebasisfornegotiationandareal-worldmethodologyforsharingoutagreedfinancialobligations.


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AAU AssignedAmountUnits

BAU Businessasusual

CDM CleanDevelopmentMechanism

CER CertifiedEmissionsReductions

CIF ClimateInvestmentFund

COP ConferenceofParties

CO2e Carbondioxideequivalent

Gt Gigatonne

REDD ReducedEmissionsfromDeforestationandDegradation

ETS EmissionstradingschemeEUA EUemissionallowance

GDP GrossDomesticProduct

GDRs GreenhouseDevelopmentRightsframework

GEF GlobalEnvironmentFacility

GNP GrossNationalProduct

IPCC IntergovernmentalPanelonClimateChange

LDCs Leastdevelopedcountries

NAMA NationallyAppropriateMitigationAction

OECD OrganisationforEconomicCooperationandDevelopment

ODA Official/overseasdevelopmentassistance

ppm Partspermillion

QUELROs QuantifiedEmissionLimitationandReductionObligations

RCI Responsibilityandcapabilityindex

UNFCCC UnitedNationsFrameworkConventiononClimateChange

Listofabbreviations


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Itisnowwellestablishedinpoliticalrhetoric,inthecampaignsofdevelopingworld-focusedorganisationsandintheUnitedNationsFrameworkConventiononClimateChange

thatactiontoavoiddangerousclimatechangemusttakeplaceaccordingtotheprinciplesofresponsibilityandcapability.Thisrulehashithertotypicallybeenappliedtomitigationaction,suggestingthattheburdenofglobalreductionsinemissionsshouldfallontheshouldersofthosecountriesmostliableintermsofcontributiontotheatmosphericstockofgreenhousegasesandmostabletopay.

However,witheverypassingday,asgloballevelsofemissionsincrease(Sheehan2008,AndersonandBows2008),thisargumentbecomesmoredifficulttoimplementasdevelopedworldemissionsareproportionatelylessthanthosefromthedevelopingworldwhoserateisincreasingrapidly.TheemissionsofthosecountriesinAnnex1oftheKyotoProtocol(developedcountries)andeventhetotalemissionsfromtheOECD(OrganisationforEconomicCooperationandDevelopment)couldbeeliminatedentirelyanddangerous

climatechangewouldnotbeavoided(EcoEquity2008).Absoluteemissionsreductionsmustnowtakeplaceindevelopingcountriestoo;emissionsreductionsmustbeglobalifdangerousclimatechangeistobeavoided.

Morallyandinpoliticaltermsdevelopedcountriesshouldleadglobalmitigationwithsignificantdomesticemissionsreductionsanddevelopingcountriesoftenstatetheirdesiretoseelow-carbonapproachesdemonstratedfirst.Butinaworldoflimited(andwaning)finance,reductionsarguablyshouldbeundertakenwherevertheycanbemadeforthelowestcost.Thissuggeststhat,sinceemissionsreductionsindevelopedcountriesareinsufficientinquantitytoresolvetheclimateproblemandareoftenmoreexpensive,theprinciplesofresponsibilityandcapabilitymightmoreproductivelybeappliedtothefinancingofglobalreductions.

InthetechnicalandlegaldebatesurroundingthecurrentUNnegotiations,developedcountriesalsofindthemselvesobligedtotransferfinancetodevelopingcountries.Article4.3oftheUNFCCC(1992),towhichallnegotiatingcountriesaresignatories,statesthatagreedfullincrementalcostsindevelopingcountriesshouldbemetbyfinanceandtechnologyfromdevelopedcountries.Ifthiscommitmentistobefulfilled,oratleastadevelopedtodevelopingcountryfinancialpackageofsomesortistobeagreed,thenthecostburdenoughttofallprogressivelybetween(andwithin)developedcountries(astheUNFCCCalsostates).

Whileconceptuallysimplethehigheracountryslevelofresponsibilityandcapability,thegreateritsshareofglobalclimatefinanceapplyingtheUNFCCCsequityprinciplesto

financeis,inpractice,fraughtwithdifficulty.Suchaconceptassumesthelevelsoffinancenecessary,measuredinhundredsofbillionsofdollarsperyear,arereadilyavailable;theyaremanifestlynot.Eveniftheywere,whatmethodologywouldbeusedfordeterminingwhopayswhatamount?Wereresourcesavailableandamethodologyagreed,pastattemptslargeandsmalltotransfersuchresourcesfromdevelopedtodevelopingcountrieshaveoften

provenunpopularwithoneorotherpartyandarguablyalsoineffective.1

Settingasidesomeoftheseperniciousproblems,itisclearfromthecurrentstateofinternationalclimatechangenegotiationsthatafinancialpackageofsomesortwillbenecessaryifthewayforwardpost-2012istobemappedoutattheforthcomingCopenhagen

Introduction

1.Thereisasizeableliteratureontheeffectivenessorotherwiseofaidandonaidconditionalityanditseffects.Effortsinrecentyearsbydonorcountriestocoordinatebetter,tountieaidfromdonorcountrygoodsandservicesandtosupportrecipientcountrygovernmentbudgetsdirectlyhaveallbeenintendedtoincreaseaideffectiveness.


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COP(ConferenceoftheParties).AsChinasrecentsubmissiontotheUNFCCCsecretariatsaid,DevelopedcountryPartiesshalltakesubstantiveactiontoprovidefinancialresourcesmainlyfromtheirpublicfinanceongrantandconcessionalbasisfordevelopingcountryparties,inaccordancewithArticle4.3,4.4,4.5,4.8,4.9andArticle11oftheUNFCCC

(FCCC/AWGLCA/2008/MISC.5).Mitigationcosts,thoughhighlycomplextoforecastbecauseofhugeeconomic,socialandpoliticaluncertainties,aresimplythedifferencebetweencarbon-intensiveenergy,industrial

andlandusepracticesandtheirlow-carbonalternative.2 Inaddition,mitigationinmany

casesdemandslarge,upfrontcapitalexpenditurescommontoandinmanycasesnogreaterthancomparableinfrastructuralendeavoursandastrongfocusonthedevelopmentofnewtechnology,whichrequiresaconstantflowoffinance.

Countriesbothdevelopedanddevelopinghavebeenreluctantandslowtopursuelow

carbonapproaches,inpartbecauseofthisincrementalcostbarrier.3 Inlieuofany

mechanismtoreducethisdifferential,governmentshavebeenunderstandablyreluctanttovisithighercostsespeciallyforenergysupplyontheirpeopleandindustriestostaveofwhatappearstomostadistantandintangiblethreat.

Focusingonthefinancialcostofemissionsreductions,ratherthantheemissionsreductionsthemselves,alsoopensuptheimportantdebateaboutwhopays.Developingcountrieswillnotcommitthemselvestoemissionsreductionsbecausedoingsoexposesthemtosignificantfinancialliabilities;thisisalsothereasonwhydevelopedcountrieshavebeenreluctanttoextendtheiremissionsreductioncommitmentsinafurtherphaseoftheKyotoProtocol.Especiallywhilemarket-basedmechanismscap-and-tradeorcarbontaxationarefavouredbypolicymakers,costswillultimatelyfalltotaxpayersandconsumers,whichis

likelytoproveunpopular.4

AimsofthepaperThispaperlooksatfairnessinmeetingcostsassociatedwithmitigatingandadaptingtoclimatechange.Itexaminesvariousassessmentsofcostandproposalsforhowtoraiseandchannelinternationalclimatechangefinance.ItalsousesthebestavailablemethodologytheindexofresponsibilityandcapabilityintheGreenhouseDevelopmentRightsFrameworktoanalysehowthefinancialburdenshouldfallinprinciple.Itthendiscussessomeofthepoliticalandpolicyimplicationsofthesharingoutoftheglobalfinancialburdenandtheraisingandchannellingoffinance.

2.Thispaperalsoconsidersadaptationcostsandmakespassingmentionofreducingemissionsfromdeforestationanddegradation(REDD),butitsfocusismitigationbecauseitscorethesisisthatburdensharingofmitigationeffortcanbetransferredeasilytoburdensharingofmitigationcostindeeditcouldbearguedthattheburdenofmitigationisacostburden.3.Therearemanyotherbarrierstothedeploymentoflow-carbontechnologies,suchasalackofregulatorymeasuresandashortageofskillsandtechnicalknow-how.

4.Carboncap-and-tradeschemes,suchastheEmissionsTradingSchemeintheEU,willincreasinglyoperatebyauctioningemissionsupfront(ratherthangrandfatheringallocatingthemtopollutersforfree).Thisauctioningprocessisadefacto taxonpolluters,thecostofwhichispassedontoconsumersthroughincreasedprices,especiallyofenergy.


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LordNicholasSterninhisreviewoftheeconomiccostsofclimatechangewasoneofthefirsttoattemptacomprehensive,globaleconomicanalysisofthecostsofdecarbonisation

(HMGoverment2006).ThenowfamousSternReviewestimatedthattheannualeconomiccostofstabilisingatmosphericconcentrationofCO2e(carbondioxideequivalent)at550

partspermillion(ppm)wouldbearound1percentofglobalGDP.Sternhassincedoubledthisestimateto2percentofglobalGDPfor500ppmstabilisation,principallyinlightoftheUNIntergovernmentalPanelonClimateChangesFourthAssessmentReport(IPCC2007)andbecausestabilisationat550ppmnowlackscredibilityasalevellowenoughtoavoiddangerousclimatechange(LondonSchoolofEconomics2008).2percentofglobalGDPat

2007levelsisaroundUS$1.3trillion.5,6

TheIPCCinitsfourthassessmentreportassessmentsurveyeddifferentmitigationcostestimationsofatmosphericstabilisationbetween445ppmand710ppmCO2e(IPCC2007).

Thecostsassociatedwiththisrangedfromaround3percentofglobalGDPtoaround-1.2

percent(soasmallincreaseinglobalGDP)between2012and2030.Therefore,stabilisation

at445ppmwould,intheIPCCsview,costaround$2trillionat2007levels(ibid).7

Thereare,astheIPCCobserves,majormethodologicaldifferencesbetweentop-down,wholeeconomystudiessuchastheSternReviewandstudiesbasedonabottom-upassessmentof

themitigationpotentialindifferentcountriesofarangeoftechnologies.8 Arecentbottom-

upstudybyMcKinseyandCompanyfindsthatannualincremental economiccostscouldbebetween200billionand350billion($273to$478billion)andin2030fora35percentreductioninglobalemissions:lessthan1percentofprojectedglobalGDP.Upfrontfinancing(capitalexpenditure)costscouldbe530billionperyearin2020and810billionperyearin2030(McKinseyandCompany2009).

EstimatesbytheUNFCCCsuggestthatin2030,additionalmitigationfinancingandinvestmentflowsof$200to$210wouldbeneededtoreduceglobalemissionsbymorethan30gigatonnesCO2e,with$76to$77billionofthecostsfallingindevelopingcountries

(UNFCCC2007).Thishassubsequentlybeenrevisedupduetohigherprojectedcapitalcosts,especiallyintheenergysectorinafurtherreport,requestedbytheAd-HocWorkingGrouponLongTermCooperationatCOP13inBali(UNFCCC2008).Itsnewmitigationcostestimatesare170percenthigherasaresult;around$350globallyperyearin2030,approximately$130ofwhichwouldfallindevelopingcountries.

TosupportitsrecentCommunicationontheCopenhagennegotiations,theEuropeanCommissionsJointResearchCentrehasalsocompletedaglobalcostsanalysisusingitsPOLESmodel.Itconcludesthattheannualcostofabatementreaches152billion($207billion)in2020inenergyandindustry(81indevelopedcountriesand71indevelopingcountries)or175billion($239billion)ifagricultureandavoideddeforestationareincluded.Thisisbasedondevelopedcountriesreducingemissionsby30percentin2020comparedto1990levelsandanincreaseindevelopingcountriesof20percentinthesameperiod(asignificantreductionagainstbusinessasusual[BAU]).

1.Estimatingcosts

5.AccordingtotheWorldBanksWorldDevelopmentIndicators,September2008,globalGDPadjustedforpurchasingpowerparityin2007wasUS$65.5trillion.6.TheEconomistIntelligenceUnitsForesight2020(2006)suggestedglobalPPP-adjustedGDPwouldincreaseatanaverageannualrateof3.5percentbetween2005and2020,totalgrowthoftwo-thirds.AccordingtotheWorldBank,globalGDPwasaround$60trillionin2005.7.ibid,WorldBank20088.Forafulldiscussionofthedifferencesandsimilaritiesbetweentop-downandbottom-upstudies,seeIPCC2007,althoughtheIPCCsassessmentofthevariouscoststudiesdoesnotincludemanyoftherecentstudiesmentionedinthispaper.


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Comparingcostestimatesisdifficultduetothemanydifferentsetsofassumptionsthatunderliethem(differenttechnicaldata,differentmitigationtargetsandbaselines,differenttime-sets,globalversusdevelopedanddevelopingworld,andsoon).Theaveragealthoughmoreorlessmeaninglessbecauseofthemixedmethodologiesandvarying

assumptionsfallsataround$670billionperannum.Figure1showsinsteadanaverageofthreerecentstudies:MckinseyandCompany;UNFCCC;andECJRCwhichsums$289billionperyear(in2020to2030).

TheCatalystProject9 estimatesthatfora450ppmCO2estabilisation10,globalemissionsneed

tohavebeenreducedby17GtCO2ein2020againstBAUprojects:5GtCO2einthe

developedworldand12GtCO2einthedevelopingworld.EstimatesbyitsCarbonFinance

WorkingGroupsuggestthedevelopingworldcostwilltotalanaverageofbetween80and115billion($109to$157billion)peryearbetweennowand2020.However,thisbreaksdownfurthertomitigationcostsofbetween55and80billion,10billionforR&Dand15to25billionforadaptation.

Developingcountries,throughtheG77andindividually,haveproposedthattofulfiltheirobligationsunderArticle4.3oftheUNFCCCdevelopedcountriesshouldcommitfinancingindevelopingcountriesequivalenttobetween0.5and1percentoftheirGNP$200400

billion.11 Thisislikelyintendedonlyasanindicationofscaleratherthantoimplyanylinkto

thelong-promisedandlargelyunmetOECDoverseasdevelopmentassistancetargetof0.7percentofGNP.

Adaptationcostestimatesalsovarywidely.TheWorldBanks(2006)oftenquotedestimate

of$10to$40billionin2020hasbeenjoinedmorerecentlybyOxfams(2007)estimateofmorethan$50billionannuallyandtheUNDevelopmentProgrammes(2007)estimateofannualadaptationinvestmentof$86billionperyearin2015.

Eventhoughcostassessmentssuchasthesehavebeenusefulthusfarinshowing

governmentsthevalueofearlyaction(evenifnottopersuadethemtoact)12,eachisbased

0

500

1,000

1,500

2,000

2,500

Stern

1

Stern

2

IPCC

high

McK

insey

low

McK

insey

high

UNFC

CC2007

UNFC

CC2008

ECJR

C

Aver

age*

*Average of bars 4 to 8 only

$

billions

Figure1.Globalcostestimates

9.TheCatalystProjecthasbeenestablishedbytheClimateWorksFoundationtoprovidetechnicaladviceandexpertisetonegotiatorsintheUNFCCCprocess.Seewww.catalystproject.info/10.UndertheCatalystProjectsworkingscenario,atmosphericemissionsconcentrationwouldinfactpeakat510ppm,returningtoordippingbelow450ppmlater.11.AccordingtotheUNStatisticsDivision,thecombinedGDPofAnnexIPartiesin2007was$40,217billion.

12.Governmentsinsomedevelopedcountries,suchastheUK,havebuilttheirownmodelstoweighupthecostsofdifferentoptionsastheyevolveinnegotiations.Developingtoolsofthisnatureonanopenaccessbasis,forinstancethroughopensourcesoftware,toallowallcountriestomakesuchjudgementsmayassistnegotiatorsfromcountrieswithfewerresourcestobetterjudgeoptions.


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onarangeofpotentiallyhighlyvariableassumptions.Forinstance,mitigationcostestimatesuseoilpriceprojections.Oilprices,asrecentexperiencehasshown,arepronetohighvolatility.Eachalsoassumesthatclimatechangepolicyespeciallythatwhichreliesheavilyonmarketmechanismswillplotthecheapestroutetoabatement.Forinstance,inits

executivesummary,theMcKinseyreportsprefixesitscostestimatesbystatingthatitsassumptionswouldholdifthemosteconomicallyrationalabatementopportunitiesarepursuedtotheirfullpotential(McKinseyandCompany2009).

However,inarecentcritiqueofclimatechangepolicytodate,economistDieterHelmidentifiespolicycostsasamajorpotentialflawintheeconomiclogicofmarginalabatement.Helmsuggeststhatgovernmentfailure,regulatorycapture,andtheimpactofrent-seekingbehaviourwithinthepolicyprocessarelikelytoleadtoanincreaseincosts

whentheabatementisundertakenintherealworld(Helm2008).13 Costsarethereforelikely

tobehigher,althoughbyhowmuchitisdifficulttosaybecausepolicycostsaredrivenbypoliticalandnoteconomicfactors.

Thereisawealthofliteratureexploringthereasonswhylow,neutralornegativecostabatementopportunities(no-regretsorwin-win)arenottakenup(forinstance,seeSorrelletal2004).Muchofwhathasbeenwrittentodateexplorestheproblemsoflackoftake-upofwin-winopportunitiesinindustrialisedeconomies,oftenatthehouseholdlevel(forinstance,seeNERAEconomicConsulting2007).Butitisclearthatitwouldbeamistaketoassumethatevennegative-cost(money-saving)abatementhappensautomatically:suchopportunitiesarebynomeansfullyexploitedevenindevelopedcountrieswithproactiveapproachesalreadyintrain.

Theconclusion,therefore,ofabriefscanoftheexistingestimatesofthecostsofmitigatingclimatechangeisthatallareatbestonlybroadlyindicativeandeachdifferentfromthelastorthenext.AfurtherproblemisthatmitigationpotentialmostadequatelysurveyedinMcKinseyandCo(2009)isinitselfadynamicconcept.Forinstance,ifmoreattentionwerepaidearlyontolow-carboninnovation,mitigationpotentialinthefuturemayincrease.Similarly,iffinancewerefrontloaded(andprobablysignificantlyscaled-up)toacceleratelarge-scaledeploymentofavailableornearmarkettechnology,inadditiontoagradualpressureonthefinancialacceleratorthroughcap-and-trade,futuredeploymentmightbecheapersooner.

Futurefinancingbydevelopedcountriesofmitigationindevelopingcountries,necessaryinordertosecureglobalactioninthenextdecadeortwo,mightthereforebebuiltupondevelopingcountryplansforNationallyAppropriateMitigationActions(NAMAs).Thesecouldincludedecarbonisationprojects,low-carbondevelopmentpoliciesandmeasuresandnational(orregional)sectoralapproachesandcouldpassthroughaninternationalapproval

processperhapsatechnicalbodyorsetofregionalpanelsaccountabletotheCOP(thatis,allUNFCCCsignatories)andbeperiodicallyreviewedtotakeaccountofthedynamicnatureofdecarbonisation.ThiscouldbeviewedasbeinginkeepingwiththeBaliDecision(UNFCCC2007),whichcallsfor:

nationallyappropriatemitigationactionsbydevelopingcountryPartiesin

thecontextofsustainabledevelopment,supportedandenabledby

technology,financingandcapacity-building,inameasurable,reportableand

verifiablemanner.

NAMAplanscouldthenbefinancedeitherthroughanew,globalfundorbyusingarangeofchannelsmonitoredandevaluatedbyanewexpertortechnicalbody(seeSection4below).

13.Forinstance,nationaltreasuriesinEUmembercountriesarecurrentlyunwillingtoearmarkall,orinsomecasesany,ofthemoneycapturedfromtheauctioningofemissionstradingpermitsforspendingonlow-carbonmeasures.Sowhiletheywillspendthismoneyonsomethingtheoveralleconomiccostofauctioningshouldbezeroitmaynotbeclimatechangemitigationmeasuresthatbenefit.


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Wherealltheaboveestimatesconvergeisonthenotionthatasaproportionoffuturewealth,mitigationcostswillbetrivial.However,viewedinabsolutetermsandonan

annualbasis,theyareanythingbut.Article4.3oftheUNFCCCnotwithstanding,anyreasonablemeasureoffairnessinthedistributionofthesecostswouldseethelionssharelikelytobebornebydevelopedcountries.However,thesumsconcernedareat

leastasbigascurrentflowsofofficialdevelopmentassistance(ODA). 14

Thesumsquotedabovearealsoseveraltimeslargerthancurrentclimatechangefinance.Thelargestexistingpoolisthe$6.1+billionpledgedlastyearby10developedcountriestotheWorldBanksbraceoffinancingmechanismsknownastheClimateInvestmentFunds(CIFs).Whiledevelopingcountriesmayyetcooperatewithandparticipateinthegovernanceofthesefunds,theG77maintainsthattheycannotbecountedasa

fulfilmentofAnnex1(AnnexII 15)Article4.3obligationssincetheywerenotagreed

underorchannelledthroughtheUNFCCC.

Inaddition,thereareseveralfundsforadaptation,threeofwhichareunderthegovernanceoftheGlobalEnvironmentFacility,aWorldBanktrustfund,andtheothertheAdaptationFundgovernedbyanewly-establishedBoardundertheCOP.TheAdaptationFundisfinancedbyalevyonCleanDevelopmentMechanismtransactionsandothercontributions(seebelow).TheGEFadaptationfundsaredrawnfromvoluntarycontributionsbydevelopedcountriesandcollectivelyamounttoaround$300million(UNFCCC2008)(asatOctober2008).

Fromwherewouldgreatersumsoffinancecapableofmeetingtheneedsestimatedabovebedrawn?Post-KyotoProtocol,theanswerisafamilyoffinancingproposalsrelatedtotheallocationofemissionsreductioncommitmentstoProtocolcountries

(presumablyincludingtheUnitedStatesseebelow),theoffsettingofthesereductionselsewhereintheworldandthesaleoftheseemissionsallowancesbygovernmentsorattheinternationalleveltopolluters.

Thusmostpost-2012financingproposalstodatepresupposeaKyotoProtocol-stylesystemwithexpandeddevelopedcountrycap-and-tradeschemesastheprincipleinstrumentsofclimatechangepolicy.Itisworthnoting,however,thatthisisasignificantpresupposition.TheUS,thoughrapidlychangingdirectiononclimatechangepolicyaftereightyearsofisolationism,andlikelytointroducedomesticcap-and-tradelegislationsoonifnotthisyear,isbynomeanscertaintoratifyafutureinternationalagreement.

Moreover,thepresumptionthatKyoto-relatedmechanismsshouldbethosefromwhichfinancetosupportglobalmitigationandadaptationissourcedisalsocontestable.Othersourcesoffinance,mechanismsandapproachesareopentopolicymakersandthebiggestfillipforclimatechangemitigationhithertoislikelytocomenotfrommechanismsrelatedtointernationalclimateagreementsbuteitherfromgovernmentsdomesticfiscalstimulusprogrammes,whichareprimarilydesignedtoincreaseeconomicproductioninthefaceofrecession,orfromregulation,suchasthatusedsuccessfullyinCalifornia.

2.Financingproposals

14.AccordingtotheOECDsDevelopmentAssistanceCommittee,ODAin2007stoodat$103.5billion.SeeAidTargetsSlippingOutofReach? (OECD2008).ThesamereportalsoobserveshowOECDcountriesareofftrackinmeetingtargetssetin2005forincreasingODAfrom$80billionin2004to$130billionin

2010.15.AnnexIIoftheUNFCCCliststhoseAnnex1countriesgenerallyOECDexcludingthetransitioneconomiestowhichArticle4applies.Seehttp://unfccc.int/essential_background/convention/background/items/1348.php


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Potentialsourcesoffinancing

Belowisabriefsurveyofpotentialfinancingsources,beginningwiththeKyotoProtocol-relatedfamily,thenconsideringarangeofotherfundingproposalsandsourcesandfinishingwithabriefdiscussionoffrontloadingordebt-basedfinancing.

1.Offsetting

TheprincipleofoffsettingiswellestablishedinthecurrentKyotoProtocolthroughtheCleanDevelopmentMechanism.Asitstandsalthoughhighlylikelytobereformedinanypost-2012agreementtheCDMisprojectbased,allowingindustryincountriesoperatingunderKyotoemissionslimitationandreductionobligations(QUELROs)topurchasecreditsissuedagainstabatementprojectsindevelopingcountries.

Someemissionstradingschemes(theEUsandAustralias)limittheproportionofdomesticreductionsthatcanbeoffsetbypurchasingexternalcredits.Toincreasetheflowofoffsetfinance,schemescouldeitherrelaxorremovethislimitorsetmoreambitioustargetswiththeaimofdrivingamoreaggressiveoffsetmarket.

Offsettinghasalreadyprovidedasteadyifsmall(relativetotheabovecostestimates)streamoffinancefromdevelopedtodevelopingcountriesthathasbroughtaboutsomesignificantgreenhousegasabatement.Whilecap-and-tradeschemesremainpopularandindeedproliferateasapolicyinstrumentforreducingemissionsindevelopedcountries,offsettingwillprovideareliablestreamoffinancetodevelopingcountriesandasimilarlyreliablesupplyofcheapreductionstodevelopedcountries.

Inenvironmentalterms,offsettingdoesnotprovideadditionalmitigation.Unlessthereweredeeperreductiontargetsindevelopedcountries,ineffectdeepenoughtoincorporatebothdevelopedanddevelopingcountryreductionsoveragivenperiod,thenoffsetswouldnotdrivemitigationinadditiontothatagreedbydevelopedcountryreductions.Andyetthe

avoidanceofdangerousclimatechangenowreliesonmitigationinbothdevelopedanddevelopingcountries(GlobalClimateNetwork2008).

Developedcountrieswillarguetheyneedtooffset,especiallyastheydeepentargetsinsecondandthirdKyotocommitmentperiods;offsettingisinevitablewhilemarketmechanismspersist.Developingcountriesareunlikelytoacceptanincreaseinoffsetsasasoleorevenmajoritysourceoffinanceforlow-carbondevelopment.

Potentialvalue:Itdependsonthedepthofdevelopedcountryemissionsreductiontargets,buttheUNFCCCestimatesthatby2020,offsettingof0.4to1.4GtCO2eatanaverageprice

of$24pertonneofCO2ecouldyieldbetween$9.6and$40.8billion.Withthecarbonprice

currentlydepressedthroughoversupply,CERshaverecentlybeentradingatlessthanhalf

thisprice.16

2.Leveragedorcompulsoryadditionaloffsetting

TheCatalystProjectsfinanceworkinggrouphassuggestedthatoffsetscouldbeleveraged;foreveryonetonneofCO2eoffsetindevelopedcountries,severalwouldbereducedina

developingcountryatapricerelatedtothemarketpriceofcarbon.Governmentsindevelopedcountrieswould,ineffect,beobligedtobuyanagreednumberofthesehigh-pricedoffsetstomakeupthedifferencebetweentheirpost-2012obligationsandtheiractualdomesticemissionsreductions.Similarproposalshavebeenmadethat,forinstance,suggestdevelopedcountriesshouldprocureagreedquantitiesofCERsfromdevelopingcountriesandretirethem,ratherthanusethemtooffsetdomesticemissions(Mllerand

Ghosh2008).

16.EUemissionallowance(EUA)priceshavebeenconsistentlybelow10pertonnesinceAutumn2008.TheCERpriceisnecessarilybelowtheEUAprice.Seewww.pointcarbon.com


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otherfactors.Forinstance,sinceAutumn2008,thecarbonpriceinEuropehasfallenduetoweakeconomicoutput.Revenuesarealsocapturedbynationaltreasuriesandmaynotbeusedtofundlow-carbonactivitiesletalonethoseactivitiesindevelopingcountries.

Potentialvalue:IfallAssignedAmountUnits(AAUs)circa16billionweresubjectto

regimesinwhichtheycouldbeauctioned,thenpost-2012,dependingonthecarbonprice,upwardof$300billioncouldberaisedbynationalgovernments.However,asanindicationthatfullauctioningofallpermitsissomewayaway,theEUwillnotauction100percentofitsETSpermits(whichinturnisonlyaproportionofitstotalAAUs)until2027.In2020theETSauctionisexpectedtoraise30billionannually,muchofwhichislikelytoberetainedbynationalgovernmentsandusedforgeneralexpenditure,withperhaps50percentusedtocovermitigationcosts(Buchan2008).Onlyaproportion,ifany,ofthisislikelytogotosupportactionindevelopingcountries.

5.Upstreamauctionrevenue(AAUhold-back)

Norwayhasproposedthat2percentofAAUsareheldbackattheinternationallevelrather

thanbeingassignedtocountries(withQUELROs)andareauctionedtoraisemoneyforaninternationalfund,primarilyforadaptationandavoideddeforestation.OthershaveproposedsimilarschemeswithhigherpercentagesofAAUsheldbackattheinternationallevelformoregeneralmitigationandadaptationfinancing(Spratt2009)orproposedsimilarprinciplesbutwithoutspecifyingthequantityofAAUstobeheldback(EC2009).

AAUhold-backoffersthepotentialforcaptureofaproportionoftherentsfromauctioningattheinternationallevel,yieldingaflowoffinancetothedevelopingworld(asopposedtoleavingthistothediscretionofindividualgovernments).Indeed,itcouldbearguedthattoavoidcaptureofrentsbynationalgovernments,allAAUsshouldbeauctionedattheinternationallevelratherthanattheregionalornationallevel.

ThevolumeoffinancethiswouldyieldwouldremainuncertainasthepricepaidfortheAAUsheldbackwouldbedeterminedbytheinternationalcarbonmarket.Toovercomethisflaw,areservepricecouldbesetusingamethodologysimilartothatusedbysomenationalgovernmentsinauctionsofETSpermitsinordertoguaranteeaminimumleveloffinance.

TheprincipleofAAUhold-backisincludedintherecentECCommunicationandstandsagoodchanceofbecomingpartoftheEUsnegotiatingofferforCopenhagen.However,reservepricesorhigherpercentagesofAAUsheldbacktoyieldgreaterand/ormorepredictablelevelsoffinancewillberesistedbydevelopedcountrygovernmentsbecausecostswouldbepassedontotheirconsumerswhilerentswouldbecapturedelsewhere.

Potentialvalue: TheUNFCCCestimatesNorwaysproposedauctionof2percentofAAUswouldraise$15-$25billionperyear(UNFCCC2007).StampOutPoverty,aUKdevelopment

financecampaigninggroup,proposestheauctionof8percentofAAUstoraise$56billionperyear(Spratt2009).TheCatalystProjecthascalculatedthateitherselling13percentofAAUsat30pertonneorlevyinga4pertonnechargeon100percentofAAUswouldyield70billion(CatalystProject2009).

6.CreditingNationallyAppropriateMitigationActions(NAMAs)

AproposalbytheRepublicofKoreacallsforasystemofcarboncreditsforNAMAstoallowforactionstobetakenearly(UNFCCC2008)andfinancedupfrontagainstafuturesaleofcarboncreditsontheinternationalmarket.Thecreditswouldbepurchasedbydevelopedcountries,wheredeeperreductiontargetswouldbeagreed(sodrivinggreateroffsettingactivity).

KoreascreditingNAMAsproposalfitswellinprinciplewiththeProjectCatalystproposalaboveforleveragingoffsets(ineffect,creatingdeeperdevelopingcountrymitigationtargetsthroughcreatinganoffsetratioofgreaterthan1:1).However,NAMAscouldintheorybecreditedbyanystreamoffinanceandevenbydebt-basedmechanisms.


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Aswellasprovidinganincentiveforearlyactionandkeepingtheglobalcostsofmitigationlow,creditingNAMAsmightassistwiththepoliticsofapost-2012agreementasitcouldhelpfinancealreadyplannedlow-carbonstrategiesindevelopingcountries.

Potentialvalue:ThiswoulddependverymuchonthescopeandeffectivenessofNAMA

plansdrawnupbydevelopingcountriesandontheavailabilityofdevelopedcountryfinancingthroughadeepeningofmitigationcommitment.

7.Globaltaxation

Switzerlandhasproposedalevyof$2pertonneofCO2eatthenationallevelinallcountries

withpercapitalevelsabove1.5tonnes,withcountriesretainingdifferentproportionsofthefundsdependingontheirlevelofdevelopment;40percentinthecaseofdevelopedcountriesand85percentforthepoorest.

Theappealofaglobalcarbontaxofthissortisthatitwouldleadtoapredictableleveloffinance,whichcouldbedepositedinaninternationalfund.NotwithstandingthepercapitathresholdintheSwissproposal,thecostsofaflatcarbonlevywouldfallregressively,althoughclearly,developingcountrieswouldretainagreaterproportionoftherentscollectedthanwoulddevelopedcountries.Thiscouldbeaddressedbybuildinginfurthermeasuresofdevelopmentandthereforeexcludingfromthelevyaproportionofsomecountriesemissionsbelowagivenpercapitalevel(inotherwords,athresholdmethodologycouldbeintroducedforallcountriesorthetaxableratecouldbehigherindevelopedcountries).

Potentialvalue: $2pertonnelevyonemissionsofallcountrieswithpercapitalevelsabove1.5tonneswouldraise$48.5billionperyearofwhich$18.4billionwouldbepassedontoaninternationalfund,accordingtotheGovernmentofSwitzerland(2008).

8.Otherlevy-basedproposals

Thereareseveralproposalsforleviesonemissions.

Leastdevelopedcountries(LDCs)haveproposedaninternationallevyonaviation(IATAL),whichcouldraisebetween$4and$10billionannually(UNFCCC2008).

LDCshavealsoproposedalevyonbunkerfuelsforaviationandshipping,whichcouldraisebetween$4and$15billionannually(UNFCCC2008).

ThePacificnationofTuvaluhasproposedthatpermitsfortheemissionsofinternationalaviationandshippingareauctioned,raising$28billionperyear(UNFCCC2008).

Brazilhasalsorecentlyhintedata100billionclimatefundproposalinvolvinganincreaseintheCDMlevyanda10percenttaxonrevenuesfromtheproductionandtradingofoiland

coal(PointCarbon2009).

9.Non-climate-relatedfundingsources

Otherfundingsources,suchasgeneraloverseasdevelopmentassistance(ODA),ataxoncurrencytransactions(TobinTax)ormorebroadlyonfinancialtransactions,revenuefromuntaxedincomeheldoffshoreandtheuseofsovereignwealth,mayallplayafutureroleinclimatechangemitigation.Forinstance,theTaxJusticeNetworkestimatesthat$11.5trillionofprivateassetsarecurrentlyheldinoffshorefinancecentres,whichwouldyieldanannualincomeof$225billioniftaxedataconservativeannualrate(TaxJusticeNetwork2005).Sovereignwealthfundsworldwidecurrentlyholdalmost$3.2trillion(Balin2008)asaresultoftaxingnaturalresourceextraction,transferringforeignexchangereservesandsovereign

debtdisbursement.Developedcountriesmaypreferafinancingarrangementthatwouldseethemchannelclimatefinancingthroughgeneraldevelopmentassistanceprogrammes,targetedatthe


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poorestcountries.Forthenegotiations,asidefromthepoliticaldifficultiesassociatedwithperpetuatingwhatdevelopingcountriesperceiveasadonor-recipientrelationship,workingourpreciselywhatisadditionaltoODAisdifficultwhendevelopedcountrieshaveyettoreachtheir0.7percentofGNPtargetandwillnotdosoforsomeyears.

Recentstimuluspackagesannouncedinupwardof15countriesworthalmost$2.8trillionhaveanestimatedclimatechange-relatedcontentof$430billion(HSBC2009).21 TheUnited

NationsEnvironmentProgrammehasproposedthatone-thirdofstimuluspackagesbespentonclimatechangemitigationorenvironment-relatedactivities.Mostifnotallstimuluspackagefinancewillbespentdomesticallybythegovernmentsconcerned,althoughtheWorldBankhasproposedavulnerabilityfundintowhichcountrieswouldpay0.7percentoftheirvalue(WorldBankNews&Broadcast2009).

10.Frontloadingfinance

TheECinitsrecentCommunicationhasproposedaGlobalClimateFinancingMechanism,whichwouldbedesignedtofrontloadclimatefinancing,especiallyforadaptationmeasures.

ItissimilartotheInternationalFinanceFacilityforimmunization,inwhichdevelopedcountriesissuebondsagainstfuturedevelopment(ODA)spendinginordertofrontload

financing.22

AlthoughintheCommissionswordsThesefundswouldinparticularallowforanimmediatereactiontourgentadaptationneeds,frontloadingusingbondsraisedagainsttheguaranteeoftaxrevenueindevelopedcountriescouldbeaveryusefulmeansofleveragingprivate

sectorfinanceintoawholerangeofmitigationmeasuresandintoREDD,too.23 Indeed

whereasadaptationmeasuresmayofferalimitedprospectofreturnsoninvestmentsandsogovernmentborrowingwouldberepaidbytaxpayers,mitigationmeasuresespeciallyenergysavingandenergyefficiencyinvestments,butalsoenergyinfrastructurecouldproveprofitable.

Developingcountriesareunderstandablycautiousaboutdebt-basedfinancinginstruments;ahangoverperhapsfrompastdebtcrises.However,theECsGlobalClimateFinancingMechanismhintsataninterestingpropositionwherebydevelopedcountriesguaranteelendingforwellstructureddevelopingcountryprojectsandpolicies.Thisapproachcouldprovideanotherperhapssignificantincrementtowardsthefulfilmentofdevelopedcountryobligations.

Thecostoffinancethroughgovernmentbondsisdeterminedbythecreditratingoftheissuinggovernment,governmentsororganisation.IfthebondisissuedbytheWorldBank,whichhasanAAArating,orbyAAA-ratedgovernmentsonly,thenfinancingischeaperbecauseitisjudgedbyinvestorstobelessrisky(inotherwords,robustpublicfinances

guaranteethatevenifaprojectfails,investorswillnotlosetheirmoney).However,evenanEU-widebondwouldbemoreexpensive;inpractice,thereareonlyahandfulofgovernmentsandthedevelopmentbanksthatcouldissuesuchbonds.

Also,wereanysignificantfundsbuiltupattheinternationallevelthroughanyoracombinationoftheabovemechanisms(thatis,AAUorpermitauctions,leviesortaxes),thefundcouldbeusedtosupplyconcessionallendinginadditiontogrants-basedfinance.Again,thisapproachwouldbeparticularlyappropriateforfinancingthenegativecostmeasuresdevelopingcountriesmighttake.

21.Someofthemeasuresincludedinthe$430billionfigure,suchasspendingonimprovementstorailwaysalargeproportionofChinasstimuluspackagewouldnotnecessarilybecountedaslow-

carbonactivityin,forinstance,McKinseyandCompany2009.22.Seewww.iff-immunisation.org/01_about_iffim.html23.ThePrincesRainforestProjectarguesthatmostdeforestationwilltakeplacebeforeglobalcarbonmarketsarefullyfunctioningandthereforefrontloadedfinancewillbenecessarytoensureearlyactiontoreducedeforestationemissionstakesplace.SeePrincesRainforestProject(2008).


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Anotherappealisthatdebt-basedmechanismsessentiallyborrowlongtermfromfuture,presumablywealthier,generationswhomightbegladtoseeclimatechangemitigation

measurestakennow.24 Thismightremovesomeoftheshort-termpoliticalpressureon

developedcountrygovernments,whosecontributionstoglobalclimatefinancingmust

otherwisebedrawnfromanincreaseincoststotodaystaxpayersorconsumers(Foley2007),measuresthatarelikelytoproveincreasinglyunpopulardomestically(LockwoodandPendleton2009).

24.Currentfinancecrisisnotwithstanding,globalGDPisprojectedtogrowbeyond$100trillionannuallyby2020.


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BreakingtheimpasseattheheartoftheongoingUNFCCCnegotiationsreliesonthefulfilmentoftwoareasoftheConventionthatareofparticularimportancetodeveloping

countries,whoseparticipationinlong-termcooperativeactionisessentialiftheoverallobjectiveoftheConventionistoberealised.Theseareequity,andtheobligationsofdevelopedcountries,aslistedinArticle4.

ThepreambleoftheConventioncallsforthewidestpossiblecooperationbyallcountriesandtheirparticipationinaneffectiveandappropriateinternationalresponse,inaccordancewiththeircommonbutdifferentiatedresponsibilitiesandrespectivecapabilitiesandtheirsocialandeconomicconditions.ThereiscurrentlynoagreedmeansattheConventionlevelbywhichtoquantifyandthereforedifferentiatebetweenlevelsofactionbeyondacrude

divisionofdevelopedorAnnex1countriesanddevelopingornon-Annex1countries.25

Relatedtothis,thesecondimportantareaoftheConventionfordevelopingcountriesisits

Article4,whichliststheobligationsofdevelopedcountries.Inparticular,Article4.3statesthatdevelopedcountriesshallprovidenewandadditionalfinancialresourcestomeettheagreedfullcostsincurredbydevelopingcountryPartiesincomplyingwiththeirobligations.Thekeywordsareagreedfullcostsasitstatesthatthefullincrementalcostsofmitigationandadaptationindevelopingcountriesshouldbepaidbydevelopedcountriesbutalsoimpliesthatthevolumeofthesemustbeagreed.

Whiledevelopingcountrymitigationcostsare,byallestimations,asmallfractionofcurrentandfuturedevelopedcountrywealth,thebillthesameormorethanthecurrentsumofOECDcountriesODAoutlayislargeand,whiletheKyoto-typeapproachpredominates,mustbepaidbyconsumersandtaxpayersindevelopedcountries.Thereisaveryrealthreatofapoliticalbacklashfromdevelopedcountrypopulationsshouldgovernmentscommit

themtointernationalaswellasnationalincrementalcosts(LockwoodandPendleton2009).Thismayproveespeciallytroublesomeatatimeofeconomichardship.

Nevertheless,withinthecurrentstructureofthenegotiations,the agreedfinancingislikelytocomeprimarilyfromKyoto-typesources,especiallywhiledevelopedcountriesremaincommittedtoputtinginplaceandlinkingupnationalorregionalcarbonmarkets.Therefore,thechoiceisbetweenanumberofdifferentcombinationsorwedgesofmeasuresthatadduptoanagreed sum(seeFigure2below).Some,suchastheCDMandoffsetleveraging,

3.BuildingaNorthSouthfinancepackage

0

50

100

150

200

250

Mixed

sources

Upscaled

AAU holdback

Offset

leveraging

$

billions

Leveraged offsets

13% AAU

holdback

2% AAU

holdback

CDM

CDM levy

Earmarked A1

auction revenue

Levies on bunkers

Figure2.Financingwedges

26.DevelopedcountriesboundbytheKyotoProtocolhavedifferentiatedtargetsaslaidoutinitsAnnexB.DifferentiationintermsofmitigationefforthasalsotakenplaceinsidetheEuropeanbubble.FurtherdifferentiationbetweenEuropeannationsaccordingtolevelsofemissions,GDP,populationandabatementeffortstodateisproposedintheCommissionsrecentCommunication.


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Whiledevelopedcountriesarelikelytobecautiousintheirapproachtotheestablishmentofanew,globalfund,theEuropeanCommissioninitsrecentcommunication(EC2009)hashighlightedanapproachinthestyleoftheMexicanproposal.Therearealsoprecedentsforinternationalfundsthatarenotwhollywithinthedevelopmentbankstructures:

TheGlobalEnvironmentFacility,takenoutofWorldBankgovernancein1994,administersfinancialflowsunderexistingenvironmentaltreaties,suchastheConventiononBiodiversityandexistingUNFCCCmonies.Furtherchangeswouldberequiredtoitsgovernance,butitisaprovenoperatorofenvironmentalfinancialtransfers.(Seewww.gefweb.org)

TheGlobalFundtofightAIDS,TBandMalariahasdisbursed$11.4billionsince2002,butitsstructure,whichusestheWorldBankasatrusteeonly,establishesausefulprecedent.TheGlobalFundhasaboardmadeupofdonors,recipients,NGOsandrepresentativesfromaffectedcommunitiesandanindependenttechnicalreviewpanelthatguidestheboardonfundingdecisions.(Seewww.theglobalfund.org)

OneofthereasonswhytheEuropeanCommissionmayfavouraMexican-stylefundis

becauseEuropeanmemberstatescurrentlypayintotheEuropeanStructuralandCohesionFunds,whichareconceptuallysimilar.ThepurposeofthefundsistoassistpoorerregionsandmemberstatesandtobetterintegrateEuropeaninfrastructure;theyaccountformorethanone-thirdoftheEUsbudget.Mostnotably,whileallmemberstatescontributetothefunds,somereceivemoreassistancethanothers.

Thealternativetoaglobalfundisanewinternationalbody29 toapproveandverify

developingcountryNAMAsandtomonitor,reportonandverifyfinanceflowsfromdevelopedcountries.Suchanauthoritywouldkeepaglobalinventoryofmeasurable,reportableandverifiable(MRV)developedcountryfinanceanddevelopingcountrymitigationactions.Thereisnoprecedentforabodyofthissort,butitmightbuildonthe

experienceoftheCDMboard.However,itwouldalsoneedteethanditisnotatallclearwhatsanctionswouldbesufficienttoensuredevelopedcountriesmetagreedfinancingobligations.Theglobalfundmodelalsosuffersfromthisproblem.

29.Althoughtheglobalfundmodelwouldalsoneedabodytoapplystandardstomitigation.


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Fairness(orequity,inthewordsoftheUNFCCC)willbeakeycomponentofclimatechangepolicyandofaframeworkattheinternationallevel,aswellasinnationalpolicy.Itis

arguablyeasiertoapportioncostsprogressively,especiallyatthenationallevel,thanitistoshareoutremaininggreenhousegasemissions.30 Attheinternationallevel,theconceptsof

responsibilitycurrentandpastcontributionstotheatmosphericstockofemissionsandcapabilitythecapacityofanationtocontributetowardsthemitigationoffutureemissionsattheheartoftheUNFCCCcouldformthebasisofamethodologicalapproachtofairness.

Whiletheseprincipleshavebeenappliedtodeterminefairsharesofmitigationeffort(througheffortsharing,suchascurrentlyinAnnexBoftheKyotoProtocolorwithintheEuropeanUnionKyotobubble),theyareyettobeusedtodeterminefairsharesintermsofthecostsofmitigation.However,suchprinciplesespeciallythoseconcerningabilitytopay

areapplicabletofinancialeffort-sharing,too.31 Further,ifdevelopedcountriesaretofulfil

theirUNFCCCobligationsandtodosoinamannerthatismeasurable,reportableandverifiable,astheBaliDecisionstates(UNFCCC2007),thensharingoutArticle4.3financingcommitmentsaccordingtoaclear,defensiblemethodologywillbenecessary.

Avarietyofexistingproposalsforpost-2012climateframeworksorregimestakeintoaccountmeasuresofequity.Forinstance,therecentCarbonBudgetingproposaldevelopedbytheChineseAcademyofSocialSciencesadjustspercapitaemissionstotakecumulativepastandfutureemissions,naturalresourceendowmentandotherfactorsintoaccount.Otherframeworks,suchasKyoto2,whichisaproposalforupstreamcarbontrading,andothermarket-basedproposalsdealwithequityex-post,bydistributingtheproceedsoftradesinaprogressivefashion(seewww.kyoto2.org).

TheGreenhouseDevelopmentRightsFramework(GDRsseeEcoEquity2008),awell-known,equity-based,burden-sharingclimatechangeframeworkproposal,isperhapsuniqueinthatitquantifiesresponsibilityandcapability,theConventionsequityprinciples.GDRsallocatesmitigationeffortandadaptationcostaccordingtoaglobalresponsibilityandcapabilityindex(RCI).Responsibilityiscalculatedbytakingintoaccountcumulativeemissionspercapitasince1990andcapabilityismeasuredasPPP-adjustedGDPpercapitaaboveanincomethresholdof$7,500.Thetwoindicatorsarecombinedwithequalvalue

(1:1)toarriveatasingleindex.32

Table1showsthesharesofglobalmitigationeffort(inpercentageterms)countriesandgroupsofcountriesareassignedonceflatnationalsharesareadjustedtotakeintoaccountresponsibilityandcapability.NotethatwhileAnnex1countrieshavealessthanone-fifth

shareofglobalpopulation(andnowemitlessthanhalfofgrossannualemissions)theyareassigned77percentoftheglobalmitigationburdenin2010declining,becauseofassumedincreasedwealthandrisingemissionsinthedevelopingworld,to69percentin2030and61percentin2030.

4.Allocatingfinancialobligations

30.Forinstance,ithasbeennotedthatpoorerpeopleindevelopedcountriesmayhavehighemissionsbutmayalsofacegreaterbarrierstoreducingthem.Equally,poorerpeopleindevelopingcountriesdonotneedaccesstoagrowingemissionsbudgetiftheyhaveaccesstolow-carbonenergytechnology.31.Thecostsofmitigationgloballyvarysignificantlyfromcountrytocountryandsomitigationcostallocationisnotadirectproxyforemissionsallocation.However,thispaperlargelyfocusesonmitigationcostsindevelopingcountriesonly(asidefrominthesectionsfocusingonglobalfund-basedproposals)andthereforeassumestheGDRsburden-sharingapproachwouldbeadequatewithoutsignificantrevision.32.RCI=aC+bRwhereaandbsum1andeachhavea0.5value.


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SincetheRCIissensitivetonationalper-capitawealthitcanbeconsideredindicativeofthecapacityofacountrytocontributetotheglobalcostsofmitigating(andadaptingto)climatechange.Itthereforelendsitselfwelltofinancialburdensharing.However,inordertoapplytheRCItothefinancialobligationsofdevelopedcountriesunderArticle4.3oftheUNFCCC,itisusefulalsotoconsiderhowfinancingwouldbesharedamongonlydevelopedcountrieswithobligationsundertheConvention(thatis,AnnexII)andtoremovefromtheindexnon-Annex1andtransitioneconomiesandredistributetheRCIaroundAnnexIIcountries.

Table1.GDRsresultsforrepresentativecountriesandgroups

Year 2010 2020 2030

Population GDPpercap. Capacity Responsibility RCI[1] RCI RCI(%ofglobal) (US$PPP) (%ofglobal) (%ofglobal) (%ofglobal) (%ofglobal) (%ofglobal)

EU27 7.3 30,472 28.8 22.6 25.7 22.9 19.6

EU15[2] 5.8 33,754 26.1 19.8 22.9 19.9 16.7

EU12[3] 1.5 17,708 2.7 2.8 2.7 3.0 3.0

UnitedStates 4.5 45,640 29.7 36.4 33.1 29.1 25.5

Japan 1.9 33,422 8.3 7.3 7.8 6.6 5.5

Russia 2.0 15,031 2.7 4.9 3.8 4.3 4.6

China 19.7 5,899 5.8 5.2 5.5 10.4 15.2

India 17.2 2,818 0.7 0.3 0.5 1.2 2.3

Brazil 2.9 9,442 2.3 1.1 1.7 1.7 1.7

SouthAfrica 0.7 10,117 0.6 1.3 1.0 1.1 1.2

Mexico 1.6 12,408 1.8 1.4 1.6 1.5 1.5

LDCs[4] 11.7 1,274 0.1 0.04 0.1 0.1 0.1

AnnexI 18.7 30,924 75.8 78.0 77 69 61

Non-AnnexI 81.3 5,096 24.2 22.0 23 31 39

Highincome 15.5 36,488 76.9 77.9 77 69 61

Middleincome 63.3 6,226 22.9 21.9 22 30 38

Lowincome 21.2 1,599 0.2 0.2 0.2 0.3 0.5

World 100 9,929 100% 100% 100% 100% 100%

Notes:[1]Responsibilityandcapabilityindex;[2]The15countriesthatmadeuptheEUbeforeMay2004;[3]The12countriesthat

joinedtheEUin2004and2007;[4]Leastdevelopedcountries

Table2.RCIForAnnexIIonly(AIIcountriesprovide100%offinancebetween2010and2020)Year 2010

Popn(%ofglobal) GDPpercap.($USPPP) RCI(%ofaII)

EU15[1] 5.8 33,754 32.9

Germany 1.20 34,812 7.8

UK 0.9 34,953 5.3

France 0.91 33,953 4.6

UnitedStates 4.5 45,640 47.7

Japan 1.9 33,422 11.2

Others 1.0 38,149 8.2

AnnexII 13.2 30,924 100Note:[1]TheEUs12accessioncountriesarenotlistedinAnnexIIbutprobablyexposedtoArticle4.3

obligationsasaresultoftheirEUmembership.However,becauseoftheirrelativelymarginalimpactonthebig

pictureinthistable,theyarenotincludedinthecalculation.


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TheRCIinTable2,adjustedfromtheoriginalintheGDRsframework,thereforeprovidesaprogressive(equitable)formulathatcanbeusedtoshareoutAnnexIIcountriesArticle4.3obligations(thatis,wherecountrieslistedinAnnexIIpayforallagreednewandadditionaldevelopingcountrycosts).Asanindicationofthesumsinvolved,theright-handRCIcolumn

alsoservesastherelativesharesofa$100billiondevelopingworldfinancingpackage(thesamenumbersrepresentingbillionsofUSdollarsratherthanpercentagesharesoftheRCI).

IntheoriginalGDRsframeworktheRCIisusedtodivideemissionsreductions.Thisofcourseimpliesthatdevelopedcountriesfinancemitigationbeyondtheirownborders,sinceadjustingobligationsaccordingtotheRCIcreatesdevelopedcountrytargetsthatprobablygobeyondtechnicalfeasibilityand,atsomepoint,mayamounttomorethan100percentoftheiremissions.AGDRsfinancingframeworkwouldmakethisexplicit;theRCIwouldapplytofinancingbydevelopedcountriesin developingcountries,ineffectasaproxyforemissionsreductions.

Waysofusingaresponsibilityandcapabilityindex

AnRCIofthissorteitheranall-countryorAnnexII-onlyindexcouldbeusedindifferentways:

1.Globalfund

TheRCIinTable1canbeusedtocalculatefairsharesinaMexican-styleWorldClimateChangeFundorsomethingalongthoselines(aglobalclimatechangestructuralfund,perhaps).AswiththeEU,allcountriescontributetosuchafundwiththeircontributions

beingsetonthebasisofRCIshares.Allcountrieswouldalsoreceivefinancefromthefund33,

butthosewithalowerRCIwouldreceivemore,withdevelopingcountriesbeingnetrecipientsandleastdevelopedcountriesreceivingseveraltimesthesumtheycontribute.

TheRCIinTable1illustratestherelativescaleofdifferentcountriesannualcontributions.

Forinstance,ina$250billionglobalfund34,theUSssharewouldbe$82.7billionin2010andwouldfallto$72.75billionin2020.Chinascontribution,ontheotherhand,wouldbe$13.75billionin2010andwouldincreaseto$26billionin2020.Similarly,theEU15ssharein2010wouldbe$57.4billion,fallingto$48.8billionin2020whileIndiassharein2010wouldbe$1.3billion,increasingto$3billionin2020.ThedynamismoftheRCI,takingintoaccountchangingsharesofresponsibilityfortheatmosphericstockofgreenhousegasesandrelativeGDPgrowth,isanaddedadvantage.

However,financialflowsinto thefundareonlyhalfthestory.CountriescouldalsoreceivefinancingonthebasisoftheRCI.Unliketheinflows,thefundsdisbursementwouldbebasedonarangeoffactors,includingnationallyappropriatepolicies,programmesand

projectsinnationalactionplans,mitigationpotentialandcostpertonneofabatement.However,theRCIwouldalsoberequiredtoguidedisbursementandwouldneedtobebroadlyindicativeofthenetlevelsoffundingacountrywouldreceive,withcountriesatdifferentlevelsofdevelopmentbeingplacedindisbursementbands.

ItissignificantthatthismodelhasbeenincludedintheEuropeanCommissionsrecentCommunicationonitsCopenhagennegotiatingposition(EC2009).TheECproposed,asoneoftwoalternativesforinnovativefinancing,afundtowhichcontributionsarebasedonacombinationofthepolluterpaysprinciple(i.e.totalamountofallowedemissions)andits

33.MexicossubmissiontotheUNFCCCregardingitsWorldClimateChangeFundproposalstatesthatInprinciple,allcountries,developedanddeveloping,couldbenefitfromtheFund.34.Estimatesoftheincrementalcostsofglobalmitigationsuggestthataminimumofaround$250billionperyearwouldberequired,notablyMcKinseyandCo2009.SeeSection1ofthispaper.


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abilitytopay(i.e.GDP/capita).Further,theECCommunicationusesfourindicatorstoarriveataburden-sharingformulaforAnnex1countrymitigation.ThesefourindicatorsGDPpercapita,emissionsintensityrelativetoGDP,earlyactiononemissionsabatement,andpopulationgrowthcouldconceivablyalsobeused,alongwithaclearerresponsibility

measure,asthebasisofweightedcontributionstoafund.

2.Article4.3(AnnexII)fund

Table2illustrateshowtheRCIwoulddistributethefinancialburdenaroundAnnexIIcountriesonly,weredevelopingcountriessuccessfulinnegotiatingthefullimplementationoftheConventionsArticle4.TheRCIshowsthefairsharescontributionsthatwouldberequiredfromdifferentAnnexIIcountriestowardsadevelopingworldfinancingtotalof$100billion.

TheEU15(thatis,theUnionwithoutitsnewestentrants)andtheUS,underthisversionofaglobalfund,areclearlyliableforthelionsshareofcontributions:$33.9billionand$47.7billionrespectively.Thesesumsrepresentanettransferfromdevelopedtodeveloping

countriesasunderthismodelcontributingcountriesthemselveswouldreceivenothingfromthefund.

DisbursementsfromafundtowhichonlyAnnexIIcountriescontributedcouldstillbemadeaccordingtoasetofcriteria,includingnationallyappropriateactionsandplans,mitigationpotentialandcostpertonneofabatementandrecipientcountriescouldstillbebandedaccordingtotheirRCI,whichwoulddeterminetheapproximateoverallleveloffundingtheywouldreceive.

3.AssignedAmountUnits(AAUs)auctionoroffsetaggregator

TheRCIcouldalsobeappliedtoAnnexBcountries,inpracticethesameasAnnex1.35

AnnexBcountries,however,havequantifiedtargetstoreduceemissionsandwhetherthey

haveratifiedtheKyotoProtocolornot(theUShasnot),eachisassignedaquantityofreductionsoveraperiodoftime,intheoryifnotinpractice.Currenttargetsexpirein2012;Protocolsignatoriesarecurrentlydiscussingpost-2012targets.

Norwayhasproposedthehold-backof2percentoftheAnnexBAAUsattheinternationallevel(seeSection2above).Asalreadydiscussed,thisrelativelysmallAAUhold-backwouldnotraiseasufficientlylargesumalone.However,werethisproposalscaledup,assomehavesuggesteditshouldbe,thenitcouldraisesufficientfinancetosupplyaglobalfund.

SincewithAAUhold-back,countrieswouldnotbeprovidingdirectfinance,butsacrificingaproportionofthepermitstheywouldotherwiseauctionatthenationallevelforinternationalauction,theRCIcouldbeappliedoncetheoveralltargetforhold-backwasagreed.Sowere

anoverallhold-backtargetagreedof10percentofAAUs,thenratherthaneachcountrysacrificingaflat10percentofitsAAUs,eachwouldbegivenadifferentproportionrelativetoitsRCIrankingandsocountrieshigheruptheRCIwouldhavemorethan10percentof

theirAAUsheldbackandvice-versa.36 AproposalbyAprodev(2009)proposesholdingback

25percentofAAUsoverallandusingtheGDRsRCItodecidewhichAnnex1countriessacrificewhatproportionoftheirAAUs.

35.AnnexBoftheKyotoProtocollistscountriesquantifiedemissionsreductionandlimitationobligations.Inpractice,anRCIforAnnexBincludesallAnnex1countriesexceptBelarusandTurkey.Seehttp://unfccc.int/kyoto_protocol/items/3145.php

36.AprecisecalculationofthisisdifficultbecausetheproportionofAAUscountrieswouldsacrificerelativetotheheadlineAnnex1percentageheld-backwoulddependonhowcomparabilityofeffortwasagreedamongAnnex1countries.Arguably,theRCIcouldbedeployedbothforafairAnnexmitigationburdenshareandthentodetermineeachcountriesproportionateAAUsacrifice.


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neededoverwhattypesoffinancewouldqualify;onlythesewouldthenbemeasured,reportedonandverifiedbythenewinternationalbody.

AmoreeclecticfinancingsystemtolerantofawidevarietyoffinanceflowsandwithCOPoversightviaanexecutivebodymightalsofitwellwithothersuggestedbodies,suchasa

TechnologyDevelopmentExecutive(E3G2008)andproposalsforREDD.Bothoftheseareaseachalsocriticaltoapost-2012agreementrequirefinanceandmightthereforebeaccountedforandverifiedthroughtheexecutivebody.Indeed,amoreeclecticsystemthataggregatedfinancefromavarietyofsourcesandwascapableofmonitoringandverifyinganumberoffinancingchannelsmightbebetterequippedthanasinglesourceorfundatrespondingtothevarietyofchallengeswithintheUNFCCCnegotiatingmandate.Thediagrambelowoutlineshowsuchabodymightfitwithinanagreed,multisource-multichannelfinancingarrangement.

COP

Executive Body

Central Fund Trustee

Agreed finance NAMAs

Developingcountryactions

Developedcountryfinance

(Offsets, proceedsfrom auctions,levies, bonds,

etc.)

International carbonaccounting instrument

incorporating RCI


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Financewillplayacriticalroleinthemitigationofandadaptationtoclimatechange.Withoutflowsofadditionalfinance,theupfrontcostsofnewinvestments,indeploymentof

low-carbontechnologyandinR&Dandtheongoingincrementalcostdifferencebetweencarbon-intensiveandlow-carbonapproacheswillnotbemet.

Thevariousestimatesofincrementalcostsareunsatisfactory.Whilebeingbasedinmanycasesonrigorousanalysis,especiallyofmitigationopportunitiesindifferentcountries,thereisahighdegreeofuncertaintyoverfuturefactorsthatwillhaveasignificantinfluenceoncosts.Inparticularthebehaviourofgovernments,officialsandpopulationsisdeeplyunpredictable;policycostsmayprovesignificantandthemostcost-effectiveroutetodecarbonisationmaynotbetheonetaken.

Nevertheless,thereisaconvergenceincostestimationsaround$100billionto$200billionfordevelopingworldcostsandaround$200billionto$400billionforglobalcosts.Adaptationcostswilladdsignificantlytothesesumsandarenowunavoidableregardlessofthepaceanddepthofmitigation.

Aplethoraoffundingproposals,eachmeretriciousinitsownright,maskswhatisessentiallyachoicebetweenKyotoProtocol-stylemechanismsreliantonthedevelopmentoftheexistingregimeontheonehandandproposalsthattapintoothertypesoffinanceontheother.Themostdevelopedoftheseproposalsleveragingoffsets,AAUhold-backandup-anddownstreamauctioningappearthemostrelevantbecausetheydockwithexistinginternationalclimatepolicy.However,theseareallbasedontheassumptionofanexpansionofcarbontrading,whichmayproveoptimistic.ProfoundproblemswiththeEuropeanEmissionsTradingScheme,theonlydevelopedworldschemecurrentlyupandrunning,haveproveddifficulttoaddress.

ThecostburdeninKyotoProtocol-relatedmechanismsessentiallyfallsontheshouldersofconsumersindevelopedcountries.Already,asaresultofvolatileenergypricesandexistingpoliciestoreduceemissionsandincreaselow-carbonenergyuse,consumersaresensitivetofurtherleviesonconsumption.Increasedcostsasaresultofmeetinginternationalobligations,ontopofdomesticeffortstodecarbonise,mayprovedifficultfordevelopedcountrygovernmentstojustifyindomesticpolitics.

Nevertheless,theUNFCCCinletterdemandsthatagreementbereachedonthescaleofnewandadditionalcostsandthatthesearemetbydevelopedcountryspecificallyAnnexIIparties.Itremainstobeseenwhetherdevelopedcountrieswillacquiescetothis.Iftheydo,thenforpoliticalsustainabilitypolicymakersmightdowelltoconsiderablendoffinancingoptionsbothrelatedtoexistingmechanismsandthatareinnovative.Thiscouldinvolvea

balancebetweenmechanismsthatimposecostsontodaysconsumersandtaxpayersandfrontloadingfinancethroughtheuseofbondsandotherdebtinstrumentstodepreciatecostsovertime.Government-leddebtfinancemayalsohelpattractgreaterparticipationindevelopingcountrylow-carbonfinancebyprivate-sectorinvestors.

Developingcountriesclearlyfavouranew,globalfundundertheCOP,butbaulkatthenotionthattheyshouldalsocontributetothesefunds.ThereisevidencethatdevelopedcountriesmightaccommodateaMexican-stylefund,butwillwantdevelopingcountriestofinancelow-costmitigationthemselves(EC2009).Theymayalsowanttouseexistingchannels,suchastheWorldBank,andcontinuetopinmostoftheirhopesontheexpansionanddevelopmentofcarbonmarketsastheprinciplesourceoffinance.Intheabsenceofdevelopingcountrycommitmentsormeasurestoleverageoffsetting,financialflowswouldbethroughoffsets,achievingnomitigationadditionality.

Almostregardlessoftheapproachtakentofinancing,theRCIintheGreenhouseDevelopmentRightsFrameworkcanprovideagoodbasisfordeterminingormeasuringtheproportionof

Conclusions


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