Five Ways to Address Fossil Fuel Subsidies through the WTO and International Trade Agreements

By Peter Wooders (IISD) and Cleo Verkuijl (SEI)

Can the international trade system be a catalyst for reforming fossil fuel subsidies (FFS) to help relieve the burden on the public purse, reduce local and global air pollution, improve energy security and tackle climate change?

Oil-drilling platform in the Brent Field, North Sea. Photo credit: UN Photo/Exxon Photo via Flickr (CC BY-NC-ND 2.0)

This was the theme of a recent workshop set at the World Trade Organization (WTO) in Geneva and organised by Climate Strategies, the Stockholm Environment Institute and the International Institute for Sustainable Development. The event forms part of a broader conversation on how the international trading system can be made compatible with the UN Sustainable Development Goals (SDGs) and the goals of the Paris Agreement on climate change.


Fossil Fuel Subsidy Reform in Context

  • Annual expenditure on fossil fuel subsidies has been estimated at US$320 billion for consumers in developing and emerging countries in 2015, and at US$100 billion for fossil fuel production worldwide.
  • Fossil fuel subsidy reform can free up significant funds towards meeting the SDGs.
  • Encouraging examples from India and Indonesia show that today’s low oil prices form an opportunity to redirect public spending on oil, coal and gas towards development priorities such as education, health, infrastructure and access to clean and reliable energy.
  • Reform is also vital piece of the climate change puzzle, with the potential to cut greenhouse gas emissions by more than 10% by 2020.
  • By complementing and strengthening ongoing reform efforts, the international trading system can be a key enabler of the 2030 Agenda.
  • Reform should adequately address the needs and concerns of developing countries, including those related to energy access.

Participants found there is significant scope for the WTO and international trade agreements to complement and strengthen reform efforts already being supported under a range of international forums, including the 2030 Agenda for Sustainable Development, the G20 and APEC (the Asia-Pacific Economic Cooperation).

Fossil Fuel Subsidies and the WTO: “A Missed Opportunity”

Owing to its wide membership, its central role in disciplining trade-distorting subsidies across economic sectors, and its well-established dispute settlement system, the WTO is well-equipped to take the FFS reform agenda forward.

To date, however, the Organization’s involvement on FFS has been limited. In notable contrast with the various disputes against renewable energy subsidies that have been launched at the WTO over the past decade, no FFS have been disputed thus far. In part this is because many WTO Members do not fully notify their FFS, whether because of a lack of data and understanding of energy subsidies and their trade effects, current shortfalls in the Agreement on Subsidies and Countervailing Measures’ (ASCM) notification questionnaire or a lack of mechanisms to enforce notification. In the absence of case law and targeted research, there is also a lack of legal clarity on the extent to which different types of FFS can be disciplined by the ASCM to begin with.

And yet addressing this topic falls squarely within the Organization’s mandate. FFS can have a range of distorting impacts on trade and investment, including by affecting the rate and timing of development of new fields or mines.

Moreover, the WTO was established with a view to ensuring economic progress is achieved in accordance with the objective of sustainable development, and the SDGs explicitly identify trade as a critically important means of implementation. As such, trade should be viewed as an enabler for achieving the SDGs and targets, including the objective of reducing FFS set out under SDG 12.

Although parallels should not be overstated, it is also worth noting the WTO’s continued engagement on reducing environmentally harmful fisheries subsidies as part of the Doha Round. Observing the discrepancy in how the two subsidies were treated in the WTO, the former Director-General Pascal Lamy characterised the absence of FFS from the WTO’s agenda as a “missed opportunity”.

What Can Be Done?

During the Geneva workshop, participants identified multiple avenues to address FFS within the international trading system. While not purporting to be exhaustive, the table below identifies five key categories of action available to WTO Members: 1) Promote capacity building and technical cooperation; 2) Enhance transparency; 3) Adopt subsidy reform pledges and ensure credible follow-up through reporting and review; 4) Clarify the interpretation of existing rules; and 5) Make changes to existing rules. Several concrete pathways to help realise these goals are also identified.

Table 1: Five Ways to Address Fossil Fuel Subsidies at the WTO

It is important to note that these pathways are not mutually exclusive, and many are likely to be particularly effective if adopted together. A pledge, report and review system, for instance, would benefit from parallel efforts to improve transparency.

All approaches would necessarily be led by WTO Members. They range from those that are purely voluntary to those that are binding, and embedded in the WTO’s dispute settlement mechanism. This provides scope for gradual enhancements of ambition.

In a similar vein, many approaches can either be taken forward plurilaterally (by a coalition of the willing) or multilaterally (involving all WTO Members). As illustrated by references to fossil fuel subsidy reduction in the EU-Singapore Free-Trade Agreement (which is awaiting formal approval), bilateral and regional trade agreements may form an effective platform to pioneer cooperative approaches on fossil fuel subsidy reform.

The workshop also made clear that any successful effort to address FFS through the international trade system will need to adequately address the special circumstances of developing countries. That might involve special and differential treatment provisions, including potential exemptions and carve-outs for development, energy access and other reasons.

With the WTO’s 11th biennial Ministerial Conference coming up in Buenos Aires in December this year, creative thinking, constructive debate, and further research on the various options on the table is needed to help ensure the promise of Paris and the SDGs is fulfilled.

 

This blog is part of a larger Climate Strategies project: ‘Making the International Trade System work for Climate Change‘. More information can be found of the project webpage.

This blog is also available on both the SEI and IISD websites.

 

About the authors

 

Peter Wooders is Group Director of Energy at the International Institute for Sustainable Development (IISD).

 

 

 

Cleo Verkuijl is Research Fellow of Climate Change Policy at the Stockholm Environment Institute (SEI).

Liability for Loss and Damage from Climate Change

By Elisabeth Gsottbauer and Robert Gampfer

The question whether countries can be held liable for climate change damages has become an important issue in the UN climate negotiations. The discussion currently revolves around fairness in the light of historical responsibility and possibilities how to finance effective loss and damage. In a new paper published this week in Climate Policy, we argue that a liability mechanism including compensation could also help countries to agree upon and enforce more ambitious emission reductions.

Loss and damage from Hurricane Matthew in Haiti, 2016 (Photo by Igor Rugwiza: flickr.com/photos/minustah /)

The average number of natural catastrophes and natural disaster losses has sharply increased in 2016. Most scientists attribute a great part of this increase to climate change. Overall, economic loss and damage from natural disasters in 2016 totaled around US$ 175 billion, and were at their highest for four years [1]. Impacts have been particularly devastating in poor, developing countries. At the same time, climate change is commonly attributed mostly to the high carbon emissions of the past two centuries in rich, industrialized countries.

Rules for Loss & Damage: justice and effectiveness

Due to this responsibility gap, developing countries are pushing a mechanism to deal with loss and damage including clear compensation rules [2]. Those efforts originate in the idea that developed nations can be held liable for climate change-related damages based on their historical responsibility for carbon emissions. Loss and damage is often seen as a means to restore “climate justice” between developing and developed countries [3].

Although loss and damage has been a subject of debate among Parties to the UNFCCC for years, the Paris Agreement was the first to devote a full article to loss and damage [4]. While presently the article provides no basis for any legal liability or financial compensation, we argue, the existence of a compensation mechanism could also help to achieve more ambitious climate cooperation and thus more effective climate policies. Developing countries might be more willing to reduce their own emissions and invest in adaptation when industrialized countries acknowledge their historical responsibility by signing up to a liability mechanism. Industrialized countries in turn might reduce their emissions further, because they see developing countries also willing to share in the payment for climate protection and want to avoid paying compensation if climate change continues unchecked.

How liability rules can help to reduce emissions

We tested this premise in an online experiment with more than 1200 participants from the US and India. We designed a “game” where players were grouped into pairs, with one player having a higher starting capital than the other, mirroring the rich and poor nations divide. Each player decided whether to invest a part of their capital into climate protection. Via their investment, players could reduce the probability of a climate catastrophe able to negatively affect the capital endowment of the poorer player.

We imposed different liability rules for different groups of player pairs. We found that without any liability rule, few players decided to invest in climate protection. With a “strict liability” rule forcing the rich player to compensate the poor player for any damages, substantially more rich players chose to invest – but only few poor players. In two other groups we introduced distinct “negligence” liability rules: only if the rich player had not invested in climate protection did she have to compensate the poor player; or the poor player could only receive compensation if she had also invested in climate protection. These two groups achieved the highest reductions in the likelihood for climate damages, with most rich and poor players investing in climate protection. Importantly, this outcome also meant that in these two groups very few poor players actually suffered damages, and very few rich players had to pay compensation. Negligence liability rules were thus most likely to lead to an effective “micro climate agreement” in our experiment.

Looking ahead

Our results suggest that policymakers would be well advised to further intensify negotiations on a compensation mechanism for loss and damage in preparation for the 23rd session of the UNFCCC conference (COP 23) by the end of this year. The Fijian presidency may help to sharpen the focus and expand the scope of loss and damage and establish more stringent institutional arrangements as small island states such as Fiji are at the forefront of climate change impacts.

Indeed, we find that a rather simple negligence rule makes cooperation more attractive and rewarding, leading rich and poor nations to boost their investments in mitigation and adaptation for climate protection. Far from opening up a Pandora’s box of endless compensation claims towards industrialized countries, a liability mechanism could make global climate cooperation more effective and less costly in the longer run.

 

About the authors

Elisabeth Gsottbauer, Post-doc at the Institute of Public Finance, University of Innsbruck (Further information on the author https://sites.google.com/site/elisabethgsottbauer/)

 

 

Robert Gampfer, Completed his PhD at the research group for International Political Economy, ETH Zurich (Further information on the author https://www.researchgate.net/profile/Robert_Gampfer)

 

References

[1] Munich Re, 4. January 2017

[2] UNFCCC Loss&Damage

[3] Loss&DamageNet

[4] Paris Agreement, Article 8

*This blog post originated from an earlier version published online at ETH Zukunftsblog, 19.08.2014

 

 

Read All About It!? Media, Accountability and the Paris Agreement on Climate Change

By Sylvia Karlsson-Vinkhuyzen

As the curtains closed on the 22nd Conference of the Parties (COP22) to the United Nations Framework Convention on Climate Change (UNFCCC) in Marrakech in November 2016, we can soon analyse how much media attention it raised. One could imagine that the unprecedented speed of ratification of the Paris Agreement leading to its entry into force on 4 November would turn media’s eyes towards Marrakech to scrutinize how governments are starting to turn words in a treaty into action – or not? While we do not have data on media coverage of COP22, it is likely to be significantly lower than for COP21 when the worlds’ eyes were on Paris.

One reason is surely that it overlapped with the presidential election in the US. Other reasons, however, are likely more systemic to the way the media works. This has important implications for the role it can play in ensuring governments keep the promises they made in Paris.

unfccc

UNFCCC

In a recently published study we were interested in the role media can play in public accountability in global climate governance.[1] Accountability in general terms involves a social relationship between someone who should be answerable for his/her actions (accountee) towards someone else (account holder). Public accountability involves the ability of citizens to hold at least their own (and possibly other) governments to account for their (lack of) actions. In our case we were interested in the role of media in enabling public accountability of the goals on climate change that states develop together with other states. Strong public accountability could strengthen both the democratic legitimacy of global climate governance and keep the pressure on governments to implement their commitments. This is important as governments are not very keen to hold each other to account for implementation – also not in the Paris Agreement.[2]

The starting point for our study was that an active media coverage of and media commentary on key meetings in global climate governance is one indicator of media’s role in holding governments to account for the promises they make in these meetings – most lately through adopting the Paris Agreement.[3] We analysed coverage in leading newspapers in seven countries (Finland, India, Laos, Norway, South Africa, UK and USA) of key meetings in global climate governance including, COP meetings, in the period 2004-2009.[4] We counted both the total number of articles written about the meetings and how many of those articles were commentaries in the form of editorials, opinion pieces and the like. Our interest in commentaries is due to their association with a part of the public sphere that still allows space for longer evaluation of arguments and evidence.

The study shows that newspaper coverage was limited or absent for meetings that were not:

  • attended by Heads of State;
  • the launch of a new process or;
  • linked to the United Nations Framework Convention on Climate Change.

The pattern of coverage differs significantly among individual newspapers with no clear distinction between developed and developing country papers. Among the UNFCCC meetings, the COPs most covered were those where major negotiation mandates or a new agreement were expected. Unsurprisingly media engages easier with events that can be sold as ‘new’ in some respect, compared to either the negotiation meetings preparing for them or subsequent meetings that focus on implementation and follow-up. For example, COP15 in Copenhagen in 2009 had very high coverage, in contrast to COP14 in Poznan the preceding year where there was still time to provide significant input.protest

The very low coverage by traditional media of the more ‘boring’ meetings prior to or after the launching of a new negotiation mandate or a new agreement poses a significant obstacle to the potential for traditional media to contribute to the public accountability on if and how governments will meet the objectives of the Paris Agreement. Social media plays a much bigger role now than in our study period. However, the traditional news media has in parallel moved online and its articles are spread through Twitter and other platforms, merging the two media.

The five year cycles in which states should submit their Nationally Determined Contributions (NDCs) is a key building block of the Paris Agreement. However, if these cycles are to become virtuous, with mutual encouragement among countries to promise deeper emission cuts, the public, through both traditional and social media, need to follow the issues and support such increased ambition. Society would therefore serve the Paris Agreement well if it keeps journalists and editors on their toes and makes it clear there is an audience for well-informed critical analysis of how well governments keep their promises.

 

About the author

sylvia

 

Sylvia Karlsson-Vinkhuyzen, Assistant professor, Public Administration and Policy, Wageningen University and member of Climate Strategies

 

 

 

References

[1] The methodology and results can be found in Karlsson-Vinkhuyzen, S. I., et al. (2016). “Read all about it!? Public accountability, fragmented global climate governance and the media.” Climate Policy. DOI

[2] Karlsson-Vinkhuyzen, S. and H. Van Asselt (2015). Strengthening Accountability under the 2015 Climate Change Agreement. Policy Brief no 2, Climate Strategies, London. Available at http://climatestrategies.org/wp-content/uploads/2015/11/CS-PB2-Strengthening-Accountability-final2.pdf 

[3] Another route is the activities of (trans)national non-governmental organizations who follow these processes and scrutinize the actions of governments within and outside them, see Steffek, J. (2010). “Public Accountability and the Public Sphere of International Governance.” Ethics & International Affairs 24(1): 45-68.

[4] The methodology and results can be found in Karlsson-Vinkhuyzen, S. I., et al. (2016). “Read all about it!? Public accountability, fragmented global climate governance and the media.” Climate Policy. http://dx.doi.org/10.1080/14693062.2016.1213695

Lessons from European Climate Monitoring Crucial for Paris Agreement Success

By Jonas Schoenefeld, Mikael Hildén and Andy Jordan

As the 22nd session of the Conference of the Parties (COP 22) in Marrakech draws to a close, it is becoming increasingly clear that credible monitoring and transparency procedures are urgently needed. Otherwise national pledges to address climate change in the spirit of the 2015 Paris Agreement will not build sufficient global trust.

The 2015 Paris Agreement marked a shift towards countries making emission reduction pledges known as Nationally Determined Contributions (NDCs) and a new Transparency Framework (Article 13). This framework requires regular progress reports on pledges to address climate change. While the quick ratification of the Paris Agreement is a sign that the international community is eager to make progress, setting up a strong and effective transparency framework will likely require hard and sustained work for years to come.

Our new research, published today in Climate Policy, shows that the long term success of the Agreement depends on the availability of well-designed and functioning monitoring and review mechanisms. The EU has one of the most advanced climate policy monitoring systems in the world – but it still encounters persistent challenges that, crucially, could jeopardize the implementation of the Paris Agreement if these challenges persist within the EU and potentially also in other countries and regions. We show that the EU’s current approach to monitoring climate policies – largely borrowed from monitoring greenhouse gases, which is a vastly different task – has not supported in depth learning and debate on the performance of individual policies. Other important obstacles include political concerns over the costs of reporting, control, and the perceived usefulness of the information produced. The international community should therefore draw on the EU’s valuable experiences and also difficulties in monitoring climate policies in order to develop the practice further.

A vital part of the implementation of the Paris Agreement will hinge on whether political actors can muster the leadership in order to successfully navigate these monitoring challenges at the international level. Monitoring is probably the most underestimated challenge in implementing the Paris Agreement. In the past, it has been seen as a technical, data gathering task. We show that it is anything but a mere reporting exercise. Implementing more advanced monitoring at the international level will require substantial political efforts, resources, and leadership. In order to justify investments in monitoring and evaluation to the public, care needs to be taken to ensure that monitoring information is used effectively to evaluate and improve policy, rather than as a weapon to lay blame when things slip.

A key strength of the Paris Agreement is that so many countries are part of it and are willing to engage. Disengagement or even withdrawal could therefore imperil the whole Agreement and have grave ramifications for the set-up of a strong monitoring system. The EU’s experience shows that recognising the role of public policies in the NDCs should thus be seen as one step in a long journey to deeper understanding of what climate policies achieve and how policies can be improved.

This blog post has also been published on Environmental Europe and on the INOGOV Blog.

What Next for Building an EU Energy Union?

By Michael Grubb and Kacper Szulecki

A new Special Issue of the Climate Policy Journal focuses on the governance of European climate change efforts.  Drawing on the insights, Michael Grubb and Kacper Szulecki argue that a huge opportunity could be grasped in the form of a New Energy Union. The outcome of the UK’s referendum illustrates the need for it to be viewed not as a technocratic venture but an economic and political opportunity.

Energy is the lifeblood of society. It heats our homes, powers our industry and entertainment, and fuels our transport. It became yet another negative punchbag in the UK Referendum campaign, with claims and counterclaims about costs. But there is a simple and very positive story to be told.

Some sixty-five years ago, after the devastation of World War II, the European Coal and Steel Community provided the vision, the coordination, and the investment that fuelled an unparalleled period of growth and stability in Europe. It laid the foundations for what then became the European Communities, the EEC and then the European Union. But ironically the energy sector got left behind.

Now is the time to update the vision. The great strength of that original Community was not to obsess about sovereignty, but to focus on a real, substantial and urgent task that required collective action. At long last, EU countries have initiated an Energy Union. It started from perhaps unexpected quarters, as Poland sought a unified European response to concerns about their excessive dependence on Russian gas. But the solution is not to go back to the dirty fuels of past centuries. Europe’s energy future can be clean, diverse, secure, and interconnected.

The old ways of energy production, emitting 40 billion tonnes of heat-trapping gases every year, are slowly choking our planet. Last year was the hottest on record; the Arctic ice has continued long-term decline in volume, with the lowest ever extent this Spring.  Fortunately, the solutions are at our fingertips.  Within less than a decade, the cost of solar energy has halved, that of wind has fallen by a third, batteries by 60%, and some technologies for energy efficiency by even more.  Crucially, the costs of both electricity system management and long distance transmission have also fallen.

What that means is that we can have radically new energy systems, combining localised generation and storage with larger resources and backup pooled across regions. But there is a catch. The cost reductions to date have been driven by the collective impact of national efforts, including those in the framework of the EU’s commitment to get 20% of its energy from renewables by 2020. Europe is on course to deliver that goal and it has driven the creation of new industries and scale economies.

The next stage will be harder. Going much further requires a more integrated effort with more connected energy systems. The wind does not blow (or cease to) everywhere at the same time across the continent. The biggest and best resources are scattered in different corners of Europe, and the vast swathes of the North Sea, the Baltic and parts of the Mediterranean.  The sun’s track from east to west can help solar output to smooth morning and evening peaks, but far more important is the difference between north and south, and across the seasons.

We will need transmission lines to harvest that huge renewable potential. The EU has set a modest 10% interconnection target for national electricity systems to meet, but even that will require some efforts. As well as ensuring security and capacity, coordination between Member States will need to monitor the impact connecting different national systems may have on overall carbon dioxide emissions. Joint efforts need not end at EU borders; neighbouring regions such as North Africa and the Balkans could also be invited to the trans-continental effort.

We will need storage of both electricity and gas. Gas is much cleaner than coal, and we can use our gas infrastructure and storage further in the future as we move towards ‘greener gas’ – for example producing hydrogen from surplus wind and solar output and injecting it into gas grids.

Our gas systems complement each other: central European dependence on Russia is matched by British dependence on the Middle East, so conjoined, each can help the other. As our own gas reserves decline, the North Sea also offers wind, waves and capacity to store both gas and perhaps carbon dioxide, as well as connections to Scandinavian hydro-electricity storage.

The economic value of the industries will be immense. An investment programme along these lines could offer a real and significant contribution to European economic recovery. A UK House of Lords enquiry concurred that channelling badly-needed investment into such real assets, which deliver unambiguous economic returns well above prevalent interest rates, would enhance future economic productivity as well as provide short-term economic stimulus.  And the savings arising from fully integrated approaches in energy by 2030 have been estimated at up to €50-80bn/yr by 2030 – hundreds of Euros per household.  But all that needs an integrated approach, and investor confidence grounded in a clear European vision, strategy and collaboration.

So there is one big catch: politics, most fervently on display in the UK Referendum.  Cost-benefit analyses with abstract ‘social welfare’ end up subordinate when political considerations take centre stage. Furthermore, different varieties of capitalism across Europe make the calculus of cost and the distribution of benefits differ between markets. But a coordinated effort on a Europe-wide scale can be made beneficial for everyone.

The UK  could still aspire to play a great role in building this future. It has leading energy expertise, superb wind resources, and is well on our way to doubling its electricity interconnections with the continent, to benefit from cheaper prices on the continent through cable which have proven to be amongst the most reliable sources of power (Figure 2), helping to ‘keep the lights on’ in recent winters of tight UK supply. Though it would clearly be easier to provide this within the EU, UK engagement will remain mutually beneficial to the effort, even if a UK departure may preclude it from some of the benefits. Norway’s example shows that however complicated a country’s relationship with the EU may be, energy cooperation can offer pragmatic solutions for mutual benefit.

The challenges then are governance to provide confidence and clarity, with a strategy to ensure that European citizens benefit from the transformation and investment at all levels, from the local to the continental – and know it.  That is what, in principle, the Energy Union can deliver; and what effective governance of Europe’s energy transition most needs to provide.

Source: Ofgem

This post draws upon a commentary by Michael Grubb published in the Guardian and Euractiv.  In addition to papers in the CP Journal Special Issue it draws upon papers for the UCL European Institute, Brexit and Energy: cost, security and climate policy implications , and UCL Institute for Sustainable Resource on Brexit, and  The costs and benefits of EU energy and climate policy.

Michael Grubb is Professor of International Energy and Climate Change Policy at the Institute for Sustainable Resources of University College London (UCL), has been Senior Advisor to the UK Energy Regulator Ofgem and served on the statutory UK Climate Change Committee.

Kacper Szulecki, Assistant Professor at the Department of Political Science, University of Oslo, guest editor of this month’s Special Issue. He is a member of editorial teams at “Energy Research and Social Science” as well as the Polish weekly “Kultura Liberalna”, where he comments on international politics, energy and climate.

Kyoto Protocol Countries Achieved Full Compliance with Targets

By Michael Grubb

All 36 countries that committed to emission caps under the Kyoto Protocol on climate change complied with their commitments, according to a scientific study by Igor Shishlov and others published today in the Climate Policy Journal, which uses the final data for national greenhouse gas emissions and exchanges in carbon credits (which only became available at the end of 2015). Nine of the 36 used Kyoto’s ‘flexibility’ mechanisms to comply.

An extended Climate Policy Editorial discusses some of the implications and lessons. It concludes that the Protocol did have substantial impact in the countries that remained (after US non-participation and the withdrawal of Canada). Emissions in both the EU and Japan during the Kyoto compliance period (2008-12) were at least 20% lower than central projections made after the Protocol was adopted in 1997.  The paper concludes that the countries signed up to the Protocol collectively surpassed their commitment to a degree larger than the ‘hot air’ reductions as a result of economic transition in Russia, Ukraine and others.

Achieving these commitments – indeed, with substantial over-achievement in Europe – cost less than 0.1% of GDP for the European Union and an even lower fraction of Japan’s GDP. This is around one quarter to one tenth of what many experts at the time had estimated compliance would cost.

The Editorial argues that the efforts made by the EU, Japan and others demonstrate the extent to which international legal commitments matter, and discusses briefly the relationships between Kyoto and the Paris Agreement. The fact that participating countries fully complied with Kyoto’s targets is highly significant, and helps to raise expectations for full adherence to the Paris Agreement.

In addition to the source articles, a shortened form of the Editorial has been posted on Climate Home.

Climate Finance: Time to Know Who Gives What

By Romain Weikmans and Timmons Roberts

As the first climate change negotiations after December’s landmark Paris Agreement  open in Bonn this week,  controversies around levels of funding for poorer countries to fight climate change may re-emerge. The absence of internationally-agreed accounting rules for climate finance makes it harder to establish whether promises are being met and which countries are doing their part.  Most debates also confound two purposes of climate finance accounting – whether it is about developed countries’ financial efforts toward developing nations or about assessing the broader question of how much financial resources are being devoted to fighting climate change. So what can be done about it?

Wealthy nations claim they have delivered on promises of ‘Fast Start Finance’, and that they are on a legitimate path to the US$ 100 billion per year goal for 2020. Fast Start Finance refers to  ‘new and additional’ financial resources approaching US$ 30 billion during 2010-2012. This promise was made by developed countries at the contentious Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC), held in Copenhagen in 2009. There, developed countries also collectively pledged to mobilise US$ 100 billion per year by 2020, with balanced allocation between adaptation and mitigation. Those financial commitments were reiterated in subsequent COP decisions, including in the Cancun Agreements (see Paragraph 98) and during the Paris Climate Conference in December 2015 – when the US$ 100 billion mobilisation goal was extended to 2025 (see Paragraph 54).

However, activists, researchers, other observers and developing countries all dispute the amounts developed countries say they have given in climate finance. Contrasting statements on the fulfilment of climate finance promises made by developed and developing countries’ representatives and by civil society observers are rendered possible by the absence of internationally-agreed accounting rules. These should also permit meaningful comparisons between developed countries’ performance with regard to the provision of climate finance, but they currently fail to do so. The COP 21 Paris decision document and this year’s negotiations provide a key opportunity to set this problem right.

For Two Purposes, One System Won’t Do

As highlighted in our recent Climate Strategies Policy Brief, the OECD’s Rio Markers methodology forms the basis of the current climate finance accounting system used by most developed countries to report to the UNFCCC. However, this methodology is not well suited for the assessment of contributing countries’ financial effort toward adaptation and mitigation in developing countries. In addition, most debates around climate finance accounting confound two purposes which are quite different.

The first approach to accounting for climate finance flows stresses the fact that the developed nations created the problem of climate change, and that they also are the ones with the resources to help developing nations avoid increasing their emissions and deal with the impacts already occurring from a destabilized climate system. In this view it is critical to prove that funding is coming from wealthy nation governments and that this funding is actually being delivered, as specified under various provisions in the UNFCCC Convention, in the Paris Agreement, and in multiple other decisions. Under this approach the implicit or explicit purpose of the climate finance accounting system is to account for developed countries’ financial effort toward developing countries.

A second and very different approach argues that it doesn’t matter much to know where the money comes from, but rather that to address climate change we need to “shift the trillions” of private and public investors to drive a green energy revolution and shift toward climate-resilient development pathways, both in poor and rich countries. In this approach the aim of the climate finance accounting system is to assess the scale of financial resources globally devoted to the fight against climate change.

These approaches vary by their aims, the parts of the Paris Agreement they align with, which flows they focus upon, whether the flows need to be public grants and concessional (i.e., low interest) loans or can also be “mobilised” private finance, whether non-concessional loans and export credits can count, how granular data needs to be, and whether self-reporting is seen as adequate. We call these approaches “meeting financial obligations” (Approach 1) and “Tracking resilient/low carbon finance” (Approach 2).

Table 1: Climate Finance Accounting Systems: Different Purposes, Different Features

APPROACH 1: MEETING FINANCIAL OBLIGATIONS APPROACH 2: TRACKING RESILIENT/LOW CARBON FINANCE
Aim of the accounting system Assessing the financial effort made by developed countries toward developing ones Assessing the financial resources devoted to mitigation/adaptation
Climate finance objective/rationale USD 30 billion for 2010-12 (Fast Start Finance)

USD 100 billion/year by 2020

“Shifting the trillions”
Implicit goal of climate finance Financial transfers between rich/highly polluting countries to low polluters and/or most vulnerable/poor countries Transition to a low carbon and climate resilient economy
Main relevant provisions under the UNFCCC Paris Agreement “Developed country Parties shall provide financial resources to assist developing country Parties with respect to both mitigation and adaptation in continuation of their existing obligations under the Convention” (Art. 9.1). “Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development” (Art. 2 (c)).
Flows Only North-South flows

(So it’s important to determine who are the contributors and who are the beneficiaries)

Domestic and international flows (North-South flows; North-North flows; South-South flows)

(It’s less important to differentiate between contributors and beneficiaries)

Effort sharing between contributing countries Very important Less important
“Provided” versus “mobilised” Provided climate finance Mobilised climate finance
Focus on public/private flows Public flows Public and private flows
Underlying Accounting System
Additionality  (above existing aid) Very important Not important
Concessionality (grants or low-interest loans) Very important Not important
Grant equivalent/budget effort versus face value Grant equivalent/budget effort Face value
Granularity Very important: Only components, sub-components, elements or proportions of projects can be reported as “climate finance” Possibly less important
Accounting based on intention or proven impact? In theory: proven impact, but this has not really been discussed under the UNFCCC.

The focus has rather been on the intention (of mitigation/adaptation). This is categorized by simple declaration of contributors (of funding as climate related or not), but some intervention types could be excluded (for example support to “high efficiency” coal plants).

Control on self-reporting Very important: Could be for example achieved through triple validation (by the donor and by the recipient country, and/or by an independent board or its agent) Less important; This approach relies more on existing large datasets (e.g., foreign direct investments, export credits, Bloomberg New Energy Finance data).

Source: Fit for Purpose: Negotiating the New Climate Finance Accounting Systems.

Both approaches are important for different sets of reasons. However, when it comes to designing an accounting system, the worst outcome is one that mixes the two and results in modalities that are inappropriate for the underlying purpose of each approach.

A Window of Opportunity

Little noted in the Paris Decision text is a call for the elaboration under the UNFCCC of “modalities for the accounting of financial resources provided and mobilised through public interventions” (see Paragraph 57). Such modalities will be “considered” in December 2018 and could lead to the adoption of a recommendation by the COP. Such a decision is long overdue and should be celebrated. However, in agreeing to postpone to 2018 the formal consideration of such a framework, negotiators implicitly accepted that we will continue to live in what we have described as a “Wild West” of climate finance for the next three years, at least.

In their efforts to develop accounting modalities for the 2018 deadline (see box 1 for a proposed timeline), we call on UNFCCC negotiators to acknowledge the fundamentally different features of the accounting system associated with each approach described, and to develop climate finance information systems that are truly fit for purpose.

Box 1. Proposed timeline for the development of modalities by 2018

§  May 2016: Agreement of work programme for developing modalities for accounting climate finance

§  Nov 2016: Details of work programme and update from SBSTA to the COP

§  Jan-Feb 2017: Parties submissions due for proposed language

§  May 2017: COP combines submissions into zero order draft text

§  Nov 2017: Draft text developed

§  May 2018: Draft text debated

§  Nov 2018: Draft modalities proposed to Parties: agreement on a recommendation to the CMA

§  CMA 1: Consideration and adoption of the recommendation by the CMA

Source: Fit for Purpose: Negotiating the New Climate Finance Accounting Systems.

Romain Weikmans is Postdoctoral Research Fellow at the Climate and Development Lab, Brown University and Fellow of the Belgian American Educational Foundation. Timmons Roberts is Ittleson Professor of Environmental Studies and Sociology at Brown University, USA and a Climate Strategies member.