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.

How transitional justice can help climate negotiations -Sonja Klinsky

Reflections by Sonja Klinsky, Senior Sustainability Scientist, Julie Ann Wrigley Global Institute of Sustainability, Arizona State University & Climate Strategies Member.

Transitional justice – a theory and practice enabling purposeful transitions from periods of deep injustices into more peaceful regimes  – was probably not on anyone’s mind during the last days of COP21, the UN conference that led to the Paris Agreement in December 2015.

However, Paragraph 52 in the Decision text – which specifically excludes liability by developed countries for “Loss and Damage”, or climate change related damages that poorer countries cannot adapt to – remains controversial.

Climate change negotiations are unique in many ways, but they are not the first time humans have faced tensions about the ideal relationship between responsibility for past and future action.  And the fears and frustrations that surround this liability debate are exactly why the climate community might be wise to take a long, hard look at transitional justice as a source of insight for climate negotiations.

Can transitional justice approaches help?

A range of transitional justice processes have emerged, and continue to be developed, as many countries have been faced with the challenge of re-building society and social solidarity after periods of injustice, violence, and oppression.

Although there are key differences in context, transitional justice experiences could indeed provide insights for navigating the difficult political territory between recognising complex, historically rooted justice claims and a future that demands solidarity and collective action.  For instance, many efforts have featured some limits to liability in order to create political space for change. But successful ones have balanced this with actions designed to nurture trust, solidarity and forward-oriented change.

In a recent workshop co-hosted by Climate Strategies and the Konrad Adenauer Stiftung and supported by KR foundation, participants explored possible insights the climate regime could glean from transitional justice experiences despite the differences in context.  Participants included transitional justice scholars and practitioners, academic and broader civil society climate policy experts, and a range of political decision-makers and stakeholders.  This was the second workshop included in the project “Evaluating peace and reconciliation to address historical responsibility within international climate negotiations”.

One clear message from these discussions is that transitional justice processes are essentially focused on repairing and changing relationships amongst those engaged in deeply damaging conflicts and who are unavoidably bound together.  The key to understanding transitional justice is that it isn’t primarily about compensation for past harms, but about stabilising society and building a sense of solidarity that would allow for a more peaceful future.

However, this movement from conflict to solidarity does not happen automatically or by ignoring past justice claims.  Instead, efforts to acknowledge responsibility are seen as essential in order to allow societies to build solidarity and move forward.  These efforts differ by context and there are a range of mechanisms involved, but they all work by including recognition of responsibility in the consolidation of a new regime.  Responsibility from this perspective is as much about creating legitimacy and buy-in for a future-oriented regime as it is about looking backwards.

A second message was that successful transitional justice processes typically involve multiple mechanisms in order to address the underlying fears and concerns of all involved. In some cases, threats of trials have been crucial in generating the political will needed for productive regime change or consolidation.  However, legal punishment alone would not result in a successful transitional justice process either.

Relying only on the court system is too expensive and unwieldy in light of the harms encountered in transitional justice (or climate) contexts to either genuinely ‘do justice’ or provide the basis for building a more cooperative future. A ‘punishment only’ approach is also unlikely to create the political space or motivation needed for those potentially facing liability to participate.

Finally, it is important to remember that the post-Paris regime is still being created.  The Paris Agreement forms a framework, but interpretation and implementation will extend over the next many years.  How Parties see each other over time, and on how successful they are at building the depth of trust, and solidarity needed for implementation will be crucial for the Agreement to become an effective and legitimate.  This is an ideal time to be thinking about how to enable the type of relationships conducive to the level of action we need.

Achieving a 1.5/2C world will absolutely not happen without massively increased mitigation from all Parties.  Much more support, action and cooperation on all fronts is required in order to facilitate rapid development of low carbon pathways for all countries.  Simultaneously, tensions about historical responsibility and liability are not going to disappear as long as those facing the worst climate impacts do not feel heard, recognised and genuinely included within global climate efforts.

The international climate regime cannot afford to ignore lessons about how to build solidarity, repair damaged relationships, and build trust and cooperation.  Focussing on either only the past or only the future is unlikely to be a winning strategy. Transitional Justice is not a perfect analogy to climate change policy, but even imperfect analogies provide seeds for creative approaches to old problems.

A third and final policy roundtable for this project is being planned for Bonn in May 2016.  Interested participants should contact Eleonora Arcese (eleonora.arcese@climatestrategies.org) or Sonja Klinsky (Sonja.klinsky@asu.edu).

Workshop presentations and a discussion paper emerging from the first workshop (co-hosted by Climate Strategies and the Hague Institute for Global Justice) can be found here.

Interested in some of the concrete details and ideas that are emerging from this project?  We regularly post work emerging from this project, keep checking back here

Could lessons from transitional justice help to realize a fair and effective global response to climate change?

Reflections by Joy Hyvarinen, Adviser to VERTIC. This blog reflects her personal views.

Many have welcomed the new Paris Agreement on climate change, but there is also recognition of its weaknesses. The new treaty includes an aim of holding the global temperature increase to well below 2° C and also to “pursue efforts” to limit the increase to 1.5 ° C. However, current emission reduction commitments do not even come close to holding warming below 2° C, let alone 1.5 ° C. It is increasingly urgent to achieve rapid and deep cuts in global greenhouse gas emissions.
The Paris Agreement is based on the idea of countries strengthening their emission reductions (their “nationally determined contributions”) with five-year intervals, but it is far from clear if this will happen. Despite the successful adoption of the Paris treaty, fundamental questions remain the same. Stepping up efforts to limit climate change will still need to involve tackling deep-seated differences between countries that have been at the centre of the international negotiations for decades.
The ultimate objective of the UN Framework Convention on Climate Change (UNFCCC) (and any related legal instrument, such as the Paris Agreement) is to stabilize “… greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. …” (UNFCCC Article 2). While “dangerous” has never been defined, either by UNFCCC parties or the Intergovernmental Panel on Climate Change (IPCC), vulnerable countries have argued for a long time that the 2° C goal is not safe, and that it should be replaced by 1.5 ° C or lower.
Poor and vulnerable countries that have contributed little to causing climate change are expected to suffer its worst impacts. Human rights, such as the right to food, are being compromised. Some countries expect to lose territory due to sea-level rise – some small island states could disappear.
Adaptation is one response to climate change, but some of the negative impacts of climate change are beyond adaptation. “Loss and damage” has emerged as a priority issue in the international negotiations, with countries that are likely to be damaged calling for compensation and help. The Paris Agreement includes loss and damage (Article 8), but according to the accompanying decision by the Conference of the Parties, this does not provide a basis for liability or compensation (paragraph 52).

Emissions are growing in developing countries, but the UNFCCC recognizes that developed countries bear a historical responsibility for climate change because of their past emissions. It requires them to take the lead in combating climate change.
There are deeply held, long-standing differences between developing and developed countries in the negotiations, with the former calling on the latter to take stronger action to reduce emissions and provide more support to developing countries, and the latter calling on developing countries to do more to limit emissions.

A fair and effective response that limits climate change, protects the vulnerable and minimizes unavoidable loss and damage will require global cooperation on an unprecedented scale. Somehow, future negotiations related to the Paris Agreement will need to find a way forward that makes it possible to overcome the deep differences between countries and achieve this. It may require new approaches, including new legal solutions.
Learning from other areas could help. In particular, learning from transitional justice could help to identify new ways of addressing difficult questions that remain at the heart of the international negotiations and overcoming long-standing and bitter differences between countries. Global climate issues are not in the same category as the terrible circumstances where transitional justice processes have become necessary to enable societies that have experienced violence and gross human rights abuses to find some degree of reconciliation and move forward. However, there are parallels. In the climate change context there is a need to address questions of justice and what many perceive to be historical wrongs, and construct an approach that makes effective global cooperation and rapid emission reductions possible. Climate change is impacting human rights. Questions of potential liability are coming to the fore with climate-related loss and damage. These are among the areas where the global climate response could be informed by lessons from transitional justice.There seems to be growing interest in exploring this possibility. For example, the topic is included in a series of papers on climate justice commissioned by the Mary Robinson Foundation – Climate Justice.

An exciting project by Climate Strategies,led by Sonja Klinsky, is currently exploring what international climate policy debates could learn from peace and reconciliation processes, in particular in relation to addressing tensions between past-oriented concerns about historical responsibility and future-oriented desires for deeper climate mitigation.

Joy Hyvarinen is Adviser to VERTIC. This blog reflects her personal views.

 

Aviation, shipping and climate change policy – Alice Bows-Larkin

Reflections on All Adrift: Aviation, shipping and climate change policy, by Alice Bows-Larkin, published in Climate Policy, Vol. 15, issue 6

“All adrift” was many years in the making. My research journey started with a focus on aviation and climate change in 2003, and it would be fair to say that I was unceremoniously thrown in at the deep end. Looking back, perhaps this was for the best, because had I realised how unpopular and apparently controversial some of my research findings at the time would be, I would have probably looked elsewhere to satisfy my academic appetite. Well before getting an opportunity to see my work formally published, I found myself building substantial radio, TV and other press experience; defending my analysis that suggested that the UK government needed to turn its attention to managing demand for air travel, if it wanted to tackle its CO2 emissions comprehensively. So, while my focus started with attention on the UK, and stirred up interest from activists keen to demonstrate about the importance of climate change, and the contribution of airport expansion, it soon broadened out to consider the EU’s Emissions Trading Scheme, as well as the global efforts to curb CO2 from the aviation sector. Then, broader still, to delve deeper into issues around the other ‘difficult’ sector in a similar boat (pardon the pun) – international shipping. Aviation and shipping release their emissions in international airspace and waters, which means that governance of their emissions, and subsequent mitigation efforts (or lack of), presented themselves as topics ripe for in-depth analysis.

From participating in numerous stakeholder workshops, industry conferences and public debates on the topic, what has always seemed clear to me is that these sectors are only doing what many others would like to do – delay any change that, while being good for CO2 emissions, apparently isn’t good for business.  It is easy to criticise the International Civil Aviation Organisation (ICAO) and the International Maritime Organisation (IMO), and the slow progress made by both towards mitigation. Indeed in the run up to COP 21 in Paris this year, full incorporation of aviation in the EU’s ETS remains on hold until ICAO make a significant move on capping emissions through a market based scheme, anticipated to be in October 2016.  At the same time, the IMO rejected a call from the Marshall Islands, the world’s 3rd largest ship registry, to set a CO2 target for shipping.  But these sectors simply reflect a reluctance by all sectors, especially those in wealthy nations, to accept mitigation measures in line with avoiding the 2°C target that are perceived to create economic losers as well as winners.  Other sectors would probably be doing the same, if not bound by legal agreements.  Moreover, and as the paper in Climate Policy discusses, even if ICAO were to agree a market based mechanism with a suitably stringent carbon cap, and the IMO were to ramp up its efficiency standard, emissions would not be mitigated in line with what is needed to avoid 2°C.  But at least it would move us in the right direction.

The challenge with any of this work, is that the conclusions tend to be rather similar. It’s never been rocket science, even if some analysis in the literature presents itself in such as way as to suggest it is. Emissions rise as economic activity grows, as long as energy efficiency and/or carbon intensity improve at a slower rate than that growth. However, delivering constructive insights can be overlooked at the expense of trying to communicate how far off we are from the 2°C goal that we’ve set ourselves. Nevertheless, this article, and the research underpinning it, does try to provide a few pointers – it’s just that they are not necessarily welcome. For aviation, technical miracles will not be performed in the time left to curb CO2 commensurate with 2°C. Instead, work needs to urgently consider how to implement innovative policies that tackle the demand-side of the problem. Perhaps an easier message emerges from our shipping research to date – there is a whole host of unexploited technical and operational opportunities to curb the CO2 from shipping, but the challenge is the sector’s complicated arrangement of ship owners, operators, charterers, registries and so on. On the other hand, aren’t these two sectors the ones with global governing bodies who could, in principle, establish rules and regulations to cut across complications arising from the traditionally national focus of mitigation policy? Wouldn’t it set a great example if, for once, the COP meeting delivered a few surprises – hard, closed caps for CO2 released in international airspace and waters, led from the front by ICAO/IMO – that would be a fine act to follow!

Read the full article by clicking here.

Adaptation and the private-sector – Pieter Pauw

Reflections on “Not a panacea: private-sector engagement in adaptation and adaptation finance in developing countries”, by Pieter Pauw, published in Climate Policy, Vol. 15, issue 5.

The issue of private sector adaptation and adaptation finance is hotly debated by researchers, climate negotiators, business and civil society alike, with a growing number of publications on the topic, including my ‘not a panacea’ paper in Climate Policy. The data collection for this paper was done in 2012; the final manuscript was submitted in May 2014. What have we learned since? One lacuna of the paper: private maladaptation is not considered well enough.

Adaptation was long seen as a public and secondary response after mitigation. In recent years, however, increasing emphasis has been put on adaptation and the roles of the private sector in its implementation and financing. This is clearly linked to the UNFCCC negotiations. For example, at the COP in 2006, the Secretary General of the United Nations stated that ‘Changes in corporate behaviour, and in the way private investment is directed, will prove at least as significant in winning the climate battle as direct Government action’. At the Copenhagen COP in 2009, the private sector was mentioned as one of the sources of the annual USD 100 billion of climate finance that developed countries pledged to mobilize from 2020 onwards to support developing countries in adaptation and mitigation efforts.

Research followed swiftly. A rapidly growing body of (grey) literature is being produced on the role of the private sector in adaptation and adaptation finance. Most studies provide theories on motivations and potentials, and many showcase successful projects across the world. However, at a more aggregated level, there is no studies providing empirical evidence on the real potential of private adaptation.

My paper in Climate Policy did become more practical – it focuses on one sector (agriculture) in one country (Zambia). I did not just interview the private sector on their adaptation actions, but policy makers, researchers and civil society too. Yet the paper is not empirical either, as it does not assess actual private adaptation interventions on the ground on their effectiveness.

What the paper does make clear is the difference between private action and investments that constitute adaptation, and those that only contribute to it. This differentiation is particularly important in the context of climate finance. Private interventions that constitute adaptation would include only private interventions that specifically aim at adaptation. In principle, such interventions could, if mobilised by developed countries, be counted as part of the annual USD 100 billion of climate finance. However, such interventions were found to be minimal or nonexistent in Zambia.

The paper did however find many private interventions that could contribute to adaptation. In fact, the private sector might sometimes contribute to adaptation without being aware of it, for example when increasing resilience by investing in more efficient irrigation technology. The potential of the domestic private sector is particularly large, both by mainstreaming climate risks in operations (e.g. conservation farming; irrigation) and in capitalizing on new opportunities (e.g. marketing of harvests and farming equipment; development of improved seeds). Examples of potential international private sector contributions to adaptation include corporate social responsibility investments in reforestation and investments in sustainable water management.

The paper does mention the risks of such a ‘contributions’ approach to adaptation. It might advance business-as usual activities rather than innovation. Indeed in the past, a broad approach to adaptation was used by development actors who used adaptation language to garner funding to suit their ends, even when they felt their work was unrelated to adaptation (Ireland, 2012). Clearly, this risk also exists for private adaptation interventions. It should be prevented that business misuse a broad definition of adaptation for greenwashing of BAU activities. It would be even worse, if the private sector would attract public climate finance for such BAU activities, or if developed country governments account such activities as adaptation of ‘their’ multinationals as part of the country’s national contribution to international climate finance.

Now that the paper is published, I realise that even this ‘mentioning of risks’ still argues from the perspective that the net private contribution to adaptation is positive. The paper’s lacuna is that private action and investments potentially cause maladaptation. This word is actually only mentioned twice in the study, and it only provides one (hypothetical!) example explicitly.

This is a consequence of the method used. I asked respondents for examples of private adaptation and adaptation finance, because this is what global climate policy asks for. A similar study with the opposite aim –asking respondents about private maladaptation- would be as useful a contribution to our insights in private adaptation.

The IPCC in its fifth Assessment Report slightly changed its definition of maladaptation. It now recognizes that it does not only arise from badly planned adaptation actions, but also from deliberate decisions where wider considerations place greater emphasis on short-term outcomes rather than longer-term threats, or from decisions that discount, or fail to consider, the full range of interactions arising from the planned action. In this context, maladaptation by the private sector in agriculture could put private actors, local communities, and the entire region at risk, for example when irrigation systems to increase resilience actually deplete water resources; when large-scale monocropping goes at the expense of a higher diversity of crops and varieties that can withstand different climatic conditions; when peatland conversion causes methane emissions; or when crops are grown in highly exposed areas such as slopes and river beds.

The discussion on private adaptation has matured over the last couple of years. It becomes clear that private adaptation is both crucial and possible. New research is needed in two directions. First, empirical evidence needs to show what the actual potential is in different countries and sectors. Second, insights are needed into the potential of private maladaptation, and how to prevent it.

Pieter Pauw – researcher at the German Development Institute/Deutsches Institut für Entwicklungspolitik and PhD candidate at the Institute for Environmental Studies (IVM, VU University). Twitter: @wp_pauw

Developing a sectoral new market mechanism – Wolfgang Obergassel, Hans Bolscher, Jeroen van der Laan, Jelmer Hoogzaad and Jos Sijm

Reflections on “Developing a sectoral new market mechanism: insights from theoretical analysis and country showcases”, by Wolfgang Obergassel (né Sterk), Hans Bolscher, Jeroen van der Laan, Jelmer Hoogzaad, Jos Sijm, published in Climate Policy, Vol. 15, issue 4

At the 2011 COP in Durban, Parties decided to establish a ‘new market-based mechanism’ (NMM) to promote mitigation across ‘broad segments’ of developing countries’ economies. So far, they have only defined some broad outlines of how it is to function. The Doha COP in 2012 identified ‘possible elements’ of the NMM to be addressed in the development of the NMM’s modalities and procedures but Parties have so far been unable to make progress on details. At last year’s COP in Lima and the recent session in Bonn, proceedings effectively stalled due to controversies about whether agreeing on details of the NMM at this point would prejudge elements of the Paris Agreement. Nonetheless, submissions by various Parties and groups of Parties such as the Environmental Integrity Group and the EU continue to advocate for the establishment of an NMM. For example, in its INDC, Switzerland explicitly indicated its intention to use the NMM for achievement of its post-2020 targets.

Our article in Climate Policy identifies available options for the NMM elements defined in the Doha decision and reviews these options against a number of criteria, including environmental effectiveness, economic efficiency, political and administrative efficiency, and others. On this basis, the article identifies options that are best suited to fulfil the main objectives of the NMM as decided at the Durban conference, namely, ‘to enhance the cost-effectiveness of, and to promote, mitigation actions’. In addition, the article analyses potential applications of the NMM for five country-sector combinations: the power sector in Chile and South Africa, the steel sector in Brazil, the refineries sector in Indonesia, and the cement sector in Vietnam. The analysis assesses the emission reduction potential that could be mobilized through the NMM as well as the institutional market readiness of the sectors.

Our analysis finds that, although there are often trade-offs, several design options recommend themselves for maximizing mitigation outcomes and economic efficiency. These include broad coverage, starting with indexed targets instead of absolute targets to enhance political acceptability and minimize the risk of over-crediting, keeping crediting/trading periods short to avoid long-term lock-in of low ambition, and establishing independent governance bodies nationally and internationally.

The examination of five country-sector combinations finds that lack of data and of institutions that could manage the NMM are key bottlenecks. In addition, the analysis reveals the existence of substantial no-regret reduction potential, suggesting that either the incentives to improve the efficiency of operations or the means to do so may be lacking, for example due to the existence of monopolies/oligopolies. Governmental capacity building and Nationally Appropriate Mitigation Actions (NAMAs) might be more appropriate in the short-term, preparing the ground for the adoption of market-based approaches at a later stage. For example, if a government has a preferential feed-in tariff for power generated with renewables, the NMM could help provide the financial means to increase the price differential with power from fossil sources or to increase the scope of the policy, either in terms of more expensive technologies or in terms of volume. Such a system would require less preparation than an entirely new programme because the institutional capacity is already largely in place.

Looking forward, the Paris Agreement will pose new issues for the NMM and market mechanisms in general. One key motivation of the NMM’s proponents was the desire to draw developing countries more strongly into global mitigation efforts. This objective may be deemed to have been overtaken by time, given that the Paris Agreement is envisaged to contain mitigation contributions from all Parties. The purpose of the NMM will therefore need to be recalibrated. The most recent submissions by the EU and the Centre for European Policy Studies (CEPS) suggest that the primary route for international emissions trading should be linking of domestic market-based systems. The NMM would in this view have a complementary role, covering countries that do not have domestic systems or do not meet eligibility criteria for linking their systems internationally.

Another aspect is that while the Kyoto Protocol’s Clean Development Mechanism (CDM) so far operates in an uncapped environment, in the post-2020 period, market mechanisms will to a large extent operate within the boundaries of countries’ contributions. In terms of accounting needs, market mechanisms operating in developing countries post-2020 will therefore be more similar to Joint Implementation (JI) than to the current CDM. If not properly accounted for, emission reductions could be claimed double, by both the host countries and by the credit buyers. Therefore, the Paris Agreement will need to contain clear provisions to prevent double-counting of emission reductions.

However, this may be easier said than done. If the pledges under the Cancún Agreements are an indication of what to expect, there may be a broad range of types of contributions under the Paris Agreement, including emission reductions relative to business as usual, intensity targets, low-emission development plans and strategies, sectoral mitigation plans and strategies, or individual policies and actions. How to reconcile transfers of emission units with some of these types of contributions is far from straightforward.

The work on how to operate market mechanisms under the UNFCCC is hence far from over.

From Lima to Paris, part 2: Injecting ambition – Michael Grubb, Heleen de Coninck and Ambuj D. Sagar

In Climate Policy’s latest editorial, Editor-in-Chief, Michael Grubb, together with Climate Strategies Chair Heleen de Coninck and the director of Indian Institute of Technology Ambuj D. Sagar, reflect on the current state of play in the climate negotiations in the run-up to Paris 2015.

They suggest that forming a plurilateral mitigation “club”, including those governments most committed to ambitious mitigation, would provide the most compelling, economically coherent and politically stable package for making genuine progress towards the global 2 degree goal.

They argue that three main areas of coordinated action by club members could mutually reinforce each other, lead to a positive dynamic, and deliver reciprocal benefits for those members.  These would be:
– A domestic price on carbon, or equivalent measures, appropriate to the stage of economic and climate policy development;
– Domestic technology programmes and international technology cooperation, spanning the full chain of innovation from R&D to accelerated international deployment of zero-carbon
technologies; and
– Agreed treatment of international trade in both energy/carbon-intensive commodities, and low-carbon technologies and products, potentially to be taken forward as a plurilateral agreement in accordance with the broad principles of the WTO.

Read the full Editorial, then come back to the blog to comment.  All Michael Grubb’s Editorials 2010-2015 can be found here (scroll to the bottom of the page).