Challenges for the next days in Copenhagen

The Kyoto Protocol was the first major step of international cooperation on climate change. It defined mid-term emission reduction targets and mechanisms to deliver marginal emission reductions in Annex 1 countries. However, long-term emission targets require going beyond marginal reductions. Envisaged 50-95% emission reductions by 2050 are possible, only if

  • countries pursue marginal reduction opportunities and shift to low-emission development
  • all countries are empowered to make the transition to low-emission development

The chair of the ad hoc working group on long-term cooperative action under the convention proposed on 11/12/09 a draft text. It requires attention on three points:

(i) Definition of domestic emission targets for Annex 1 countries

Low-carbon transformations require diffusion of existing and new technologies, infrastructure, and business models. As pointed out by a group of 186 investment institutions, representing assets of 13 trillion US dollar, this requires clear, credible and long-term policies. Domestically defined emission targets define market opportunities to focus innovation and investment in low-carbon activities. The targets provide the necessary guidance for the design and implementation of stringent regulatory frameworks and carbon prices.

So far the text states ‘Emission reduction targets have to be delivered [mainly] domestically.’  Brackets around the word mainly indicate the ongoing discussion. If ‘mainly’ remains in the text:

  • It creates a loop-hole that allows domestic lobby groups to undermine the international political commitment to a low-carbon transformation –emissions might not be reduced domestically, but through environmentally controversial offsets or even ‘hot air’.
  • It creates uncertainty for low-carbon investments in Annex 1 countries, as it would not be clear what stringency future climate policy has and what opportunities for low-carbon products are created.

(ii) Low-carbon development in non Annex-I countries

Global emission reductions can only be achieved if developing countries avoid lock-in of carbon intensive technologies and infrastructure. Therefore the draft text requires that non-Annex I countries “prepare low-emission development plans” in line with “achieving a substantial deviation of emissions [in the order of 15-30 percent by 2020] relative to those emissions that would occur in the absence of enhanced mitigation.”

Putting the low-emission development plans into action requires policies and programs in areas such as buildings, transport, power and industry. The character of each specific action will determine whether it is an “autonomous mitigation action” or an internationally supported “nationally appropriate mitigation action” (NAMA). NAMAs are “supported by finance, technology and capacity-building provided by developed country parties.” The structure of this support can determine their political viability and ability to attract private investment.

This is outlined in the draft text, but can succeed only with commitments from all parties:

  • A commitment from Annex 1 countries on the total amount of resources they will make available to support the implementation of NAMAs in developing countries (e.g. auctioning revenue, use of Special Drawing Rights, risk guarantees to facilitate finance)
  • A commitment of all parties to carbon pricing on international aviation and shipping and use of revenue for support of adaptation and mitigation in non Annex 1 countries.
  • A commitment from non Annex 1 countries to outline ambitious low-emission development strategies.
  • A commitment from advanced non Annex 1 countries to some “autonomous mitigation actions” (e.g. China’s energy efficiency target).
  • A commitment from all parties to comprehensive monitoring to manage effective policy implementation and detailed international reporting of policy implementation for rapid international learning and transparency for private sector investors.

(iii) The role of the carbon markets

Exposing actors to the social cost of carbon is essential, albeit insufficient, to shift innovation and investment towards low-carbon technologies, projects and activities. The European Emission Trading Scheme has demonstrated how trading within a defined cap can deliver an effective carbon price. Carbon taxes are another policy instrument to deliver a carbon price.

The CDM offsetting mechanism has also put a price on carbon. However, it acts as a subsidy for low-carbon options, as opposed to providing a disincentive to chose carbon-intensive options. This can kick-of initial projects and has indeed been effective in creating awareness, interest, and expertise. However, many difficulties have been identified from the experience with the CDM mechanism, among them:

  • It creates profits for actors in energy and carbon-intensive sectors in non Annex 1 countries, contributing to a lock-in of energy and carbon intensive activities, rather than facilitating a shifting towards low-carbon development.
  • It creates incentives for actors participating in the CDM mechanism to oppose domestic regulation or carbon pricing, because domestic regulation disqualifies CDM projects.

This shows a clear strategy is necessary to focus the CDM on specific sectors and activities where other mechanisms are not more effective in providing support. This decision is unlikely to emerge from reforms of the mechanism in the current structure, because project developers, finance institutions, and host countries have vested interested and are well organized to veto significant change.

A political decision is necessary in Copenhagen for a clear transition from off-setting mechanisms (CDM) to tailored support mechanisms for NAMAs. Otherwise uncertainties will delay both investment in CDM projects and implementation of autonomous mitigation actions and NAMAs. A clear transition allows expertise that was build with the CDM mechanism to be transferred: Technology and MRV experience can be used when designing, implementing, and generating international support of NAMAs. Project development and financing expertise can be used to realize investment opportunities, created for example with feed-in tariffs.

Conclusion

The draft is a big step forward for international climate cooperation, if this week delivers political commitments to (i) domestic delivered emission targets in Annex I countries (ii) frameworks for low-emission development strategies and their national and international support (iii) a transition strategy from the CDM mechanism. Clarity on these points allows for agreement on detailed design in the next months, and for a rapid shift of investments to low-carbon opportunities.

By Dr. Karsten Neuhoff, Climate Policy Initiative.