Developments at the United Nations and Financing Emissions Abatement
Discussions at the pithily-named ‘ninth session of the Ad-Hoc Working Group on Further Commitments for Annex 1 Parties under the Kyoto Protocol’ United Nations meetings in Bangkok which finished last week demonstrate that there’s much work to be done in order to reach political agreement in Copenhagen in December.
There is just one last major meeting before Copenhagen, which is due to set out the framework for a post-2012 agreement to follow up on the Kyoto Protocol, which expires in 2012.
While, on the one hand, Yvo de Boer, the UNFCCC Executive Secretary, provided a reasonably up-beat assessment of progress made at the Bangkok summit, a number of observers stressed the divide that persists between negotiating blocks on the most substantial of issues.
Developing countries are concerned that the ‘industrialised’ (Annex 1) Parties are trying to step back from deep emissions abatement obligations and re-open the fundamental agreement format. At the same time, there is dispute over investment funds that will be made available to developing countries.
Under the International Energy Agency’s 2008 Energy Technology Perspectives Blue roadmap to 2050, the anticipated investment requirement to reach 50% cuts on 2005 levels by 2050 is an aggregate $45 trillion, including an annual $10-100bn in R&D, an annual $100-200bn in ‘learning investments’ and a further annual $1000 to $2000 billion commercial investments. Some estimate the investment required for annual emissions abatement under emissions trading at around the USD $100bn-$150bn mark. There is a requirement from both an absolute and efficiency perspective for much of this abatement to occur in developing countries. However, there is no visible sign of an agreement as to how and from where this level of financing is going to be made available from the industrialised countries.
The issue of investment is tied up in the big-picture debate about the targets that industrialised nations should assume. Broadly, the higher the target, the higher the level of investment through the carbon markets and other means. However, the industrialised nations do not currently seem willing to continue to pursue the differentiation model of the Kyoto Protocol that entails industrialised nations taking binding quantified emissions reduction targets further while none exist in emerging economies.
The onus of the cost of investment is likely to fall on business, consumers, and the taxpayer in general in industrialised nations. The extent to which stakeholder group carries the greater burden will depend upon the allocation of the burden between the public purse through direct government intervention on the one hand, and the covered and un-covered sectors through carbon markets and other mechanisms on the other. Individual governments like to retain sovereignty over these sorts of issues.
These critical negotiations are obviously occurring at an interesting time in terms of the global economy. On the one hand, the capacity and appetite for further taxpayer-funded commitments is significantly reduced, given the massive budget deficits in industrialised nations exacerbated by large stimulus investment packages and diminished tax returns. In addition, debt provision for ‘risky’ capital-intensive projects in emerging markets has inevitably become more expensive or unavailable. On the other hand, as demonstrated in the G20 stimulus packages (see my blog post here), there is a real appetite to invest in the ‘green economy’ among the largest economies.
Somewhat ironically in the context of the UN climate negotiations, by many measures the largest green stimulus investments have been made by emerging economies – Korea and China in particular – those not subject to binding emissions limitations under Kyoto.
How funding and commitments are established is important. Different propositions entail different (potentially very substantial) transaction costs, levels of domestic and international political acceptability, and leverage and efficiency implications.
Market-based allocation of funding may present better potential opportunities for efficiency, standardisation, and private sector capital leverage. However, there could be an obvious tendency towards higher levels of bilateral or regional government-to-government direct funding, with investment being guided more by political and equity considerations – thus more an extension of existing donor-driven aid programmes.
The carbon markets really only drive mature project technology deployment. Happily, much progress has also been made to develop programmes to address the full cycle of technology development, commercialisation, and deployment, through national and regional technology partnerships. Australia continues to be party to such initiatives. Governments and flexible public-private partnerships will continue to have an important role to play in bringing new systems to point of deployment.
The carbon market mechanisms established under the Marrakech Accords (international emissions trading, Clean Development Mechanism, Joint Implementation) have largely been muddling along during this period of uncertainty. At present, there is only a very thin market for the carbon credits from any projects initiated after 2012. Given the time taken to develop projects from scratch, project deferrals and a substantial market deflation is a possibility.
For continuation of carbon pricing to induce substantial ‘additional’ investment, there needs to be a structure which leads to high levels of demand for carbon credits for a foreseeable and extended timeframe. The outlook from the talks so far is that the industrialised countries are unlikely to commit their economies to the requisite carbon price.
Multilateral initiatives such as the ADB and World Banks’ low emissions funds, unilateral domestic government policy intervention, and bilateral and regional technology partnerships are important contributions. However, if the scale of investment required to meet emissions abatement targets is to be reached then a greater scope and depth of private sector capital needs to be leveraged through the global capital markets.
As such, there needs to be greater certainty around market mechanisms, and those signals have to be generated by the negotiators in a hurry through a rapid consolidation of a workable position.