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Post-Copenhagen: Australia’s Big Funding Gap

February 18, 2010

Australia has no detailed plan established to meet its obligations under the Copenhagen Accord.

This is particularly true given the current domestic policy vacuum.

So, in a policy field where acronyms are de rigeur – and preferably three-letter-acronyms at that – and populist messages are streamlined, the term ‘Big Funding Gap’ (BFG) should fit right in.  Drawing any parallel with the Roald Dahl children’s novel ‘BFG’ (Big Friendly Giant’) will be tough, but readers will have to read on to see if we succeed….

One of the key political decisions arrive  the UNFCCC meeting in Copenhagen and included within the Copenhagen Accord was an agreement to the extent of funding that Annex 1 (Developed) countries should contribute for climate change mitigation and adaptation activities in Non-Annex 1 (Developing Countries) (Paragraph 8).

This funding from Annex 1 countries should constitute $30 billion between 2010-2012 in quick-start funding, and a further $100 billion a year by 2020.  A significant portion of such funding should flow through the Copenhagen Green Climate Fund. (There is very little information available on this fund, but it is entertaining to note the domain-name land grab that has occurred around it!).

In previous posts, we have discussed issues related to fiscal liability and international funding commitments, and the extent to which Australian plans may be commensurate with requirements.  We have explored the extent to which the CPRS is fully funded, and the potentiality for Australian Government intervention in the international carbon markets.  Elsewhere, we examine possible funding obligations in the context of the extent of public budget deficits.  We have also looked explicitly at the implication of the combination of these factors, in the lead-up to Copenhagen, for the Australian Government.

At Copenhagen, the Government approached the issue of international finance commitments with a fairly broad and bland public statement of their position.  The position notes the ‘extremely large’ scale of the financing task which is ‘beyond the capacity of public finances alone’. 

Key components of the position are:

  • to establish a global agreement that ‘Broadens the base of contributing countries’
  • public finances should be used to ‘unlock private investment’
  • that ‘carbon markets will provide the majority of support for global actions to reduce emissions’

There are a number of issues raised in considering how the Copenhagen agreement on financing might be implemented.

The 2008 UNFCCC analysis of Financial Mechanisms ‘Investment and Financial Flows to Address Climate Change: An Update’ maps out the extent and mechanisms by which appropriate mitigation might be achieved, and at what cost.

An interesting conclusion reached in the analysis is that existing carbon trading mechanisms are not sufficient or appropriate for a large portion of this abatement.  This is clearly demonstrated and discussed in the Executive Summary on P9.  The implication is a need for broadening and deepening of the market mechanisms – particularly to include Carbon Capture and Storage (CCS), as well as Reducing Emissions from Deforestation and forest Degradation (REDD) in developing countries – and a correlative increase in Annex-1 commitments in order to generate necessary demand for carbon credits.  In 2008, the UNFCCC estimated Annex-1 demand to be between 0.5-1.7 Gt CO2e, against a mitigation potential of 7 Gt CO2e in developing countries.

Some progress has been made in regard to the necessary arrangements to expand funding.  The World Bank’s range of funds are expanding, and REDD looks to be part of any final deal.  Carbon trading is in some trouble in the short-term, with the current structure for an international agreement not inducing the confidence required for stringent domestic trading targets within Annex 1 economies.  The EU looks unlikely to substantially increase targets or access to international offsets, while in the US and Australia legislative action is in doubt.

Already we see haggling over the mechanism by which funding should be delivered, including recently, for example, whether Bangladesh had in fact accepted UK funding due to the mechanism – the World Bank (rather than the UNFCCC) – by which that finance was to be made available.

In a 22 page analysis of Annex 1 country commitments made after Copenhagen, the World Resources Institute attempts to draw comparisons among the ‘mulitiple dimensions’ of commitments made, and aggregate those commitments to establish the extent of the cuts and their effect.  The report points out that there is an absence of detail about how many countries will achieve their goals through either international or domestic measures.  It establishes a range of achievement of 12-19% cuts below 1990 levels – short of the IPCC target range of 25-40% cuts by that date, leaving an almost inconceivable task between 2020 and 2050.  The WRI takes a more pessimistic view of the implications of aggregate cuts than the analysis of Trevor Houser, visiting Professor at the Peterson Institute for International Economics (PIIE).  PIIE suggests that the aggregate bottom-up pledges (both Annex 1 and Non-Annex 1) keep the Accord ‘within reach’ of keeping global temperature increases within 2 degrees Celsius.

The WRI emphasises that reductions through international actions need be ‘real and additional’, requiring ‘high regulatory standards’ and ‘robust accounting rules’.  In addition, the base year and inclusion of Land Use, Land Use Change and Forestry (LULUCF) within a target is noted to be particularly influential.  Echoing the Copenhagen agreement call for accounting targets that are ‘rigorous, robust and transparent’, the report recommends consistency in approach to land use accounting rules and approaches.

There seems to be some uncertainty by the proponents of key domestic legislation in Australia as to the effects and costs of the various mechanisms available.  Recently, the Rudd Government has been interrogated by the Coalition about the impact of the Carbon Pollution Reduction Scheme on electricity bills post-2012.  By the same token, including at this Blog, many have pointed out the significant functional and strategic deficiencies of the recently announced ‘Direct Action’ climate change policy of the Coalition. 

These domestic measures, and the uncertainty of their implementation, ricochet back up into Australia’s international commitments.  The mechanism and cost by which Australia will meet any pledge is uncertain. 

There will be temptations to skew conditions and accounting rules to favour a target amenable to special circumstances in Australia.  One key example of this is the effort to which the Government, and likely the Coalition should they come to power, is going to secure a carve-out of anthropogenic land-use emissions from natural emissions events (drought, bushfire) within the LULUCF component of the national inventory.

No matter, it is quite evident that Australian commitment to a range of international funding mechanisms will need to be forthcoming in order to meet the bipartisan national target, and for Australia international funding to be comparable to that of counterparties in Annex 1. 

Australia thus far has committed a few tens of millions of dollars to the International Forest Carbon Initiative, including the Indonesia-Australia Forest Carbon Partnership, and $100m to the Global Carbon Capture and Storage Institute

We have identified that the CPRS provides for a reasonable proportion and major responsibility for international climate investment commitments through proposed acquisition of international credits bought by covered sectors under the proposed trading scheme – to the tune of $500m per annum.  Despite this, climate change Minister Penny Wong recognises the continued uncertainty in relation to the extent and nature of the likely private sector obligations.

The Coalition ‘Direct Action’ policy however does not commit one single dollar of funding to international investment.  At this blog, we are not even sure if the Coalition realises that they would face such an obligation should they reach Office.  As it stands, their reliance (and most probably also the Government’s reliance) on LULUCF activities including soil carbon and other biological sequestration to achieve (or at least backstop) emissions targets contravenes the accounting principles set out in the Copenhagen Accord.

In short, Australia will need to ‘pony up’ above and beyond what is currently visible to industry and the voting public. 

We do not yet know the method for accounting and equating contributions by Annex 1 countries to international investment.  This is a key item of negotiation which will now be operationalised.  Australia ranks in the top 20 on both GDP and GDP per capita, and very highly on greenhouse gas emissions metrics.  By any measure, Australia’s equitable contribution to international funding will be substantial.

The Government has a mechanism in view (CPRS) to achieve international contributions, if not the detail.  We are yet to see that of the Coalition. 

In either case, it indeed seems that there is a BFG.  However, it doesn’t look like the giant will be very friendly like the BFG, but more of a Fleshlumpeater.

How well does Australia understand the BFG, and how well are we prepared?  How will our obligations – which could run into many billions of dollars – be met? This is particularly pertinent if we are to consider a scenario of no emissions trading.  The common refrain is that the longer investment is left, the more expensive it gets. 

Let us hope that we are not served up a nasty serving of ukyslush snozzcumbers by our policy-makers.  I won’t let it give me trogglehumpers – for now.

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