Climate change: Who is going to pay?
Although the outcome of the UN climate change conference that ended on 19 December was disappointing, the Copenhagen Accord nevertheless represents the first step in determining how to finance mitigation and adaptation measures. It puts in place fast-start funding of 30 billion US dollars for the period 2010-2012 and sets a goal of mobilising 100 billion dollars a year by 2020 to address the needs of developing countries.
According to the Intergovernmental Panel on Climate Change (IPCC), the cost of cutting global greenhouse gas emissions by 50% by 2050 could be in the range of 1-3 percent of GDP worldwide 1“World Development Report 2010”, World Bank, 22 October 2009. Moreover, developing countries are likely to bear the brunt of the cost. The Commission estimates that by 2020, developing countries will face annual costs of €104-118 billion (in 2005 prices) – or about 1% of GDP – to mitigate their greenhouse gas emissions and adapt to the impacts of climate change.
Much of the finance needed can come from domestic sources and an expanded international carbon market in which developed countries offset their emissions by investing in low-carbon technologies in developing countries. Nonetheless, the Commission estimates that developing countries could need €9-13 billion of additional financing from international sources of public finance in 2012, rising to €22-50 billion per year by 2020.
The cost of inaction
Given the staggering costs to mitigate and adapt to the effects of climate change, there may be a temptation not to act or to take only half-hearted measures. But delay will only increase the cost of action. Climate scientists have calculated that we can emit in total no more than 250,000 megatonnes of greenhouse gases in order to have a 75% chance of limiting global warming to 2°C – the threshold beyond which many changes will be irreversible and others will pose a serious threat to millions of people. But at current rates we will have used up this ration in 20 years. If the world uses up a large portion of its remaining emissions “budget” in earlier years, then countries will have to take more drastic – and costly – measures to stay within budget in later years.
“The earth’s atmosphere is like a box which we can fill with a given amount of emissions,” says Mark Hayden, Deputy Head of Unit for Environmental Policies with DG ECFIN. “In the end we will run out of space.”
Unfortunately, it is easier to quantify the economic costs of dealing with climate change than the economic costs of not adequately addressing the issue. “We can’t do a proper cost-benefit analysis because we have more information about the costs than about the benefits, namely the avoided damages,” says Hayden. According to Hayden, projections for GDP growth are based on the implicit assumption that climate change won’t affect agriculture, infrastructure and other parts of the broader economy. But in reality there would be costs such as repairing bridges, building sea defences, and relocating people.
Who is going to pay?
The real question, however, is not whether action is necessary but who should pay for it. In its Communication of 10 September, “Stepping up international climate finance: A European blueprint for the Copenhagen deal”, the Commission proposed that industrialised nations and economically more advanced developing countries provide the requisite public financing in line with their responsibility for emissions and ability to pay. The EU formula is consistent with both the spirit and letter of the UN Framework Convention on Climate Change (UNFCCC) which speaks of “common but differentiated responsibilities” and “respective capabilities”.
Responsibility for climate change could be determined based on annual emissions while ability to pay could be determined based on GDP. On this basis, the EU share in financing would lie somewhere between 10-30% as the EU contributes 10% of world emissions and represents 30% of world GDP.
How to pay?
Who is going to pay is not the only issue, however. How to finance mitigation and adaptation measures is of equal importance. According to the Commission, establishing a global carbon market combined with a 30% reduction target for developed countries would cut global mitigation costs by about a quarter by 2020, and generate annual financial flows to developing countries of around €38 billion. This assumes that a sectoral crediting mechanism is introduced for advanced developing countries in place of the project-based Clean Development Mechanism. A global carbon market could cover 40% of the cost of mitigation and adaptation measures in the developing countries, with the remainder coming from domestic public and private finance (20-40%) and international sources. Introducing a global emissions trading system for international aviation and shipping or a levy on their emissions could also generate international funding. A significant portion of the contribution from the EU and Member States could be covered by revenues from the auctioning of EU Emissions Trading System (EU ETS) allowances.
Sustainability gaps in the EU Member States
Two possible futures: one in which no climate policies are implemented (red), and one with strong action to mitigate emissions (blue). Shown are fossil CO2 emissions (top panel) and corresponding global warming (bottom panel). The shown mitigation pathway limits fossil and land-use related CO2 emissions to 1000 billion tonnes CO2 over the first half of the 21st century with near-zero net emissions thereafter. Greenhouse gas emissions of this pathway in year 2050 are ~70% below 1990 levels. Without climate policies, global warming will cross 2°C by the middle of the century. Strong mitigation actions according to the blue route would limit the risk of exceeding 2°C to 25%.
For more details, see Figure 2 in Meinshausen, M., N. Meinshausen, W. Hare, S. C. B. Raper, K. Frieler, R. Knutti, D. J. Frame and M. R. Allen (2009): “Greenhouse-gas emission targets for limiting global warming to 2°C” in Nature 458(7242), 30 April 2009.
Source: Adapted from Meinshausen et al. (2009)
Given the large transfer of funds from North to South, aid effectiveness is sure to be an issue. For mitigation, the EU proposes using country driven Low-Carbon Growth Plans as a key tool. All nationally appropriate mitigation actions and their financial support would be recorded in a central registry, and backed up by annual emission inventories and regular peer reviews. “This will provide greater transparency since all initiatives will be on the radar screen,” states Hayden.
The EU also proposes a “matching mechanism” in which developing countries approach developed countries with their proposals for funding. The UN could ensure that funds are allocated where they are needed most, and not just based on existing or historical relationships between donor and recipient countries.
Support would be bottom-up and de-centralised rather than top-down. It would depend on specific programmes being proposed and developed by developing countries. Moreover, as there are bigger scale effects by dealing at sector rather than project level, there would be a natural progression: countries would move from a project focus under the Clean Development Mechanism to a sector focus and then beyond to sectoral carbon caps, economy-wide caps and ultimately to participation in an international carbon trading system.
In all cases, the EU will ensure that money is well spent. “It’s not a blank cheque,” says Hayden. “We’re not going to pay without knowing what we get for our money.”
The long-term economic impact
Despite concerns about the cost, financing climate mitigation and adaptation measures could be budget-neutral. The cost will depend on the policy mix used, and governments are free to determine for themselves whether to employ revenue-generating instruments such as carbon taxes and the auctioning of EU Emissions Trading System (EU ETS) allowances or non-revenuegenerating instruments such as subsidies and regulations.
Financing could also have a neutral or even positive impact on economic growth. Far from requiring additional investment, shifting to a lowcarbon economy requires re-orienting investment from carbon technologies to clean technologies. Moreover, the costs of technology may be far lower than foreseen thanks to innovation. A breakthrough in battery technology, for example, could dramatically alter the market for electric vehicles.
A clear commitment to reducing emissions would reduce uncertainty and make investing in clean technologies more attractive to industry. And the region that invests decisively in these technologies may benefit from a first-mover advantage as the markets for low-carbon technologies emerge. Without action on a global scale, however, these nascent markets will never develop. Europe cannot do it alone.
The Copenhagen Accord and the state of play
Global action was the subject of two weeks of intensive negotiations and much political grandstanding at the COP 15 UN Climate Change Conference which ended on 19 December. The outcome of the conference was disappointing. According to José Manuel Barroso, the European Commission president, the outcome fell “far short of our expectations.” Barroso added: “Our level of ambition has not been matched.”
Our level of ambition has not been matched. José Manuel Barroso, President of the European Commission”
Environmental activists from the World Wide Fund for Nature (WWF) demonstrate on 7 December 2009 outside the Climate Change Conference.
Several developing countries refused to even endorse the final agreement, the Copenhagen Accord, meaning that it could not be formally adopted as a decision of the UN meeting. The conference agreed instead to a much weaker “decision to note” the accord’s existence.
Despite disappointment with the final deal, the Copenhagen Accord nonetheless represents tangible progress. It recognises the scientific case for keeping the rise in global temperatures to 2°C and establishes a February deadline for nations to specify their commitments to curb emissions.
Agreement was also achieved on new and additional funding from developed countries amounting to 30 billion dollars for the period 2010-12. This so-called fast-start funding is roughly in line with the Commission proposal. It will be provided to poor countries to help them adapt to climate change, reduce their emissions and embark on a low-carbon development path. Developed countries also made a broad commitment to financing climate change mitigation and adaptation measures. They agreed “to set a goal of mobilising jointly 100 billion dollars a year by 2020 to address the needs of developing countries.”
While the Copenhagen Accord falls short of EU objectives, Hayden prefers to look for the silver lining. “It’s not a bad sign if countries agree to keep on talking,” he says, “and set a deadline or ambition for reaching a firm deal in 2010.”
A global agreement is essential, however. “The EU accounts for approximately 10% of world emissions,” states Hayden, “so even if we reduced our emissions to zero or near zero, 90% of the problem would remain unsolved.”