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Dr Erik Haites on Climate Finance

27 March 2009
Dr Erik Haites on Climate Finance

A global agreement on climate change must not only set targets and commitments - it must come up with a means to finance its implementation. This will be a crucial, and complex, part of the negotiations at Copenhagen in December. The Climate Group recently spoke with Dr. Erik Haites to better understand the challenges of achieving and implementing a successful financial framework.

The good news, according to Dr Haites, is that creative options for funding do exist. It is now up to negotiators to employ them.

The founder of Margaree Consultants, Dr Haites has published extensively on issues related to the economics of climate change, emissions trading, and the Kyoto mechanisms. He has helped design greenhouse gas emissions trading programs for Australia, Canada, the European Union, the United Kingdom and the United States. He has served as a lead author for both IPCC's Second and Third Assessment Reports and since 1998 has assisted the UNFCCC Secretariat on issues related to the Kyoto mechanisms, especially the Clean Development Mechanism.

Adequate finance and investment will be crucial to achieving and implementing a global agreement. What would be the hallmarks of a successful financial framework?

A new agreement must mobilize enough resources to finance mitigation and adaptation measures, as well as technology development and transfer, on a predictable and sustainable basis to meet the global emissions target. A serious target, such as emissions peaking no later than 2020, will require substantially more financial resources than are currently available.

The financial resources will need to come from several sources and be mobilized in different ways. Domestic policies to meet developed country national commitments will stimulate private investment in mitigation and in technology development. Through international crediting mechanisms, developed countries will also support mitigation and technology transfer in developing countries.

Developed countries also are likely to increase government spending, and to implement policies that require private investment, to finance adaptation. Given a serious commitment, developed country governments are likely to increase funding for domestic research and development as well. That would yield both domestic and global benefits.

Actions by developed countries at home are important because they will account for well over half of global emission reductions. These countries will source over 75% of the necessary research and development. And developed country action on adaptation, mitigation and technology development will reduce the costs of many technologies for developing countries.

A new agreement must also provide developing countries significantly more international financial support for mitigation actions that do not respond to market incentives, as well as for adaptation and technology development and transfer.

This international financial support for developing countries - which is only a small part of the total financial resources required - will be the focus of most of the negotiating effort.

What issues must be addressed if we are to avoid an impasse at Copenhagen? And what can we learn from Kyoto in designing a new regime?

A new regime must raise substantially more resources for international financial support for developing countries. It must also agree on how these resources should be used.

Traditionally contributions by developed country governments have been the main source of international climate finance. The Kyoto Protocol established new sources for climate finance, including the Clean Development Mechanism (CDM). The CDM is probably the largest source of funding for mitigation in developing countries. The 2% levy on the CDM will be the largest source of international funding for their adaptation efforts over the next few years.

Numerous options for raising additional financial resources have been proposed. Only a few have the potential to generate funds on the scale likely to be needed, which is billions of dollars or euros per year.

Norway, for instance, has proposed auctioning a small share of the allowances (AAUs) corresponding to each developed country's commitment. Some proposals, such as the Swiss proposal for a carbon tax, suggest increasing direct contributions, mainly by developed countries. Other options would impose fees on or auction allowances for international aviation and shipping emissions.

New and revised crediting mechanisms will help scale up mitigation in developing countries. But the potential of such mechanisms is only as large as is the demand for credits; this depends on developed country commitments and the scale of their domestic actions.

The Guardian recently reported that, in the last seven years, developing economies have received less than 10% of the adaptation funds promised them. How can we ensure that governments live up to their financing commitments?

I haven't seen the analysis that supports that claim, but the developed country track record of delivering promised financial resources is less than stellar. For example, only a few countries have met the promise to increase Official Development Assistance (ODA) to 0.7% of GDP. The trend over the past decade suggests that the prospects of it being met are slim. Due to rules governing national budgets, financial commitments can be made only for a few years into the future. Thus, the Global Environment Facility (GEF) has a four year replenishment cycle.

This means that promises of significantly increased developed country contributions will not be credible, predictable, or sustainable. Most of the extra funding will need to come from the other options.

The Norwegian option can be implemented easily as part of the climate negotiations. It would require developed country governments to create a demand for the auctioned AAUs. They could allow entities covered by domestic emissions trading systems to use AAUs for compliance; something few systems currently allow. Or they could commit to buy the auctioned AAUs to meet their national commitments.

Emissions from international aviation and shipping are large and growing quite rapidly. These will need to be regulated if atmospheric concentrations of greenhouse gases are to be stabilized. Regulation in this area could generate substantial financial resources for the climate agreement. These costs would be borne mainly by developed country air travellers and consumers. But this will require cooperative action by the International Civil Aviation Organization and International Maritime Organization, which have stymied efforts to address these emissions for the past decade.

Despite the fact that promises of increased developed country contributions will not be credible, predictable or sustainable, developed countries will be expected to commit to increased funding in the coming negotations. This expectation will focus on higher contributions to international funds for adaptation, mitigation or technology. But if significant resources can be generated from other sources, commitments to increase domestic funds for adaptation, mitigation and research may be sufficient.

Either way, given the track record, promises of increased financial resources -- international or domestic -- may be subject to "measurable, reportable and verifiable" provisions.

How much funding will be required to help countries mitigate and adapt to climate impacts?

We don't know how much international financial support will be needed to fund adaptation, mitigation and technology development and transfer. Estimates of adaptation costs alone in developing countries run to several tens of billions of dollars per year. But the fact is that we do not have good information on the specific measures that will require financial support, nor on the amount of support needed. In any case, the needs will change over time.

Will the private or public sector bear the financing costs? How can private financing be best leveraged?

Most investment in new facilities is made by corporations (60%) and households (26%) - the private sector. Government is responsible for the remaining 14%. Thus, most of the costs of adaptation, mitigation and technology transfer probably need to be borne by the private sector.

Policies and financial incentives are effective ways to leverage private financing. Building codes and standards, for example, are effective ways to make facilities more climate-resilient. They can lead to lower insurance premiums and damages for the owners. Energy efficiency standards also help mitigate emission and typically provide a quick payback to the owner. Tax credits can stimulate private research and development. Policies for mitigation and adaptation will also create markets for improved technologies; these in turn will stimulate more private research and development in these areas.

But public spending will also be needed. Certain adaptation measures, such as coastal protection, are most likely to be provided by governments. Financial support, rather than market mechanisms, may also be more effective for some mitigation measures - those where the cost is well above or below the market price. And much technology development and transfer relies on government support.

What sort of institution(s) would be able to manage and deliver these financial flows effectively?

Currently a variety of organizations under and outside the Convention - including the World Bank and the GEF, which is housed at the World Bank - manage international financial support for adaptation, mitigation and technology development.

Which organizations should disburse funds for a particular purpose is contentious. With much larger financial resources, there will be more contentious negotiations over management and disbursement. Heavy reliance on contributions from developed country governments is likely to lead to use of institutions, such as the World Bank, where they have relatively more influence. However, if most of the new resources are to come from other sources, there may be greater willingness to use existing and new institutions under the Convention.

Countries will need to decide how to allocate available financial resources among the competing needs of adaptation, mitigation and technology development and transfer. This could be done by designating specific purposes for certain sources. The share of proceeds from the CDM might be dedicated to adaptation, for example. Alternatively, a body could be established to recommend, or make, these allocations.

Funds for specific purposes then need to be disbursed effectively and fairly. None of the institutions have as yet addressed the issues associated with disbursing adaptation funds on a large scale. These decisions will be highly contentious. They involve dividing funds among countries and require very difficult choices: for example, do they go to starving farmers in Africa or to the survival of Pacific island states?

In terms of mitigation, the GEF currently manages funding. Again, the availability of additional funds will raise issues around which measures to finance and at what level. For example, should more money go to reducing emissions from degradation and deforestation (REDD), or to developing carbon capture and storage (CCS)? Should countries that do not attract CDM projects receive financial support for mitigation measures? Several countries have proposed moving responsibility for providing financial support for mitigation measures from the GEF to a new institution under the Convention.

No specific body currently implements technology development and transfer of technologies for mitigation and adaptation, although the GEF is initiating a pilot programme. The mandate of the advisory body for technology -- Expert Group on Technology Transfer (EGTT) -- expires at the end of 2012. Should a new body be established with both advisory and operational responsibilities? Or should operational responsibilities be given to other institutions, perhaps the Multilateral Fund of the Montreal Protocol?

Many believe that Copenhagen is our last shot to achieve a successful global deal that will stave off the worst impacts of climate change. Financing issues could prove the deal-breaker in achieving agreement. What advice would you give to ministers preparing their positions for this crucial COP?

The total financial resources available internationally will need to be significantly higher than at present; several billions of US dollars or euros per year. And the sources of international financial resources need to be credible, predictable and sustainable. In addition, developed countries will need to commit to more domestic spending for specified purposes, such as research and development.

Developed country governments will need to decide on their preferred source of financial resources: their national budgets; their industries, under the Norwegian proposal; or the customers of the international aviation and shipping industries. They should consult their colleagues in the ministries of finance, industry and transport to find the most acceptable option(s).

Governance and disbursement of the additional resources will involve intense negotiations. Some will prefer to rely on existing institutions (and their established governance structures). Others will want to establish new mechanisms (with new governance structures) under the Convention. Although some proposals have been floated, alternative institutional structures are not yet available to facilitate the negotiations. These alternatives will need to be introduced into the negotiations soon.

Climate negotiators have demonstrated their ability to address financial issues creatively. Significant investment in mitigation has been generated in developing countries through the Clean Development Mechanism. And although tiny relative to the funding needed for adaptation, the share of proceeds levy on the CDM will be one of the largest sources of funds for this purpose. Creative options are available to meet the much larger needs for a future agreement. Negotiators need to agree on a creative option and avoid promising funds that will not be delivered.

The views presented in the Viewpoint Interview series are not necessarily representative of the views of The Climate Group.

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