House of Commons - Environmental Audit

Select Committee on Environmental Audit Sixth Report

4 Kyoto instruments

Adaptation and mitigation funding

52. Given the likely impacts of climate change, substantial funding will be required to help developing countries to lower their emissions and adapt to the change that the world is already committed to. As described earlier, such funding will make or break a global deal. Adaptation costs alone will run to some $86 billion by 2015. With mitigation costs as well a total of $155 billion will be needed per year.[56] Although these are vast sums of money, they should be put into perspective. $155 billion is less than 0.5% of developed countries' GDP.[57] Existing adaptation funding mechanisms have only delivered $26 million so far—this is around the same amount that the UK spends on flood defence each week.[58]

53. The difficulties involved with ensuring the delivery of such sums are made apparent when they are considered alongside Official Development Assistance (ODA). A commitment to give 0.7% developed country GNI as aid to developing countries has been in place since the 1970s. It has not been delivered. The UK provided 0.56% in 2007,[59] up from 0.26% in 1997.[60] At Gleneagles the G8 committed itself to increase aid by $50bn by 2010, but this only translated into 0.36% of the GNI of the G8—approximately half of the 1970 target.[61] The UN recently commented that the signs regarding the delivery of aid commitments are 'not encouraging' and that aid has actually decreased since 2006.[62] It should also be remembered that the levels of climate change funding described above would have to be in addition to currently committed ODA.

54. Under the UNFCCC and Kyoto Protocol, $26 million is currently available each year for adaptation work in developing countries. Dr Huq told us that these would not deliver the scale of action required.[63] He argued that it will be important to agree new and innovative funding mechanisms able to generate regular and large sources of capital. He pointed to the Adaptation Fund of the Kyoto Protocol as an example of such an innovative funding mechanism. As it draws money from a 2% levy placed upon CDM credits it is essentially a global tax on an international transaction, and the tax is held by an international fund rather than going into national treasuries. This fund might generate US$160-950 million by 2012, depending of the degree of trade and the costs of transactions. Jennifer Morgan told us that deeper emissions cuts in developed countries could mobilise increased CDM credits. She pointed out that an advantage of using the international carbon market is that much of this investment comes from the private sector. However, she also made it clear that the international carbon market alone will not provide the necessary funding.[64]

55. Given the size of the shortfall, there is a need for further funding sources. One potential source could be the partial auctioning of international emissions credits rather than their free allocation as at present. Jennifer Morgan told us that $150 billion per year could be generated if 40% of emissions credits were auctioned at 30 to 40 $/ton, thereby generating enough money for both adaptation and mitigation in developing countries. An alternative to auctioning at an international level could be the use of revenues raised from auctioning within emissions trading schemes. The UN Human Development Report calculated that an adaptation levy set at US$3/tonne CO₂ on the EU ETS to 2012 would raise US$570 million.[65] Another source could be through direct taxation. It is claimed that an international aviation levy of 5 euros per ticket could generate 10 billion euros per year.[66] Another source of funding could be from the potential border adjustment taxes that might be introduced to protect domestic industries at risk of carbon leakage. The hypothecation of such revenues might make the introduction of such a tax more politically acceptable.

56. The Minister thought that 85% of the money required would have to come from the private sector. He also thought 'funding should be multilateral; that recipient countries should have a major say; that the World Bank should be a major conduit, if not the major conduit'.[67] Chris Dodwell told us that the Office of Climate Change had been charged to undertake a project looking at 'ways of meeting this gap—[…] looking at the costs and benefits of auctioning, versus ODA, versus other forms of finance'.[68] He said that through the Strategic Climate Fund they would work with the World Bank and others to pilot some different approaches and 'actually try to work out how you can best get the right blend of public and private finance into solving the problem'.[69]

57. The scale of funds required for adaptation and mitigation in developing countries might run to some US $150 billion each year by 2015. Given past failures to meet commitments on Official Development Assistance it is unlikely that conventional funding sources will deliver the funds required. Existing mechanisms such as the international carbon market are also unlikely to be able to mobilise the scale of funds required. The Government has commissioned work to identify appropriate funding mechanisms. We welcome this and urge that the work should be published at the Government's earliest opportunity.

Technology transfer

58. As we found during our visit to China, technology transfer is a top priority for developing countries. An agreement on this will be required if we are to secure a successful conclusion to the negotiations However, there appears to be confusion about what technology transfer means. Dr Müller described it as a 'euphemism which can be used by both sides to talk to each other thinking that they… agree', but in actual fact 'in the north we mean exports and in the south we mean gifts'.[70] He said that given the significance placed upon this issue by developing countries it would be best to let them decide what they would like in this regard.

59. Some developing countries have argued that intellectual property rights (IPR) are a barrier to the diffusion and transfer of low-carbon technology. However, Mr David Hone, Group Climate Change Adviser for Shell International, described such concerns as a 'red herring'.[71] He argued that technology is already successfully deployed around the world—from computers to mobile phones, and that companies will develop links with developing countries, especially those where they wish to produce their goods. He could not think of concrete examples of technology that needed to be transferred.[72] Professor Burke agreed, and pointed out that wind technology was being deployed quickly in developing countries and that it was likely that other renewable energy technologies, such as photovoltaics, were going to be built in China and India for the same reasons that other goods were produced there. He cautioned that there might be demands for certain technologies, such as nuclear, or even technologies that might not necessarily have anything to do with climate change.[73] Dr Müller pointed out that CDM projects involve the transfer of technology and that other mechanisms do the same, such as bilateral agreements.

60. We asked a number of Chinese officials about technology transfer. There was a general view that more advanced technology is required to reduce emissions. Yu Qungtai, Chinese Ambassador and Special Representative on Climate Change Talks, told us that they do not possess the most efficient technologies and urged western governments not to turn climate change into a money-making exercise. He told us that China was not looking for charity or gifts, but was instead looking for companies to make technologies more affordable and available. Yu Qungtai said he was encouraged by the UK Government's stance on technology transfer. He welcomed the agreement made between the Prime Minister and the Chinese Premier in January 2008. Chinese officials were hopeful that this would lead to closer working on clean coal technology, carbon capture and storage, capacity building, environmental technologies, wider research and development, and also public awareness strategies. However, a note of caution was raised by Xu Huaqing, Director of the Centre for Energy, Environment and Climate Change, who told us that in the past there had been a failure to ensure that bilateral agreements resulted in the diffusion of technologies across the country.

61. E3G also stressed the importance of technology diffusion.[74] It said that the establishment of Low-Carbon Economic Zones between the EU and China could facilitate the required technological diffusion and also provide 'testing grounds' for low-carbon policies.[75] This option was also put forward by Chatham House in a recent report, which concluded that the common interest of the EU and China in a low carbon future could mean that, working together, these countries could become the 'global powerhouse' of low-carbon innovation.[76] It recommended the creation of Low-Carbon Economic Zones as a way to focus EU energy and climate cooperation with China 'to demonstrate the real possibility of large-scale transformations to other regions and countries'.[77] Chatham House also recommended trade reforms involving joint agreements on the energy efficiency of goods and also an agreement on free trade in low-carbon products. In our Eleventh Report of Session 2005-06 we recommended action on the removal of trade barriers to environmental goods and services. Bilateral agreements would seem to be a way to take this forward.

62. There appears to be a widespread perception in developing countries that they are missing out on certain key technologies due to the expense of intellectual property rights. This view has not been supported by the evidence that we received. However, given the significance of this issue for developing countries the Government is right to allow them to develop their own proposals.

63. Low carbon technologies will have to be deployed in developing countries. To facilitate this, technology transfer will need to include the direct funding of projects through mechanisms like the Clean Development Mechanism, as well as bilateral work on research and development. We welcome UK-China and EU-China commitments to closer working in relation to climate change, environmental technologies and research and development. It is critically important that these lead to advances in the deployment and diffusion of low-carbon technologies. Parties should explore the concept of Low-Carbon Economic Zones as a way to focus joint-working opportunities. In addition the Government and EU must seek to establish bilateral, low-carbon, free trade agreements, and also to define stringent joint standards for energy efficient goods. In order to aid the diffusion of low-carbon technology globally, trade barriers to low-carbon goods and services must be removed; efforts must continue on this issue in the Doha trade round.

International credits

64. The Kyoto Protocol created three 'flexibility mechanisms' in order to lower the overall cost of reducing greenhouse gas emissions: the Clean Development Mechanism (CDM); Joint Implementation; and emissions trading. These mechanisms enable countries to access opportunities to reduce emissions in other countries where it might be cheaper to do so.[78] Damien Meadows explained that a significant benefit of the CDM has been that it has engaged some 150 developing countries in the international carbon trade.[79] Dr Müller said that the CDM might have helped to pave the way for action in developing countries. He thought that as the CDM was now trusted by developing countries it might be used to encourage them to take further action.[80] Flexible mechanisms lower the incentive for developing countries to free-ride as non-participants would not have access to the funding that they provide.

65. Nevertheless, CDM credits can cause problems. To begin with, credits have to be proven to be 'additional' i.e. that a project would not have gone ahead without flexible mechanism funding. There have been concerns about the true additionality and sustainability of certain projects[81]—although witnesses to this inquiry thought that the robustness of CDM rules lowered this risk. There is also a fear that permitting the use of too many international credits in the EU might mean that the necessary action and investment does not take place domestically. For example, it could undermine investment in renewables making it more expensive to deliver the renewables targets.[82]

66. Recent European Commission proposals have sought to limit CDM credit use within the EU ETS. In order to balance the risk that use of CDM credits would undermine domestic efforts, and to ensure that the cost of compliance was not too high, it proposed that no new credits should be permitted in the third emissions trading period. Instead, credits can be carried over from the second period. As the second period allocation was so generous this equates to more than a third of the total reduction effort by 2020 within the EU ETS.[83] A Commission official told us that there had been pressure to both increase the proportion of credits that could be used in the scheme,[84] and also pressure from NGOs to ban the use of these credits.[85]

67. The Minister indicated to us that the Government might be happy for a greater proportion of international credits to be used than has been proposed by the European Commission. He argued that it makes little difference where emissions are reduced and that credits generate useful investment in developing countries. He would be happy for a significant proportion of Britain's commitment to be met internationally, although he accepted the need for 'balance'.

68. We are concerned by this view. As we noted in our Second Report of Session 2006-07, the Government's 'endorsement of and reliance on making up shortfalls in… national targets by buying carbon credits from other countries' is not consistent with the fact that substantial emissions cuts in developed countries are required alongside challenging caps on emission growth in developing countries.[86] We argued that developed country reliance on overseas credits could mean that global emissions will not actually be reduced. We felt also that the Government must face up to the fact that 'ultimately neither the UK, nor any country, nor any industry, can simply buy its way out of meeting its carbon commitments'. Further to this, in our Seventh Report of Session 2006-07, we said that we had concerns about 'the practical feasibility of relying… on finding significant volumes of surplus carbon credits to buy from other countries, when all nations will surely find it very challenging to meet their domestic emissions targets for 2050 under any post-2012 regime'.[87]

69. We urge caution about the use of international carbon credits. The argument that a tonne of carbon reduced abroad is the same as a tonne of carbon reduced at home is an over-simplification of a complex issue. Permitting the use of too many international credits will drive down the cost of carbon, but this will also make renewables and air pollution targets more expensive to reach and potentially slow down the long-term shift to a low-carbon economy in the UK.

70. The Minister argued that the market in flexible mechanisms will help to provide investment in developing countries. We accept this but we caution that current flexible mechanisms will only provide a proportion of the funds required for mitigation and adaptation in developing countries. The post-2012 negotiations will have to identify additional sources of money to supply the tens of billions of pounds that will be required.

71. Nevertheless, we feel that there is still a role for flexible mechanisms in transferring funds and technology to developing countries. They will also provide a 'carrot' to developing countries to play their part in a post-2012 agreement. We agree with the European Commission that the current level of credits proposed to be permitted in the EU ETS should not be expanded further under current emission reduction targets. Only when the EU adopts a target of at least 30% by 2020 could their use be increased, and only to a level that does not undermine the carbon price in the EU.

CDM REFORM

72. Benito Müller argued that developing countries should be rewarded through the CDM for implementing policies that reduce emissions below business as usual.[88] Jennifer Morgan agreed with this proposal and said that the CDM could also be reformed to deliver sectoral emission reductions.[89] The aim of such reforms would be to encourage wider action in developing countries through the creation of no-lose mechanisms. The Government said that it was exploring how the CDM might be applied to sectors. It pointed out that a potential benefit of a sectoral CDM approach could be that it reduces the risk that a project might have gone ahead anyway (in other words, additionality concerns). It was hopeful that CDM improvements would be possible in the negotiations.[90] Eric Bettelheim thought that the safeguards applied to the CDM process were so stringent that they were preventing business investment.[91] Benito Müller recognised that business had found it difficult to get approval for projects, but asserted that the rules were required to prevent inappropriate projects from receiving credits. He thought that due to these rules most approved projects were authentic.[92]

73. We believe that there is a good case for sectoral and policy-focused CDM. We recommend that the government explores the desirability and feasibility of its introduction. The government should also explore whether CDM project approval rules need to be reformed.

INTERNATIONAL REGULATORY BODY FOR CARBON MARKETS

74. The Market Mechanisms Working Group of the Global Legislators Organisation for a Balanced Environment (GLOBE) recommended in February 2008 that a new international independent regulatory body for carbon markets be established. It said that this would be required to 'oversee all carbon transactions, develop clear guidelines for transactions, [and] provide technical advice to countries that operates under standards associated with commercial law and operations'.[93] It indicated that this would be needed to create a stable and predictable regulatory framework. Eric Bettelheim thought that the creation of such a body was 'absolutely essential' and that it was unrealistic to expect the UN to serve as a regulator of 'what is essentially a financial market'.[94] The Scientific and Business Congress on Protecting the Climate agreed with the above, and suggested that this body would be needed to encourage private companies to invest in solutions to climate change.[95]

75. We recommend that the Government explores with existing market participants and other interested parties the creation of a new independent regulatory body to manage and develop the international carbon market.

Deforestation

76. Emissions from deforestation are immense. It currently contributes more than 18% of annual man-made greenhouse gas emissions.[96] Without prompt action deforestation emissions between 2008 to 2012 will be more than the total emissions from aviation since its invention until at least 2025. The Stern Review concluded that 'curbing deforestation is a highly cost-effective way to reduce emissions; large-scale international pilot programmes to explore the best ways to do this could get underway very quickly'.[97]

77. We received written evidence from Sustainable Forestry Management (SFM), which stressed the critical need to address emissions from deforestation. SFM argued that flexible mechanisms have failed to take advantage of the potential for land use, land use change and forestry (LULUCF) projects in mitigating climate change. It concluded that this has had a negative impact on deforestation rates. In particular, SFM argued that the EU ETS ban on the use of forestry credits, and EU policy on biofuels, have combined to create market signals that promote deforestation.[98] It also stressed that limiting the use of LULUCF credits is not economically sound as it unnecessarily increases the carbon price in the EU. Eric Bettelheim made the point that mitigation actions are focusing on technological change rather than taking advantage of the natural biological mechanism that LULUCF projects represent.[99] These strong, market-centred, views went further than other witnesses to this inquiry, who stressed the need to restrict the use of these credits to prevent carbon prices from being too low.[100]

78. We received conflicting evidence about how deforestation should be tackled in the negotiations. Proposals included:

a fund-based mechanism in which developed countries pay agreed amounts to developing countries not to deforest land;
a standalone market-based system rewarding avoided deforestation; and
the full integration of LULUCF credits into existing market mechanisms.

79. Eric Bettelheim called for improved regulation in the sector and for LULUCF credits to be integrated into existing carbon markets.[101] The European Commission rejected this in its recent EU ETS proposals, arguing that deforestation should be addressed through other instruments. It suggested that part of the proceeds from auctioning allowances in the EU ETS could generate additional means to invest in LULUCF activities both inside and outside the EU.[102] A number NGOs agreed that LULUCF activities should not be permitted in the EU ETS because: there is uncertainty about permanence and additionality; they are simply a cheap way to avoid reducing emissions from industry; allowing such credits would flood the market with cheap credits.[103] There are also questions about the use of such credits in the absence of appropriate data to make them verifiable. These concerns led one European Commission official to describe such credits as being 'sub-prime'.[104] A recent OECD report appeared to confirm this view, but also indicated that there might be ways to address forestry credit data and verification concerns in the future.[105]

80. The Minister told us that if the technical issues surrounding data, monitoring, sustainability and additionality can be dealt with, he thought LULUCF projects should be part of the carbon market.[106] Allowing their use in the EU ETS would, he believed, destabilise it at this stage, but he stressed that the Government's policy is to work towards their eventual inclusion.[107] Ms Jan Thompson, Head of Negotiations on International Climate Change at Defra, pointed out that if these credits were permitted to be used in the EU ETS in future, there would have to be deeper emission reduction commitments to balance out their relative cheapness. She also highlighted that the Government has provided funding for the World Bank's forest carbon partnership facility which might help to reduce deforestation:

In Bali the UK Government announced a contribution of £15 million to the [facility] which has a couple of funds in it—a readiness fund which looks at building capacity in developing countries so that they can measure these emissions properly and try and address issues of leakage and that sort of thing; and a carbon fund which looks at testing out incentive mechanisms and how payments are to be made and whether or not this comes through carbon markets, through public finance and to whom those payments would go and so on. Those pilots are getting underway now through this year and next so we can see where we get to by the time we are looking to include an international agreement.[108]

Deforestation and land use change will have to be tackled as part of the post-2012 negotiations. It provides an effective natural option for mitigating greenhouse gas emissions. However we have received conflicting evidence as to how this could be done without undermining the EU ETS. We intend to return to this issue at the earliest opportunity. In the meantime we welcome Government contributions to 'avoided deforestation' pilot studies. These studies will need to report as soon as possible to be able to inform the negotiations.

56 Ev 36 Back

57 UN Development Programme, Human Development Report 2007-2008 (New York, 2007), hdr.undp.org/en/ Back

58 ibid Back

59 "Keeping promises to the world's poor", Department for International Development, 9 October 2007, www.dfid.gov.uk Back

60 Department for International Development, Statistics on international development 1998/99-2002/03, October 2003 Back

61 "Gleneagles: What really happened at the G8 summit?", Oxfam, July 2005, www.oxfam.org.uk Back

62 UN Development Programme, Human Development Report 2007-2008 (New York, 2007), hdr.undp.org/en/ Back

63 Ev 10 Back

64 Ev 35 Back

65 UN Development Programme, Human Development Report 2007-2008 (New York, 2007), hdr.undp.org/en/ Back

66 Benito Muller & Cameron Hepburn, "IATAL-An outline proposal for an International Air Travel Adaptation Levy", Oxford Institute for Energy Studies, October 2006 Back

67 Q190 Back