1 INTERNATIONAL
CLIMATE FINANCE
(30910)
13183/09
+ ADD 1
COM(09) 475
| Commission Communication: Stepping up international climate finance: A European blueprint for the Copenhagen deal
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| Legal base | — |
| Document originated | 10 September 2009
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| Deposited in Parliament | 17 September 2009
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| Department | Energy and Climate Change
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| Basis of consideration | EM of 8 October 2009
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| Previous Committee Report | None, but see footnotes 1 and 4
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| To be discussed in Council
| See para 1.22 below |
| Committee's assessment | Politically important
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| Committee's decision | For debate in European Committee A
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Background
1.1 In our Report of 4 March 2009, we drew to the attention of
the House a Communication[1]
relating to the international climate change negotiations to be
held in Copenhagen at the end of this year. We noted that the
Commission regards a successful conclusion to those negotiations
as a key Community priority if its agreed objective of limiting
the average global temperature increase to less than 2°C
compared with pre-industrial levels is to be achieved, and that
it had reiterated that the Community should be willing to agree
to a reduction by 2020 of 30% in its greenhouse gas emissions
in 1990 in the context of a comprehensive international agreement,
involving comparable reductions by other developed countries and
appropriate contributions by the economically more advanced developing
countries. The Commission also said that any agreement must be
underpinned by adequate financial resources for its implementation,
and it has now sought in this further Communication to suggest
ways in which this might be achieved, though it stresses that
the figures quoted should be seen, not as formal proposals, but
as indications of the order of magnitude of the finance likely
to be required if the Copenhagen conference achieves
an ambitious outcome.
The current document
1.2 The Commission says that the aim of the paper
is to break the current impasse where developed countries expect
developing countries, especially those most economically advanced,
to contribute to the overall effort to reduce emissions, whilst
developing countries want to see a clear position from developed
countries on finance for mitigation and adaptation. It looks in
turn at ways of generating adequate flows of finance, the contribution
which the Community might make, and the ways in which decentralised,
bottom-up finance might be organised.
GENERATING ADEQUATE FINANCIAL FLOWS
1.3 The Commission suggests that around €100
billion a year will be needed by 2020 for adaptation and mitigation,
but points out that this is very often wrongly equated to the
contribution needed from the public budgets of developed countries,
whereas contributions can be expected from a variety of different
sources, with public and private domestic finance, and flows leveraged
by the carbon market, perhaps contributing between them some 60-80%
of the overall amount required. In particular, it says that the
further development and expansion of the carbon market should
be the main means whereby private-sector carbon finance supports
mitigation activities in developing countries, leaving public
finance to focus in the short and medium term (and beyond) on
adaptation, capacity building, and technology research, development
and demonstration.
Mobilising domestic private finance
1.4 The Commission believes that domestic private
finance will constitute a large part of the necessary investment
in both developed and developing countries, and that the major
part of what is needed for developing countries as a whole to
limit their emissions growth by 2020 to roughly 15-20% below "business
as usual" is already commercially viable, with additional
investment being recouped by reduced energy bills. It points out
that private investment can be stimulated through the right policy
framework, including emissions trading schemes covering key sectors,
national regulations, and financial incentives, and that developing
countries are already introducing energy efficiency standards
in excess of old carbon intensive technologies, with many of the
more economically advanced, such as Brazil, having sufficient
resources at their disposal, and the potential for a large contribution
from private households for whom adaptation is in their own interest.
That said, it recognises that the poorest countries, together
with the poorest segments of the population in developing countries,
will not have sufficient means for the investment needed, and
will depend largely on both domestic and international public
finance.
Making full use of the carbon market
1.5 The Commission says that the international carbon
market has been an effective means of leveraging private sector
investment in developing countries, whilst allowing developed
countries to achieve their emission reduction targets cost-effectively.
However, it observes that the project-based Clean Development
Mechanism (CDM)[2] provided
for under the Kyoto Protocol needs to be substantially reformed,
crediting only those projects which produce real additional reductions
and focussing on the least developed countries (LDCs). In addition,
a new sectoral carbon market crediting mechanism for more economically
developed countries (and highly competitive economic sectors)
should be phased in after 2012, as an interim step towards the
introduction of cap and trade systems in developing countries.
1.6 It adds that, in moving beyond a project-based
approach, any new sectoral mechanism should deliver a significant
scaling up of investment in low-carbon technologies in developing
countries, with the driving force being a robust medium-term carbon
price in OECD countries. It also believes that the international
carbon market delivers a number of benefits, by cutting global
mitigation costs by about a quarter by 2020, by generating financial
flows to developing countries of around €38 billion a year,
and by leveraging substantially more finance into low carbon development
investments. However, it warns that the potential scale of these
financial flows will depend upon the structure of the Copenhagen
agreement, and that the parties will need a high level of ambition
for emission reduction targets from developed countries and for
the starting levels of emission reduction paths for the period
2013-20 if the requisite supply-demand balance is to be achieved
across all countries listed in Annex I of the UNFCCC,[3]
noting that the carbon price and financial flows to developing
countries in the period 2008-2012 are largely the result of the
action taken by the Community.
The scale of international public funding
1.7 The Commission observes that, the less delivered
by the carbon market, the greater will be the demand for public
finance for mitigation, but that the scale cannot be predicted
with certainty at this stage, requiring a regular review via a
proposed High Level Forum on International Climate Finance (see
below). In the meantime, it suggests that the amount of public
finance required is likely to rise gradually, and will be linked
to the level of ambition in developing countries. It also says
that the emphasis immediately after the Copenhagen agreement should
be mainly on capacity building, since the demand for public finance
is likely to rise with the implementation of mitigation action
plans, and it will also be needed to stimulate private sector
investment into research, development and demonstration.
1.8 In particular, it suggests that:
- the additional costs for developing
countries which cannot be covered by the carbon market will be
around €33 billion a year in 2020, though most of these would
be long-term, low-cost efficiency measures which should be financed
domestically, mainly from private sources, leaving only about
10-20% of these additional costs (€3-6 billion), mainly in
the poorer developing countries, to be funded by international
public support;
- the additional costs of reducing non-carbon dioxide
emissions from agriculture, and carbon dioxide emissions from
deforestation and forest degradation, would be around €23
billion a year, with public finance being the predominant incentive
in the two latter cases until 2020: as most of the mitigation
potential is in the poorer developing countries, a larger share
of the additional costs (from 30% to 60%), equivalent to €7-14
billion, will probably have to be covered by international public
finance, and the Commission draws attention to its earlier Communication[4]
on a Global Forest Carbon Mechanism, which would be supported
by revenues from the auctioning of allowances under the revised
Emissions Trading Scheme, raising between €1.5 and 2.5 billion
in 2020;
- taking these elements together, global public
transfers in 2020 for mitigation could be between €10 and
€20 billion in 2020, with about one third of that amount
in 2013, but the actual flows will depend critically upon the
availability and quality of low-carbon growth plans of developing
countries (and proposals for mitigation action);
- the current emission reduction pledges of developed
countries do however imply much lower flows of carbon finance,
and those countries will come under pressure to finance additional
reductions in developing countries;[5]
- international public funding for capacity building
and cooperation for research and technology demonstration has
been estimated at an additional €2 to 6 billion in 2020;
- public funding, both domestic and international,
will be an important source of finance for adaptation in the poorer
developing countries, with the UNFCCC Secretariat having estimated
that the adaptation costs for all developing countries could range
from €23 — 54 billion a year in 2030, implying global
public transfers of €10-24 billion a year in 2020.
The Commission also suggests that adaptation financing
will probably originate primarily from the public sector as a
combination of direct budgetary outlays from contributing partners
and as a share of carbon market revenues, with a need for a strategic
integration of climate change adaptation concerns in all sectors
of national development strategies.
Fast-start international public funding 2010—12
1.9 The Commission suggests that, if there is an
overall deal in Copenhagen which implies fast-start international
funding, initial contributions should concentrate on (i) financing
the process and capacity building required, and (ii) estimating
the likely impact of climate change, integrating adaptation into
national development strategies and financing priority investments.
It also considers that additional finance should be mobilised
in the short term to respond to urgent and identified needs for
the most vulnerable developing countries, small island developing
states and African countries, including a further strengthening
of disaster risk reduction capacity, with the initial contribution
being progressively scaled up after 2012 as needs are quantified,
capacity for implementation is built up, and an agreement is reached
in Copenhagen on a scale of contributions. It believes that this
would imply a public contribution from the developed world of
€5-7 billion between 2010 and 2012.
Financing from international aviation and maritime
transport
1.10 The Commission notes that the Council has highlighted
the benefits from global instruments which address emissions in
international aviation and maritime transport, and that this would
have the potential to provide a significant source of finance
to support the mitigation and adaptation efforts of developing
countries, either through cap-and-trade systems or through a levy
on emissions. At the same time, however, it says that the challenges
involved in establishing such a framework should be recognised,
but that, given the need to develop this at a global level if
the sectors in question are to make a meaningful contribution,
a workable compromise might be to make all subject to the same
overall cap with full auctioning, whilst redistributing some auction
revenue to developing countries, depending on their respective
emissions and economic capabilities.
Determining contributions to international public
finance
1.11 The Commission says that the substantial public
resources needed will come in different forms and via different
channels, and that the Copenhagen agreement should include a common
scale based on agreed principles to determine the financial contributions
of different countries, taking into account their overall effort
(including effort reduction commitments). It notes that the European
Council in June 2009 expressed a preference for contributions
based upon ability to pay (GDP) and responsibility for greenhouse
gas emissions, with the need for any distribution key to be "universal",
extending beyond developed countries (but excluding LDCs), bearing
in mind that some of the more economically advanced developing
countries have significant levels of emissions and GDP.
1.12 It suggests that, although the actual contribution
would depend upon the relative weight given to the two criteria,
the Community's share could range from around 10% if the only
criterion is emission levels to 30% if GDP is used (which, on
the various estimates above, implies a contribution of €0.9-3.9
billion in 2013, rising to €2-15 billion in 2020). It also
points out that giving relatively more weight to emissions would
provide an additional incentive to cut these, but lead to relatively
higher contributions from major emitting developing countries.
However, in the case of fast-funding, it suggests that, in view
of the importance of early capacity building and adaptation, the
Community should consider whether to increase its contribution
above the 10-30% range.
1.13 The Commission has summarised these various
figures in the following table, showing the estimated international
annual public finance requirements over the period 2010-2020 (in
€billion):
|
| 2010-2012
(fast start)
| 2013
| 2020
|
Mitigation
Energy and industry
Agriculture and forestry
| 1 | 3-7
| 10-20
3-6
7-14
|
| Adaptation | 2-3
| 3 | 10-24
|
| Capacity building
| 1-2 | 2
| 1-3 |
| Technology, research etc
| 1 | 1
| 1-3 |
| Total | 5-7
| 9-13 | 22-50
|
THE COMMUNITY CONTRIBUTION TO PUBLIC FINANCE
1.14 The Commission first considers how the Community can make
an ambitious and fair contribution, and says that there are
strong arguments for it making a single global offer, which would
ensure coherence and visibility, allow for a fair and transparent
distribution between Member States, permit economies of scale
in the management of disbursements, and strengthen the Community's
voice in ensuring proper implementation. It adds that the Community
will also need to consider three options for channelling such
funding — direct funding through the Community budget (which
would take advantage of existing procedures, offer rigorous financial
control and a standard funding key, and involve the European Parliament),
establishing a new common Climate Fund through bilateral contributions
from each Member State (though this would require its own inter-governmental
agreement and legal basis, be outside the Financial Framework
and Own Resources ceiling, and not involve the European Parliament),
and direct financial contributions from Member States (provided
this was clearly presented as part of the Community's single global
offer).
1.15 The Commission next considers how the Community
budget can be mobilised up to 2012. It says that, whiles the
main financial implications of an agreement in Copenhagen would
come into effect from 2013 at the earliest, such an agreement
would be accompanied by a swift increase in support to developing
countries, which should be partly financed through the Community
budget, subject to the availability of resources. It points out
that it has already proposed an additional €50 million for
fast-start activities in 2010, and that comparable figures would
be needed for subsequent years: and it adds that identifying appropriate
sources will not be easy, since the remaining margins are extremely
limited and existing programmes already under pressure, requiring
creative solutions and a need to assess the optimal mix of funding
sources.
1.16 The Commission also looks at an equitable
Community contribution beyond 2012, noting that the budgetary
implications of an ambitious agreement at Copenhagen for the Community
and Member States are likely to be substantial, running to several
billion euros a year. It also notes that this would raise a particular
issue for 2013 for which the financial framework has already been
set, but will thereafter be an issue for the new financial framework.
More specifically, it reiterates that, if contributions are based
on the ability to pay and emission levels, the greater the emphasis
on the first of these, the higher the Community contribution will
be. In addition, it also considers the mechanisms which could
be used to adjust the burden on specific Member States, noting
that these have at their disposal significant revenues from auctioning,
and that Directive 2009/29/EC requires at least 50% of these resources
to be re-cycled for domestic and international climate change
purposes — a figure which it suggests would be well in excess
of the maximum amount of €3 billion which the Community would
be required to finance in 2013.
DECENTRALISED, BOTTOM-UP CLIMATE CHANGE GOVERNANCE
1.17 The Commission says that there needs to be an
efficient, effective and equitable governance structure, which
builds on the principles of country ownership, subsidiarity, coherence,
transparency, accountability, rewarding performance, additionality
and complementarity. It adds that any blueprint should be based
upon low-carbon growth plans by developing countries, which would
be reviewed by an independent "co-ordinating mechanism";
that such strategies should be presented by all countries —
including the Community — by 2011, and that, although this
obligation should not apply to the LDCs, they should be encouraged
to move in this direction over an appropriate time-scale; that
a bottom-up approach should involve the gradual integration of
climate resilience into national plans; that existing institutions
and structures should be used wherever possible; and that a High
Level Forum on International Climate finance should be created
to identify gaps and imbalances for mitigation and adaptation
actions, give political guidance, and ensure that funds are distributed
equitably.
The Government's view
1.18 In his extremely detailed Explanatory Memorandum
of 8 October 2009, the Secretary of State for Energy and Climate
Change (Rt Hon Ed Miliband) sets out the Government's views on
the various aspects of the Communication.
1.19 As regards the generation of adequate finance
flows, he says that the Government:
- welcomes the inclusion of a
global figure for the finance needed (and its breakdown into public
and private finance, and mitigation and adaptation components),
and it hopes that the Community will use this to agree on an overall
figure for the international community to work towards by 2020;
- will continue to look further into the Commission's
breakdown of international public financing needs, but notes that
the UK has proposed $100 billion (€68 billion) as a working
figure;
- supports the Commission's call for fast-start
funding for 2010-2012, and has already invested significant sums
for pre-2013 financing through the newly established Climate Investment
Funds, the Global Environment Facility and UN Funds, whilst continuing
to support countries on a bilateral basis (including through the
Department for International Development);
- agrees with the Commission's recognition of the
role of the carbon market and the need for reform of existing
mechanisms, in order to facilitate the scaling up of financial
flows for mitigation and technology transfer to developing countries;
- supports Commission proposals for the phase-in
of the sectoral carbon market crediting mechanism for economically
more advanced developing countries and highly competitive economic
sectors: and, although it believes that it is too early to set
a phase in date, it welcomes 2012 as an ambitious starting point
for discussion;
- believes that agreement to a clear timetable
for the phase-in is needed to reduce investment uncertainty, but
considers that the CDM will continue to have a role during this
period, and in countries and sectors not covered by the sector
mechanism, and that agreement on its reform is therefore important
in the shorter term;
- emphasises that sector-based emissions trading
in developing countries — an option not mentioned in the
Communication — offers significant advantages over other
mechanisms in terms of emissions certainty, upfront incentives
and engaging private sector finance;
- welcomes the Commission options for financing
emissions reductions from reducing deforestation and degradation,
and recognises a role for offsetting and sector-sector trading
in the forest sector before 2020, noting that it is unlikely there
will be full access of forest emissions reductions to the market
before 2020, not least because of the need for capacity building
in developing countries;
- shares the Commission's view on offset credits;
- welcomes the further analysis provided on innovative
financing from international aviation and maritime transport,
believing it is important that such emissions (which could also
provide significant revenue for innovative climate financing)
are brought into the Copenhagen agreement;
- believes that ensuring financial flows are predictable
will be key, and is willing to support an international mechanism
for the setting aside and auctioning of a small percentage of
national emissions allowances;
- strongly agrees that a Copenhagen agreement should
include a common international scale based on agreed principles
to determine individual countries' contributions to international
public finance, based on the 'ability to pay' and 'responsibility
for emissions';
- believes that, whilst the Commission's estimate
that the Community's financial contribution would be between 10
and 30% are not final figures, it is important to put finance
on the table, in order to help build trust with developing countries.
1.20 As regards the Community's contribution to
public climate change finance, he:
- says that the Government has
a clear position on additionality, believing that public finance
should be additional to Official Development Assistance targets,
and that only a limited proportion (up to 10%) of that Assistance
should be able to play a role in helping fight climate change
at the same time as meeting poverty reduction objectives;
- notes the Commission's proposals for the Community
budget in 2010 and for the next financial perspective starting
in 2014, adding that the UK supports fundamental reform, with
a re-orientation of resources towards addressing climate change,
and will continue to consider the suggestions for the use of the
Community budget for international climate financing, as one of
a number of options for meeting any commitments made at Copenhagen.
- says that the Government agrees with the European
Council that the Community should be willing to contribute its
fair share of the global financial effort and that 'ability to
pay' and 'responsibility for emissions' should be the preferred
principles.
1.21 As regards as the blueprint for decentralised,
bottom-up climate finance governance, the Minister says that
the Communication puts forward some useful ideas, and that the
Government particularly welcomes its views on a developing country-led
approach to integrating both mitigation and adaptation into national
plans and the planning process, regarding this as a crucial principle
which should be reflected clearly in concrete proposals. He adds
that the Government welcomes the suggestion of a new high level
forum to ensure better coordination of financing flows, but would
also like to see that body able to manage a portion of international
climate finance, and allocate this to different spending themes,
adding that there is a need for further substantial discussion
with both developing and developed countries on the structure
of this body, its exact functions and its relationship with the
UNFCCC. However, the Government agrees with the Commission that
the body should not be involved in country-level programmes or
projects, with the emphasis being instead on national structures
and donor coordination around country plans, which should help
existing bilateral and multilateral institutions to scale up finance
with a focus on recipient country priorities. Finally, he says
that the establishment of a technical coordination mechanism for
mitigation is consistent with Government thinking, though it would
like to see that mechanism have some financial responsibility.
It is also clear that the mechanism should be a technical not
a political body, which should not have responsibility for assessing
the level of mitigation ambition in national plans; that the review
of the coordination mechanism should establish whether national
plans will deliver this ambition, and that there is value in establishing
a similar mechanism for adaptation.
1.22 As regards timing, the Minister says that, since
this is not a legislative proposal, there is no formal timetable,
but that the ideas in the Communication are being discussed in
the run up to the ECOFIN Council on 20 October, the Environment
Council on 21 October, and the European Council on 29-30 October.
Conclusion
1.23 As is evident, this is a complex document,
containing a plethora of figures which makes it difficult in places
to distinguish the wood from the trees. Having said that, it is
clearly also an important document, in both its substance and
timing, given the crucial role which finance will play in securing
any climate change agreement at Copenhagen. Moreover, the amount
of international finance which may be required is not only potentially
very large, and linked to the outcome at Copenhagen, but also
dependent upon a number of assumptions as to the likely contribution
of private finance, the extent to which the carbon market, particularly
in other developed countries, can play a greater part, and the
way in which any figure is apportioned between the Community and
other contributors.
1.24 For all these reasons, we believe that the
document raises important issues which the House would wish to
consider further, and we are therefore recommending it for debate
in European Committee A.
1 (30412) 5892/09: see HC 19-ix (2008-09), chapter
1 (4 March 2009). Back
2
This is an offset mechanism under which developing countries can
sell credits which represent emission reductions achieved by a
specified project: these credits can then be bought by a developed
country in order to comply with its national reduction target,
and so provide finance for clean technology in the developing
country concerned. Back
3
United Nations Framework Convention on Climate Change. Back
4
(30047) 14473/08: see HC 19-x (2008-09), chapter 3 (11 March 2009). Back
5
For example, the Commission says that, if the emission reduction
target for developed countries were to be reduced from 30% to
10% (the low end of current pledges), this would require the transfer
of international public finance of around €120 billion a
year in 2020. Back
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