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Memorandum submitted by Jodie Keane and Christopher Stevens, Overseas Development Institute (ODI) Sustaining development during climate change - international aspects, by Jodie Keane and Christopher Stevens 22 November 2008 Summary1. Action is required across the board to prevent climate change derailing development - much of it in the developing countries. This written submission focuses attention on just two of the international aspects of the adjustment, because they are ones on which the European Union (EU) is a major actor. It argues that current EU policy is insufficiently nuanced to protect development. 2. The first issue is EU biofuel policy. It has an impact on the choices that are made on power generation and energy sources in both developed and developing countries. We believe that the policy pendulum has now swung too far from unbridled optimism and pessimism about the potential role of biomass production in developing countries to alleviate the impact of rising energy prices on all net energy importing states. 3. The second issue concerns the European Emissions Trading Scheme (ETS) - and its relationship to to the Clean Development Mechanism (CDM),which offers opportunities to an increasing number of developing countries. The ETS has been vital for the success of the CDM to date, but recent EU policy states that if no agreement is reached on the successor to the Kyoto Protocol it will limit the volume of certified emissions reductions obtained through the CDM and used by European businesses. 4. A failure to agree reductions in emissions after 2012 will remove the need for carbon offsetting at the multilateral level and therefore the CDM. Such a 'beggar thy neighbour' policy is not conducive to promoting continued support for the transfer of clean energy technologies to the developing world, nor does it send out the right signals to investors in both developed and developing countries EU biofuel policy5. Biofuels may be very important for developing countries - and so is the impact of biofuel policy. It is important to remember that developing countries are affected both as potential producers (for their own use or export) and as consumers (of crops displaced by biofuels and of energy). So even though only a small number of countries are likely to emerge as exporters of biofuel feedstock, a much larger number will be affected by industrialised country policy - favourably if it reduces energy prices for the net importers and unfavourably if it pushes up food prices for the net importers. Since Europe is a major producer of biofuels, with an estimated 10% share of world bioethanol production, its policies can have a significant effect (ODI 2008e). 6. 7. We believe that the scepticism has gone too far and, in particular, fails to distinguish between biofuel production that is good for development and that which is bad. Despite the public perception of biofuels production as competing with food crops, it is important to distinguish between crops, countries and food production systems. Moreover, it needs to be considered that developing country households typically grow both, food and biofuels, and that biofuel production could provide a stimulus to agricultural productivity. Whilst it is certainly the case that many poor countries do not have enough unused arable land with the potential to develop the production of feedstock - either for national transport fuels, or for local energy supplies including electrification - the benefits of developing biofuel in the developing world are not only limited to countries that have spare land. More biofuel means less use of fossil fuels. Models show that this would help reduce the price of oil, to the benefit of other developing countries that cannot grow biofuel feedstock (ODI 2008b). 8. As a result of concerns over the Green House Gas (GHG) pathways of biofuels the EU has adopted sustainability criteria. The GHG emission saving from the use of biofuels and other bioliquids must be at least 35%, applicable from 1 April 2013 (EC 2008a). The European Commission (EC) will report on the requirements of a 'sustainability scheme' for biomass energy uses by 31 December 2010 (ODI 2008a). 9. Some developing country producers such as Brazil appear better able to meet GHG pathway and sustainability criteria than do European producers. But the current restrictions on their access to the EU market will need to be lifted if they are to gain directly. Other developing country producers may be disadvantaged by the inclusion of sustainability criteria - not because they cannot meet them, but because they cannot afford to prove compliance. ODI has recently reviewed a number of existing agricultural standards attached to product labels, and its research suggests that few low income and less developed country exports are covered because compliance costs are high and that this acts as a barrier to exporting (see ODI 2008d). 10. The EC will review in 2015 its 10% target for the biofuel content of petrol and diesel by 2020, as a result of concerns over food prices. But it has also been stated that at least 20% of the EC's 2015 target and 40% of the 2020 goal must be met from crops that do not compete with food or feed and from second-generation biofuels (which are more technologically sophisticated, using enzymes, steam heating or other treatments).[1] There has been a shift from food-competing biomass to non-food-competing biomass production. Whilst ensuring that increased use of biofuels does not have an adverse impact on food prices, it is undesirable to introduce a mandatory rule that disadvantages those developing country producers that are able to expand their production of first-generation biofuels without compromising food security. Arguably it serves to increase the protection afforded to European producers (who have easier access to second-generation technology). 11. The precise level of EU imports exclusively for biofuels is currently not known. The EU's tariff codes, for example, do not distinguish between denatured ethanol for biofuel and that for other industrial uses. But it is clear that trade in biofuels is limited: in 2007 around 8% of ethanol and 12% of biodiesel were traded. Almost all ethanol exports came from Brazil and China, with the United States of America (USA) as the single largest importer followed by Japan. Biodiesel was exported by Argentina, Indonesia, Malaysia and the USA; with the EU and Japan as the two main destinations (ODI 2008b). 12. Trade is much influenced by tariffs. Table 1 shows those applying to ethanol: the EU imposes a tariff that in early 2007 was the equivalent of a 52% ad valorum charge to imported ethanol, while the US tariff was equivalent to 28%. These represent very strong protection against ethanol for the world's most efficient producing area, Brazil. Table 1: Applied tariffs on ethanol in selected countries, as of 1 January 2007
Note: ethanol is classified for trade purposes as HS 2207.10, undenatured ethyl alcohol. Source: Steenblik, 2007 quoted in FAO 2008
13. 14. It follows that to increase imports in an environmentally friendly way requires either the removal of import barriers from countries like Brazil that can produce bioethanol in ways that result in substantial carbon savings, or an increase in production in the sugar-exporting African, Caribbean and Pacific and least developed states to a level at which they exhaust European market demand for the higher-priced sugar products (ODI 2008b). But it is worth remembering there are opportunities that arise from the development of biofuels for developing countries either through taking advantage of the potential to export biofuel or feedstock to the EU, or by developing domestic biofuel industries that could create new jobs and save foreign exchange (ibid.). The Clean Development Mechanism (CDM)15. The is the principal tool within the climate regime established in 1997 to encourage trade in Certified Emissions Reductions (CERs) between developing and developed countries, enabling developing countries to tap into a new market and source of income and achieve a form of 'green growth'. So far the developing countries most involved in the trade have been China, Brazil, Mexico and India, but an increasing number of poorer countries are now becoming involved. So any threat to its continued vitality must be of concern. 16. The CDM was designed to help developing countries (known in the jargon as 'non-Annex 1 countries') to pursue sustainable development with additional investment from developed and industrialised countries. The binding emission targets of the Kyoto Protocol, coupled with the CDM, make it possible for both developed and developing countries to achieve green, or greener, economic growth. They provide an incentive to reduce emissions in developed countries and to encourage investment in cleaner energy sources in developing countries. 17. Although the growth of the emissions traded has been impressive, the scope for further expansion of the market for emissions reductions is potentially huge. The ETS and CDM are currently trading only around 0.5% of annual GHG emissions. Global anthropogenic GHG emissions are in the region of 49 billion tonnes of CO2e per annum (IPCC 2007), calculated on the basis of emissions in 2004. 18. The global carbon market encompasses a number of different actors, but the institutional and legal framework of the global carbon market - within which the CDM plays a crucial role - is set out by the United Nations Framework Convention on Climate Change (UNFCCC). The post-2012 climate change regime hinges on the level of emissions reductions developing countries can agree to meet.[2] A failure to agree reductions in emissions after 2012 will remove the need for carbon offsetting at the multilateral level and therefore the rationale for the CDM. Although this worst-case scenario may be unlikely, the uncertainty of the post-2012 climate change regime may well constrain further investment in CDM projects, which may in turn stall the continued growth of clean energy projects. 19. The EU is attempting to use a form of extra-territoriality to exert pressure for a new set of targets. Its ETS Directive of January 2008 (EC 2008a) states that if no satisfactory international agreement is reached, the amount of CERs allowed into the ETS from 2013 will be limited to the 2008-12 level of 1,400 million tonnes. It has made clear that: 'additional use of CERs and Emission Reduction Unit[s?] (ERUs) should be provided for once there is an international agreement on climate change [post 2012], from parties which have concluded that agreement' (EC 2008a:17-18). 20. The ETS has been vital for the success of the CDM to date with EU buyers taking a very large proportion of sales in 2007. If no agreement is reached on emissions reductions at the multilateral level post 2012, purchases by European businesses and governments could be severely limited. The policy has been adopted by the EU, of course, to encourage other countries to agree reduction targets and to support efforts to conclude a new global agreement (Capoor and Ambrosi 2008). But it involves risks: unless agreement is reached it will adversely affect developing country suppliers and the current uncertainty may serve to constrain further investments in these countries. 21. The impact of this cutback could be widespread. Although over half of all registered CDM projects are based in either India or China, and only 2% are in sub-Saharan Africa (as of August 2008), this concentration is changing. Africa's share of transacted CDM projects has increased over the period since carbon trading began and this is likely to continue as the type of project supported by CDMs changes. The bigger countries are better able to supply industrial gas projects (which account for the bulk of the value of CDMs issued to date) but poorer countries can supply hydro and biomass energy projects (which are much more numerous). A look at the number of CDM projects registered within country and per capita gross national product implies that there is no clear relationship, and the same is true for those awaiting validation and registration (ODI 2008a). 22. As opposed to limiting use of the CDM unless agreement on a post-2012 agreement is reached, a bolder strategy for the EU would be to promote purchases made by European companies from developing countries through other private voluntary certifying bodies (of which there are many), benchmarked to the criteria of the CDM. Such a strategy would promote less of a 'beggar thy neighbour' policy and could stimulate increased private sector engagement less confined by the bureaucracy of the UNFCC system. It would also provide signals to investors in both developed and developing countries on continued support for and the potential of scaling up the transfer of clean energy technologies. ReferencesCapoor, K. and Ambrosi, P. (2008) 'State and Trends of the Carbon Market 2008', World Bank: Washington, DC, http://carbonfinance.org/docs/State___Trends--formatted_06_May_10pm.pdf EC (2008a) Proposal for a Directive of the European Parliament and of the Council on the promotion of the use of energy from renewable sources, European Commission: Brussels, http://ec.europa.eu/energy/climate_actions/doc/2008_res_directive_en.pdf EC (2008b) 'Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the Community', European Commission: Brussels, http://ec.europa.eu/environment/climat/emission/pdf/com_2008_16_en.pdf European Parliament (2008) 'More Sustainable Energy in Road Transport Targets, press release http://www.europarl.europa.eu/meetdocs/2004_2009/documents/pr/722/722155/722155en.pdf FAO (2008) State of Food and Agriculture. Biofuels: prospects, risks and opportunities, ftp://ftp.fao.org/docrep/fao/011/i0100e/i0290e.pdf IPCC (2007) 'Climate Change 2007: Synthesis Report', IPCC Fourth Assessment Report, IPCC: Geneva, http://www.ipcc.ch/ipccreports/ar4-syr.htm Mitchell, D (2008) A Note on Rising Food Prices, World Bank Policy Research Working Paper, http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2008/07/28/000020439_20080728103002/Rendered/PDF/WP4682.pdf Observer 15 June 2008 'Stern plans credit rating for carbon offset deals' http://www.guardian.co.uk/environment/2008/jun/15/carbonoffsetprojects.carbonemissions ODI (2008a) Achieving Green Growth in a Carbon Constrained World, Background Note, ODI: London, www.odi.org.uk/resources/odi-publications/background-notes/2008/green-growth-carbon-trading.pdf ODI (2008b) Production and use of biofuels in developing countries, European Parliament Briefing, written with ProForest. ODI (2008c) Review of the Indirect Effects of Biofuels: Economic benefits and food security, Report to the Renewable Fuels Agency (RFA), www.dft.gov.uk/rfa/_db/_documents/Report_of_the_Gallagher_review.pdf ODI (2008d) A review of ethical standards and labels: Is there a gap in the market for a new 'Good for Development' label? ODI Working Paper 297, http://www.odi.org.uk/resources/odi-publications/working-papers/297-good-for-development-label-ethical-standards-trade.pdf ODI (2008e) 'Biofuels and Development: Will the EU help or hinder?, ODI Briefing Paper,www.odi.org.uk/resources/odi-publications/briefing-papers/32-biofuels-development-eu.pdf Peskett, L. and Harkin, Z. (2007) 'Risk and Responsibility in Reduced Emissions from Deforestation and Degredation', ODI Forestry Briefing 14: London, http://www.odi.org.uk/fecc/resources/briefing-papers/fb15-0712-redd.pdf Rosegrant, M (2008) Biofuels and Grain Prices: Impacts and Policy Responses, Director, Environment and Production Technology Division, IFPRI http://www.ifpri.org/pubs/testimony/rosegrant20080507.pdf Steenblik, R. (2007) Biofuels - at what cost? Government support for ethanol and biodiesel in selected OECD countries, Global Subsidies Initiative, http://www.globalsubsidies.org/files/assets/Brochure_-_US_Update.pdf Stern, N. (2008) Key Elements of a Deal on Climate Change, Chair of the Grantham Research Institute on Climate Change and the Environment, London School of Economics, http://www.lse.ac.uk/collections/granthamInstitute/publications/KeyElementsOfAGlobalDeal_30Apr08.pdf Stern, N. (2006) The Economics of Climate Change, HM Treasury, http://www.hm-treasury.gov.uk/stern_review_final_report.htm
[1] See http://www.europarl.europa.eu/news/expert/infopress_page/064-36659-254-09-37-911-20080909IPR36658-10-09-2008-2008-false/default_en.htm [2] Signatories to the UNFCCC are referred to as Annex 1 countries and are all developed countries. |