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0 Climate change: international funding for the global deal Tony Venables University of Oxford Project Catalyst: Climate.

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Presentation on theme: "0 Climate change: international funding for the global deal Tony Venables University of Oxford Project Catalyst: Climate."— Presentation transcript:

1 0 Climate change: international funding for the global deal Tony Venables University of Oxford Project Catalyst: Climate Works Foundation, supported by McKinseys - unofficial and independent support for policy makers & negotiators pre- Copenhagen - lay out facts and generate some ideas 0

2 11 Long run emissions goals Shorter run emissions targets for developed countries Domestic mitigation ( = abatement) Offsets – purchasing reductions in developing countries ‘Nationally appropriate’ mitigation actions by developing countries Financing for developing country actions International architecture for financing This talk What has to be done How, where, and at what cost Financing needs and sources International architecture for financing The global deal: 5 key elements

3 2 Carbon market interventions Funding requirements Sources of funds Institutional arrangements 1°C2°C5°C4°C3°C Sea level rise threatens major cities Falling crop yields in many areas, particularly developing regions Food Water Ecosystems Risk of Abrupt and Major Irreversible Changes Global temperature change (relative to pre-industrial) 0°C Falling yields in many developed regions Rising number of species face extinction Increasing risk of dangerous feedbacks and abrupt, large-scale shifts in the climate system Significant decreases in water availability in many areas, including Mediterranean and Southern Africa Small mountain glaciers disappear – water supplies threatened in several areas Extensive Damage to Coral Reefs Extreme Weather Events Rising intensity of storms, forest fires, droughts, flooding and heat waves Possible rising yields in some high latitude regions 1) What must be done

4 3 What must be done: 650ppm  4 o, 550  3 o, 450  2.5 o, 400  1.8 o Stock – flow dynamics NB: currently around 380ppm, increasing 2.5ppm  550ppm by 2035

5 4 Source:McKinsey Global GHG Abatement Cost Curve v2.0; Houghton; IEA; US EPA; den Elzen, van Vuuren; Project Catalyst analysis 17 Gt of emission reductions required for a 450ppm pathway Change relative to %-7% Reference pathway ‘BAU’ 450ppm pathway (with overshoot) Gt CO 2 e per year Change relative to BAU -28%-50%

6 5 2) How, where and what cost? Opportunities for the 17 Gt required to reach a 450ppm pathway McKinsey global GHG abatement cost curve, 2020* (up to costs of €60/t, excluding transaction costs, 4% discount rate) -90 Lighting – switch incandescents to LED (residential) Retrofit building envelope (commercial) Solar PV Cars ICE improvement New waste recycling Electricity from landfill gas Shift coal new build to gas Rice management Reduced deforestation from slash-and-burn agriculture conversion Reduced deforestation from pastureland conversion Wind (low penetration) Grassland management Biomass Wind (high penetration) Solar conc. Organic soil restoration Cars aerodynamics improvement Nuclear Reduced intensive agriculture conversion Abatement potential Gt CO2e -10 Pastureland afforestation Source:McKinsey Global GHG Abatement Cost Curve v Gt Breakdown by abatement type: 9 Gt for terrestrial carbon 6 Gt for energy efficiency 4 Gt for low carbon energy supply Breakdown by geographic location: 5 Gt in developed country geographies 14 Gt in developing country geographies 5 17 Gt

7 66 * Amount will depend on size of emissions cap adopted. Under a 25% aggregated developed country cap this will equal 3 Gt; under a 40% cap, 6Gt Source:McKinsey Global GHG Abatement Cost Curve v2.0, team analysis Breakdown by developed/ developing Abatement in developing countries with negative cost (NPV positive) Abatement in developing countries receiving incremental cost financing from developed world Abatement feasible in developed countries <60 €/t CO2e 5 Required abatement for 450ppm pathway 17 9 The Split of the required abatement in 2020 Gt CO2e, 2020 Abatement receiving additional financing (to meet incremental costs) from developed world

8 Capital intensity* € per tCO 2 e Agriculture Power Abatement cost € per tCO 2 e, 2030 Cement Iron and steel Transport Buildings Forestry Waste 10 Size of the bubble indicates the abate- ment potential in each sector *Defined as the additional upfront capital investment compared to the BAU technology divided by the total amount of emissions avoided during the lifetime of the low carbon investment. For measures/technologies where upfront investments decrease over time with a learning rate, the weighted average investment over time has been used. Source:Global GHG Abatement Cost Curve v2.0 Capital intensity and abatement cost

9 8 From the ‘investor perspective’; (incl taxes and higer interest rate) Abatement GtCO 2 e per year Inclusion of energy taxes results in a further reduction in cost for many negative cost levers Capex subsidies cause a modest price reduction in Transport Road, Power, Buildings and Waste Feed-in tariffs cause large reduction in costs in renewable energy levers in certain regions Higher interest rates result in a further increase in cost for many positive cost levers Investor perspective Societal perspective McKinsey global GHG abatement cost curve including investor perspective 2020* Source:McKinsey Global GHG Abatement Cost Curve v2.0

10 Abatement cost € per tCO 2 e -50 BAU energy price – oil price at $60 per barrel High energy price – oil price at $120 per barrel Effect of high energy prices (oil price at $120 a barrel) Abatement potential GtCO 2 e per year Energy efficient measures become more profitable Alternative energy measures become cheaper Source:Global GHG Abatement Cost Curve v2.0 Global abatement cost curve, 2030

11 10 Key messages: what has to be done, where, and cost Gt of emissions reductions required to limit warming to 2 degrees: Marginal cost high Average cost – depends on whether negative cost measures can be implemented Add transactions costs Eg: what does it take to persuade people to save money by changing their light bulbs? High capital costs 17 Gt of emissions reductions: 5 Gt is in the developed world and 12 Gt in the developing, of which 9 is to be financed

12 11 3) Funding: needs and sources Article 4.3. The developed country Parties and other developed Parties included in Annex II shall provide new and additional financial resources to meet the agreed full costs incurred by developing country Parties in complying with their obligations under Article 12, paragraph 1. They shall also provide such financial resources, including for the transfer of technology, needed by the developing country Parties to meet the agreed full incremental costs of implementing measures that are covered by paragraph 1 of this Article and that are agreed between a developing country Party and the international entity or entities referred to in Article 11, in accordance with that Article. The implementation of these commitments shall take into account the need for adequacy and predictability in the flow of funds and the importance of appropriate burden sharing among the developed country Parties Source: United Nation Framework Convention on Climate Change, entered into force 21 March 1994 Under the UN Framework Convention, Annex II countries have committed to provide financial resources to meet incremental costs

13 12 Funding needs: € billion required in developing countries (similar magnitude to current aid flows) Total financing requirement for developing countries ~65–100 Adaptation estimate** Total financ- ing require- ment for abatement in developing countries 55–80 Financing need for technology deployment with high learning potential 5 Estimated transaction costs for the whole curve of €1–5 per tonne of carbon abated 5–30 Additional cost for higher dev- eloping country financing rate (10%) 10 Required flows for abatement at cost to society* Developing country financial requirements, € billion on average p.a. 2010–20 (excluding self-financing) *Assumes all abatement delivered at average cost; 4% discount rate **Based on increased financing for global public goods (incl. research), expected funding required for priority investments for vulnerable countries (based on NAPA cost estimates), and provision of improved disaster support instruments (based on MCII work) Source:McKinsey Global GHG Abatement Cost Curve v2.0; ‘Bosetti; Carraro; Massetti; Tavoni’; UNFCCC; Project Catalyst analysis Costs of 12 Gt of abatement in developing countries Adaptation cost

14 13 Financing flows by sector and region Financing flows, 10% discount rates, including transaction costs of €1–5 per tonne € billion, average p.a. 2010–20 Total55–80 Technology Waste~1 Transport~1 Buildings1–2 Agriculture5–9 Industry6–10 Power16–20 Forestry20–31 Total55–80 Technology Rest of Eastern Europe South Africa~1 Mexico~1 Rest of Latin America 2–3 Brazil3–6 Middle East3–4 India4–6 Rest of Africa5–7 Rest of Developing Asia 15–23 China16–22 Source:McKinsey Global Cost Curve v2.0, Project Catalyst analysis

15 14 Breakdown of adaptation cost estimates: public sector only Average annual adaptation cost 2010–2020, € billion Net adaptation cost 10–20 Discount for co-benefits from other resources 10–25 Gross adaptation cost 20–45 Social adaptation 6 Hard adaptation 5 0–15 Soft adaptation 4 5–10 Disaster preparedness & insurance 3 Preparation, planningPreparation, planning 2 ~1 Investments in knowledge 1 0–5 1Based on benchmarking of existing leading institutions (e.g. NOAA, NASA, Met Office, CGIAR) 2Calculated on the basis of costs of Pilot Programme for Climate Resilience in ten countries, scaled to all developing countries 3Based on Munich Climate Insurance Initiative proposal 4Based on annualised NAPA cost estimates – using median NAPA cost to scale to all developing countries 5Derived from UNDP cost estimates for ‘climate proofing investment’ 6Derived from UNDP cost estimates for social adaptation Source:NASA; UK Met Office; NOAA; CGIAR; UNFCCC; NAPAs; Munich Climate Insurance Initiative; EM-DAT International Disaster database Proactive adaptation

16 15 The financing needs ramp up over the period Source: McKinsey Global GHG Abatement Cost Curve v2.0; Project Catalyst analysis FINANCING REQUIREMENT TO REACH 450 PPM PATHWAY Mitigation Adaptation Capacity building ~ Developing country financing needs, € billion (annual averages)

17 16 Sources of funds: where does the $100bn pa come from? Carbon markets Direct trade (ie purchase of offsets) Carbon market interventions Public funds raised by auction of permits Other public funds BUT: politically feasible in developed countries? ‘new and additional’? ‘adequate and predictable’? Want to get as much as possible from carbon markets

18 17 Sources of funds: the arithmetic Financing needs and sources assuming 25% caps (< 1990) in developed countries, € billion, annual average 2010–20 rounded to nearest € 5 billion Public fiscal revenues Internat- ional transport levies 4–8 Concess- ional debt 10–20 Other public and inter- national sources 45–50 ETS auction revenues 5–20 Carbon market inter- ventions 5–15 Direct carbon markets 10–15 Total need 65–100 Adaptation 10–20 Mitigation 55–80 ETS markets Source:Project Catalyst analysis

19 18 Source:McKinsey Global GHG Abatement Cost Curve v2.0, team analysis Public finance needs depend on the cap adopted by developed countries: 25% aggregate developed world cap could deliver 3 Gt of offsets Abatement in developing countries with negative cost (NPV positive) Abatement in developing countries receiving incremental cost financing from developed world 6 Abatement feasible in developed countries <60 €/t CO2e 5 Required abatement for 450ppm pathway The Split of the required abatement in 2020 Gt CO2e, 2020 Abatement in developing countries financed through carbon markets (counting towards developed country caps) Required abatement for developed country Under 25% aggregate cap Abatement receiving additional financing (to meet incremental costs) from developed world Abatement in developing countries financed through public finance

20 19 Source:McKinsey Global GHG Abatement Cost Curve v2.0, team analysis 40% aggregate developed world cap could deliver 6 Gt of offsets Abatement in developing countries with negative cost (NPV positive) Abatement in developing countries receiving incremental cost financing from developed world 3 Abatement feasible in developed countries <60 €/t CO2e 5 Required abatement for 450ppm pathway The Split of the required abatement in 2020 Gt CO2e, 2020 Abatement in developing countries financed through carbon markets (counting towards developed country caps) Abatement in developing countries financed through public finance Abatement receiving additional financing (to meet incremental costs) from developed world Required abatement for developed country Under 40% aggregate cap

21 Carbon markets under 25% target, €bn p.a.* Offsets are only purchased for cost positive abatement (i.e., right hand side of cost curve) Carbon market intermediation: capturing the surplus Price paid for offsets Cost of abatement 5-20 Potential surplus to investors/ Interme- diaries 0 1,000 2,000 3,000 4,000 5,000 6, Cost €/t CO 2 e Forest sector cost curve Non-Annex 1, 2020 Surplus Opportunity cost FORESTRY EXAMPLE Abatement potential Mt CO 2 e ILLUSTRATIVE Source:Project Catalyst analysis, UNFCCC

22 21 Funds (bilateral and international) Link between sources and different ways to deliver financing Offset markets (demand driven by developed country caps) Direct carbon markets (ETS) – offset purchases Carbon markets (ETS) – auction revenues Carbon market interventions (ETS) Public fiscal revenues International maritime and aviation levies Public balance sheet/ credit rating Government Way to deliver financingSources of financing Other public finance commitments

23 22 Key messages: funding; sources and needs 22 Substantial funding to the developing world (€65-100bn pa) is required over the next ten years The ability of markets to provide effective financing is a function of the emissions targets set by the government regulating the market. The targets need to be sufficient to create domestic mitigation potential in the developed world and create demand for off-set carbon credits to finance mitigation efforts in the developing world. Even under a 40% reduction commitment from the developed world, significant public financing will be required Intermediation in the carbon markets (either internationally or nationally) will be required to limit the pressure on public finances

24 23 4) International architecture: how to channel $100bn pa? Issues: Allocation between developing countries? Allocation within developing countries? Formula based or responsive? Alternatives could range from: World body selecting projects World body funding sectoral programmes Countries bidding for funds and spending as they see fit

25 24 International architecture: Overarching structure Criteria: Need, Efficiency, Additionality, MRV, Scalability, Technology transfer Clean Development Mechanism – project level Pay to not emit (when otherwise would have (?)) Weak on virtually all criteria? Programmatic/ sectoral: Better on scalability technology transfer National programmes – ‘budget support’: Learn from experience with aid: countries must develop their own credible plans for mitigation & adaptation – Low Carbon Growth Plans Bid for funds on basis of these plans Centralised? UN World Bank Carbon Bank Decentralised? Existing aid architecture Criteria: Legitimate Accountable Effective Delivery channels

26 25 Low Carbon Growth Plans (LCGPs) as a way to operationalise developing country mitigation and adaptation actions Differentiation: Both developing + developed Process: Support, best practices, review, MRV Content: Priorities, policies/measures and international support Focus: Development, mitigation + adaptation LCGP (=Low Carbon Growth Plans) “Under the Copenhagen agreement, all developing countries, except least developed countries (LDCs), should commit to adopting low-carbon development strategies by the end of 2011” EU COM/2009/0039 final Time horizon: Long term and short/medium term

27 26 United States ‘Building a Low-carbon Economy’ report released in December’08 Contains recommendations on the 2050 emissions reduction target (80% relative to 1990) Follow up launched in July 2009 – Low Carbon Tranistion plan United Kingdom South Korea has already launched 3 plans and it is preparing the forth one The lesson learned from the previous plans is the need for some long-term goals South Korea National Action Plan on Climate Change launched in June’08 Plan identifies eight “national missions” and directs ministries to submit implementation plans to the Prime Minister’s Council on Climate Change Ultimate goal is to never reach Annex I level of per capital emissions India Framework for Climate Policy released in July’08 Aims to implement three strategic options derived from government's long-term mitigation scenario analysis South Africa European Parliament approved Climate Change Plan in Dec’08 Includes three goals - GHG emissions reduction 20% below 1990 levels by 2020; double the renewable electricity generation by 2020; and increased use of biofuels EU National Plan on Climate Change launched in December’08 Includes initiatives such as promoting sustainability in the industrial and agricultural sectors, maintaining a high share of renewable in power production, encouraging biofuels in transportation and reducing deforestation Brazil Special Program on Climate Change (PECC) will be launched in 2009 Includes a voluntary commitment to reduce emissions 50% relative to 2000 baseline by 2050 Includes specific short-term and long-term initiatives to achieve this Mexico National Climate Change Program released in June’07 Provides a policy framework that outlines actions that China will take in the future to address climate change China Many countries have started designing national strategies to get onto low-carbon pathways Source:Project Catalyst analysis NOT EXHAUSTIVE The Obama plan aims to reduce GHG emissions 80% below 1990 levels by 2050 through a market-based cap and trade system

28 27 Coordination/Oversight/ Registry for LCGPs – UN? Sources of funding DeliveryAllocation/aggregation mechanisms Market ( ETS) Public finance Power, afforestation Energy efficiency Deforestation, agriculture Adaptation Intermediary Contributor trust funds Recipient trust funds Intermediary CER, € € € € € CCGP/LCGP/NAPA Carbon market (sectoral & programmatic) Funds: global, regional, national? Eg national Markets primarily in form of sector programmes, plus some sector (no-lose) caps Global fund Recipient trust funds compete for funding based on quality of LCGPs/NAMAs/NAPAs Recipient funds could be national or regional They are sole issuer of credits Global fund (~20%) created for –Adaptation –Mitigation action not funded by national contributor funds Contributor countries provide financing in form of cash to contributor funds Contributor and recipient funds go through ‘matching’ process Intermediation on supplier and /or demand side

29 28 Key messages 28 Of the 17 Gt of emissions reductions required to limit warming to 2 degrees, 5 Gt is in the developed world and 12 Gt in the developing Substantial funding to the developing world (€65-100bn pa) is required over the next 10 years Targets for developed countries need to create domestic mitigation and also create demand for off-set carbon credits to finance mitigation efforts in the developing world. Even under a 40% reduction commitment from the developed world, significant public financing will be required Intermediation in the carbon markets can limit the pressure on public finances The architecture for transferring funds should build on existing institutions and draw on experience with development aid All countries should produce Low Carbon Growth Plans. These provide the basis for bidding for resources and are ‘country led’.


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