by Carlo Carraro

This post is taken from Carlo Carraro’s Blog (published 16/12/14)

Many comments on the outcome of the 20th Conference of the Parties (COP 20) recently held in Lima have already been circulated. Most commentators focus on the broad consensus to adopt national commitments to reduce greenhouse gas emissions (GHGs). Some of them highlights the important benefits of reaching such broad consensus, even though not yet on ambitious mitigation targets. Others complain about the distance between existing commitments and the mitigation effort needed to maintain future temperature increase below the 2°C degree target. All of them agree on the crucial role of COP 21 in Paris to reach a final agreement on both ambitious Individually Nationally Determined Contributions (INDCs) and on an effective verification system to compare these mitigation efforts.

This emphasis on emission reductions somehow obscures the real issue at the core of the COP 20 negotiations (that will be at the core of COP 21 as well), namely the difficulty of agreeing on the resources that must be devoted to achieve mitigation targets, on their distribution across different world regions, on the mechanisms to fund the huge investments that will be necessary for both mitigation and adaptation.

The discussion in Lima was centered on the Green Climate Fund, established in Copenhagen in 2009, but the debate was more on distributional issues (how much will developing countries receive and how much will they contribute) rather than on efficiency issues (how best can the fund be used).

The Green Climate Fund
While there have been some murmurings of the need to focus on technology development, technology transfer and capacity building, the climate finance debate has been overtaken by the Green Climate Fund. How much should be given? Should quantitative limits be set? Should there be a legally binding system? Since there was so much focus on the Fund, it is encouraging to see that the first real milestone in this process – USD 10.2 billion pledged by the end of 2014 – has been achieved. Further, since 50% of the Green Climate Fund is to be allocated to adaptation measures, the prominence of adaptation in the COP 20 agenda should be welcomed. Specifically, the promise that a “loss and damage” scheme would be introduced to help poorer countries cope with the financial implications of a warming planet. Despite these steps forward, the funding required to decarbonize the global economy by 2050, address adaptation and meet the rising cost of loss and damage caused by extreme weather events, will be in the region of trillions of dollars over the upcoming decades. As such, the Green Climate Fund, even when it will hopefully reach the USD 100 billions in 2020, will be far from covering both the required investments in adaptation to deal with the impacts of ongoing climate change, particularly in developing countries, and the costs to support the transition to a low-carbon economy.

Policy signals
One of government’s main roles in enabling climate finance is to send a clear, consistent, long-term signal to investors that there is a safe market for low-carbon technologies. There is a great deal of aversion to be overcome in this respect. Currently, low-carbon technologies are perceived to come only at a short to medium term trade off with economic growth. This misconception (built into many model assessments) is based on the assumption that economies are perfectly efficient. As a result, any climate change policy is expected to lead to short and medium term costs. However, in reality, many such policies, particularly technology policies, in fact reduce market failures and the rigidities that lead to inefficient allocation of resources. This understanding was woefully overlooked at COP20. Indeed, the very fact that governments spent so much time publicly quibbling over what to implement is signal enough to the private sector that investments in low-carbon technologies may not be supported by a sound policy environment (e.g. by a tax internalizing carbon externalities). Some nations even went to say that private sector needs to be the driving force behind the transition. While developments in private sector do anticipate policy, their success is often dependent on a fertile policy environment. As such, Brazil strongly cautioned against too strong a reliance on the private sector. Even Australia was able to recognize the need to motivate businesses.

Kick-starting innovation
There are two channels that governments can exploit to provide these policy signals. First, government needs to stimulate innovation. Innovation is key to a low-carbon future. OECD projections of population growth indicate that population will increase from 7 billion people (2010) to more than 9 billion people (2050). With this, global GDP will nearly quadruple, requiring 80% more energy. To sustain this growth, energy must be mostly generated in a carbon neutral or low carbon manner. At COP20, countries were asked to support all low-carbon technologies and not pick winners. Even so, each country demonstrated its aversions to specific technologies, notably nuclear and carbon capture and storage (CCS).The main way to incentivize innovation in low-carbon technologies is to put a price on carbon. Carbon pricing is one of the strongest signals that governments can send to say they are serious about low-carbon. Not only does this provide a way – if effectively implemented – of progressively moving away from fossil fuel energy, it also provides financial benefits. Lobbying and sideline action abounded with pressure to develop carbon pricing mechanisms. Like the drop of water on stone, this is making an impact nation by nation. However, no concrete progress came forth from COP20 on this, even though important signals came from the UN Summit in New York last September and much more will emerge in 2015 in preparation to COP 21.

Investing
Second, governments need to look to how and when they invest in low-carbon solutions. No public sector actors are yet fully successful in setting regulation, incentives, co-investment, risk-sharing instruments or other policy measures. Most developed countries firmly opposed internationally accountable commitments to climate finance. Switzerland notably refused legally binding aims. Part of the unanimous aversion to strong investment is the fear that policies would require prolonged public sector support for low-carbon technologies. This assumption ignores the fact that government only needs to promote low-carbon innovation for a limited time. Just long enough to kick-start the low-carbon pathway. Once the technology is rolling along this path, the economy will be locked-in to low-carbon and there is no need for further regulatory intervention. Another investment deterrent is the presumed high-cost, low-return nature of low-carbon energy. However, the higher upfront costs in low-carbon technologies are offset by avoiding the operating and financing costs that characterize fossil fuel energy. And by the increasing benefits of reducing GHG emissions and therefore the concrete, very costly, negative impacts of climate change on our economies.

The Lima Legacy
COP20 concluded with a document that called for an “ambitious agreement” in 2015 that considers the “differentiated responsibilities and respective capabilities” of each nation. This common-but-differentiated-responsibilities approach has characterized climate change talks since 1992. It reflects the strong divide and attribution of responsibility that still exists between poor and rich nations. Meek language asking countries merely to go beyond their “current undertaking” on climate action does not instill you with confidence that any of the INDCs that will be announced over the first quarter of 2015 will be sufficient to keep the globe within the 2°C limit. Perhaps, there is hope in the fact that some of the desired measures indicated above can be developed without the need for international agreements. Even so, at the moment, none of these issues that will really make a difference in the effective deployment and use of climate finance have been seriously addressed by COP 20.

Much of this is unsurprising. Asking 194 countries to find consensus on the many issues implicated in climate change – not only climate finance – is, as UNFCCC Executive Secretary Christiana Figueres puts it, “very, very challenging”. Therefore, the resulting “range of key decisions agreed and action-agendas launched, including how to better scale up and finance adaptation” should be welcomed. However, as ever, we cannot let complacency take root and must maximize the pressure for the forthcoming INDCs to be meaningful and verifiable commitments.

Overall COP 20 in Lima was consistent with expectations. Together with other important events (the UN Climate Summit in New York, the EU Policy Framework on Energy and Climate, the US-China deal, etc.) it contributed to pave the way for an important agreement in Paris. The idea of Intended Nationally Determined Contributions was already circulated and debated months ago. It became concrete in Lima and this is a very positive change, crucial to achieve a large participation to the Paris agreement. Now it’s time to go back to climate finance and to agree not only on the size of additional resources to be devoted to climate mitigation and adaptation, but rather on the policy signals to redirect the huge amount of resources devoted every year to energy infrastructures, buildings, city development and transports towards a low carbon transition path.