CAP&TRADE CAN FUND EMERGING WORLD NEW ENERGY TRANSITION

Rich Nations Promise $100 Billion Per Year Aid to Poor Nations in Climate Fight
Mridul Chadha, May 28, 2009 (Red, Green and Blue via Reuters)

SUMMARY
In a breakthrough for negotiators working out the details on a post-Kyoto international agreement to fight global climate change, preliminary assent has been reached by developed nations for a $100 billion per year investment to fund developing nations’ transition to New Energy.

This potentially settles one of the most contentious issues in the agreement the world’s nations hope to sign at the Copenhagen summit in December.

Through the breakthrough measure, developed nations would create an international adaptation fund to support emerging economies' transition to New Energy and away from deforestation. Emerging nations have heretofore insisted they will not sacrifice economic growth to reverse a climate change they say is caused by the burning of fossil fuels in developed nations over the last 2 centuries to achieve affluence.

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The contentiousness over the issue has been complicated by the worldwide financial downturn in recent months. Developed nations, with diminished productivity and rising unemployment, were reluctant to take on the financial responsibility. Emerging economies, struggling against more difficult economic circumstances to sustain growth, were more adamant that they could not cut emissions without assistance.

The capital for the adaptation fund would theoretically come from the sale of allowances in international cap&trade systems, some still only hypothetical. The European Union (EU), through its existing Emissions Trading Scheme (ETS), has committed to the fund but will not follow through until nations like the U.S. and Australia kick in through their proposed and pending cap&trade systems.

Australia has approved a cap&trade plan that would sell allowances and raise the revenues but delayed implementation due to the economic downturn.

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The U.S. is debating a cap&trade plan. One of the main impediments to support for it is the political risk associated with adding higher short-term energy prices to the public’s burden during a recession.

Japan represents another important and problematic dimension of the debate. It is calling for stronger but potentially politically untenable emissions reductions goals.

The opponents to aggressive action against climate change question the possibility of effective implementation. A recent World Bank report found that while emissions markets worldwide have doubled in value, emissions reductions have slowed by a third.

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The Copenhagen negotiators are working to draft satisfactory rules to make the New Energy and deforestation program transparent and effective.

The Copenhagen negotiators are also considering creating an alternative tier of participation for the emerging BRIC economies (Brazil, Russia, India and China) so as to charge them with a role in the process that would include some responsibility to undeveloped nations. It might take the form of a voluntary emissions offset program or some form of aid to nations where the BRIC countries do business. China seems to have indicated tentative approval of emissions reductions for some of its heaviest industries and an investment program for New Energy projects in poor countries.

The single most important element in writing an agreement is that it provides for actual and transparent measurements of emission cuts so the primary goal - reducing greenhouse gas emissions - remains uppermost and the emissions trading market does not become an impotent tool of the investing class.

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COMMENTARY
One of the contentious issues in the debate has been what emissions reductions goals to set. The U.S. will be lucky to get a 17% cut by 2020 out of its political struggle this year. EU leaders last year set a 20% by 2020 goal. Japan wants the Copenhagen summit to call for the 25-to-40% emissions cuts the scientists of the United Nations Framework Convention on Climate Change (UNFCCC) say are necessary to significantly affect the progress of climate change.

The resistance of the conservative side of the U.S. political system to moving against climate change with significant emissions reductions often is expressed as a concern for putting the U.S. at an economic disadvantage to its economic competitors among emerging nations, especially the BRIC countries.

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A significant portion of the fund will be directed at the goal of reversing deforestation in the developing world. Reversing deforestation is one of the single most impactful changes in emissions the world can make. It is a particularly significant undertaking because, unlike cap&trade, it is not a way to put the market to work against climate change. It is, instead, a way to use cap&trade revenues in direct action against deforestation and climate change.

A conclusive answer to the question of whether a cap&trade system would significantly affect emissions cannot yet be answered, despite the best World Bank statistics about emissions markets and emissions changes. The world as a whole is not yet participating and emissions know no borders. Even in the EU, where markets are the most advanced, emissions changes are not indicative because the EU is still integrating former Soviet bloc Eastern European nations with essentially third world economies and power generation systems.

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Some EU ETS monies have been directed at deforestation but it has been done on a too-limited basis and the kind of rules needed to make action effective are only just beginning to be clear.

The UN Clean Development Mechanism (CDM) sells Certified Emissions Reductions (CERs) to EU companies seeking to “offset” emissions by funding New Energy and emissions reduction projects in emerging and undeveloped countries. Under the right rules, the CDM could use market forces to protect forests by selling CERs for projects that protect forests.

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But CDM rules governing the approval, award and sale of CERs are so far inadequate. This is not so much a reason to dismiss the idea of forest protection with the use of CERs as it is a reason to make the rules workable.

Examples: Unlike Brazil’s present rules, countries investing in forest protection projects must have some oversight on how the investment is used. Unlike India’s present system, CDM projects must go on line, or least prove feasibility, before earning CERs so that investments are made on the basis of actual emissions reductions.

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QUOTES
- Mridul Chadha, author, Rich Nations Promise $100 Billion: "The problem is not only 'who would pay how much' but also 'who gets how much'."
- Mridul Chadha, author, Rich Nations Promise $100 Billion: "The new climate treaty should have provisions which are not biased in favor of a few countries. Developed nations have been hit the hardest by the economic recession and even though they will provide the bulk of the financial aid to the developing and poor countries for transition to clean energy technology, the advanced developing nations must play their part by agreeing to voluntary emission reductions and help poor nations."
- Mridul Chadha, author, Rich Nations Promise $100 Billion: "The UN must also ensure that the emissions trading system is not reduced to merely a business tool for industries…"