EU foresees major role for carbon trading in efforts to tackle climate change.

February 4, 2009 | 00:00

EU foresees major role for carbon trading in efforts to tackle climate change.

In a paper outlining its position ahead of international climate talks, the commission says the costs of containing global warming are likely to soar in years to come – adding €175bn to the world's annual bill by 2020. More than half that amount will be needed in developing countries like China and India. The EU and other economic powers should help defray the costs of reducing greenhouse gases emitted by developing nations.

The paper presents various options for increasing international funding – including requiring countries to contribute according to their incomeand level of emissions. Another option would be toauction some emission allowances on a carbon market.

In return, all developing nations – except the very poorest – should limit growth in emissions by adopting development strategies that produce fewer greenhouse gases. These strategies should include curbing tropical deforestation, as trees and plants absorb carbon dioxide.

The EU has already taken bold action of its own to tackle climate change, taking steps to scale back emissions. Now it is keen to build on that success at the talks in Copenhagen in December. The UN is organising the conference for the purpose of securing a new and more ambitious global commitment to tackling climate change. The current treaty – the Kyoto Protocol – expires at the end of 2012.

The EU will urge developed countries to commit to an overall 30% reduction in greenhouse gas emissions by 2020 (compared with 1990 levels). The contribution would vary by country, depending on income, population, level of emissions and past efforts to reduce emissions. Compliance should be monitored and enforced.

The commission also foresees a major role for emissions trading, and will seek to build a global carbon market. A growing number of countries including the US, New Zealand and Australia are looking to set up schemes similar to the; EU carbon market introduced in 2005. The scheme caps overall CO2 emissions, but allows businesses to buy and sell credits amongst themselves.

As some climate change is inevitable, the Copenhagen agreement should also provide a framework to help countries adapt. And it should ensure support for poor nations vulnerable to extreme weather such as drought, storms and floods.

The commission’s proposals, tabled on 28 January, will be discussed by European leaders and lawmakers in the months to come.

Questions and answers on the communication towards a comprehensive climate change agreement in Copenhagen

What is the aim of the Communication?

The Communication aims to facilitate the conclusion of a fair and effective United Nations climate change agreement that sets the world on a pathway to preventing global warming from reaching dangerous levels. International negotiations are under way and are set to be finalised at the UN climate conference in Copenhagen in December 2009. The agreement in Copenhagen would be the basis for further international action on climate change, following on from the Kyoto Protocol’s first commitment period, which ends in 2013.

The Communication sets out concrete proposals for action by the EU and the rest of the international community with the aim of limiting the global average temperature rise to less than 2°C above the pre-industrial level. This is seen by many scientists as the threshold beyond which climate change would become far more dangerous, with the risk of irreversible and potentially catastrophic environmental changes. The Communication also sets out an effective financial architecture to support the actions that need to be agreed on in Copenhagen.

Why is stronger action to combat climate change needed?

The average global temperature has increased by 0.74°C over the past 100 years and is now rising by around 0.2°C per decade. Because it takes time for past and present GHG emissions to show up in higher temperatures, the window of opportunity for staying below the 2°C temperature ceiling is closing very fast.

The Kyoto Protocol is an essential first step towards reducing the greenhouse gas (GHG) emissions that are responsible for this warming trend, but it was never expected to solve the problem on its own. The Protocol commits only industrialised countries to reduce their emissions, and this by an average of only 5.2% below 1990 levels by 2012. This reduction is nothing like enough to keep within the 2°C temperature limit, and in any case the USA, the largest global emitter, has not ratified Kyoto. International agreement on deeper, global emissions reductions is needed for the period after the Kyoto targets expire in 2012.

What are the key points of the Communication?

The key points can be summarised as follows:

Developed countries should continue to take the lead in international efforts to fight climate change. The EU has already proposed that developed countries should commit to cutting their GHG emissions, as a group, to an average of 30% below 1990 levels by 2020 under the Copenhagen agreement. The Communication sets out criteria that should be taken into account when setting national reduction targets to ensure comparable contributions by each developed country to this overall effort.

Developing countries as a group should limit growth in their GHG emissions to 15-30% below business as usual levels by 2020. To enable them to do so, developing countries, except the least developed, should commit to putting forward national low carbon development strategies, covering action in all key emitting sectors, by the end of 2011. These plans will provide the basis for discussion at international level of the adequacy of the proposed actions and of external financial support for them where needed.

Emissions from international aviation and shipping, which are not covered by the Kyoto Protocol, should be included in the overall targets of the new agreement.

The Copenhagen agreement should also provide a framework to help countries adapt to inevitable climate change. All developed and developing countries should be required to develop comprehensive national adaptation strategies. Financial and technological support should be provided to the most vulnerable developing countries.

A major boost to research, development and demonstration (RD&D) of low-carbon and adaptation technologies is needed in all sectors. Global energy-related RD&D should be at least doubled by 2012 and quadrupled by 2020.

To reduce global emissions it is estimated that net additional investment worldwide will need to rise to around €175 billion per year by 2020, more than half of this in developing countries. Public and private sources of external support to developing countries will need to be provided in the context of the Copenhagen agreement. The public contribution of each developed country should be fair and comparable and should be negotiated as part of the deal. The Communication identifies options for creating innovative additional international financing sources.

The EU should seek to build, by 2015, a robust OECD-wide carbon market through the linking of the EU emissions trading system with comparable domestic cap-and-trade systems in the US, Australia and other developed countries. As a first step the Commission aims to set up an EU-US working group to share experience on designing domestic emissions trading systems. Over time developing countries should also implement domestic trading systems so the OECD-wide market could be expanded to all major emitting countries by 2020.

Kyoto’s Clean Development Mechanism should be reformed, while for advanced developing countries and highly competitive economic sectors it should be phased out and replaced by a crediting mechanism covering whole sectors.

Why is the Commission proposing differentiated emission reduction targets for developed countries? How should these be established?

Scientific evidence shows that for there to be a reasonable chance of respecting the 2°C temperature ceiling, worldwide emissions will need to peak before 2020 and fall by more than 50% of 1990 levels by 2050. Stabilisation of global emissions within just over a decade will require decisive action. This is why the European Council has agreed that the essential next step must be for developed countries to reduce their emissions by an average of 30% below 1990 levels by 2020 as their contribution to global efforts in reducing emissions.

This overall target must be distributed between developed countries in a way that is fair and ensures that their efforts are comparable. Socio-economic circumstances differ, however, from one developed country to another. The Communication therefore proposes that four key parameters should be taken into account when setting differentiated national emission targets:

  • Countries' income levels (GDP per capita)
  • Emission intensity of countries' economies (GHG per GDP)
  • Countries population trends (e.g. trend between 1990 and 2005)
  • Countries past efforts to reduce emissions (e.g. emissions trend between 1990 and 2005)

These criteria can be applied to determine the future emission targets of individual countries compared to the emission level of a recent year. The total reduction effort for the group of developed countries should amount to 30% below 1990 levels in 2020, 1990 being the accepted Kyoto Protocol base year.

Ambitious and binding emission reduction targets will also strengthen the international carbon market, whose further development is essential to limit the costs of cutting emissions.

The post-2012 framework will have to contain effective, binding rules for monitoring and enforcing developed countries' commitments to ensure they are met.

Why should developing countries contribute to the global effort, and what contribution should they make?

The UN Framework Convention on Climate Change (UNFCCC) is based on the principle that countries have common but differentiated responsibilities to combat climate change. As developed countries have been responsible for a large part of the greenhouse gas emissions in the atmosphere to date and have a larger capacity to act, it has been agreed by most that they should take the first step towards limiting or reducing their emissions under the Kyoto Protocol.

However, developing country emissions are growing rapidly and threaten to outweigh any emission reductions achieved by developed countries. This means that action by developed countries alone will not suffice. Consequently the Commission is proposing that developing countries – with the exception of the least developed countries - should slow the rate of growth of their emissions as soon as possible with the aim of keeping them to 15-30% below business as usual levels in 2020. Included in this is a major effort that will be needed to halve emissions from deforestation by 2020 and halt global forest cover loss by 2030 (see IP/08/1543 and MEMO/08/632).

To ensure an appropriate and effective contribution by developing countries, all except the least developed countries should put forward national low carbon development strategies, including specific actions to reduce emissions in key sectors, by the end of 2011. These strategies should set out a credible pathway to limit the country’s emissions and identify the external financial support required to implement actions that are too expensive for the country itself. A new international Facilitative Mechanism for Mitigation Support should assess the adequacy of the actions planned and match them with appropriate bilateral and multilateral funding mechanisms.

Developing country action should be entered in an international registry. The UN climate change conference should review the emissions efforts of developing countries as a whole, and may decide to ask them to strengthen these efforts and developed countries to increase their support.

Many policy options are available to developing countries where the long term benefits can outweigh the costs, for example by increasing energy efficiency, promoting renewable energy, saving fuel costs, improving local air quality or capturing methane from sources such as landfills as a cheap source of energy. Such policies can be strengthened by sharing good practice in policy design and planning and technology co-operation.

Least developed countries should not be asked to take action to reduce their emissions since these are at a low level.

How should developing countries be supported in reducing their emissions?

There is a broad portfolio of possible options to reduce emissions in developing countries, ranging from options where benefits exceed the cost (‘win-win’ options) or with very low cost, to more expensive options that require deployment of advanced technologies. For instance, it is estimated that more than half of the reduction in the energy sector can be realised through energy efficiency measures.

A large part of the necessary action will need to be achieved in the energy, industry, transport and agriculture sectors. For a number of developing countries, emissions from deforestation will need to be addressed.

Developing countries will increasingly be required to reduce the growth in their emissions using their domestic resources, in particular to realise win-win and low-cost options. Domestic regulation can mobilise and shift private sector investment towards less emitting technologies. In some cases this may require support from targeted international loan schemes to provide countries with the necessary upfront investment capital that can be paid back from subsequent savings.

In addition, public funding provided by the international community is needed to cover part of the investments that cannot be undertaken with domestic resources alone but are necessary to ensure sufficiently ambitious emissions action in developing countries. The Copenhagen agreement needs to include a mechanism to mobilise significant resources to match this demand for funding (see below).

The international carbon market can create further incentives to reduce emissions. If well designed, one third or more of the investment needed for emission reductions in developing countries could be mobilised by carbon market mechanisms.

Why does the Commission propose including emissions from international aviation and shipping in the Copenhagen agreement?

International aviation and maritime transport are large and rapidly growing sources of GHG emissions which are not covered by the Kyoto Protocol. Emissions from these sources should now be included in the overall targets set in the Copenhagen agreement. The UNFCCC should set targets for reducing the climate impact of these sectors below 2005 levels by 2020, and significantly below 1990 levels by 2050.

Global measures should be taken to address aviation and shipping emissions given the international nature of these sectors. The EU emissions trading system, which will include CO2 emissions from international aviation from 2012, could serve as a model for emissions trading worldwide for these two sectors. If no effective global rules to reduce GHG emissions from shipping could be agreed on, the EU should take its own measures.

What about potent fluorinated gases?

Many members of the family of industrial gases known as hydrofluorocarbons (HFCs) are very potent GHGs. They are used as replacements for another family of gases, HCFCs, which damage the ozone layer. The accelerated phase-out of HCFCs over the coming decade which has been agreed under the Montreal Protocol on protecting the ozone layer may lead to a rapid increase in HFC emissions as they become more widely used. The Copenhagen agreement should therefore include an international arrangement to reduce HFC emissions. This will encourage industry to intensify research into and development of HFCs with low global warming potential and/or HFC-free alternatives.

What is necessary to ensure effective adaptation to climate change by all countries and to support the poorest and most vulnerable developing countries?

The Copenhagen agreement should provide a framework for action on adaptation. Adaptation is a challenge for all countries and especially those that are most vulnerable to climate change. These include the least developed countries, small island developing states and African countries that are prone to extreme weather events such as drought, storms, floods and desertification.

The Communication proposes that all countries, developed and developing alike, should be required to draft comprehensive national adaptation strategies to ensure that costly and recurring climate impacts can be prevented as far as possible.

In many cases, successful adaptation by developing countries can be achieved only if climate change impacts are taken into account in development cooperation projects. This needs to be done more systematically to prevent climate change impacts from jeopardising development assistance efforts.

Better tools and know-how to design and implement adaptation strategies need to be developed. National institutions and international cooperation should be strengthened to disseminate knowledge and technologies for adaptation and climate resilient development. To pool experience, the EU should recommend that a technical panel on adaptation be set up under the UNFCCC.

Financial and technological support should be provided to the most vulnerable developing countries. Kyoto’s Adaptation Fund can play an important role but will be insufficient to support adaptation in all developing countries, so innovative additional sources of financing will be needed. The UNFCCC Secretariat has estimated that total adaptation costs in developing countries could range from €23 to €54 billion per year in 2030.

As with mitigation, financing options need to be tailored to actual investment needed. A large number of early measures will even generate a net benefit to the economy, for instance measures to improve water use efficiency in areas that will suffer from water shortages.

A multilateral insurance pool to cover disaster losses should be explored to complement existing funding mechanisms in case of climate-related natural disasters.

How can the necessary resources be made available?

Developed countries will contribute to assistance for developing countries through public funding as well as the use of carbon crediting mechanisms. The financial contribution of each developed country should be comparable and be based on the polluter pays principle – in other words, its allowed level of GHG emissions - and on its ability to pay. The scale of contributions should be negotiated as part of the Copenhagen agreement.

Two principal options for creating an innovative international source of additional funding have been identified.

Under the first option, developed countries would commit to providing a certain amount of funding through bilateral and multilateral channels, calculated for each country on the basis of its allowed emissions and its income levels. The higher the country’s income levels and the more it emits, the more it would need to contribute. This would provide certainty about the total amount of funding available.

The second option would be to set apart a certain percentage of emission rights that each developed country would receive to cover their emissions, and auction these rights to governments at the international level. The percentage could increase progressively in line with the country’s per capita income. This option would give developed countries that cannot cover all their emissions the option to buy emission rights from these international auctions. Unlike the first option, however, it would not necessarily generate predictable levels of funding since governments could choose to buy Clean Development Mechanism credits instead.

In either case, the timely provision and effective use of the resources to be made available will need to be verified under a new agreement to ensure its effectiveness. It should be explored how developing countries, except the least developed and small island developing states, could contribute over time in line with their financial capability.

For the EU, significant additional public revenue will be generated through the auctioning of emission allowances under the emissions trading system from 2013. Member States could use some of this revenue to honour their international funding commitments under the Copenhagen agreement.

How could resources be generated to support early action by developing countries?

The EU should explore the possibility of developing a ‘front-loading’ mechanism to deliver substantial funding in the short term for the poorest and most vulnerable developing countries.

Based on the issuance of bonds, this proposed Global Climate Financing Mechanism (GCFM) would allow early spending on priority climate-related actions. These funds would in particular facilitate an immediate reaction to urgent adaptation needs with a high return such as disaster risk reduction. A share of the funds raised could also support emission mitigation activities, in particular those that generate synergies between mitigation and adaptation, such as reducing emissions from deforestation.

The GCFM aims at raising around €1 billion per year for the period 2010-2014. After the initial phase of increased funding, the mechanism would start to pay back the funds raised.

How should these various sources of funding be coordinated?

Coordination and cooperation will need to be improved given that the sources of funding for adaptation and mitigation are likely to be multiple. A high-level forum on international climate finance should be set up, bringing together key decision makers from the public and private sectors and international financial institutions. It should cooperate closely with the Facilitative Mechanism for Mitigation Support.

What is the role of technology in the Copenhagen agreement?

Technology will be an essential part of a post–2012 climate agreement. Most of the options to implement mitigation and adaptation actions will require the deployment of clean and safe low carbon technologies. Many recent studies show that for ambitious mitigation scenarios a broad portfolio of technologies will be needed. While some technologies are already contributing to mitigation today and will do so increasingly, others will contribute significantly over the medium to long-term.

This implies that the Copenhagen agreement should include incentives to drive technologies at three different stages:

  • Accelerate diffusion of existing low carbon technologies;
  • Accelerate development and large scale demonstration of near-commercial technologies, such as carbon capture and storage (CCS), second generation biofuels, solar energy and advanced transmission and grid technologies;
  • Increased spending on research and development of new technologies.

Different approaches to supporting technology deployment will be needed with regard to different parts of this spectrum.

Domestic policies and the carbon market will be the main drivers behind faster diffusion of existing technologies.

For near-commercial and new technologies, however, current public expenditure on energy related research, development and demonstration is far from sufficient to achieve the technological advances and cost reductions that are needed in the medium to long term. Public and private expenditure on energy-related RD&D has fallen dramatically to about half its level of the early 1980s.

This trend needs to be reversed to help sharply reduce the cost of future mitigation action. Global energy-related RD&D should be at least doubled by 2012 and quadrupled by 2020, with a significant shift in emphasis towards low-carbon technologies, especially renewable energy sources. An explicit commitment by countries to a step-wise increase in their spending should form part of the Copenhagen deal.

How can domestic emission trading systems such as the EU ETS contribute to addressing climate change?

By establishing the EU ETS in 2005, the EU has pioneered the use of company-based emissions trading systems as a domestic policy tool to address climate change. There is increasing interest in other countries and regions, for example in Australia, New Zealand and the USA, in establishing similar systems. The new US administration has repeatedly stated its objective of establishing a federal cap-and trade system.

The EU should aim to build a robust OECD-wide carbon market by promoting the establishment of national emission trading systems in all OECD countries by 2013 and the linking of comparable systems by 2015. This market should then be further expanded to economically more advanced developing countries by 2020. The EU should help them gain experience with this.

As an important step towards the goal of an OECD carbon market, the Commission should engage with the US administration and legislators and seek to put in place an EU-US working group on the design of carbon markets to facilitate the formation of a transatlantic carbon market. Similar bilateral processes should be set up with other OECD countries.

Linking of carbon markets makes it possible to achieve emission reductions at lower cost and accelerates innovation. Larger trading volumes and improved market liquidity are likely to result in more robust and stable price signals. Early collaboration in design issues will facilitate linkage in the future.

While the design and linking of domestic carbon markets is outside the scope of the UN negotiations, the Copenhagen agreement will nevertheless be very important for the development of the international carbon market as it will set the level of ambition for domestic climate policies beyond 2012.

What about the Clean Development Mechanism?

Kyoto’s Clean Development Mechanism (CDM) has enabled developing countries to participate in the carbon market. It is currently designed as a project-based offset mechanism through which developing countries can sell credits for emission savings achieved by a specific project. These credits can be bought by developed countries to help them meet their emission reduction targets, and most are also accepted for use by companies in the EU ETS.

To ensure the CDM’s environmental integrity, the Commission proposes that the mechanism should be reformed. In future only those projects that genuinely bring about additional emission savings and that go beyond the cheapest options should be able to generate emission credits. In addition, for advanced developing countries and in highly competitive economic sectors, the project-based CDM should be phased out and replaced by a crediting mechanism covering whole sectors. This can also pave the way for the development of cap and trade systems in the economically more advanced developing countries.

What are the prospects for reaching a global agreement?

Strong political will in all major emitting countries is required to reach an effective agreement. Continued leadership by the EU and an acceptance by other developed countries of their responsibility to take serious action will be an important pre-requisite for success in Copenhagen.

The Commission believes the basis for reaching a global agreement exists and is getting stronger. Although the US has not ratified the Kyoto Protocol, there is a strong commitment by the Obama administration to engage the US fully in the international negotiations and to develop effective domestic legislation to reduce emissions of greenhouse gases significantly.

At the same time, the business community in many countries is increasingly taking a long-term view and becoming a driving force in the fight against climate change. In particular, as the world moves inevitably towards creating the low-carbon economy that is needed to stop climate change, the business community is asking for a coherent, stable and efficient policy framework to guide its investment decisions.

Moreover, most of the technologies needed to reduce emissions sharply already exist or are at an advanced stage of preparation.

What are the next steps?

The Communication is addressed to the EU's legislative institutions (the Council and European Parliament) and consultative bodies (European Economic and Social Committee and Committee of the Regions) for their consideration. The European Council is expected to discuss the communication at the spring summit on March 19-20 and this will be an extremely important input to the EU's position for Copenhagen.

Externally, the EU will have to mobilise all available resources over the coming months to ensure intensive dialogue and cooperation with third countries on its proposals ahead of Copenhagen.

Where can I find further information?

Climate change:

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