Climate Action - Assisting business towards carbon neutrality

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Rae Kwon Chung, UN ESCAP

There is a strong perception among developed countries that net global greenhouse gas emissions (GHG) reductions are only possible by imposing targets on developing countries. But to do so is neither politically feasible nor technically practicable. We should not waste time designing targets into any post-Kyoto climate change regime. Instead, we should explore other options, such as market mechanisms. This article looks at the arguments for doing so.

Target obsession and political deadlock

Climate change negotiations are facing serious political deadlock regarding the reduction of GHG emissions from developing countries in designing the climate change regime after 2012. Most developed countries share the view that imposing targets on developing countries is the only available option to ensure emission reductions from developing countries. But the technical difficulties and uncertainties involved in projecting a future emission trajectory are making many developing countries uneasy and reluctant to accept any form of target. Misunderstandings arising from this issue are beginning to sour mutual trust and threaten to block any positive progress in the negotiations.

Targets in the form of equal global quota

Calculating an equal global per capita carbon quota can easily be achieved by dividing the target volume of GHG gases by the number of people in the world. However, there is little chance that this idea will gain political acceptance and be agreed on as an immediate option for the climate change regime after 2012.

TARGETS AGAINST BUSINESS AS USUAL

Most targets now being proposed tend to look at reducing expected emissions based on business as usual (BAU) scenarios, eg intensity, sectoral and even no-lose targets. There are, however, considerable technical difficulties for developing countries in setting up such targets where the task is less onerous for developed countries whose economic growth rate and industrial structure are stable and predictable unlike developing countries.

TARGET SETTING FOR DEVELOPING COUNTRIES

Even the best economists often fail to predict the exact economic growth rate of developed economies for a given year. How then can we expect reliable long term projections for GHG emissions for developing countries whose economies are far more volatile and vulnerable?

If actual emissions unexpectedly drop below projected BAU, the imposed target will mean very little. If actual economic growth and GHG emissions unexpectedly shoot up, the target will in effect impose growth capping, which is detrimental to the economy of any developing country.

There are three major reasons why BAU emission trajectories for developing countries are difficult to predict: vulnerability to external factors; transformation of industrial structure; and high impact of non-climate policies.

Vulnerability to external factors

Many developing countries are far more vulnerable to external factors such as unexpected sudden economic crises than developed countries, eg the financial crisis experienced by many Asian countries during the late 1990s. Those countries were enjoying high growth rates immediately before the crisis that reduced their growth rate for several years.

If China and India set targets based on the current high growth rates as is suggested by many developed countries, there is a higher risk that growth rates may slow in the middle of the commitment period due to unforeseen reasons such as high oil price (external factor) or domestic political turmoil such as democratisation and labour strikes (internal factors).

Some might argue that the economies of developed countries are also vulnerable to external factors. However, developed countries, such as the EU member states, the US and Japan, have the power to lead or drive the world economy. They set the basic parameters of the world economy while developing countries follow, having to live by the rules set by developed countries. The degree of vulnerability and fluctuation is much more unpredictable for developing countries.

Transformation of industrial structure

The economies of developing countries are undergoing rapid structural change as globalisation opens the door to world trade. Many countries are changing their industrial structure from primary industry to manufacturing and a service economy. However, it is difficult to predict this rate of change. It is even more difficult to estimate the impact of such structural changes on GHG emissions.

While developed countries also experience industrial structural changes, these are generally far more subtle and predictable given the mature nature of their economies.

HIGH IMPACT OF NON-CLIMATE POLICIES

There are many socio-political factors that impact the GHG emissions of developing countries, such as the democratisation process, workers rights, urbanisation, land planning, infrastructure, housing, transportation or even population growth rate. China’s one child policy, for example, which has been credited with saving 1.3 billion tonnes of CO2 in 2005 may well change for social reasons as per capita income rises along with the inevitable CO2 increase. Most governments will give higher priority to such social issues over climate change.

Agreeing on specific targets

Even if we do have a reliable projection on BAU for the emission trajectory, we still face the far more difficult political problem of haggling about the absolute level of an acceptable target for each developing country. We have all observed the difficulties of setting up targets even among developed countries (Annex 1) during the negotiation process of the Kyoto Protocol. Agreeing on specific targets for so many developing countries will be far more difficult. We will need a miracle to arrive at such a consensus.

Agreeing on target level of per capita emissions

If we were to set per capita emissions, the question is how would we set the most appropriate level for developing countries. How can we ask China or India to freeze their per capita emissions by, for example five tonnes of CO2, which is higher than the current per capita level but much lower than that of Japan, EU and the US?

Difficulty of verification

Even if we could set up a perfect target thanks to a super computer or modern day Nostradamus, we still have the difficulty of imposing and verifying compliance. Given the low reliability of data in many developing countries, it will not be easy to do so.

DIVERSE MODIFIED TARGETS

In view of these difficulties, experts have come up with modified target ideas, such as intensity, sectoral or no-lose targets. However, none of these are free from the difficulties mentioned above.

Intensity targets

Intensity targets have merit as they are relative, not absolute, giving more flexibility. However changes of GHG emission intensity are not easy to predict or to curb and control as they are directly related to industrial structure. As economic development progresses, carbon intensity generally goes down. But if energy intensive heavy industry continues to grow, the intensity would increase.

Sectoral targets

Sectoral targets are more easy to project, but they face the more difficult problem of industrial competitiveness. Energy intensive industries, such as steel, cement and chemical are usually the backbone of industrial competitiveness of any country. It is highly unlikely that these countries will submit their key strategic industries under an international target.

No-lose targets

No-lose targets attempt to provide incentives. But they are not free from the difficulty of projection and face the added problem of negotiating an acceptable target between the buyers and sellers of carbon credit expected to be generated by developing countries who successfully reduce their emissions target.

Pledge and review targets

Imposing capping and forcing compliance on developing countries, necessary for pledge and review targets, will be difficult to achieve; any legally binding target seems technically impracticable and realistically unfeasible.

A voluntary pledge and review target could, however, function as a driver for best possible efforts to reduce GHG emissions. Developing countries have a strong incentive to improve their energy efficiency as the price of oil rises.

Compatibility of climate action and economic goals

The rising oil price makes energy efficiency and major climate action increasingly compatible with economic interests. China, for example, has set up its own target of improving energy efficiency by 20 per cent during its current economic development plan, not because of climate change, but because of the economic need to save energy. The Chinese government is vigorously pursuing this goal and the 20 per cent energy efficiency target is a good example of a voluntary pledge and review target for climate change action.

WHY NOT MARKET MECHANISMS

If targets are not workable, market mechanisms could provide incentives for developing countries to act on climate change. Economic instruments and market mechanisms are generally regarded as more efficient than command and control measures in environmental governance. Why then, are we so obsessed with imposing targets which represent a typical command and control mechanism?

The Clean Development Mechanism

There are already market mechanisms available. The Clean Development Mechanism (CDM), developed under the Kyoto protocol, is one such international mechanism and the only one that engages developing countries. Designed to promote sustainable development in developing countries and to assist Annex I countries in meeting their GHG emission commitments, the CDM can function as an incentive mechanism for emission reduction projects in developing countries.

There are other forms of market mechanisms that could be developed, such as a global carbon tax but time is running out to negotiate and while the CDM, in its current form, has limitations, reforms could reap results.

Currently, the CDM has limited scope with very complex procedures. To expand the scope of CDM, among the three criteria for financial, technical and project additionality, project additionality has to be relaxed while  technical additionality should remain strict in order to ensure the quality of Certified Emission Reduction (CER), the unit of carbon credit generated by CDM projects.

There is no reason to discriminate among projects that reduce emissions based on arbitrary criteria. Project additionality criteria was introduced from an ideological point of view that CDM projects should be purely designed for climate change that have not been tainted by commercial interests. In the real world, however, most projects have certain commercial components which would very likely make them ineligible under the CDM.

In order to make CDM function as a market mechanism, such ideological purity should be abolished. CDM should be more practical and not isolated from the dynamism of the private sector. Any project that reduces GHG emissions according to a strict technical baseline should be eligible to become a CDM project without going through the hassle of proving that it is not an ‘anyway’ project. Once the project additionality criteria is removed, CDM can function as a genuine market mechanism and would provide incentives for many more meaningful climate action projects.

NET GLOBAL EMISSIONS REDUCTIONS

A reformed CDM can function as a market mechanism to provide incentives for emission reduction of developing countries. Nevertheless, CDM itself does not generate net global emission reductions, since the CER generated by CDM is sold to developed countries (Annex 1) and will increase their own emissions. Currently CDM simply shifts emissions from developing countries to developed countries but if CERs were discounted this could change.

A CER discounting scheme

If only certain portions of CER were sold to Annex 1 buyers, the unsold portion could contribute to net global emissions reductions. If for example, out of two million tonnes of CO2 reduced by a CDM project, only one million tonnes were sold, this would result in a net global emissions reduction. Once we introduce such a rule, CDM will be able to generate net global emission reductions.

CONCLUSION

Developing countries are prepared to take meaningful climate action as part of their economic development plan and are in fact already doing so. They simply do not accept that fixed targets are workable and realistic for them. The changes to the CDM discussed here represent a real, tangible and measurable option to reduce GHG emissions, while emissions reductions based on a fictitious BAU target can never be verified or certified.

If we could reform and redesign CDM, the current climate crisis can be turned into an economic opportunity for developing countries. Redesigned CDM would enable developing countries to contribute to net global emission reductions, moreover without imposing any binding target. In the UNFCCC climate meeting in Bali, climate change negotiators need to focus on reforming and redesigning CDM rules.

Of course, the basic assumption of this idea is that developed countries would accept deep targets after Kyoto, so that a strong demand for CER from CDM could be sustained. This is one of the basic requirements for any kind of climate change regime after Kyoto Protocol.

This article is the work of the author in his personal capacity and does not represent the views of his organisation.

Author

Rae Kwon Chung is Director of the Environment and Sustainable Development Division of the United Nations Economic and Social Commission for Asia and the Pacific. He is a former Korean career diplomat and negotiator for many global environment conferences, inserting ‘compulsory licensing’ and ‘transfer of publicly-owned technologies’ in Agenda 21 of Rio Earth Summit in 1992, and proposing unilateral CDM for the Kyoto Protocol in 2000.

Mr Rae Kwon Chung served as Director-General for International Economic Affairs Bureau at the Korean Foreign Ministry until July 2004 before joining the UNESCAP.

Organisation

The United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) is the regional development arm of the United Nations for the Asia-Pacific region. With a membership of 62 governments and a geographical scope that stretches from Turkey in the west, to the Pacific island nation of Kiribati in the east, and from the Russian Federation in the north, to New Zealand in the south, ESCAP is the most comprehensive of the United Nations five regional commissions.

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