Climate change: international funding for the
global deal
Tony Venables
University of Oxford
Project Catalyst: http://www.project-catalyst.info/
Climate Works Foundation, supported by McKinseys
- unofficial and independent support for policy makers & negotiators preCopenhagen
- lay out facts and generate some ideas
0
The global deal: 5 key elements
• 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
1
1) What must be done
0°C
Food
Water
Global temperature change (relative to pre-industrial)
1°C
2°C
3°C
4°C
5°C
Falling crop yields in many areas, particularly
developing regions
Falling yields in many
Possible rising yields in
developed regions
some high latitude regions
Funding requirements
Small mountain glaciers
disappearof–funds
water
Sources
supplies threatened in
several areas
Significant decreases in water
availability in many areas, including
Mediterranean and Southern Africa
Sea level rise
threatens major cities
Carbon market interventions
Ecosystems
Extensive
Rising number of species face extinction
InstitutionalDamage
arrangements
to Coral Reefs
Extreme
Rising intensity of storms, forest fires, droughts, flooding and heat waves
Weather
Events
Risk of Abrupt and
Increasing risk of dangerous feedbacks and
Major Irreversible
abrupt, large-scale shifts in the climate system
Changes
2
What must be done: 650ppm  4o, 550 3o, 450 2.5o, 400 1.8o
Stock – flow dynamics
450ppm CO2e
100
Global Emissions (GtCO2e)
90
500ppm CO2e (falling to
450ppm CO2e in 2150)
80
70
550ppm CO2e
60
Business as Usual
50
40
50GtCO2e
30
65GtCO2e
20
70GtCO2e
10
0
2000
2010
2020
2030
2040
2050
2060
2070
2080
2090
2100
NB: currently around 380ppm, increasing 2.5ppm  550ppm by 2035
3
17 Gt of emission reductions required for a 450ppm pathway
Gt CO2e per year
75
70Reference
pathway
‘BAU’
70
65
61
60
55
52
-35
-17
50
45
44
40
0
1990
Change
relative to
1990
Change
relative to
BAU
2000
2010
2020
450ppm
35 pathway
(with
overshoot)
2030
+17%
-7%
-28%
-50%
Source: McKinsey Global GHG Abatement Cost Curve v2.0; Houghton; IEA; US EPA; den Elzen, van Vuuren; Project
Catalyst analysis
4
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)
70
60
Solar PV
Reduced intensive agriculture conversion
Solar conc.
Organic soil restoration
Wind (high penetration)
Pastureland afforestation
Biomass
Grassland management
Wind
(low
penetration)
Reduced deforestation
50
40
30
20
10
from pastureland conversion
Reduced deforestation from
slash-and-burn agriculture conversion
Nuclear
0
-10
-20
-30
10
Rice management
Shift coal new build to gas
Electricity from landfill gas
New waste recycling
15
17 Gt
20
19 Gt
Abatement potential
Gt CO2e
-40
-50
-60
-70
-80
-90
-100
Cars ICE improvement
Cars aerodynamics improvement
Retrofit building envelope (commercial)
Lighting – switch
incandescents
to LED (residential)
Breakdown by geographic
location:
• 5 Gt in developed country
geographies
• 14 Gt in developing
country geographies
Source: McKinsey Global GHG Abatement Cost Curve v2.0
Breakdown by abatement
type:
• 9 Gt for terrestrial carbon
• 6 Gt for energy efficiency
• 4 Gt for low carbon energy
supply
5
Breakdown by developed/ developing
Abatement receiving additional
financing (to meet incremental costs)
from developed world
The Split of the required abatement in 2020
Gt CO2e, 2020
17
5
9
3
Required
abatement for
450ppm pathway
Abatement
feasible in
developed countries
<60 €/t CO2e
Abatement in
developing countries
receiving incremental
cost financing from
developed world
Abatement in
developing countries
with negative cost
(NPV positive)
* 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
6
Size of the bubble
indicates the abatement potential
in each sector
Capital intensity and abatement cost
Abatement cost
€ per tCO2e, 2030
30
25
20
Power
Iron and steel
15
10
Agriculture
5
Cement
-5
-5
Forestry
5
10
20
25
30
75
Transport
-10
-15
15
80 Capital
intensity*
€ per tCO2e
Waste
-20
-25
-30
Buildings
-35
-40
* 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
7
From the ‘investor perspective’; (incl taxes and higer interest rate)
McKinsey global GHG abatement cost curve including investor perspective
2020*
200
Societal perspective
150
Higher interest rates
result in a further
increase in cost
for many positive
cost levers
Investor perspective
100
50
0
5
-150
-200
15
19
Abatement
GtCO2e per year
-50
-100
10
Inclusion of energy
taxes results in a
further reduction
in cost for many
negative cost
levers
-250
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
8
Source: McKinsey Global GHG Abatement Cost Curve v2.0
Effect of high energy prices
(oil price at $120 a barrel)
BAU energy price – oil price at $60 per barrel
High energy price – oil price at $120 per barrel
Global abatement cost curve, 2030
Abatement cost
€ per tCO2e
100
50
0
5
10
15
20
25
35
40
Abatement potential
GtCO2e per year
-50
-100
30
Energy efficient
measures become
more profitable
Alternative energy
measures become
cheaper
-150
-200
9
Source: Global GHG Abatement Cost Curve v2.0
Key messages: what has to be done, where, and cost
• 17 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
3
10
3) Funding: needs and sources
Under the UN Framework Convention, Annex II countries have
committed to provide financial resources to meet incremental costs
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
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Funding needs: €65-100 billion required in developing countries
(similar magnitude to current aid flows)
Costs of 12 Gt of abatement in developing countries
Developing country financial requirements,
€ billion on average p.a. 2010–20 (excluding self-financing)
Adaptation cost
~65–100
55–80
10-20
10-20
5
5–30
35
Required
flows for
abatement
at cost to
society*
10
Additional
cost for
higher developing
country
financing
rate (10%)
55-80
Estimated
transaction
costs for the
whole curve of
€1–5 per tonne
of carbon
abated
Financing
need for
technology
deployment
with high
learning
potential
Total financing requirement for
abatement
in developing
countries
Adaptation
estimate**
Total financing
requirement for
developing
countries
* 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
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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
Forestry
20–31
Power
16–20
China
Rest of
Developing Asia
Rest of Africa
16–22
5–7
4–6
15–23
Industry
6–10
India
Agriculture
5–9
Middle East
3–4
Brazil
3–6
Buildings
1–2
Transport
~1
Rest of Latin
America
Mexico
Waste
~1
South Africa
~1
Rest of Eastern Europe
1
Technology
~1
5
Technology
Total
2–3
55–80
Source: McKinsey Global Cost Curve v2.0, Project Catalyst analysis
Total
5
55–80
13
Breakdown of adaptation cost estimates: public sector only
Average annual adaptation cost 2010–2020, € billion
20–45
10
10–25
0–15
10–20
5–10
0–5
~1
Investments Preparation,
in knowledge1 planning2
1
2
3
4
5
6
Source:
5
Disaster
Soft
Hard
preparedness adaptation4
adaptation5
& insurance3
Proactive adaptation
Social
adaptation6
Gross
adaptation
cost
Discount for
co-benefits
from other
resources
Based on benchmarking of existing leading institutions (e.g. NOAA, NASA, Met Office, CGIAR)
Calculated on the basis of costs of Pilot Programme for Climate Resilience in ten countries, scaled to all developing countries
Based on Munich Climate Insurance Initiative proposal
Based on annualised NAPA cost estimates – using median NAPA cost to scale to all developing countries
Derived from UNDP cost estimates for ‘climate proofing investment’
Derived from UNDP cost estimates for social adaptation
NASA; UK Met Office; NOAA; CGIAR; UNFCCC; NAPAs; Munich Climate Insurance Initiative; EM-DAT International Disaster database
Net
adaptation
cost
14
The financing needs ramp up over the
2010-20 period
FINANCING REQUIREMENT TO
REACH 450 PPM PATHWAY
Developing country financing needs, € billion (annual averages)
90-145
15-30
65-100
10-20
40-55
5-10
75-115
55-80
Capacity building
Adaptation
Mitigation
~15-30
3
3-9
11-17
2010-12
35-45
2010-15
2015-20
Source: McKinsey Global GHG Abatement Cost Curve v2.0; Project Catalyst analysis
2010-20
15
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
16
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
10–20
65–100
10–15
5–15
55–80
5–20
45–50
10–20
4–8
22-31
Mitigation
Adaptation Total
need
Direct
carbon
markets
Carbon
market
interventions
ETS markets
Source: Project Catalyst analysis
ETS
auction
revenues
Other
public
and international
sources
International
transport
levies
Concessional debt
Public
fiscal
revenues
17
Public finance needs depend on the cap adopted by developed countries:
25% aggregate developed world cap could deliver 3 Gt of offsets
Abatement receiving additional
financing (to meet incremental costs)
from developed world
The Split of the required abatement in 2020
Gt CO2e, 2020
17
Required abatement for developed country
Under 25% aggregate cap
5
9
Abatement in developing
countries financed
through carbon markets
(counting towards
developed country caps)
3
6
Abatement in developing
countries financed
through public finance
Required
abatement for
450ppm pathway
Abatement
feasible in
developed countries
<60 €/t CO2e
3
Abatement in
developing countries
receiving incremental
cost financing from
developed world
Abatement in
developing countries
with negative cost
(NPV positive)
18
Source:McKinsey Global GHG Abatement Cost Curve v2.0, team analysis
40% aggregate developed world cap could deliver 6 Gt of offsets
Abatement receiving additional
financing (to meet incremental costs)
from developed world
The Split of the required abatement in 2020
Gt CO2e, 2020
17
Required abatement for developed country
Under 40% aggregate cap
5
9
Abatement in developing
countries financed
through carbon markets
(counting towards
developed country caps)
6
Abatement in developing
countries financed
through public finance
Required
abatement for
450ppm pathway
Abatement
feasible in
developed countries
<60 €/t CO2e
3
Abatement in
developing countries
receiving incremental
cost financing from
developed world
3
Abatement in
developing countries
with negative cost
(NPV positive)
19
Source:McKinsey Global GHG Abatement Cost Curve v2.0, team analysis
Carbon market intermediation: capturing the surplus
Carbon markets under 25% target,
€bn 2010-20 p.a.*
Forest sector cost curve
Non-Annex 1, 2020
•
FORESTRY EXAMPLE
Offsets are only
purchased for cost
positive abatement
(i.e., right hand side
of cost curve)
Surplus
Cost
€/t CO2e
ILLUSTRATIVE
Opportunity cost
•40
20-40
•30
15-20
•20
5-20
•10
•0
•0
•1,000 •2,000 •3,000 •4,000 •5,000 •6,000
Abatement
potential
Mt CO2e
Source: Project Catalyst analysis, UNFCCC
Price paid
for offsets
Cost of
abatement
Potential
surplus to
investors/
Intermediaries
Link between sources and different ways to deliver financing
Sources of financing
Way to deliver financing
Direct carbon markets
(ETS) – offset purchases
Offset markets
(demand driven by
developed country caps)
Carbon market
interventions (ETS)
Carbon markets (ETS) –
auction revenues
Public balance sheet/
credit rating
Government
Funds
(bilateral and
international)
Public fiscal revenues
International maritime and
aviation levies
Other public
finance
commitments
21
Key messages: funding; sources and needs
• 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
22
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
23
International architecture:
Overarching structure
Criteria:
Legitimate
Accountable
Effective
Centralised?
UN
World Bank
Carbon Bank
Decentralised?
Existing aid architecture
Delivery channels
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
24
Low Carbon Growth Plans (LCGPs) as a way to operationalise
developing country mitigation and adaptation actions
Focus: Development,
mitigation + adaptation
Time horizon: Long term
and short/medium term
•
Content: Priorities,
policies/measures and
international support
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”
Differentiation: Both
developing + developed
Process: Support, best
practices, review, MRV
EU COM/2009/0039 final
25
Many countries have started designing national strategies
to get onto low-carbon pathways
United States
• The Obama plan aims to
reduce GHG emissions
80% below 1990 levels by
2050 through a market-based
cap and trade system
Mexico
United Kingdom
• ‘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
China
• 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
• Special Program on Climate
•
•
South Korea
• 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
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
EU
• 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
Source: Project Catalyst analysis
NOT EXHAUSTIVE
Brazil
• 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
South Africa
• Framework for Climate Policy released
in July’08
• Aims to implement three strategic
options derived from government's
long-term mitigation scenario analysis
India
• 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
26
Funds: global, regional, national? Eg national
• Intermediation on supplier and /or demand
• Markets primarily in form of sector programmes, plus
side
some sector (no-lose) caps
Coordination/Oversight/ Registry for LCGPs – UN?
Sources of funding
Allocation/aggregation mechanisms
CER,
€
Market
( ETS)
Public finance
Carbon market
(sectoral & programmatic)
Intermediary
Contributor
trust funds
CER,
€
Intermediary
€
CCGP/LCGP/NAPA
Power, afforestation
€
Recipient trust
funds
Delivery
€
Energy efficiency
Deforestation,
agriculture
€
Global fund
• Contributor countries provide financing
•
in form of cash to contributor funds
Contributor and recipient funds go
through ‘matching’ process
• Global fund (~20%)
created for
– Adaptation
– Mitigation action not
funded by national
contributor funds
Adaptation
• 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
27
Key messages
• 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’.
28