Financing climate change

The proposal provides a way to tackle the question of historical and cumulative effects. Importantly, it brings up the question of equity. Not only total emissions but per capita emissions, the proposal clarifies, should be taken into account and there must be a progressive convergence of per capita emissions.

There should also be a distinction between emissions for basic needs and emissions in countries with a much greater level of development. ‘There should also be a sharing of the terrestrial and marine sinks, so that every person on Earth can benefit equally from this environmental service’.

Like Mexico, G-77 is united in its demand for a funding mechanism within the scope of the UNFCCC. The EU differs, suggesting a ‘toolbox’ to deliver finances that contains already existing channels of financing also outside the treaty.

As with the question of techno­logy transfer, the US does not agree in creating a new institution under the UNFCCC, foregrounding its partnerships outside the ambit of the treaty as proof of its generosity. 

Mexico (2008/misc.2), August 13, 2008

A World Climate Change Fund (Green Fund) should be agreed upon and established as a financial scheme that complements existing mechanisms.

All countries could contribute to the fund in accordance with the principle of common but differentiated responsibilities and respected capabilities.

The differentiation of responsibilities would be determined through three indicators:

1. Greenhouse gas emissions
2. Population
3. Gross Domestic Product

With regard to historical and cumulative effects, several possibilities are feasible:

• To disregard cumulative emissions for determining contributions and to take only current emissions;
• To calculate the responsibility derived from historical emissions in terms of their contribution to increasing temperatures (Brazil’s proposal);
• To calculate cumulative emissions from 1990, a general reference for national communication or 1992, when the Convention was adopted.

With regard to equity, not only total emissions but per capita emissions should be taken into account and the regime must induce a progressive convergence of per capita emissions.

There should also be a distinction between emissions for basic needs and emissions in countries with much greater level of development. There should also be a sharing of the terrestrial and marine sinks, so that every person on Earth can benefit equally from this environmental service.

The gross domestic product per capita will represent the country’s economic capacity to tackle climate change. As with other factors, it would seem equitable to agree that those with greater capacity make larger contributions to the fund.

In the initial phase, it is expected that the fund will mobilize US$ 10 billion per year. Several mechanisms could mobilize new financial resources that would add to the fund, including levy on cap and trade systems in developed countries, tax on air travel.

In principle, all countries, developed or developing would benefit from the fund. The mitigation activities would be defined by the country, based on their development needs, but would be real, measurable, reportable and verifiable.

It is necessary to adopt baselines derived from periodic emission inventories with methodologies used for national communication under the convention. The baselines would reduce transaction costs and overcome the need of much stricter additionality tests of CDM products derived from their offsetting nature.

To avoid imbalance, a threshold of 15 per cent of the funds total amount is proposed on the withdrawal by any single developing country. Developed countries will only be permitted to use a fraction of their contribution (70 per cent) so that developing countries have an incentive to participate in the fund.

A part of the fund would be set aside fro the benefit of LDCs – it is possible that these countries benefit from the fund, without making a contribution to it.

Instead of separate mechanisms, the proposed fund could establish linkages between mitigation, adaptation and technology transfer. But to do this, all contributions should be subject to a double levy.

The first levy would be for the adaptation fund, which at present is only fed through contributions from the CDM operations. This enlarged adaptation fund would work within the decisions already taken by COP.

The second levy would enable the development of a clean technology fund, to promote the transfer and development, demonstration and dissemination of technologies that are close to acquiring commercial status and would allow beneficiary countries to reorient their development towards a lower carbon economy.

The governance of the fund would be under the aegis of the COP, which would set up its support committees. 

Sources of funding

• The main sources of funding will be through the implementation of commitments under Article 4.3. The funding will be new and additional, which is over and above ODA and the major source will be the public sector.
• Any funding pledged outside of the UNFCCC will not be regarded as the fulfillment of commitment under 4.3 of the Convention.
• It should be ensured that there is predictability, stability and timeliness of funding.
• The level of new funding can be set at 0.5% to 1% of the GNP of Annex 1 parties. 

India (October 17, 2008)
The commitments (article 4.3, article 4.4 and article 4.5 of UNFCCC) by developed country parties are at the core of the balance of commitments between the parties.

This is reflected in article 4.7, which states that “the extent to which developing country parties will effectively implement their commitments under the Convention will depend on the effective implementation by developed country parties of their commitments related to financial resources and transfer of technology and will take fully into account that economic and social development and poverty eradication are the first and overriding priorities of the developing country parties”.

Sources of funding

• The magnitude of funding needed is enormous compared to what is available under the current financial mechanism of the Convention. The funding committed to GEF, for various funds managed by it, is US$ 1.3 billion for the period 2007-10.
  
  The funds for adaptation total about US$ 275 million and since 2005, GEF has provided US$ 110 million for adaptation projects. The adaptation fund to be built up from 2% of CDM flows is expected to amount to US$ 100-500 million by 2012.
  
  And while carbon markets (based on deep emission reduction targets) may be able to fund incremental costs of mitigation, funding for adaptation will need resource transfers or grants.
• Annual contributions equal to 0.5% of the total GDP of the developed world should be paid to the fund for full-agreed incremental costs of adaptation and mitigation. Individual country contributions may be decided on the basis of historical responsibility, current emissions etc. Each developed country party would be free to decide the means for raising these accessed contributions.
• Any levies on international travel or use of marine haulage that are negotiated under the convention.

The proposed financial architecture must be under the direct control of COP, with an executive board with equitable and balanced representation. 

China (misc.5, September 28, 2008)
Supports the establishment of a financial mechanism, as proposed by G77 and China for operationalisation of an effective financial mechanism under the COP.

The financial resources provided by developed country parties shall be new, additional, adequate, predictable and sustained. The funding scale shall be 0.5%-1% of the annual GNP of Annex 1 parties and additional to the existing ODA.

Any funds pledged outside UNFCCC should not be regarded as the fulfillment of commitments by developed country.

Norway supports expanding the carbon market aimed at establishing a global carbon price on emissions. In Norway, 70 per cent of greenhouse gas emissions are subject to a tax or covered by an emissions trading scheme.

There is a potential for the market to generate a demand for permits from developed countries when companies from both developed and developing countries take part in the same emission-trading scheme.

In addition, a small portion of the proceeds of the auction of permits could be withheld from the national quotas and auctioned by the appropriate international institution. This revenue could be placed in a fund for adaptation or technology development.

Norway suggests discussions on:

• Mechanisms for the establishment of a global price on emissions of CO₂ and other greenhouse gases consistent with the global emissions target;
• Innovative means of funding;
• The interconnection between the global cap, emission trading and other national measures
• The consequences and alternatives when allowances are considered a financial instrument

A sectoral crediting mechanism should be discussed as a means to assist nationally appropriate mitigation action by developing countries and private flows should be promoted for technological inducement.

Considers that financing mitigation should help to achieve equity (sharing the costs of action and effort-sharing), efficiency (channeling scarce resources to key areas) and predictability.

Suggests that the AWG-LCA focuses its work on developing a toolbox to deliver finance, including;

1. The carbon market to leverage resources;
2. Innovative financing mechanisms – like the Global Energy Efficiency and Renewable Energy Fund. A part of the revenues of 15% of the EU-ETS allowance for aviation that will be auctioned from 2012 onwards will be used to finance mitigation in the EU and third countries.
3. A range of domestic policies are at the state’s disposal – EU proposes that parties may agree on cost-effective policies focused on specific sectors and that incentives be provided to assist the introduction of these policies. 

The US does not agree that enhancing financial and technology promotion tools will mean creating new institutions under the UNFCCC.

Many non-Annex 1 parties, in particular major emerging economies, have a level of financial and technical capacity far greater than two decades ago. It is therefore, important to consider what national governments can be reasonably expected to do through their own policies and resources, consistent with their obligations under the Convention.

FCCC/AWGLCA/2008/16

On characterizing the provision of new and additional resources, Parties proposed that these be: 
   
(a) New (EC and member states, MISC.2) and additional, i.e. over and above the target of 0.7 GNP for Official Development Assistance (ODA) (Colombia, MISC.1; Singapore, MISC.2; AOSIS, G77 and China, African Group, MISC.2/Add.1; Argentina, Brazil, China, MISC.5, LDCs, finance workshop);    

(b) Adequate (EC and member states, Singapore, MISC.2; AOSIS, G77 and China,     MISC.2/Add.1, China, MISC.5; LDCs, finance workshop);   

(c) Measurable, reportable and verifiable (Saudi Arabia, MISC.1; Australia, G77 and China, MISC.2/Add.1) with clear targets and timelines (Gambia, adaptation workshop);

(d) Predictable (EC and member states, Singapore, MISC.2; AOSIS, G77 and China,     MISC.2/Add.1; Brazil, China, Norway, MISC.5; LDCs, finance workshop);    

(e) Reliable (Norway, MISC.5);    

(f) Stable (G77 and China, MISC.2/Add.1; AOSIS technology workshop);    

(g) Sustainable (EC and member states, Singapore, MISC.2);    

(h) Timely (AOSIS, G77 and China, MISC.2/Add.1);    

(i) Inclusive, financially feasible, and able to broaden the scale of mitigation and adaptation activities (Mexico, MISC.2);    

(j) Coherent, flexible, and able to mobilize all sources of finance (South Africa, MISC.5). 

Resources should be generated by:
(i) Developed country Parties and other developed Parties included in Annex II (G77 and China, MISC.2/Add.1; China, Turkey, MISC.5);

(ii) An expanded number of countries included in Annex II based on capacity and national circumstances, for example, measured in GDP per capita (Australia, MISC.2/Add.1; New Zealand, MISC.5);

(iii) All countries in strict accordance with the principle of common but differentiated responsibilities and respective capabilities (Mexico, MISC.2);

Resources should be provided by Parties on the basis of, or taking into account, the following criteria and indicators:

i. GHG emissions (AOSIS, MISC.2/Add.1) and/or GHG per capita (Mexico, MISC.2);

ii. Historical contribution to climate change (Argentina, MISC.5);

iii. National circumstances (Argentina, MISC.5);

iv. Capabilities (Australia, MISC.2/Add.1);

v. GDP and/or GDP per capita (Mexico, MISC.2);

vi. Carbon intensity (emissions per unit of GDP) (Mexico, MISC.2);

vii. Size of a national economy relative to the global economy (Mexico,
MISC.2);

viii. Population (Mexico, MISC.2);

ix.  Contributions to funds under the UNFCCC, other multilateral funds,
ODA, technology assistance, R&D and market investment (Japan, MISC.5);

On contributions by Parties, specific proposals are:
i. The level of the new funding can be set at 0.5 to 1 per cent of the GNP of
Annex I Parties (G77 and China, MISC.2/Add.1; China, MISC.5);

ii. Developed countries should commit to a target of financial aid and technology transfer (Panama on behalf of Costa Rica, El Salvador, Honduras, Nicaragua and Panama, MISC.5).

On the generation of resources, Parties proposed :
a. Voluntary contributions (Tuvalu, forest workshop) and non-offset market arrangements (levy on international aviation and maritime transport, auctioning of allowances under a self-contained cap and trade regime for international transport, pledged percentage of auctioned national emission trading allowances, percentage  of AAUs auctioned on the international market);

b. Auctioning allowances or assigned amounts (Panama on behalf of Costa Rica, El Salvador, Honduras, Nicaragua and Panama, MISC.5);

c. Sector-based approaches as a means to transfer resources from developed countries to developing countries (Japan, Norway, MISC.5);

d. Market finance, such as loans on preferential terms, revolving credit, venture capital (South Africa, MISC.5).

On generation of new and additional resources from fiscal measures, Parties proposed:

a. Applying a uniform global levy on carbon of USD 2/t CO₂ on all fossil fuel emissions with a basic tax exemption of 1.5 t CO₂ eq per inhabitant (Sri Lanka, MISC.5; Switzerland, MISC.5 and FCCC/AWGLCA/2008/11);

b. That permits in domestic cap and trade systems be auctioned in some developed countries (Mexico, MISC.2);

c. Expanding the CDM levy (Bangladesh, MISC.1);

d. Taxing air travel (Bangladesh, MISC.1; Mexico, MISC.2).