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Africa: Real Climate Finance Options
AfricaFocus Bulletin
Oct 27, 2011 (111027)
(Reposted from sources cited below)
Editor's Note
Expectations are low for the international summit on
climate change scheduled for next month in Durban, South
Africa. A face-saving agreement to keep talking is perhaps
the most "optimistic" view. The prospects for serious new
international commitments to counter climate change are
very low. But there is no shortage of proposals for actions
that can be taken by national governments. "A starting
point," concludes a new report, "should be the removal of
subsidies on fossil fuel use" by developed countries, with
part of the proceeds going to climate change financing for
developing countries.
In preparation for the G20 summit in France scheduled for
November 3-4, 2011, a wide variety of international
agencies were involved in preparation of a paper on sources
for "scaled up finance for climate change adaptation and
mitigation in developing countries." While the paper covers
a wide range of both public and private options, and
includes both the widely discussed mechanisms for setting a
price on carbon emissions (carbon taxes and market-based
carbon offset mechanisms), it is particularly clear on the
advantages of two common-sense options which should have
wide appeal: stopping subsidies in rich countries for
fossil fuels, and imposing charges on international
aviation and shipping fuel.
These steps, despite predictable political obstacles, have
multiple advantages. They would simultaneously add pressure
to reduce consumption of fossil fuels, and they would
provide revenue. The revenue in turn could have multiple
uses, including financing climate change action in
developing countries as well as reducing fiscal deficits in
rich countries.
This AfricaFocus Bulletin contains excerpts from the
report, including from the executive summary and, in
particular, from the sections on fossil-fuel subsidies and
proposed charges on international aviation and shipping
fuel.
Two additional AfricaFocus Bulletins released today, not
sent out by e-mail but available on the web at
http://www.africafocus.org/docs11/dur1110a.php and
http://www.africafocus.org/docs11/dur1110b.php, have
additional background information and commentaries relevant
to the international climate change summit taking place
from 28 November to 9 December 2011 in Durban, South
Africa. The first contains the most clearly written roundup
of issues in the talks preceding Durban, from the always
well-informed Third World Network. The other includes a
selection of recent article excerpts and links that I have
found helpful.
For previous AfricaFocus Bulletins on issues of the
environment and climate change, visit http://www.africafocus.org/envexp.php
[Additional note to readers: Despite the urgency of
climate-change issues, the language of policy discussions,
particularly connected to the international negotiations,
is often packed with jargon difficult for the non-insider
to decipher. Unfortunately this is true not only for
officials, as one might expect, but also among
commentators, critics, and climate justice activists.
Finding summary commentaries suitable for reposting on
AfricaFocus has been difficult.
For this one sent out by e-mail, I have selected one
document citing two specific and seemingly obvious policy
options, which is also significant because of the wide
range of international groups involved in its preparation.
In the accompanying Bulletins on the web, I have tried to
select a variety of excerpts and links which at least try
to explain the terminology they use and may be useful as
background.]
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DRAFT
Mobilizing Climate Finance
A Paper prepared at the request of G20 Finance Ministers
September 19, 2011
[Excerpts only. The full draft was leaded to the Guardian
(http://www.guardian.co.uk), and is available for reading
on-line at http://tinyurl.com/6jdc8kd PDF versions can be
located through Google search.]
Work on this paper was coordinated by the World Bank Group,
in close partnership with the IMF, the OECD and the
Regional Development Banks (RDBs, which include the African
Development Bank, the Asian Development Bank, the European
Bank for Reconstruction and Development, the European
Investment Bank and the Inter- American Development Bank).
The IMF led the work stream on sources of public finance.
The OECD contributed the analysis of fossil fuel support,
monitoring and tracking of climate finance and other
inputs. The IFC and EBRD led the work stream on private
leverage, and the World Bank those on leveraging
multilateral flows and carbon offset markets, with inputs
from other RDBs. Comments and information were kindly
supplied by the International Civil Aviation Organization
(ICAO) and the International Maritime Organization (IMO).
Executive Summary
1. This paper responds to the request of G20 Finance
Ministers in exploring scaled up finance for climate change
adaptation and mitigation in developing countries. In so
doing it builds upon and extends the work of last year's
High Level Advisory Group on Climate Finance (AGF). Its
starting point is the commitment made in the Copenhagen
Accord and Cancun Agreements on the part of developed
countries to provide new and additional resources for
climate change activities in developing countries. This
commitment approaches $30 billion for the period 2010-12
and $100 billion per year by 2020, drawing on a wide range
of resources, public and private, bilateral and
multilateral, including innovative sources.
2. While there is no precise internationally agreed
definition of climate finance at present, the term broadly
refers to resources that catalyze low-carbon and climateresilient
development. It covers the costs and risks of
climate action, supports an enabling environment and
capacity for adaptation and mitigation, and encourages R&D
and deployment of new technologies. ... this paper
concentrates on climate finance flows from developed to
developing countries.
[In this paper developed countries are understood as Annex
II countries, those which have pledged to provide Fast
Start Finance for adaptation and mitigation activities in
developing countries. They comprise the 27 EU member
states, Australia, Canada, Iceland, Japan, New Zealand,
Norway, Switzerland and the United States.]
3. Both public and private flows are indispensable elements
of climate finance. Competitive, profit-oriented private
initiatives are essential in seeking out and implementing
least cost options for climate mitigation and adaptation.
... Public policy and finance nonetheless play a crucial
dual role: first, by establishing the incentive frameworks
needed to catalyze high levels of private investment in
mitigation and adaptation activities, and second, by
generating public resources for needs which private flows
may address only imperfectly.
4. A starting point should be the removal of subsidies on
fossil fuel use. New OECD estimates indicate that reported
fossil fuel production and consumption supports in Annex II
countries amounted to about $40-60 billion per year in
2005-2010. Over 250 individual producer or consumer support
mechanisms for fossil fuels are identified in the
inventory. Not all these mechanisms are inefficient or lead
to wasteful consumption and, as such, governments may wish
to retain some. Nevertheless, if reforms resulted in 20
percent of the current level of support being redirected to
public climate finance, this could yield on the order of
$10 billion per year. As noted in a separate G20 paper,
there is also considerable scope for reforms of fossil fuel
subsidies in developing and emerging economies.
Experience shows that well targeted safety net programs can
help address distributional concerns.
[Note that G20 Leaders agreed in 2009 to "rationalize and
phase out over the medium term inefficient fossil fuel
subsidies that encourage wasteful consumption".]
5. Comprehensive carbon pricing policies such as a carbon
charge or emission trading with full auctioning of
allowances are widely viewed as a promising option. A
carbon price of $25 per ton of carbon dioxide (CO2) in
Annex II economies - corresponding to the medium damage
scenario in the AGF - could raise around $250 billion in
2020 while reducing their 2020 CO2 emissions by about 10
percent compared to baseline emissions in that year.
Allocating 10 percent for climate finance would meet a
quarter of the $100 billion funding committed for climate
change in 2020. ...
6. Market-based instruments (MBIs) for international
aviation and maritime bunker fuels have been proposed as an
innovative source of climate finance. A globally
coordinated carbon charge of $25 per ton of CO2 on these
fuels could raise around $40 billion per year by 2020, and
would reduce CO2 emissions from each sector by around 5 to
10 percent. ...
...
8. Carbon offset markets can play an important role in
catalyzing low-carbon investment in developing countries
but now face major challenges. Offset markets through the
Clean Development Mechanism have resulted in $27 billion in
flows to developing countries in the past 9 years,
catalyzing low carbon investments of over $100 billion.
However, transaction value in the primary offset market
fell sharply in 2009 and 2010, amid uncertainties about
future mitigation targets and market mechanisms after 2012.
Depending on the level of ambition with which countries
implement national mitigation targets under the Copenhagen
Accord and Cancun Agreement, offset market flows could
range from $5 - 40 billion per year in 2020. An
international accord targeting a two degree pathway, which
would require a much higher level of ambition, could
stimulate offset flows in excess of $100 billion. ...
9. Private flows for climate mitigation related investment
in developing countries have grown rapidly but remain
hampered by market failures and other barriers. Investments
in clean energy (including renewable energy, energy
efficiency, and energy-motivated transport investments
exceeded half a trillion dollars in 2010, with over $200
billion in developing countries. ...
10. Although there is limited current headroom for MDBs to
greatly expand climate financing on their own balance
sheets, there are significant opportunities for them to
mobilize resources through new pooled financing
arrangements. ...
11. It is important to determine which options for
increased climate financing are most promising for
prioritization in the near term and which for development
over the medium term. This task is made more challenging by
the present difficult economic conditions and fiscal
pressures in many developed countries, exacerbated by sharp
political divisions over fiscal policy in some cases. ...
1.1.2 Market-based instruments for fuels used in
international aviation and shipping
Market-based instruments (MBIs) for international aviation
and maritime fuels - either emissions (fuel) charges or
emissions trading schemes - have been proposed as innovative
sources of climate finance.
These international activities are currently taxed
relatively lightly from an environmental perspective:
unlike domestic transportation fuels, they are subject to
no excise tax that can reflect environmental damages in
fuel prices. Seen in the wider context of efficient
revenue-raising, MBIs also have potential merit in
offsetting distortions that arise from the absence of
consumption taxes such as VAT on aviation services and from
uniquely favorable corporate tax regimes for shipping. The
critical point for present purposes, however, is that MBIs
for aviation and maritime fuels are likely a more costeffective
way to raise finance for climate or other
purposes than are broader fiscal instruments: increasing
from zero a tax on an activity that causes environmental
damage is likely to be a more efficient way to raise
revenue than would be increasing a tax (on labor income,
for instance) that already causes significant distortion.
A globally implemented carbon charge of $25 per ton of CO2
on fuel used could raise around $13 billion from
international aviation and around $26 billion from
international maritime transport in 2020, while reducing
CO2 emissions from each industry by around 5 to 10 percent.
Compensating developing countries for the economic harm
they might suffer from such charges -“ ensuring that they
bear no net incidence - is widely recognized as critical
to their acceptability, as discussed further below. Such
compensation seems unlikely to require more than 40 percent
of global revenues. This would leave about $24 billion or
more for climate finance or other uses.
...
MBIs are widely viewed as the most economically-efficient
and environmentally-effective instruments for tackling
environmental challenges in these sectors. Under the
auspices of the International Maritime Organization (IMO)
and the International Civil Aviation Organization (ICAO),
both industries are taking important steps to improve the
fuel economy of new planes and vessels. In maritime,
notably, agreement was reached in July 2011 on the first
mandatory GHG reduction regime for an international
industry.
However, higher fuel prices resulting from MBIs would be
additionally effective because, for example, they would
also reduce the demand for transportation (relative to
trend), promote retirement of older more polluting
vehicles, and encourage use of routes and speeds that
economize on fuel.
The principles of good design of MBIs are the same in these
as in other sectors. For emissions trading, this means
auctioning allowances to provide a valuable source of
public revenue and including provisions to limit price
volatility. For emissions charges it means minimizing
exemptions and targeting environmental charges on fuels
rather than on passenger tickets or on arrivals and
departures.
Failure to price emissions from either industry should not
preclude pricing efforts for the other. Though commonly
discussed in combination, the two sectors are not only
different in important respects - for example, ships
primarily carry freight while airlines primarily serve
passengers - but they also compete directly only to a
limited degree. Nonetheless, simultaneous application to
both is clearly preferable, and could enable both a common
charging regime (enhancing efficiency) and a single
compensation scheme for developing countries.
...
Fully rebating aviation fuel charges for developing
countries (or giving them free allowance allocations) would
likely more than compensate them: that is, they would be
made better off by participating in such an international
regime even prior to receiving any climate finance. This is
because most of the real incidence of charges paid on jet
fuel disbursed in developing countries would likely be
borne by passengers from other (wealthier) countries.
Developing countries - including tourist destinations - would
then receive more than adequate recompense if revenues
collected were fully passed to them.
In contrast, rebating maritime fuel charges to developing
countries may not provide full compensation. Unlike
airlines, shipping companies cannot be expected to normally
tank up when they reach their destination. Some
countries -hub ports like Singapore - disperse a
disproportionately large amount of maritime fuel relative
to their imports, while the converse applies in importing
countries that supply little or no bunker fuel, including
landlocked countries. Revenues from charges on
international maritime fuels could instead be passed to or
retained in developing countries in proportions that
reflect their share in global seaborne trade.
...
1.1.3 Fossil fuel subsidy reform
Many governments in both developed and developing countries
have in place policies that explicitly or implicitly
subsidize the production or consumption of fossil fuels.
Many of these mechanisms effectively subsidize the emission
of carbon dioxide. Reform of these policies would not only
reduce greenhouse gas emissions, it would also improve
economic efficiency and free up scarce public resources -
resources that could be directed to climate finance and to
other public priorities.
The AGF report estimated a potential $3-8 billion in public
finance savings from reform of fossil fuel subsidies in
developed G20 economies. It assumed that all of these
resources could be devoted to public climate finance. This
paper draws on a new OECD inventory of various mechanisms
that effectively support fossil-fuel production or
consumption in 24 OECD countries. Reported fossil fuel
support in OECD Annex II countries estimated using
benchmarks and valuations from the respective governments
amounted to about $40-60 billion per year over the
2005-2010 period. We use the figure of $50 billion as a
benchmark for potential savings from reform of fossil fuel
supports in Annex II countries.28 Not all of these support
mechanisms are inefficient or lead to wasteful consumption,
and, as such, governments may wish to maintain some.
Nevertheless, assuming for illustration that as a result of
reforms 20 percent of the current value of support was
redirected to public climate finance, this would yield on
the order of $10 billion per year.
Systems for fossil fuel support in developed countries are
extraordinarily complex, using a diverse array of
instruments. Governments support energy production in a
number of ways, including by: intervening in markets in a
way that affects costs or prices, transferring funds to
recipients directly, assuming part of their financial risk,
selectively reducing the taxes they would otherwise have to
pay (tax expenditures), and by undercharging for the use of
government-supplied goods or assets. Support to energy
consumption is also provided through several common
channels: price controls intended to regulate the cost of
energy to consumers, direct financial transfers, schemes
designed to provide consumers with rebates on purchases of
energy products, and tax relief.
...
Bearing these caveats in mind, the aggregate of reported
fossil fuel supports in OECD Annex II countries has, as
noted, been running in the range of $40-60 billion in
recent years. In 2010 a little over half of this fossil
fuel support was estimated to be for petroleum, with a
little under a quarter for coal and natural gas
respectively. Viewed by type of support, about two thirds
of total fossil fuel support in 2010 was estimated to be
for consumer support, with a little over 20 percent being
producer support and just over 10 percent general services
support. The evolution of the country estimates underlying
these aggregates reflects some important policy changes.
Germany's decision to phase out support for its domestic
hard-coal industry by the end of 2018 is reflected in a
decline in the value of this support from about EUR 5
billion in 1999 (about 0.24 percent of GDP) to about EUR 2
billion (about 0.09 percent of GDP) in 2009. In the case of
the United States, while total producer support represented
slightly more than $5 billion in 2009 (about 0.04 percent
of GDP), the federal budget for FY2012 proposes to
eliminate a number of tax preferences benefitting fossil
fuels, which could increase revenues by more than $3.6
billion in 2012.
While the primary focus of this discussion is on fossil
fuel subsidy reform in developed economies, it is worth
noting that there is also considerable scope for such
reforms in developing and emerging economies. Such reforms
would have multiple benefits for developing economies,
including improvements in economic efficiency and real
income gains, reduced greenhouse gas emissions and
increased government revenues available for development
purposes. Most relevant from the perspective of climate
finance, such reforms would also improve the overall policy
environment and incentive structure for encouraging private
climate finance flows from developed to developing
countries, a point further elaborated in the discussion
below on leveraging private climate finance.
The IEA estimates that direct subsidies to consumers in
developing countries amounted to $557 billion in 2008 and
$312 billion in 2009 (IEA, 2010). A number of these
countries may also support fossil-fuel production. Using
the ENV-Linkages global general equilibrium model, OECD
analysis projects that phasing-out fossil-fuel consumption
subsidies in emerging and developing countries by 2020
could lead to about a 6 percent reduction in global
greenhouse gas emissions in 2050 compared with a businessas
-usual scenario. The analysis suggests that most
countries or regions would record real income gains and GDP
benefits from unilaterally removing their subsidies to
fossil-fuel consumption, as a result of a more efficient
allocation of resources across sectors. OECD analysis also
suggests that elimination of fossil-fuel subsidies could
lead in 2020 to extra government revenues equal to between
0.5 and 5 percent of GDP in various developing economies.
Experience shows that subsidy reforms are often difficult
to accomplish given political sensitivity to distributional
consequences and concerns about affected industries and
workers. A number of developed and developing countries
have nevertheless made some progress in reforming consumer
and producer fossil fuel subsidies in recent years. In
implementing fossil fuel consumer subsidy reforms,
governments need to consider broader distributional
implications of reform and the need for well targeted
safety net programs to protect the poor and vulnerable, in
addition to providing transparent information about the
expected impacts and incidence of the reform. To make
progress on reform of fossil fuel producer support,
governments may consider assistance for affected firms, for
example to restructure operations, exit the industry or
adopt alternative technologies. Assistance to affected
workers may be part of such packages and could include
initiatives for worker retraining or relocation, or the
provision of incentives to diversify the regional economic
base. In general, it is important that any assistance for
economic restructuring or industry adjustment in response
to subsidy reform be well-targeted, transparent and timebound.
AfricaFocus Bulletin is an independent electronic
publication providing reposted commentary and analysis on
African issues, with a particular focus on U.S. and
international policies. AfricaFocus Bulletin is edited by
William Minter.
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