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

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Climate change international funding for the
global dealTony VenablesUniversity of
OxfordProject Catalyst http//www.project-cata
lyst.info/Climate Works Foundation, supported
by McKinseys- unofficial and independent
support for policy makers negotiators
pre-Copenhagen- lay out facts and generate some
ideas
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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

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1) What must be done
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What must be done 650ppm ? 4o, 550? 3o, 450?
2.5o, 400? 1.8o
Stock flow dynamics
NB currently around 380ppm, increasing 2.5ppm
? 550ppm by 2035
5
17 Gt of emission reductions required for a
450ppm pathway
Gt CO2e per year
Change relative to 1990
17
-7
Change relative to BAU
-28
-50
Source McKinsey Global GHG Abatement Cost Curve
v2.0 Houghton IEA US EPA den Elzen, van
Vuuren Project Catalyst analysis
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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
50
Reduced intensive agriculture conversion
Solar conc.
40
Wind (high penetration)
Organic soil restoration
Biomass
Pastureland afforestation
30
Grassland management
Wind (low penetration)
Reduced deforestation from pastureland conversion
20
Nuclear
Reduced deforestation from slash-and-burn
agriculture conversion
10
0
10
15
20
19 Gt
17 Gt
Rice management
-10
Shift coal new build to gas
Abatement potential Gt CO2e
-20
Electricity from landfill gas
New waste recycling
-30
-40
Cars ICE improvement
-50
-60
Cars aerodynamics improvement
Retrofit building envelope (commercial)
-70
-80
Lighting switch incandescents to LED
(residential)
-90
-100
5
Source McKinsey Global GHG Abatement Cost Curve
v2.0
7
Breakdown by developed/ developing

The Split of the required abatement in 2020 Gt
CO2e, 2020
Abatement receiving additional financing (to meet
incremental costs) from developed world
17
5
9
Abatement in developing countries with negative
cost (NPV positive)
Abatement in developing countries receiving
incremental cost financing from developed world
Abatement feasible in developed countries lt60
/t CO2e
Required abatement for 450ppm pathway
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
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Capital intensity and abatement cost
Size of the bubbleindicates the abate-ment
potentialin each sector
Abatement cost per tCO2e, 2030
30
25
20
Power
Iron and steel
15
Forestry
10
Agriculture
5
Cement
5
75
80
-5
Capital intensity per tCO2e
10
15
20
25
30
-5
Transport
-10
Waste
-15
-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
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From the investor perspective (incl taxes and
higer interest rate)

McKinsey global GHG abatement cost curve
including investor perspective 2020
200
Higher interest rates result in a further
increase in cost for many positive cost levers
150
100
50
0
19
5
10
15
-50
Abatement GtCO2e per year
-100
Inclusion of energy taxes results in a further
reduction in cost for many negative cost levers
Capex subsidies cause a modest price reduction in
Transport Road, Power, Buildings and Waste
-150
Feed-in tariffs cause large reduction in costs in
renewable energy levers in certain regions
-200
-250
Source McKinsey Global GHG Abatement Cost Curve
v2.0
10
Effect of high energy prices (oil price at 120
a barrel)
0
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
100
100
100
50
50
50
50
0
0
0
0
5
40
35
30
25
20
15
10
Abatement potentialGtCO2e per year
-50
-50
-50
-50
Alternative energy measures become cheaper
Energy efficient measures become more profitable
-100
-100
-100
-100
-150
-150
-150
-150
-200
-200
-200
-200
Source Global GHG Abatement Cost Curve v2.0
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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

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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)

Developing country financial requirements,
billion on average p.a. 201020 (excluding
self-financing)
65100
10-20
10-20
5580
5
530
10
55-80
Total financing requirement for developing
countries
Adaptation estimate
Total financ-ing require-ment for abatement in
developing countries
Financing need for technology deployment with
high learning potential
Estimated transaction costs for the whole curve
of 15 per tonne of carbon abated
Additional cost for higher dev-eloping country
financing rate (10)
Required flows for abatement at cost to society
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 15 per tonne billion,
average p.a. 201020
China
1622
Forestry
2031
Rest of Developing Asia
1523
Power
1620
Rest of Africa
57
Industry
610
India
46
Middle East
34
Agriculture
59
Brazil
36
Buildings
12
Rest of Latin America
23
Transport
1
Mexico
1
South Africa
1
Waste
1
Rest of Eastern Europe
Technology
Technology
Total
5580
Total
5580
Source McKinsey Global Cost Curve v2.0, Project
Catalyst analysis
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Breakdown of adaptation cost estimates public
sector only

Average annual adaptation cost 20102020,
billion
Text
2045
1025
015
1015
1020
510
05
1
Net adaptation cost
Discount for co-benefits from other resources
Gross adaptation cost
Social adaptation6
Hard adaptation5
Soft adaptation4
Disaster preparedness insurance3
Preparation, planning2
Investments in knowledge1
Proactive adaptation
1 Based on benchmarking of existing leading
institutions (e.g. NOAA, NASA, Met Office,
CGIAR) 2 Calculated on the basis of costs of
Pilot Programme for Climate Resilience in ten
countries, scaled to all developing
countries 3 Based on Munich Climate Insurance
Initiative proposal 4 Based on annualised NAPA
cost estimates using median NAPA cost to scale
to all developing countries 5 Derived from UNDP
cost estimates for climate proofing
investment 6 Derived from UNDP cost estimates
for social adaptation Source NASA UK Met
Office NOAA CGIAR UNFCCC NAPAs Munich
Climate Insurance Initiative EM-DAT
International Disaster database
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The financing needs ramp up over the 2010-20
period

Developing country financing needs, billion
(annual averages)
90-145
15-30
65-100
10-20
40-55
5-10
75-115
55-80
15-30
35-45
Capacity building
3
Adaptation
3-9
11-17
Mitigation
2015-20
2010-20
2010-15
2010-12
Source McKinsey Global GHG Abatement Cost Curve
v2.0 Project Catalyst analysis
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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
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Sources of funds the arithmetic

Financing needs and sources assuming 25 caps (lt
1990) in developed countries, billion, annual
average 201020 rounded to nearest 5 billion
1015
65100
1020
515
5580
520
1020
4550
48
22-31
Public fiscal revenues
Internat- ional transport levies
Concess-ional debt
Other public and inter-national sources
ETS auction revenues
Carbon market inter-ventions
Direct carbon markets
Total need
Adaptation
Mitigation
ETS markets
Source Project Catalyst analysis
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Public finance needs depend on the cap adopted by
developed countries25 aggregate developed
world cap could deliver 3 Gt of offsets

The Split of the required abatement in 2020 Gt
CO2e, 2020
Abatement receiving additional financing (to meet
incremental costs) from developed world
Required abatement for developed country Under
25 aggregate cap
17
Abatement in developing countries financed
through carbon markets (counting towards
developed country caps)
5
9
3
6
Abatement in developing countries financed
through public finance
Abatement in developing countries with negative
cost (NPV positive)
Abatement in developing countries receiving
incremental cost financing from developed world
Abatement feasible in developed countries lt60
/t CO2e
Required abatement for 450ppm pathway
18
Source McKinsey Global GHG Abatement Cost Curve
v2.0, team analysis
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40 aggregate developed world cap could deliver 6
Gt of offsets

The Split of the required abatement in 2020 Gt
CO2e, 2020
Abatement receiving additional financing (to meet
incremental costs) from developed world
Required abatement for developed country Under
40 aggregate cap
17
Abatement in developing countries financed
through carbon markets (counting towards
developed country caps)
5
9
6
3
Abatement in developing countries financed
through public finance
Abatement in developing countries with negative
cost (NPV positive)
Abatement in developing countries receiving
incremental cost financing from developed world
Abatement feasible in developed countries lt60
/t CO2e
Required abatement for 450ppm pathway
19
Source McKinsey Global GHG Abatement Cost Curve
v2.0, team analysis
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Carbon market intermediation capturing the
surplus

ILLUSTRATIVE
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)
Cost/t CO2e

• 40

20-40

• 30

15-20

• 20

5-20

• 10

• 0

Price paidfor offsets
Cost of abatement
Potential surplus to investors/ Interme- diaries

• 0

• 1,000

• 2,000

• 3,000

• 4,000

• 5,000

• 6,000

Abatement potential Mt CO2e
Source Project Catalyst analysis, UNFCCC
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Link between sources and different ways to
deliver financing
Way to deliver financing
Sources of financing
Offset markets (demand driven by developed
country caps)
Direct carbon markets (ETS) offset purchases
Carbon market interventions (ETS)
Funds (bilateral and international)
Carbon markets (ETS) auction revenues
Government
Public balance sheet/ credit rating
Public fiscal revenues
Other public finance commitments
International maritime and aviation levies
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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

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4) International architecture how to channel
100bn pa?
Issues Allocation between developing
countries? Allocation within developing
countries? Formula based or responsive? Alter
natives could range from World body selecting
projects World body funding sectoral
programmes Countries bidding for funds and
spending as they see fit
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International architecture
Overarching structure
Centralised? UN World Bank Carbon
Bank Decentralised? Existing aid architecture
Criteria Legitimate Accountable Effective
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

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Low Carbon Growth Plans (LCGPs) as a way to
operationalise developing country mitigation and
adaptation actions
Focus Development, mitigation adaptation
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 EU COM/2009/0039
final
Differentiation Both developing developed
Time horizon Long term and short/medium term
Process Support, best practices, review, MRV
Content Priorities, policies/measures and
international support

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Many countries have started designing national
strategies to get onto low-carbon pathways
NOT EXHAUSTIVE
United Kingdom
China
United States

• Building a Low-carbon Economy report released
  in December08
• Contains recommendations on the 2050 emissions
  reduction target (80 relative to 1990)
• Follow up launched in July 2009 Low Carbon
  Tranistion plan

• National Climate Change Program released in
  June07
• Provides a policy framework that outlines actions
  that China will take in the future to address
  climate change

• The Obama plan aims to reduce GHG emissions 80
  below 1990 levels by 2050 through a market-based
  cap and trade system

Mexico

• Special Program on Climate Change (PECC) will be
  launched in 2009
• Includes a voluntary commitment to reduce
  emissions 50 relative to2000 baseline by 2050
• Includes specific short-term and long-term
  initiatives to achieve this

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

India

• National Action Plan on Climate Change launched
  in June08
• Plan identifies eight national missions and
  directs ministries to submit implementation
  plans to the Prime Ministers Council on Climate
  Change
• Ultimate goal is to never reach Annex I level of
  per capital emissions

EU

• European Parliament approved Climate Change Plan
  in Dec08
• Includes three goals - GHG emissions reduction
  20 below 1990 levels by 2020 double the
  renewable electricity generation by 2020 and
  increased use of biofuels

Brazil

• National Plan on Climate Change launched in
  December08
• 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 July08
• Aims to implement three strategic options derived
  from government's long-term mitigation scenario
  analysis

Source Project Catalyst analysis
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Funds global, regional, national? Eg national

• Markets primarily in form of sector programmes,
  plus some sector (no-lose) caps

• Intermediation on supplier and /or demand side

Coordination/Oversight/ Registry for LCGPs UN?
Sources of funding
Delivery
Allocation/aggregation mechanisms
CER,
CER,
Carbon market (sectoral programmatic)
CCGP/LCGP/NAPA
Market ( ETS)
Power, afforestation
Intermediary
Intermediary
Energy efficiency


Contributor trust funds
Recipient trust funds
Public finance
Deforestation, agriculture

Adaptation

Global fund

• 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

• Global fund (20) created for
• Adaptation
• Mitigation action not funded by national
  contributor funds

• Contributor countries provide financing in form
  of cash to contributor funds
• Contributor and recipient funds go through
  matching process

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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.

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