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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.]

++++++++++++++++++++++end editor's note+++++++++++++++++

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.

AfricaFocus Bulletin can be reached at africafocus@igc.org. Please write to this address to subscribe or unsubscribe to the bulletin, or to suggest material for inclusion. For more information about reposted material, please contact directly the original source mentioned. For a full archive and other resources, see http://www.africafocus.org


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