Monday, 12 December 2011

Durban Climate Agreement: Gap Period in the International Actions and its Economic Implications

To put the developments of the international climate negotiations in economic jargon: The marginal cost of the climatic damages is much higher than the marginal revenue (progress) of the international negotiations. That said, the results of the climate summit in Durban CoP17 have effectively abolished the opportunity of maintaining the 2 degrees Celsius target.

South Africa, CoP17 host, has administrated the talks using ‘Indaba’process, based on its traditional tribal meetings, to help facilitate transparent and fully inclusive negotiations. On the edge of collapsing, Durban talks resulted in half-baked solutions. Instead of agreeing on a legally-binding treaty effective immediately or by the end of Kyoto period, the negotiators agreed on setting a roadmap to finalise a treaty by 2020. This was satisfactory enough for Europe to maintain its lead in the international climate agenda and commit itself to another period of Kyoto Protocol.

Furthermore, new measures on the REDD+ were agreed upon, which guarantee more markets’ intervention. While the extensive and focused efforts on the Green Climate Fund this year have no clear outcomes. Perhaps, the major achievement under this roadmap is having all major emitters like US, China and India effectively involved in the roadmap toward a legally-binding agreement. Yet this is all dependent on the definition of the legal form of the agreement, which, unsurprisingly, caused the major crisis in the talks during the last few hours of the extended talks on Sunday morning.

Looking back at Copenhagen Agreement, we are just stepping backward. The ambitions set in Copenhagen are looming away. One could suggest that in Copenhagen and Cancun accords countries committed themselves to voluntary targets rather than legally binding ones, which, the latter, is the case now after Durban. However, there were no clear details on how far and how fast will the Parties cut their emissions. Moreover, it’s been well documented by researchers, institutions, environmentalists and economists that postponing the collective international action till 2020 will make meeting the 2 degrees target virtually impossible. This extension will increase the cost of minimising the irreversible climatic damages.

In this article, I intend to report on the negotiation process and the results of the summit. Most importantly, I will provide evidences on the drastic economic implications of postponing the global action until 2020. These evidences are based on estimations by WITCH Model developed by Fondazione Eni Enrico Mattei (FEEM) research institute in Italy.


The Negotiations Process:

The EU has put forward a roadmap proposal calling for a mandate to negotiate a new legally binding treaty on global warming by 2015, covering all major emitters, in return for the bloc signing up to a second period of emissions cuts under the existing Kyoto Protocol architecture. There were also several documents circulated by the UN to propose different pathways for the agreement and the implications of each. The latter documents were meant to guide the discussions on more solid grounds.

In the early days of the conference, many officials considered a meaningful outcome could be achieved on finance. There was high optimism on the ability to launch the fund as an outcome of the talks. The form and shape of the $100 billion fund has been the subject of discussions by a 40-member committee over the past nine months to draft rules to govern the pool of the money. Informal discussions about the fund are being held, following objections by Saudi Arabia, the United States and Venezuela.

The UN document seeks clarifying the sources of the $100 billion Green Climate Fund when the current fast track funding scheme finishes by 2012, and urges higher transparency in aid pledge delivery. This action is being called upon since Copenhagen negotiations with no step forward. One clause in the document called the developed nations to include climate aid in their budgets equivalent to their spending on defence, security and warfare. “It gives them a very good sense what the package is going to look like next week,”Christiana Figueres said. “We see very good progress on a package of measures to do with adaptation. Durban will move forward with adaptation.” She added.

The initial Blueprint for the climate fund was refused by the US, a move that was backed by Saudi Arabia. While the US is after more private sector involvement to raise the climate fund, Saudi Arabia is seeking a compensation scheme for the oil-producing countries. Later on, the US Special Envoy on Climate Change Todd Stern said the United States is “quite committed”to getting the climate fund done at the ongoing climate conference. He also insisted that such fund should be operated under the guidance of the CoP rather than under its authority.

On a related note, Lord Stern suggested that rich economies should stop subsidising the fossil fuel industries. This will facilitate raising the required fund for the developing and developed countries for climate mitigation and adaptation agendas. While the climate fund discussions are focused on the technicalities of channelling the fund, no sufficient discussions aim at the fund raising modalities. He also suggested that cutting the subsidies should be coupled with introducing new levies on international aviation and shipping industries, in addition to loans from international development banks. Moreover, to enhance the impacts of any climate fund, negotiators should agree on setting low interest rates on its related finances and loans. In his article in the Guardian, he put forward sophisticated and innovative mechanisms that not only provide options for raising the climate green funds, but also catalyse on the capital flows.

On the future of Kyoto Protocol, the EU’s proposal for the roadmap has played a key role in the negotiations over the last two weeks. Also, the UN document stressed the urgency of sticking to the 2 degrees target and proposed analysing the 1.5 degrees target by 2015. The main debate on the future of the agreement is still lagging behind the urgency of taking a new action. Developing countries including China and India initially wanted Annex-I countries to continue the efforts on curbing their emission beyond 2012 in a Kyoto-like agreement. While calls from Annex-I countries, led by Russia, Canada and Japan, are still deterring such resolution. Furthermore, the latter countries have officially ruled out the possibility of going into another period of Kyoto Protocol.

A changing tone in the European stance, where they said that they will only sign for further cuts if all polluters backed the “roadmap” in Durban leading to a legally binding agreement in 2015 that would come into force by 2020. The EU has done the most in curbing its emission. However, the carbon prices in the European Emission Trading Scheme were plummeting low. Beside the impacts of the current European crisis, these low prices are results of dysfunctional scheme, as reported by the UBS, where the oversupply trend will carry on till 2025. Connie Hedegaard said that the EU’s roadmap aims for an agreement by the first CoP after 2015, that is December 2016, and then it should come into power by 2020. A Japanese official saw in this date a realistic estimation for a deal to be done.

In a letter by the UK Secretary of State for Energy and Climate Change to the Guardian, Chris Huhne said that UK is in favour for international agreement to be signed straight away, but the reality is that some of the biggest economies are not ready yet. Therefore, the roadmap for an agreement in 2015 is considered to be an achievement in Durban. He also stated that global emissions should peak by 2020 to prevent catastrophic damages. One should wonder how fast and at what costs the emissions cuts should be to reach such peak target.

The BASIC countries (Brazil, South Africa, India and China) took new approach in the talks this year, where they presented themselves as a formal negotiation block. This gave them clear distinction as emerging countries. The Chinese and Brazilian envoys stressed their bitterness that Durban has no potential of extending Kyoto Protocol, which, the Chinese lead negotiator Su Wei, considered as a deviation from an agreement in 2007 where the UN talks set out plans to extend Kyoto. However, he announced during the talks that China may agree to cap its emissions after 2020. This came as alternative option to the calls of reaching the peak of their emissions by 2020. Xu Huaging, a researcher from Energy Research Institute in China, stated that such alternative will be more in line with the urbanisation challenges facing China. Furthermore, referring to various researchers who estimated a sustainable peak of the Chinese emission at 2035-2045, he criticised the 2020 peak scenarios. The Chinese minister stated that they are already doing their fair share, and developed countries are not able to prove that they are up to the speed with China.

Backed by India, China proposed that developing countries should be allowed to submit low targets that are either voluntary or binding on the national level. However, the EU is seeking the establishment of a legal parallelism under which the developing countries take serious actions. In response, the US said that it won’t adopt any new targets without having all polluters, specifically China and India, on board. Early in the second week, China and Brazil agreed to discuss the proposed European roadmap, given that rich nations set their own obligations in a way that corresponds with their capacity and historical responsibility.

The US negative leadership in such negotiation has emerged again in stating that formal legally binding agreement is unnecessary until 2020, claiming that there are multiple ways to reach the 2 degrees target after 2020. Recent studies show that the US emissions have reached a new record level. Scott Barrett, the respective Natural Resource Economics Professor, suggested that prospects for the US to curb its emissions in the near future do not exist. Official from the World Resource Institute said that the new American emission trend will continue on the Business as Usual pathway until at least 2020. Despite the recent rules on fuel efficiency and power plants, more need to be done. As long as the climate-sceptic congress is rejecting any climate-related bill and continue to be more concerned about the American business competitiveness, an international efficient and effective action won’t materialise. It is still unclear how Obama’s pledge of cutting the US emission by 17% by 2020 will be achieved. Canada presented the highest threat to the talks in the first week as unconfirmed reported stated that it will totally withdraw from the Kyoto agreement. Later on, such move was confirmed and its commitment to Kyoto Protocol is officially ended.

In the last few hours, India and group of other countries refused to sign the final form of the roadmap without knowing its details. That ends up with India and the EU setting on one table in the middle of the negotiations hall to work out the language technicalities. Following the Brazilian suggestion, both Parties agreed a road map which states “negotiating a protocol, another legal instrument or an agreed outcome with a legal force”.The roadmap also addressed the need to revisit the currently pledged reduction targets in order to tackle the emissions gap scantiest pointed out last year.

This focus on the wording of the document rather than on the ultimate goal of 2 degrees is the tendencies that overthrew the efficiency of any future climate agreement. Despite the backing of 120 countries and major emitters, the EU couldn’t push its roadmap in its initially proposed shape, as it was facing major objections from China and India.

Other issues were discussed during the two weeks, such as those related to international trade. Countries called for not using greenhouse gas reduction as a justification for trade barriers and tariffs, a reference to the inclusion by the European Union of international aviation in its emissions trading system. Adding to the menu mitigating actions, there were calls for ending the war and weapons production. India requested setting measure for the intellectual property rights. The UN documented has also stress the need for the establishment of an International Climate Court of Justice to hold committed countries to account for their reduction targets.


The Outcomes:

In short, the agreed roadmap for legally binding agreement will be finalised in 2015 and come into power in 2020. Meanwhile, the EU will commit itself to another period of Kyoto agreement. However, this is not to suggest that we will be able to reach the 2 degrees by any means. Also, nations will face higher costs in cutting their emission should they working on cutting them to a responsible level.

Discussions on the Green Climate Fund have again further the modalities and mechanism for administering this fund, yet no details emerged on the sources of the fund itself. Further measure on the REDD+ were agreed upon, which guarantee more markets’ involvements.

If the wording of the roadmap caused such tensions for the last few days, one should be concerned about setting the actual modalities and mechanism to get the roadmap in action. No wonder it will take eight years. On the other hand, given the complexity of articulating the international policy, this period will be essential for nations to design the regulations on the national level and define their targets or the gaps in their current ones.


Gap Period Economic Implications - Findings and Discussion:

A report by the International Energy Agency stated that failing to take a collection action on climate change before 2017 would lock in high carbon global energy infrastructure that would lead to a rise in temperature of 3 degrees or more. Many scientist and economists such as Fatih Birol and Lord Stern saw such move as a collective legacy for failure. In this section, I will provide further evidences on the catastrophic economic impacts of a delayed action using WITCH model.

WITCH Model (World Induced Technical Change Hybrid model), developed by FEEM, introduce a framework to assess different climate policy architectures with respect to four criteria: climate effectiveness, economic efficiency, equity and distributional impacts, and enforceability and feasibility. I used the publicly available Policy Simulator, thanks to FEEM, to compare three scenarios: 1) 640ppm CO2-eq - All technologies and policies: where a global collaborative action on climate change is being taken immediately to secure the 2 degrees target in temperature rise, 2) 535ppm CO2-eq - All technologies and policies: where a global collaborative action on climate change is being taken immediately given that such target will result in a temperature increase up to 3 degrees, and 3) 535ppm CO2-eq - All technologies and policies – Start in 2020: where all parties follow their Business as Usual emission pathways until 2020, when global collaborative action on climate change starts. This scenario will surely result in more than 3 degrees rise. It is worthy to note that in an earlier research, FEEM suggested that it is impossible to attain the 2 degrees target without violating the current geo-political settings. Therefore, the 535ppm CO2-eq is more achievable with loose political constraints.

Comparing the global economic implications of these three scenarios, in 2020 the World GDP per Capita will face losses of -26.21USD if the parties adopted scenario 2 instead of scenario 3. In other words, postponing the action will generate economic benefits by 2020. However, if they adopted scenario 1 instead of scenario 3, then the World GDP per Capita will face losses by only -5.21USD. That said, taking late action in 2020 will result in short term economic gains, yet taking immediate aggressive action won’t affect these gains massively on the short term.

On the long-term, in 2050 the World GDP per Capita will face losses of -60.79USD if the parties adopted scenario 3 instead of scenario 2. Therefore, taking immediate action, even if it was not ambitious enough, will generate long-term gains. Heroic adoption of scenario 1 and in comparison with scenario 3, the World GDP per Capita will be saved from losses of -384.43USD. This is to reflect the huge long-term economic losses that could be saved from taking immediate and bold actions.
Despite whether the underlying assumptions of the model match the exact current circumstance, these figures are just to give an indication of the economic inefficiency of delayed actions, notwithstanding the unequally distributional and intergenerational environmental damages.


The Way Forward:

Whether this negotiation process will deliver a meaningful agreement at some point or not, it is all dependent on the collective political will across the world, which doesn’t seem to be able to intersect on this matter. The perception that any climate action means de-growth and anti development is the dominant pollutant in the climate diplomacy atmosphere.

Those countries with climate mechanisms and modalities in place should move collectively and introduce new trade laws that penalise the laggards like the US. Surely, it easier said than done, if politically feasible at all. But that again get us back to the political collective unwillingness to act on climate change. Perhaps those with national legislation are seeking the immediate popularity with the domestic electorate; knowing that national actions are inefficient due to the carbon leakage. A climate deal will not only avoid future damages, but also it will pave the way for the urgent economic transition toward sustainability.

Bailing out the economy is proving to be a hard task that requires high political intervention and cuts on the public benefits, while bailing out the environment is virtually impossible. It is perfectly rational to start plan channelling the Climate Green Fund based on damages pathway of an increase in the global temperature by 3 degrees or more. The large historical emitters owe the future generations worldwide the responsibility for their carbon-intensive growth. The era of “incremental advances” in the climate negotiation should come to an end in Qatar 2012, CoP18. All major negotiators should stand tall on accelerating the adoption of the Durban Roadmap before 2020.