International Climate Policy & Carbon Markets

Bi-monthly report International Climate Policy & Carbon Markets International Climate Policy and Carbon Markets is a bi-monthly report aimed at used for the analysis will be cited in the final reference section. providing a clear analysis of the worldwide evolution of the carbon market, and the international and domestic climate policies. This issue features an in-depth analysis of For questions and comments please contact CATERINA CRUCIANI - caterina.cruciani@feem.it MARINELLA DAVIDE - marinella.davide@feem.it ALICE FAVERO - alice.favero@feem.it CHIARA ROGATE chiara.rogate@feem.it the main issues that are likely to be debated during the upcoming Conference of Parties to the United Nations Framework Convention on Climate Change, starting in Cancún on November 29. The information and data presented in each section are not only an update of recent events but also an extrapolation of the quantitative implications of recent events, based on a detailed analysis of academic papers and recently published reports (i.e. how the carbon price will be impacted by changes in the energy demand, etc). We will briefly introduce and analyse the most important policies (proposed or applied) and actions. Each article will include boxes, figures and graphs in order to provide in-depth examinations and data GETTING READY FOR CANCÚN FEATURING pp. 2-6: HOT TOPICS IN INTERNATIONAL NEGOTIATIONS UN: climate financing feasible! The Tianjin talks and the legal gaps It s time for REDD+ pp. 7-9: KEY PLAYERS POSITIONS BEFORE CANCÚN The European Union U.S. climate bill: another year lost? Blocs on the rocks pp. 10: REFERENCES exemplifications; all papers and reports Page 1 of 10

HOT TOPICS IN INTERNATIONAL NEGOTIATIONS UN: climate financing feasible! According to a report released on November 5, 2010, delivering US$100 billion per year after 2020 in climate financing to developing countries is feasible through a mix of public and private effort in developed countries. The UN Secretary-General s High-level Advisory Group on Climate Change Financing released a report (Box 1)in which it evaluates the financing potential of the different actors (Box 2) in climate finance. In particular, the report suggests that with an international carbon price in the $20-25 range by 2020, about US$ 30 billion could come from 10% of the allowance auction s revenues in developed countries. Further, US$10 billion could come from carbon pricing in international transportation, such as aviation and shipping, with another US$10 billion coming from redirecting fossil fuel subsidies in developed countries. The private sector plays an important role in the future climate financing. In fact, supposing that the international carbon price is indeed in the range mentioned above, it could generate gross private capital flows in the range of US$100bn-$200bn, with further US$30 billion and US$50 billion from the carbon offset market annually, with BOX 1. KEY METHODOLOGICAL FEATURES [1] ESTIMATION OF REVENUES 1. All public sources estimated at face value 2. Multilateral development bank sources estimated on both a gross and a net basis; 3. Carbon market offset flows measured on a gross basis (i.e. total flows), with indication of net carbon market flows; 4. Private sector financial flows measured as gross international flows (i.e., excluding capital mobilized domestically in developing countries), with indication of net carbon market flows PRICE SCENARIOS Created around three carbon prices for the above sources : a low carbon price (US$15 per tco2); a medium carbon price (US$25 per tco2); and a higher price scenario (US$50 per tco2). The scenarios were built following a literature review of a broad range of models. In particular, the low and medium scenarios are broadly consistent with the Copenhagen Accord pledges that followed the 15th Conference of the Parties to the United Nations Framework Convention on Climate Change, further checked by the Advisory Group by running models made available by some members. The high-price scenario is meant to be an illustrative scenario to test the revenue flows of different sources in a high carbon price context. ( ) that could be seen as consistent with stronger emission reductions, in line with a trajectory consistent with the outcome of a 2- degree rise in global temperatures. The models based to derive these price scenarios are: Framework to Assess International Regimes for differentiation of commitments (FAIR) model of the Netherlands Environmental Assessment Agency; Prospective Outlook on Long-term Energy Systems (POLES) model. Additional sources are: Environment Protection Agency (EPA) on the implementation of the Waxman-Markey bill; US EPA the United States Energy Information Administration s National Energy Modelling System (NEMS); World Energy Outlook 2009; Page 2 of 10

US$10 billion in net transfers. The report also mentions a financial transaction tax levied on banks, but it recognizes that it might be "difficult to implement universally" because of the lack of political acceptability. Last but not the least, multilateral development banks could work as an important multiplier for collecting the remaining revenues: the report estimates that for every $10 billion of additional resources, institutions such as the World Bank could deliver $30- $40 billion in grants and loans, implying a leverage factor between US$3 and US$4 of lending per US$1 of paid-in resources. The Advisory group was set up in February and features heads of state, finance ministers and economists, including financier George Soros and Lord Nicholas Stern. The report concludes that the Advisory Group found that raising US$100 billion per year is challenging but feasible. Now is the time to take decisions. With the Cancún conference just a few days away, decision time might be closer than ever. C.C. BOX 2: CLIMATE FINANCING SOURCES [1] Source: own elaboration from Report of the High-level Advisory Group on Climate Change Financing Page 3 of 10

The Tianjin talks and the legal gaps During the Tianjin Climate Change Talks (4-9 November, 2010) not much progress was achieved on the major hot issues that will be discussed in Cancún: a possible second Kyoto Protocol commitment period; the elements of a long-term agreement; and the legal status of the Copenhagen Accord. As regard the first, within the Ad Hoc Working Group on the Kyoto Protocol (AWG-KP), Parties were not able to agree on the issues of the base year, the length of the second commitment period, and last but not least - the scale of emissions reductions to be achieved by Annex I Parties (the socalled numbers ). While the AWG-KP mandate also includes other issues (like LULUCF and flexible mechanisms), discussions focused on these major topics (particularly on numbers and on transforming pledges into Quantified Emission Limitation and Reduction- QUELROs), with the aim of reducing the pledges options outlined in the text presented by the Chair. Nevertheless, there was no movement on the issue of actual figures In fact, negotiations were obstructed by discussions on the need to clarify rules and legal options before pledges could be translated into QUELROs (e.g. Australia), while other countries (e.g. Bolivia) called for immediate translations affirming that legal matters were outside the AWG-KP mandate (but they are within it). Instead of moving forward, discussions went on questioning the KP Working Group s areas of competence. Together with this, Parties also had to address the potential consequences of a gap phase between the first and a second commitment period for the KP. In fact, the first commitment period of the Kyoto Protocol expires on December 31, 2012, and amendments require a qualified majority and 90 days to come into force (Art.20). This means that even if an agreement is found in Cancún, ¾ Parties will have to submit their instruments of acceptance by the 3 rd of October 2012. If provisions related to a second commitment period are not in force by the 1 st of January 2013, Annex I Parties will not have QUELROs to fulfil; flexible mechanisms could be suspended; and the compliance procedures foreseen by the Kyoto Protocol could not be implemented. While the UNFCCC has already envisaged alternative legal options to streamline the process (e.g. reduction of the required majority; provisional extension of the Kyoto targets), negotiations in Tianjin did not progress, since they mainly focused on whether to create a permanent forum to address potential consequences or use existing channels (such as the national communications). Finally, a second commitment period would not be as ambitious as an agreement on climate change needs to Page 4 of 10

be, since the U.S. will not be part of it (and therefore does not participate in the AWG-KP table); Japan (although it did participate in the first commitment period) already declared its intention not to participate to a second phase; and developing countries (e.g. India and China) are not included in the Annex I list, to which a new commitment would be applied. Concerning the Ad Hoc Working Group on Long-term Cooperative Action (AWG- LCA), Parties were asked to concentrate on what was achievable in the remaining time before Cancún and [to present] a balanced set of decisions to COP 16. Nevertheless, wide differences emerged on the contents of these decisions and, according to many, AWG-LCA made mixed progress subject to different interpretation (e.g. on REDD+) [2]. In particular, divisions were stuck over taking decisions on all elements of the Bali Action Plan. In fact, many developed and developing countries stressed that there will not be any comprehensive agreement until clarity is reached on the issues of mitigation commitments or actions for developed and developing countries; the associated measurement, reporting and verification (MRV) of these actions; and MRV support for developing countries to implement these actions. between, for instance, its targets and financial commitments, and its political character, which does not have the authority to establish legal obligations. The relationship between the Copenhagen Accord and the UNFCCC still constitutes a matter of discussion among Parties. While, for instance, the BASIC group would like to relegate the role of the Copenhagen Accord to an information document, the U.S. and the EU consider the Accord a document on which a long term agreement could be built [2]. The Copenhagen Accord now constitute a third negotiating track, further complicating the AWG-KP/AWG- LCA relationship and the links among agreements. For instance, even if a second commitment period is approved, it could be integrated (or not) into a long- term agreement or the latter could incorporate it without requiring a second Kyoto Protocol phase. After Tianjin hot issue are still on the table. The focus for Cancún seems to have shifted from nothing is agreed until everything is agreed to more realistically achieving enough to send a signal, that is, for many, the contours of what will be further elaborated in 2011 and beyond [3]. C.R. Finally, as regard the Copenhagen Accord, after COP 15 it has fallen into a legal limbo given the contradiction Page 5 of 10

It s time for REDD+ Despite the lack of progress during the last climate talks in Tianjin, it could be foreseen that Parties in Cancùn will translate into a balanced set of decisions some negotiating issues, where consensus can already be reached. One of these is the REDD-Plus mechanism, which will allow for Reduced Emissions from Deforestation and Forest Degradation in developing countries. Notwithstanding that REDD- Plus has been included in the Copenhagen Accord, in Cancún negotiators will need to make several improvements in order to finalize rules around scope, safeguards, finance and methodological matters [4]. Indeed, REDD-Plus has links to several pending issues under negotiation, such as financing sources and Nationally Appropriate Mitigation Actions (NAMAs). As regard to the scope of the REDD-Plus mechanism, Parties have to work to clarify the type of activities to be included (Box 3). In addition, the establishment of reference levels and scale is critical to the measurement of actual carbon removals and carbon benefits. Another key issue is to agree on the rules around safeguards, in order to guarantee that the reduction from reduced deforestation and degradation will be undertaken in a socially responsible and environmentally sound way. In particular, it is widely accepted BOX 3: SCOPE OF REDD- PLUS [4] The type of REDD-Plus activities mentioned by the Copenhagen Accord are: Reducing emissions from deforestation; Reducing emissions from forest degradation; Conservation of forest carbon stocks; Other options proposed by countries during the subsequent negotiations are: Sustainable management of forests; Enhancement of forest carbon stocks. that REDD-plus schemes should take into account forest-dependent communities and include them into decision-making process and sharing of benefits [5]. Equally challenging for negotiators will be to agree on the nature of finance to be available for REDD-Plus activities (either through a carbon market approach or only relying on public funds). In a broader context, finance debate has focused on creating a green fund for all climate activities. To this regard, negotiators will have to decide how REDD-Plus s finance if included in such a fund would be managed and what activities would be prioritized. Finally, one of the most important decisions to take in Cancún would be to extend the Subsidiary Body for Scientific and Technological Advice (SBSTA) mandate to continue research on REDD- Plus methodologies in order to better address this issue. M.D. Page 6 of 10

KEY PLAYERS POSITIONS BEFORE CANCÚN The European Union During the Coucil of European Environment Ministers, on October 14, 2010, the EU reiterated its note of concern for the current pace of climate negotiations, highlighting the need to increase it to avoid a further lack of progress as during the Bonn and Tianjin conferences. Despite calling for an improvement in both its market instruments (for a reform of the Clean Development Mechanisms) and for the introduction of new sectoral or scaled-up mechanisms (such as REDD+), the Council confirmed its support for a second commitment period of the Kyoto Protocol (KP). This confirms its preference for a single legally binding instrument including the essential elements of the KP, building on the Copenhagen Accord. A successor to the KP should be drafted also improving on other issues, such as adaptation, mitigation, technology transfer, capacity-building, agriculture, Measurement, Reporting and Verification (to develop guidelines for a coherent and balanced system) and finance. Regarding mitigation commitments, the EU Council reaffirmed its offer to commit to a 30% reduction target conditional on other developed countries committing themselves to comparable emission reductions, and proposed to continue examining options beyond its current 20% reduction target. The Council reaffirmed the need to agree on global emission reduction targets for international aviation and maritime transport, and reaffirmed the Union s financial commitment to contributing 2.4 billion annually over the period 2010-2012. C.C. TABLE 1. THE EU POSITION BEFORE CANCÚN [6] HOT TOPICS Mitigation Adaptation Flexible mechanisms REDD+ Financing Technology transfer EU POSITION Confirmed 30% reduction target conditional on similar commitments by other developing countries; continued examination of further options beyond 20% target Confirmed urgency, importance and prioritisation of support for countries that are particularly vulnerable to the adverse effects of climate change and the important role of fast-start finance in addressing urgent adaptation and related capacity-building needs of developing countries Need to reform the CDM in order to improve its environmental integrity, efficiency, governance and regional distribution, including use of standardized baselines and enhancement of programmatic approaches. COP 16 should provide a basis for the introduction of new sectoral or other scaled-up market mechanisms Call for the adoption of sound guidelines, rules and modalities for REDD+ actions during COP16, ensuring its environmental integrity Confirmed commitment to provide 2.4 billion annually over the period 2010-2012; commitment to take on fair share of long-term financial commitment (US$100 billion a year by 2020. Establishment of the Copenhagen Green Climate Fund need to promptly operationalize a Climate Technology Centre and Network and a Techology Mechanism to accelerate the development, deployment and diffusion of environmentally safe and sustainable low-carbon technologies in developing countries Page 7 of 10

U.S. climate bill: another year lost? Domestic political events in the United States have certainly effect also beyond national borders. This is the case of the recent Obama failure to endorse a bill to reduce greenhouse gases (GHGs) emissions at the federal level. Indeed, the withdrawal of the bi-partisan Kerry- Lieberman climate bill could undermine the U.S. credibility at the upcoming Conference in Cancún, decreasing the likelihood of reaching an international agreement to tackle climate change. As showed by the past Kyoto Protocol experience, an international agreement would come only if the United States firstly commits to a domestic energy and climate strategy. For the time being, this appears very unlikely as in the U.S. midterm elections, held last November 2010, Republicans won control of the House of Representatives, as well as more seats in the Senate. Among the new Congress members there are also a number of self-proclaimed climate change deniers [7]. This will suspend the debate over climate legislation in the next two years, essentially frustrating the White House's strategy on emission reduction [8]. In general, the preparatory talks, held in 2010, showed that the U.S. negotiating position has not made much progress. Even without the support of a national law, the U.S. target, proposed last year ahead of Copenhagen talks, to reduce emissions 17 % by 2020 compared to 2005 levels, it is still on the table. The U.S. also confirmed the decision not to participate in a second commitment period under the Kyoto Protocol. On the contrary, it pushed for a new binding agreement involving all relevant countries. For this reason, U.S. delegates proposed to use the Copenhagen Accord as a starting point for 2010 negotiations. After developing countries refusal, and the consequently resumption of previous negotiating text, the U.S. participated to the talks with the objective to make progresses in some important issues in order to include them in the Copenhagen Agreement during the Conference of Parties in Cancún [2]. M.D. TABLE 2. U.S. CLIMATE ACTIONS IN 2009 2010 [9] 26 June 2009 31 Jan. 2010 1 April 2010 12 May 2010 14 May 2010 The American Clean Energy and Security Act of 2009 (H.R.2454) also called Waxman-Markey passes in the House of Representatives. U.S. submits to the UN Copenhagen Accord a commitment to cut GHG of 17 % below 2005 levels by 2020 EPA issues regulation for fuel economy of light-duty vehicles that would decrease emissions of new vehicles by approximately 5 % annually from 2012 to 2016. Senators Kerry (D) and Lieberman (I) unveil the American Power Act, a climate bill aiming at gathering bipartisan support (abandoned in August 2010). EPA issues final tailoring rule establishing thresholds for GHG emissions for stationary sources. Page 8 of 10

Blocs on the rocks In her opening address UNFCCC Executive Secretary Christiana Figueres emphasised the need to prevent the world from seeing multilateralism as an endless road. Yet, discussions in Tianjin again featured a strong North/South divide and tensions between China and the U.S. visibly resurfaced. Divisions are blocking progress in the Ad Hoc Working Group on the Long - Term Cooperative Action (AWG-LCA) and the Ad Hoc Working Group on the Kyoto Protocol (AWG-KP). Particularly, most developing countries insist that Annex I countries (or, for some, all developed countries) must engage in a second Kyoto Protocol commitment period, while developed countries would prefer a single agreement under the AWG-LCA including all major emitters [2]. Therefore, any developed countries sign of willingness to make progress under the AWG-LCA is interpreted by developing countries as an attempt to kill the Kyoto Protocol. Remarkably, developing countries were increasingly belonging to blocs, or group of countries (G/77 + China, ALBA, African Group, Arab Group, Least Developing Countries, AOSIS and BASIC), and mainly spoke in their names. In addition, the, BASIC + meeting after the talks, with representatives of all the abovementioned groups, moreover aimed at building common position for developing countries. Developing countries insistence on defining new Annex I commitments (despite the developed countries need to first refine the rules for translating these pledges), hampered negotiations, wasting time in achieving substantive decisions. As much as developing countries will insist on their requirements, a compromise will be impossible to reach. In this context, the transfer of new and additional financial and technology transfers will be key to increasing developed countries credibility and, hopefully, to overcome developing countries mistrust. As regards China and the U.S., tensions mainly revolved on the measurement, reporting and verification (MRV) issue [10]. On the one hand, the U.S. pushed China (and other developing countries) on allowing monitoring and verification of their efforts to curb GHG emissions. On the other, China accused the U.S. of exploiting the MRV issue to avoid its own responsibilities on substantial emission cuts and transferring financial aid and technology to poor developing countries. As Cancún approaches, a turning point in the endless road is not even at the horizon. C.R. Page 9 of 10

REFERENCES [1] United Nations (2010). Report of the Secretary-General s High-level Advisory Group on Climate Change Financing. November 5, 2010. Available at http://www.un.org/wcm/webdav/site/climatechange/shared/documents/agf_repo rts/agf_final_report.pdf [2] IISD (2010). Earth Negotiation Bulletin, Report compilation. October 12 th, 2010, available at http://www.iisd.ca/climate/ccwg12/compilatione.pdf. [3] ibid. and Houser T. (2010). Copenhagen, the accord, and the way forward. Policy Brief 10-5, Peterson Institute for International Economics. [4] World Resource Institute (2010). From Copenhagen to Cancun: Forests and REDD+ at http://www.wri.org/stories/2010/11/copenhagen-cancun-forests-and-redd [5] La Viña A.G.M. (2010). The future of REDD-Plus: Pathways of Convergence for the UNFCCC Negotiations and the Partnership Foundation for International Environmental Law and Development FIELD Working Paper. Available at http://www.field.org.uk/files/field_la_vina_redd_paper_sept_2010.pdf [6] Council of the European Union (2010). Preparations for the 16th session of the Conference of the Parties (COP 16) to the United Nations Framework Convention on Climate Change (UNFCCC) and the 6th session of the Meeting of the Parties to the Kyoto Protocol (CMP 6) (Cancún, 29 November to 10 December 2010) Council conclusions (14957/10). Available at http://register.consilium.europa.eu/pdf/en/10/st14/st14957.en10.pdf [7] US Today (November 25 th, 2010). 2010 Election: Live results at http://www.usatoday.com/news/politics/default.htm [8] The Washington Independent (November 3 rd, 2010) Midterm Wrapup: What the Election Means for Energy and the Environment at http://washingtonindependent.com/102467/midterm-wrapup-what-the-electionmeans-for-energy-and-the-environment [9] World Resource Institute (2010). U.S. Climate Action in 2009-2010 at http://pdf.wri.org/factsheets/factsheet_us_climate_action_in_2009-2010.pdf [10] Associated Press (October 9 th, 2010). U.S.-China Deadlock Dims Climate Talk Prospects at http://www.nytimes.com/2010/10/10/world/asia/10climate.html Page 10 of 10