Published: December 13 2009 23:10 | Last updated: December 13 2009 23:10
The question of how to fund cuts in greenhouse gas emissions has long vexed politicians. Those meeting at the United Nations conference on climate change at Copenhagen are no exception. They, however, have the luxury of ducking the question.
At Copenhagen, no firm decisions are likely to be taken on the details of how to ensure that finance is available, particularly in poor countries, to make the emissions cuts that will have to be laid out in any agreement.
Instead, world leaders are likely to sign up to a headline figure for the future financing required. Rich nations should commit to at least $100bn a year in financial assistance to help poor countries curb their emissions and adapt to the effects of climate change, the UN has suggested.
As part of this agreement, negotiators will draw up a menu of options for how this may be achieved, with the final list likely to be laid out later.
This is possible because it was decided as long ago as September that the conference would not produce a binding legal treaty, but rather a “political deal” that leaders would have to sign but that in the following months would need to be translated into legal language, with many details filled in, before it could be passed into law by national parliaments.
The mechanisms that are laid out will certainly include carbon trading. Most of the funding requirement will have to come from the private sector, and carbon trading offers one of the few ways of achieving such finance flows at a reasonable cost.
“Any treaty must be adequately financed, and since the the bulk of climate finance will flow through the private sector, it’s crucial that carbon markets work,” says Jennifer Haverkamp, climate talks director at the US campaigning group Environmental Defense Fund.
Carbon trading is also regarded as a “flexible” mechanism that can be adapted to benefit nations, regions and communities.
Carbon trading was first set up under the Kyoto protocol. Rich countries can make up part of their emissions-cutting targets by funding projects – such as wind farms or solar power generation – that reduce greenhouse gas output in developing countries. These projects are awarded carbon credits, each representing a tonne of carbon avoided, that can be bought by companies or governments.
Not only should such a system – in theory, at least – produce emissions cuts at the lowest possible cost, it should also benefit the poor countries where the projects are set up, by funding access to technology and infrastructure that such countries could not otherwise afford.
The knock-on benefits to local communities in the developing world are potentially huge – new forms of energy, for instance, that reduce reliance on burning biomass, which causes indoor air pollution, one of the biggest killers of women and children in developing nations.
In practice, however, the Kyoto carbon trading system – known as the clean development mechanism – has brought little benefit to many regions. The bulk of the credits generated have been in China, which arguably has least need of such finance, and the projects have involved the destruction of industrial gases which, although harmful, could have been destroyed at a fraction of the price.
Africa, by contrast, has reaped the least outside investment from the system, though arguably it has the greatest claim on funding.
Other problems have also become apparent since the system – which was designed before 1997, when the Kyoto protocol was signed, but only started up in 2005, when the treaty finally came into effect – has been in operation. The current mechanism is unwieldy, and project developers complain that it can take more than a year to process their applications for credits.
So the current system of carbon trading is scheduled for sweeping reforms that should help to preserve the guiding principles but improve its working in practice.
Lex de Jonge, chairman of the UN’s CDM board, says ways of improving the working of the system include allowing whole categories of projects to be considered as one, instead of having to be awarded credits one by one. “There are ways to improve the operation, to make it much quicker and easier,” he says.
Other options range from the simplest – having more people to oversee the award of credits – to the most radical, such as allowing countries to set targets for cutting their emissions and then awarding large tranches of credits to the government to be made available to fund projects.
Any reforms agreed – probably not until next year – must be laid out in legal language to give investors certainty and clarity. “Carbon markets will need clear rules to give businesses a steady signal to invest in efficiency and low-carbon technologies. Without strong rules, it will be nearly impossible to generate sufficient and sustainable finance,” concludes Ms Haverkamp.
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