Creating Incentives to Reduce Greenhouse Gas Emissions Post 2012: Options from the Future Actions Dialogue Ned Helme, President Jake Schmidt, International.

Creating Incentives to Reduce Greenhouse Gas Emissions Post 2012: Options from the

Future Actions Dialogue

Ned Helme, PresidentJake Schmidt, International Program Manager

Center for Clean Air Policy******

UNFCCC Dialogue on long-term cooperative action to address climate change by enhancing implementation of the Convention

16 November 2006Nairobi, Kenya

www.ccap.org

About the Center for Clean Air Policy

Founded in 1985, the Center for Clean Air Policy (CCAP) is a recognized world leader in air quality and climate policy and is the only independent, nonprofit think tank working exclusively on those issues at the local, national and international levels.

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Dialogue on Future International Actions to Address Global Climate Change

• Brings together senior climate negotiators from some 15 developed and 15 developing countries and a limited number of companies

• Informal, off-the-record forum to discuss mitigation and adaptation options for a possible post-2012 international framework for climate policy

CCAP produces working papers on options and quantitative analyses (e.g. Brazil, China, India Analysis)

Discussions focus on practicality and implementation

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Future Actions Matrix:Major Elements of the Future Actions

Dialogue

Atmospheric Atmospheric ConcentrationsConcentrations

What global concentrations, by when, and through what combination of national contributions/targets?

EquityEquityOn what basis can we divide responsibility among countries?

Structural Structural OptionsOptions

What policy architecture and mechanisms for reaching concentration goals?

FinancingFinancingWho pays, how much, and for what?

AdaptationAdaptationHow to prepare for climate change?

NegotiationsNegotiationsWhat strategies and process options for reaching

agreement?

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Range of Structural Options Discussed

Developing Country economy-wide GHG intensity targets “Greening Investment Flows” from Multilateral Financial

Institutions, ECAs and the private sector Technology Strategies “Positive Incentives” for Reducing Deforestation

More Stringent Annex I commitments Sector-Based Approaches Sustainable Development Policies and

Measures (SD-PAMs) Sectoral CDM

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DIALOGUE OPTION IN DEPTH PROFILE

Sectoral Approach to Post-2012

GHG Reductions

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Power of Unilateral Actions by Developing Countries

New CCAP study shows: Brazil, China and India are making significant

unilateral GHG reductions based on new policies 70% of these unilateral reductions in Brazil and China

are outside the CDM, 30% in India Unilateral reductions are comparable to those of the

US voluntary intensity program and roughly equal to 40% of EU actions within Europe through 2010

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Sector-Based Approaches-- Advancing Sustainable Development Goals --

Recognizes and encourages unilateral efforts by developing countries to reduce GHG emissions

• Helps produce co-benefits (improved energy security, public health from improved air quality)

• Improves upon the Clean Development Mechanism by encouraging technological innovation

• Helps explicitly mobilize public & private sector technology financing

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What is a Sectoral Approach to Post-2012 GHG Reductions?

• Bottom-up method for encouraging sector-wide actions in developing countries & for deriving economy-wide targets in developed countries

• Based on analysis of what is technologically feasible and economically cost-effective in each industrial sector both globally and in each country

• In each sector, developing countries pledge to achieve a carbon intensity level and are rewarded for beating the target but not punished for falling short

• For Annex I countries, carbon intensity goals are the basic building blocks for the next national tonnage targets

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Establishing the “No-Lose” Sector Target

● A voluntary “no lose” intensity target (e.g., ton CO2 / ton of steel) is established

● Emissions reductions beyond the “voluntary pledge” are eligible for sale

» No penalty for not meeting the pledge

Developing Country’s Contribution to Protecting the Atmosphere

Eligible for Sale

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“Technology Financing and Assistance Package”

To encourage developing countries to take on more aggressive no-lose targets:

• Industrialized countries, International Financial Institutions (IFIs), Export-Credit Agencies (ECAs) provide:

» A package of technology finance and assistance incentives

Designed to encourage demonstration of more expensive innovative technologies like IGCC/CCS

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Government Policies Can Drive Technological Innovation

Source: Schmidt et al. 2006. Sector-Based Approach to the Post-2012 Climate Change Policy Architecture. CCAP Future Actions Dialogue Working Paper.

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Negotiation Process

Negotiation of the program could proceed as follows:

1. Agree on which countries will participate – minimum global coverage needed in each sector

2. Independent agency defines energy intensity benchmark for a given sector as starting point for negotiations

3. Negotiate a GHG intensity using such factors as the energy intensity benchmark, fuel mix, and cost – one for new facilities and one for existing facilities in each sector

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Negotiation Process

4. Link the program to a technology finance package – assistance from tech finance is incentive to stronger pledge levels

5. Link to Annex I target-setting process

6. Agree on how the sectoral approach is linked to trading

CDM continues for countries not involved in the sectoral approach and for all countries in non-industrial sectors.

Countries electing the sectoral approach for key industries still play in CDM in other sectors.

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How Many Developing Countries Need to Play ?

Source: Author’s calculation; see Schmidt et al., 2006

Top 10 developing countries in each sector emit 80-90% of CO2

10

3

9

47

4

10

6

4

2

7

2

0

5

10

15

20

Electricity

Iron & Steel

Chemical & Petrochemical

Aluminum

Cement & Limestone

Paper, Pulp & Printing

Nu

mb

er

of C

ou

ntr

ies

80% of NA1 Sectoral Emissions 90% of NA1 Sectoral Emissions

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Which Sectors Should Be Covered?

Start with electricity and major industrial, internationally competitive sectors

These sectors are roughly 1/3 of developing country (excluding LULUCF) GHG emissions and 1/3 of global emissions

Could expand to auto manufacturing, fuels, appliance standards etc.

Prefer a country-based approach

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Sectoral Approach + Stringent Annex I Targets in 2020 = 550 ppm CO2e

possible

If the six highest-emitting developing countries follow a sectoral approach in three key sectors and:

» EU et al achieve emissions 30% below 1990 levels by 2020» US achieves 1990 emissions level by 2020

Source: Höhne et al., 2005

0

2

4

6

8

10

12

14

16

18

20

1990 2000 2010 2020 2030 2040 2050

Glo

bal C

O2

emis

sion

s (G

tC)

Reference

Strong

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Lessons for International Policy from the Sectoral Approach

Build on developing country unilateral actions

Build targets from the bottom-up

Focus on internationally competitive industries first

Seek industrial level playing field –» Rely on energy intensity benchmarks as starting

point

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Lessons for International Policy

Focus On Information-Rich Sectors where there is less uncertainty

Provide incentive based approach – Encourage developing countries to take actions without penalties

Provide new technology financing» as incentive to deploy new technologies and take

on more aggressive intensity targets» link World Bank Clean Energy Investment

Framework to the international climate policy regime.

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Lessons for International Policy

Build on private sector momentum – harness private sector investment flows

Focus on removing financing and policy barriers in developing countries to cost-effective EE/RE options

Agree on global emissions budget for 2020 consistent with long term atmospheric concentration goals

Agree on more stringent developed country targets for 2020 to set carbon price signal

Creating Incentives to Reduce Greenhouse Gas Emissions Post 2012: Options from the

Future Actions Dialogue

For More Information about the Future Actions Dialogue and

The Sectoral Case Study

Visit: www.ccap.org