By Michael Liebreich
Bloomberg New Energy Finance
Starting from Monday, the international Climate Change circus will descend on Cancún for the latest attempt at replacing the Kyoto Protocol, which is due to expire in 2012. Last year’s COP15 meeting in Copenhagen ended after two fractious weeks of protests and negotiations, with a document long on commitments but short on details. At Cancún the challenge facing negotiators is to turn the Copenhagen Accord into a binding agreement.
But if a deal could not be done in Copenhagen, it will be even harder this year. Yvo de Boer, the head of the UNFCCC, who did so much to create the sense of urgency around Copenhagen, has moved on. Gone or going soon are many of those who pushed hardest for an agreement in Copenhagen, including Brazil’s President Luiz Inacio Lula da Silva and Britain’s Gordon Brown. Gone is what little support there was in the US Congress for action on climate change.
Not surprisingly, the months since Copenhagen have seen a series of increasingly bad-tempered preparatory sessions. India, supported by much of the developing world, has demanded that any outcome enshrine the Kyoto Protocol, which gave them a free pass on binding commitments; America has refused to consider any framework based on Kyoto, which it feels will cost it jobs. The Chinese have been accused of pulling back from commitments they made in Copenhagen. Europe, having so spectacularly hit the fiscal buffers, has been reduced to the role of bystander.
The new head of the UNFCCC, Christiana Figueres, has spent her first six months talking down expectations and positioning Cancún as something of a reboot of the international process, aiming only for a “mutually agreeable deal to get action started”.
Hopes for progress at Cancún rest on an arcane formula involving carbon prices to reduce deforestation, and on progress towards spending the $30bn earmarked under the Copenhagen Accord to tide the developing world over until 2012 – dubbed in the Copenhagen Accord “Fast Start” funding (with unintentional irony). There may also be agreement on a modest initiative to speed up the transfer of low-carbon technology to the developing world. But of a binding cap on carbon emissions there will be no real sign.
There will also be much discussion of a recent report by the UN Secretary-General’s High-level Advisory Group on Climate Change Financing. This weighty committee of politicians and financiers was charged with figuring out how to meet the Copenhagen Accord’s most ambitious commitment, for the developed world to invest $100bn per year by 2020 in the developing world, to help reduce its emissions and deal with the effects of climate change.
Unfortunately, this committee of experts was unable to agree whether the $100bn was allowed to include private funds, whether it had to be made up only of public money. Nor did they address whether it could be spent in China or not. This did not stop them finding that meeting the target would be “challenging but achievable”, as long as the world adopted a carbon price of at least $20 per tonne, as well as taxes on global aviation and shipping – initiatives that could best be described as quixotic before the US mid-term elections and downright madness after. At least they did not burn all their bridges by backing a Tobin tax on financial transactions.
The irony is that world powers are perfectly prepared to take action on climate change. Over the past six years global investment in clean energy – renewables, energy efficiency and other technologies to reduce emissions – has soared from $46bn to nearly $200bn. This is mainly private money, supported by over 1,500 pieces of legislation around the world in support of low-carbon energy or energy efficiency. Include nuclear power and the number is even bigger.
However, over 90% of this investment has taken place in the developed world or in rapidly-emerging economies such as China and Brazil. It turns out that the countries which are finding it hard to attract climate finance are countries that have under-developed capital markets and poor records on attracting foreign direct investment. And therein lies the $100bn challenge.
Instead of dreaming of a global carbon market or a global tax on financial transactions or trade, ask yourself this: under what terms would you want your pension or tax dollars being invested in infrastructure development in the world’s poorest countries? The answer, of course, is when it is not going to disappear down the plug – and from this observation emerges the germ of a possible solution.
Take the $21bn already being invested annually in clean energy by multilateral and national development banks, according to Bloomberg New Energy Finance’s database. Increase it by as much as fiscal constraints allow. Throw in a sovereign guarantee, underwritten by the same governments that signed the Copenhagen Accord and that reaffirmed their commitment to fighting climate change at this month’s G20 meeting. Mix in some hedging, to protect investors from macroeconomic forces beyond their control. Add a sprinkling of grants to cover the extra cost of clean energy over fossil fuels (a differential which is coming down all the time). Throw in a spoonful of construction insurance, a dash of export trade credit and a pinch of finance from the existing carbon markets. Stir the mixture and get it an investment-grade rating. Smells good? Now the big pension funds are tempted, and we have a chance of generating funds on the scale required.
But why should Western taxpayers underwrite a sovereign guarantee on anything like this scale when the biggest risk is of policy change or expropriation by the recipient countries? Make the acceptance of these very cheap climate funds conditional on an investment treaty – and while you are at it, demand that recipients stop subsidising fossil fuels to compete with the clean energy projects being supported. And don’t build in the sort of complexity around reporting and verification that has bedevilled the carbon markets: all that is needed is a list of clean technologies that qualify for support and the same sort of due diligence as on any other type of project.
Will all developing countries agree to this formula? Absolutely not – but in this vision of the world, who says they need to? To those that do, go the funds. To those that do not – wait and see if there’s a better deal on offer in Cancún. If there is not, then this sort of Coalition of the Committed may be the best way the world can move from rhetoric to action.
A version of this article by Michael Liebreich also appears in Bloomberg BusinessWeek, available on the Bloomberg terminal today and on news-stands from Monday.