Creating Incentives to Reduce Greenhouse Gas Emissions Post 2012: Options from the Future Actions Dialogue Ned Helme, President Jake 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 2006 Nairobi, Kenya

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.

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 l CCAP produces working papers on options and quantitative analyses (e.g. Brazil, China, India Analysis) l Discussions focus on practicality and implementation

Future Actions Matrix: Major Elements of the Future Actions Dialogue Atmospheric Concentrations What global concentrations, by when, and through what combination of national contributions/targets? Equity On what basis can we divide responsibility among countries? Structural Options What policy architecture and mechanisms for reaching concentration goals? Financing Who pays, how much, and for what? Adaptation How to prepare for climate change? Negotiations What strategies and process options for reaching agreement?

Range of Structural Options Discussed l Developing Country economy-wide GHG intensity targets l “Greening Investment Flows” from Multilateral Financial Institutions, ECAs and the private sector l Technology Strategies l “Positive Incentives” for Reducing Deforestation l More Stringent Annex I commitments l Sector-Based Approaches l Sustainable Development Policies and Measures (SD-PAMs) l Sectoral CDM

DIALOGUE OPTION IN DEPTH PROFILE Sectoral Approach to Post-2012 GHG Reductions

Power of Unilateral Actions by Developing Countries New CCAP study shows: l Brazil, China and India are making significant unilateral GHG reductions based on new policies l 70% of these unilateral reductions in Brazil and China are outside the CDM, 30% in India l Unilateral reductions are comparable to those of the US voluntary intensity program and roughly equal to 40% of EU actions within Europe through 2010

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

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

Establishing the “No-Lose” Sector Target ● A voluntary “no lose” intensity target (e.g., ton CO 2 / 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

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

Government Policies Can Drive Technological Innovation Source: Schmidt et al Sector-Based Approach to the Post-2012 Climate Change Policy Architecture. CCAP Future Actions Dialogue Working Paper.

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

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.

How Many Developing Countries Need to Play ? Source: Author’s calculation; see Schmidt et al., 2006 l Top 10 developing countries in each sector emit 80-90% of CO 2

Which Sectors Should Be Covered? l Start with electricity and major industrial, internationally competitive sectors l These sectors are roughly 1/3 of developing country (excluding LULUCF) GHG emissions and 1/3 of global emissions l Could expand to auto manufacturing, fuels, appliance standards etc. l Prefer a country-based approach

Sectoral Approach + Stringent Annex I Targets in 2020 = 550 ppm CO 2e possible l 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

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

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.

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

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