Global climate policy reached a turning point at the 2009 Copenhagen conference.

Expectations of a binding global climate treaty were dashed; instead, all major countries made unilateral pledges to cut or restrain their greenhouse gas emissions. In reality, that was probably a more significant outcome than a binding, but weak, agreement — what counts is what countries do, not what they sign up to.

The next conference, Cancun 2010, was of value largely because it ratified the 2009 agreement, which, due to the blocking action of a small number of countries, had been noted but not formally agreed to at Copenhagen.

And so the annual climate conference circus rolls on, this year to Durban, South Africa. What should we expect of Durban?

Two points, often overlooked, need to be kept in mind. The first is that we now have an agreement on the way forward for the world to combat climate change. Countries representing 80 per cent of emissions have signed up to emissions control targets, and developed countries have promised billions in assistance to poorer countries for both mitigation and adaptation. There are still details to be worked out (and there always will be), but it is more than the current framework.

The second point is that we now have a way of regularly updating and developing the agreements already in place. For better or for worse — and one can argue the case both ways — the world has decided, at least for the foreseeable future, not to negotiate a new treaty for climate change. Instead, it depends on the less formal, but also less binding, approach of relying on decisions made at these annual meetings, as they are officially recorded and agreed to by all parties.

These two points imply that there will be no major breakthrough at Durban — because there is no major breakthrough to be had. Successful annual climate change conferences would be those which enable further detailing of agreements already in place, and, increasingly, countries to report on efforts aimed at meeting their self-imposed targets. It is a process of building confidence and trust.

The expectations of many in the media and some in politics are very different. There is no shortage of commentators who want to build up Durban, or rather set it up for failure, by saying that it will be a success only if there is a breakthrough.

Although we should not expect a breakthrough, and should not require one in order to judge Durban as a success, this does not mean Durban cannot fail.

The progress over the last few years has only been possible because disagreements on other issues have been set aside. In particular, there is a fault line in the negotiations between those who want to see a second commitment period for the Kyoto Protocol (a so-called Kyoto II), and those who do not. As the first commitment period (that is, the first period in which countries commit to reduce their emissions) expires in 2012, this issue is pressing.

Developing countries, including the powerful BASIC group (Brazil, South Africa, India and China) want to see a second commitment period. They view the Protocol as the cornerstone of international action on climate change, which should be sustained rather than allowed to fade away.

Those who disagree are largely those to whom the first commitment period applied, namely, the rich countries. The US has not ratified Kyoto. Canada, Japan and Russia did, but have already declared they will not take on a second commitment period. That leaves Europe, Australia and New Zealand. They have not ruled out a second commitment period, but their support is conditional on other major emitters also promising to take on legally binding commitments. There is no sign of this happening.

EU climate commissioner Connie Hedegaard stated recently: ‘Some seem to think that if only Europe took a second commitment period, that would make Durban a big success. The world should not fool itself. It’s only interesting to keep Kyoto alive if somebody is following. Europe represents only 11 per cent of global emissions. What will the other 89 per cent do?’

Europe will only sign onto Kyoto II if other countries follow suit, and agree to sign on to a similarly binding agreement in later years. But there is no sign that either the US or the BASIC countries are willing to make such a commitment. Moreover, Europe faces the possibility of severe recession, and there are even fears that Europe might break apart politically. It seems impossible that the EU would promise to sign on to Kyoto II at this point in time. And without the EU, Kyoto II simply will not happen.

China has signalled preparedness to consider a legal framework for developing-country targets at some point in the future. But this is conditional on Kyoto II and the US taking on legally binding targets. And whether China is prepared to go beyond domestic laws to a binding international treaty is still unknown.

All in all, there are so many ifs and buts that an agreement on Kyoto II is not a likely scenario, nor is it the outcome by which Durban should be judged. The real test for Durban is whether the world can continue to entrench and progress its newfound, bottom-up approach to climate change. This requires Durban to avoid an implosion over disagreements concerning Kyoto’s future and its alternatives. Avoiding this will in itself mean success.

Stephen Howes is Director at the Development Policy Centre, the Australian National University. Frank Jotzo is a Senior Lecturer and Director at the Centre for Climate Economics and Policy, the Australian National University.

Earlier versions of this article appeared here on the Development Policy Blog and here in The Australian

1. Measuring the success of Indonesia’s involvement in Durban
2. Durban climate talks bring mixed results for Indonesia
3. The politically possible: How to achieve success in Copenhagen

Indonesia is among the world’s largest greenhouse gas emitters, and it has committed to cut its carbon footprint.

Can Indonesia achieve its goals, what is its role in the region, and how could developed countries assist?  Indonesia’s government has stood by its emissions target announced at a 2009 G20 summit. Just last week the President stated that he would ‘dedicate the last three years of [his] term as President to deliver enduring results that will sustain and enhance the environment and forests of Indonesia’. But, as always with such ambitious announcements, many observers are doubting how much will actually come of it.

The target is for a 26 per cent reduction relative to business-as-usual at 2020  undertaken by Indonesia unilaterally, and up to 41 per cent with international assistance. This is a substantial undertaking when taken at face value, even in comparison with other major countries. But what it actually means will depend on the definition of the business-as-usual baseline. An earlier government document submitted to the UN assumes fast growth in emissions under a business-as-usual scenario. If chosen as the official baseline, this would make the target less ambitious and affect its international credibility.

The overwhelming share of reductions over the next decade is likely to come from the land sector.  This emphasis is reflected in a list of emissions reductions programs to be initiated and financed by the Indonesian government, announced last month.

But if large-scale and sustained carbon savings are to be made, this must go hand-in-hand with a more holistic approach to land-based industries. Greater emphasis would need to be placed on local environmental factors like watershed protection, local economic development that is socially inclusive, and promoting models of land use that are productive over the long run — not just profitable in the short term. ‘Green growth’ thinking along these lines is evident in some provinces, districts and central government ministries. There is even a new national motto which demands development be ‘pro-growth, pro-poor, pro-jobs and pro-environment’.

But this is set against the strong influence of industry and parts of the government and bureaucracy that have a strong vested interest in the status quo. This difficult political economy is, of course, not unique to Indonesia; it has played out in the US and Australia in recent years, with very different results. What counts on the ground though is economic opportunity and enforcement of laws and regulations. Protecting forests and peatlands, for example, will require substantial financial incentives for businesses and local governments. Reforms to the tax system, along with intergovernmental fiscal transfers tied to environmental outcomes and properly enforced regulatory measures, could achieve this — especially if they are coupled with alternative strategies to promote local economic development.

The longer-term challenge is in Indonesia’s energy system. Industrial energy use, electricity use in public buildings and homes, and transport are all growing rapidly as the country moves up the development ladder. The solution involves a shift from coal to gas, expansion of renewable energy like geothermal power, better energy efficiency and better transport systems. But making the shift requires policy reform that is difficult both technically and politically. Power sector reform has been on the agenda for decades and energy subsidies have, to date, only partially been removed. Copious amounts of additional investment will also be needed: what role can developed countries in the region play in helping Indonesia achieve its goals?

Aid can be important, and plenty of donors are (or want to become) active on climate change in Indonesia. The most promising area for aid is targeted capacity building, helping Indonesia reap the opportunities that arise in policy reform and in access to international funding. Trialling implementation options is also important, for example testing payment schemes for better land management. This carries risks, but could have large returns where successful models are identified. Large scale concessional finance, for example through the World Bank, has a role in facilitating clean energy investments. But the big game down the track could be carbon markets. A number of developed countries will be looking to invest in emissions reductions in developing countries, as part of their own climate change commitments. In most advanced countries, emissions reductions at home — beyond a certain point — will come at a higher cost than cutting emissions in developing countries. Australian annual payments for overseas emissions reductions could be as high as AU$3 billion dollars at 2020, according to government modelling. While the actual amount of market flows could be lower, this figure is in the ballpark of what Australia might commit through its Copenhagen climate financing commitment.

Large flows could also become available from Japan, South Korea, California and elsewhere. It will be natural for these and other countries to turn to Indonesia as a key ‘supplier’ of emissions reductions. But more preparatory work needs to be done in Indonesia before this can happen. Trading emissions reductions across borders requires reliable monitoring, confidence in institutional frameworks, as well as sound policies and consistent implementation. After all, investors will want confidence that they are in fact supporting change. And to the extent that Indonesia is successful in addressing climate change, it gives the country a natural leadership position on the issue in Southeast Asia.

Dr Frank Jotzo is Director at the Centre for Climate Economics and Policy, Crawford School of Economics and Government, the Australian National University.

This is an abridged version of a paper presented at the 2011 Indonesia Update Conference, the Australian National University.

1. An important international climate change funding proposal from China
2. Changing the international climate for global climate change negotiations
3. US: Waxman-Markey Bill changes the landscape of international climate change negotiations

Australia is going to put in place carbon pricing at a level on par with the European Union with a design that could make it a solid foundation for long term policy.

It took five years of political struggle to get to this point, and several leaders of government and opposition lost their jobs in the process. That the most emissions intensive of the developed countries, awash with cheap coal, finally takes this step will send a signal around the globe.

The details of the scheme were released yesterday. It was negotiated between the minority Labor government, the Greens party and two independent parliamentarians, and while some of the political compromises weakened the scheme, others strengthened it.

The scheme will start in mid-2012 with a government-determined price of AUD$23 (USD$25, €17) per tonne of carbon dioxide. It applies to all energy use except private cars and some other categories of transport. The price will rise to $25.40 in 2014–15, then in mid-2015 the scheme converts to emissions trading with a price determined in the market.

The Australian carbon price could, for a while, be the world’s highest. Today’s European emissions trading price equates to $17, down from $23 a month ago on fears of recession and uncertainty about the effects of EU regulation on energy efficiency. The EU price is likely to rise again and the Australian dollar is likely to come down, so by 2015 the international price could again be higher than the Australian price. But markets are not always so predictable.

To help deal with the price uncertainty, there will be a guardrail for the price for at least the first three years. A price floor set at $15 rising at 4 per cent per year plus inflation, and a price ceiling that is $20 above the market price in 2015–16, rising at 5 per cent plus inflation. The price floor helps manage risk for low-carbon investment, and will result in more domestic low-carbon investment. Getting this provision in is a win for the Greens. The price ceiling is very unlikely to be triggered — which is just as well as it would inhibit market operation and international linking.

Linkage to international markets will be crucial for Australia. Achieving any kind of reduction at home in the short term will not be easy in the face of strong underlying emissions growth that partly stems from the rapid expansion of the resources sector. New modeling by the Australian Treasury indicates that almost two thirds of Australia’s overall effort to get a 5 per cent reduction in national net emissions by 2020 relative to 2000 may come from abatement purchased overseas. Although Australia’s scheme is small relative to the European trading scheme, the demand is sizeable in absolute terms.

Where international abatement will be sourced remains to be seen. Existing mechanisms like the Clean Development Mechanism will be eligible, but Australia will probably be looking toward broader and more reliable sources of supply. These could either come on the back of possible new global market mechanisms under the UN climate negotiations, or they might be arranged in bilateral or regional arrangements. In any event, the scheme that is about to be passed sets Australia on the path to becoming a major investor in greenhouse gas reduction programmes in developing countries in the region.

Three aspects of the carbon pricing policy design stand out as lessons other countries may follow on the road to putting a price on carbon.

The first is about the persistence of gifts to industry. When the precursor scheme was floated under Prime Minister Rudd in 2009, government invited industry to stake their claims. Despite advice to the contrary by the Garnaut Review and many other economists, many industries were granted large allocations of free permits — equivalent to government cash subsidies. In some cases these are necessary to preserve a level playing field in international markets, and in many cases they are inevitable for political reasons. But that money then is lacking for other purposes, and the problem is persistence of those subsidies. Australia’s new scheme offers the chance to change the scheme to lower, principles-based allocations of free permits, but whether and when this happens is unclear.

The second is about tax reform. The scheme will give over half the revenue back to households. This is done mostly through a threefold increase in the tax-free threshold for income tax coupled with changes to marginal tax rates, resulting in tax savings for low income earners. That will reduce the macroeconomic cost of the scheme as it improves incentives to participate in the labour force. At the same time, it will create a strong political advantage. Government estimates that one million people will no longer even have to file tax returns.

The third is about independent institutions. An independent Climate Change Authority will advise government on the amount of permits issued under the emissions trading phase of the scheme and other specific aspects of the running and evolution of the scheme. This is similar to the role of the UK Committee on Climate Change. Government will make the decisions, but going against the Authority’s advice could be awkward. Born out of a political impasse between the government and the Greens, this feature could make a big difference in making the scheme stand the test of time in the face of short-term political considerations that tend to preoccupy democratic governments.

Frank Jotzo is Director of the Centre for Climate Economics and Policy at the Australian National University’s Crawford School. He was an advisor to the Garnaut Review.

1. Lessons from the US for strategies to put a price on carbon in Australia
2. Emissions trading scheme or carbon tax: What’s the difference?
3. Australia cans its carbon emission trading scheme, for now

The last two years have seen economic upheaval in the West, and climate change negotiations move along rather different tracks than most anticipated before the 2009 Copenhagen conference.

What are the implications for global climate policy, the Asia Pacific region and Australia? New papers by Australia’s Garnaut Climate Change Review Update released last week attempt to give some answers.

Updated projections of global emissions and their drivers, in the absence of effective mitigation action, are provided in the Review’s Emissions Trends paper. The analysis shows that the global financial crisis and recession in the developed countries in the northern hemisphere did not succeed in giving the atmosphere a break. Despite a short-term dip in growth, the overall growth momentum for global carbon emissions remains almost the same. Global emissions would double between 2005 and 2030 under business-as-usual — this is a measure of the magnitude of the task ahead.

What has changed since the 2008 assessment is the distribution of underlying growth between the developed and the developing world. While Europe’s and America’s growth prospects have been dented, the outlook for rapid economic expansion in the developing world seems even better now than it did three years ago. China continues powering ahead, India is growing at a faster rate than was thought possible just a few years ago, and many other developing countries could follow, entering long periods of sustained fast growth.

Expectations of the future price of oil and other fossil fuels have been revised upward, with a flow-on effect of faster improvements in energy efficiency and a shift away from energy-intensive activities and goods. But this does little to change the overall picture which is dominated by strong economic expansion in the developing world. Under the new business-as-usual scenario, developing countries would account for 70 per cent of the world’s energy-related carbon emissions by 2030.

Actual carbon emissions will, in all likelihood, be substantially lower than in a business-as-usual scenario. That is because many countries have already got climate change mitigation policies in place, and Copenhagen Accord commitments by the major countries — crucially including China — implies substantial extra reductions below a no-action scenario. Countries’ pledges are unilateral and defined in different metrics, and there is no binding global agreement. But still, this new bottom-up approach to international climate policy may well result in substantial action.

The shift in global growth momentum to developing countries suggests, at first glance paradoxically, that developed countries cannot relax in their efforts to curb carbon emissions. Rather, achieving the same global outcome will require the rich world to go lower in their emissions, as the developing world takes up a greater share. This need not cost developed countries more than was anticipated before the global financial crisis, because the underlying growth momentum is less also. In other words, the same level of carbon policy effort in the United States and Europe will now result in lower emission levels than were anticipated in 2008 and earlier.

Australia is in an exceptional position as the only major developed country that escaped the 2009 recession, and with continued strong growth driven in part by mining and gas extraction. Without new policies, energy use and carbon emissions are on a strong upward trend, projected to rise to 24 per cent above 2000 levels by the government’s latest report. This will not serve as an excuse for Australia to go for a more lenient emissions target, but it will mean that additional policy effort is needed to achieve any given target.

In his paper on ‘progress towards effective global action on climate change,’ Ross Garnaut takes a close look at recent and prospective climate policy developments in key countries. He finds strong policy actions and commitments in China. China’s goal to reduce the emissions intensity of its economy by 40 to 45 per cent from 2005 levels by 2020 was ‘opposed by official advisers with responsibility for economic policy, on the grounds that they may be unattainable, or attainable only at unacceptable cost to economic growth,’ Garnaut reports. However, ‘once they had been accepted by the leadership, it became the responsibility of the economic officials to make sure that they were achieved.’ Regulatory approaches have dominated Chinese emissions reduction measures, with authorities closing or constraining energy and emissions intensive plants and industries, and giving fiscal support for renewable and nuclear power, improvements to the power grid, and expansion of high speed rail.

Garnaut reports assurances from top level US officials that the United States is still committed to a substantial emissions reduction objective, despite big political obstacles to early domestic action — notably the failure of proposed federal legislation for a price on carbon. The US commitment is supported by a fall in emissions since 2007 attributable to the recession; new large and cheap sources of gas that can replace high-carbon coal; a surge in investment in low-emissions technologies in response to support through fiscal stimulus packages; a greater role of the Environmental Protection Agency; state-based initiatives to establish emissions trading schemes and emissions-reducing regulations; and by uncertainty about future emissions constraints that have hampered investment in new coal-based power stations.

These international developments mean that the pressure is on for stringent domestic mitigation policies in Australia. Pointedly, Ross Garnaut stated that if Australia ‘ceased being a drag’ on international climate action, this would already be a significant improvement. Australia may be small but it is one of only a small number of significant developed country players in the global climate change arena, and what Australia does or does not do is noted internationally.

The Australian government, working through the Multi-Party Committee on Climate Change, is preparing for the introduction of carbon pricing as the central plank of mitigation policy. But investing in mitigation action overseas will very likely have to be part of the equation, if Australia is to meet a reduction target in its stated range between 5 and 25 per cent (at 2020 relative to 2000 levels). Other developed countries may also find that compliance with their national emissions targets requires the purchase of permits internationally. Typically permits would be sourced from developing countries.

Yet as the Garnaut Update notes, it is possible that there will be a ‘long transitional period before there is comprehensive binding international agreement.’ How can international emissions trading take place without a binding global agreement and without universal rules for international permit trading?

The answer may well lie in bilateral or regional trade. Arrangements between countries that have existing economic and political relationships, and that complement each other as prospective buyers and sellers of emissions permits, would be an obvious way to realise gains from trade. And Ross Garnaut argues that regional trading schemes could become much more than a stop-gap measure: ‘If carefully structured, they can become building blocks for a genuinely open global trading system.’

In the Asia Pacific region, a number of potential partners can be readily identified. Setting aside the United States and China, which at this stage seem more likely to pursue their own agenda, countries in the Asia Pacific that have pledged emissions targets under the Copenhagen Accord include Japan, South Korea, Indonesia, Australia and New Zealand. It would only be logical for these and other countries to explore the options for regional climate policy alliances.

Frank Jotzo is Director of the Centre for Climate Economics and Policy at the Crawford School of Economics and Government at the Australian National University. He advised the Garnaut Review 2011 Update on its papers two (international) and three (emissions trends).

1. Financial crisis driving emissions up or down?
2. Climate change policy resurrected in Australia
3. Managing China’s per capita carbon emissions

Climate change policy is alive again in Australia. Prime Minister Gillard has committed to introduce a carbon price during the current term of government. A Multi-Party Committee on Climate Change is at work, and an update to the Garnaut Review takes a fresh look at some of the tough issues facing the world and Australia in getting good climate policy off the ground.

Getting carbon pricing off the ground may seem a tall order after the attempt of the previous government under Kevin Rudd  to introduce emissions trading failed among a collapsed deal with the opposition (whose leader Malcolm Turnbull was deposed over the issue), considering that the current government’s needs rely on votes by Independents and the Greens to get any legislation through Parliament, and in the context of setbacks in US climate policy and widespread (if largely misplaced) disappointment with the international climate negotiations.

And yet, this time the stars may come into alignment. Action on climate change is important to the independent members of Parliament who elevated it to a headline issue in their deal to support the government, as well as to the Greens who will be casting the deciding votes in the Senate from the middle of the year. Key sticking points that need to be resolved include

• how to bridge the gulf between the government and the Greens on Australia’s emissions target;
• how to design carbon pricing, given the target debate, uncertainty about international emissions trading opportunities, and calls by industry for price certainty;
• how to square the competing demands for revenue from carbon pricing; and
• how to comprehensively engage the rural sector.

For the target, the pragmatic solution may turn out to be deferring the decision, although the Copenhagen pledges by major countries suggest a target for Australia that is more ambitious than the government’s current commitment yet less than the Greens’ demand. For carbon pricing design, a fixed-price permit system that allows a later shift to market trading, as suggested by the 2008 Garnaut Review, is receiving increasing support.

A more fundamental question for Australian policymaking over the last two decades has been whether decisive action on climate change is in Australia’s interest, and whether Australia should lead or lag the global effort. Australia is in a unique position, given it is a large exporter of carbon-intensive energy and so stands to lose from global climate action, but is also extremely vulnerable to climate change including extreme weather events that result in flooding or bushfires.

The Garnaut Review’s first Update paper, released this week, reinforces the conclusion from the 2008 Review that strong global climate action is in Australia’s interests, because the benefits from avoided climate change outweigh the costs.

The paper is the curtain raiser for a series of eight topical Update reports to be released over February and March, tackling the issues of the international mitigation framework, global emissions trends after the financial crisis, carbon sequestration in agriculture and forestry, the latest in climate change science, how to reduce Australia’s emissions, the role of innovation, and transformation of the electricity sector.

The papers are written from an Australian perspective, but the issues are relevant elsewhere in the world. They will help inform policy makers in the Asia Pacific region and beyond — as can the actual outcome from Australia’s fresh go at climate policy.

Frank Jotzo is Director of the Centre for Climate Economics and Policy at the Crawford School of Economics and Government at the Australian National University. He advises the Garnaut Review Update.

1. Ross Garnaut at the Australia-China Climate Change Forum
2. Garnaut on climate change; Japanese agriculture – Weekly editorial
3. Regional movement on the global problem of climate change

Under the Copenhagen Climate Accord, developed countries pledged to mobilise funds of US$30 billion between 2010 and 2012, and US$100 billion a year in climate finance by 2020, to support climate change action in developing countries. This compares to global Official Development Assistance (ODA) in 2009 of around US$120 billion, and some assessments indicating needs could be considerably higher. One of the big questions is how to raise the money. The UN High-level Advisory Group on Climate Change Financing (AGF) last Friday reported on the issue, concluding that meeting the $100 billion a year goal is ‘challenging but feasible’.

The AGF sensibly supports using a mix of revenues to meet the goal rather than a single instrument. It places heavy emphasis on carbon pricing and carbon markets, supports new instruments like transport levies but is guarded on proposals for a global financial transaction tax, and it foreshadows continued reliance on contributions from national budgets.

In doing so, it shows just how difficult the task could be: if carbon pricing were to remain limited, then greater contributions from national budgets will be needed, but these can be fickle and it is difficult to verify that aid is not simply being diverted. And the alternative of financial transaction taxes, favoured by many NGOs, clearly faces an uphill battle.

The AGF report aims primarily to inform the UN climate negotiations commencing later this month in Cancún. Its findings could help galvanise current initiatives within and outside the climate negotiations on international transport emissions. Equally, the report’s analysis is relevant for national policymaking, as it will likely be up to national governments to come up with a significant share of the total, using their own chosen revenue sources and instruments.   At the same time, many of the issues the AGF has grappled with may only be resolved through longer-term negotiation, and the AGF’s ability to recommend a clear set of options appears to have been constrained by pressure points in the negotiations.

As headline numbers, the report finds that revenue from carbon pricing in developed countries could mobilise US$30 billion annually; a carbon levy or emissions trading scheme for international transport US$10 billion; up to US$10 billion from redeploying fossil fuel subsidies in developed countries or “some form of financial transaction tax”; US$10-$20 billion net transfers associated with private capital flows of US$100-200 billion facilitated by developed country interventions; US$10 billion in net transfers from carbon offset markets from $30-$50 billion gross flows; US$11 billion net from multilateral development banks translating to US$30-40 billion gross capital flows; and the likelihood of direct contributions from developed countries’ budgets to help cover the remaining funding gap.

A systemic perspective

It is not as simple as picking and choosing from these to make up the US$100 billion. The AGF argues that a systemic perspective is needed to make the most of complementarities between sources – for example using public finance to leverage private investment – and to avoid problems such as double-counting or taxing the same activities twice. However, the AGF’s ability to maintain a systemic perspective was limited by one of the major faultlines in the financing negotiations: whether the climate finance goal should be raised primarily through public sources (as argued by developing countries) or private sources (as argued by developed countries), and whether gross or only net flows should be accounted for (see this ODI post).

As a result, the AGF supports a loose array of public and private instruments that together could meet the goal. As Bob McMullan, the only member of the panel from Australia, has pointed out, ‘It is a menu of options, rather than a blueprint’.

The flexibility provided by this approach will no doubt be beneficial for negotiators and policymakers, but it also means that there is no straightforward package. To run with the culinary analogy, for many instruments on the menu it’s hard to tell whether they should be classed as entrées or mains. Developing agreed methodologies for counting climate finance will be a major challenge for the transparency of future financing arrangements. Much further analysis will be needed to better understand the connections and tradeoffs among sources, and how the global menu of options might translate into practice for any specific developed country. Nevertheless, the report’s analysis should at least help move the debate beyond the somewhat simplistic opposition between public and private sources.

The central role of carbon pricing

The AGF emphasises that robust carbon pricing will be key to raising adequate funds. The report estimates that with a carbon price of around US$20-$25 per ton of CO₂ equivalent, around $30 billion a year could be raised annually from either carbon taxes or auctioning of allowances under emissions trading schemes. No global carbon market or internationally coordinated scheme would be needed. Rather, national governments could earmark funds from their own domestic schemes. Therefore, funds could be generated quite soon, independent of progress in the climate negotiations.

However, in the United States nationwide carbon pricing is off the agenda in the short to medium term, and proposals for carbon pricing policies in some other major potential contributing countries remain deadlocked or on the drawing board. The AGF is right to strongly support carbon pricing, which in most cases will be the cost-effective option to raise revenue as well as cut emissions. However, if carbon pricing remains patchy, or if countries insist on quarantining all revenue for domestic purposes, this could severely hamper the chances of reaching the $100 billion goal under the AGF’s model (a similar concern is expressed here).

Innovative mechanisms

The AGF takes into account proposed new mechanisms that have figured prominently in the climate financing debate, such as a financial transaction tax (FTT), or carbon levies on international sea and air transportation. The report supports transport levies, along with redirecting governments’ fossil fuel subsidies towards climate finance. Some assumptions about the revenue that could be raised from these innovative sources are on the conservative side, for example the assumptions that only a quarter to half of revenue from transport schemes be earmarked for and that there be no net incidence on any developing countries. They may have greater potential to counteract the downsides of some other instruments.

The only innovative mechanisms that the AGF explicitly rules out are a ‘carbon export minimisation tax’ (taxes imposed by developing countries on their emissions-intensive exports to developed countries that have carbon prices), and a fund based on the International Monetary Fund’s Special Drawing Rights. Both are ruled out because they would likely impose burdens on developing countries and have limited political acceptability. The same disadvantages are cited for FTTs, which the report stops short of ruling out altogether, although the Brookings Institution suggests that it amounts to as much (at least for a global FTT), given concerns whether enough countries could participate to make it efficient and sustainable.

Direct budget contributions

Despite the diversity of possible financing sources on the menu, the report anticipates that direct budget contributions from national governments ‘will play a key role in the long term’, even though budgets remain extremely tight in the developed world at this time. If budget finance becomes and remains an important part of the mix, this is likely to have significant implications for ‘additionality’ in the financing negotiations.

It is reasonably straightforward to establish that new mechanisms are additional to what would have happened anyway. The same cannot be said for flows from national budgets, where there is always a temptation to cut aid (or reduce increases in aid) to pay for climate change transfers. Transparency in climate change funding may then hinge on striking international agreement on a useful and practicable interpretation of additionality, as well as working out whether contributions should be based on emissions, capacity to pay or a combination of both – a daunting prospect indeed. On-budget contributions are also notoriously fickle as they are largely at the discretion of the government of the day.

Many had hoped that the new climate funds could be exclusively raised through new mechanisms, providing a stable source of funding, and that the additionality problem would go away. If the AGF is right, then such hopes are largely misplaced, and getting to US$100 billion could be a tricky process indeed, but given the stakes for developing countries, it’s a challenge that needs to be met.

Jonathan Pickering is a PhD student working on climate and development ethics at the ANU, based in the Centre for Applied Philosophy and Public Ethics (CAPPE). Frank Jotzo is Director of the Centre for Climate Economics & Policy at the ANU Crawford School.

This article was first published here at the Development Policy blog.

1. Indonesia climate green paper: towards carbon pricing, geothermal power and regional incentives
2. Finance and climate: impossible to solve one crisis without the other
3. How might China achieve its 2020 emissions target?

The Copenhagen climate conference and subsequent developments have made it clear that a legally binding international climate agreement is out of reach for the time being. But the Copenhagen Accord outcome delivered on something that until then seemed unattainable: unilateral commitments by all major emitters to cut or constrain their greenhouse gas emissions over the next decade.

Whether this is a viable basis for global climate policy in the medium term depends on whether countries will follow through with domestic policies for implementation, and that in turn depends on whether countries’ targets are seen to be mutually compatible in their ambition. Reassurance that any one country is not going it alone is particularly important as we move into a ‘bottom-up’ approach to international climate policy, as Stephen Howes argued is inevitable.

In recent analysis released, I put the Copenhagen targets of the thirteen largest emitters on a common footing. The results give reason for optimism, because the pledges by most major countries imply significant effort, including in China and in a number of other large developing countries.

Countries have framed their commitments in different terms. Developed countries have expressed their targets as reductions in absolute emissions, but have chosen different base years. China and India have pledged a reduction in emissions intensity (the ratio of carbon emissions to GDP), while Brazil, Indonesia, South Africa, Mexico, South Korea and others have pledged percentage reductions in emissions relative to business-as-usual scenarios.

Translating all countries’ targets into changes in absolute emissions levels shows that growth in emissions would continue in China, India and some other fast-growing countries, while decreases would occur in most developed countries and, notably, in several developing and industrialising countries – provided reasonable business-as-usual scenarios are applied. The differences are driven to a large extent by differing prospects for economic growth and structural change, differing levels of development, as well as differing emissions profiles.

The differences are much smaller when looking at change in emissions per capita. A number of countries that are substantially below the developed country average per capita emissions levels – and far below North America and Australia – are targeting sizeable reductions in their own per capita emissions.

Taking the Chinese and Indian perspective and converting countries’ targets to change in emissions intensity of GDP reveals a striking result: the Copenhagen targets imply remarkably similar reductions across countries. The percentage cuts in emissions intensity in the United States, European Union, Japan and other advanced countries are all in almost the same range as the Chinese target of reducing emissions intensity by 40-45 per cent from 2005 to 2020. The intensity metric is important, as it directly reflects the ultimate aim of climate change mitigation policy – to achieve economic growth with fewer and fewer greenhouse gas emissions.

Targets can also be compared in terms of the deviation from business-as-usual baselines, the metric chosen by a number of developing and industrializing countries. Business-as-usual numbers are by nature contestable, as they are counterfactual scenarios. But a consistent set of assumptions applied to the major countries again shows remarkably similar targets across the majority of large countries. The average targeted reduction relative to business-as-usual for the major developing countries is the same as for the developed country average, at around one quarter. This would mean that developing countries account for the majority of overall pledged reductions globally.

The prerequisite is that the developing countries choose realistic baseline numbers to apply to their percentage targets, and resist temptation to inflate their business-as-usual trajectories. Visible action to curb greenhouse gas emissions in developed countries will help in this regard, as will independent analysis of all countries’ pledges.

A pivotal question for global climate policy is what ambition is implied by China’s pledge. My analysis shows that this pledge is in line with the targets by the major developed countries including the United States, both in terms of emissions intensity and relative to business-as-usual. Studies using other methodologies come to similar conclusions, for example Warwick McKibbin and colleagues who in addition model required carbon prices and economic costs of meeting some countries’ targets. This is in contrast to some earlier claims that China’s target implies little effort. Such results typically refer to projections that already assume significant policy action directed at lowering emissions intensity.

Reaching China’s target will require replication of reduction rates achieved during the reforms of the 1990s which did away with much energy waste, and which were followed by increases during the early 2000s. The difficulties in achieving China’s 2005-2010 target to cut energy intensity of its economy is another indication that the 2020 target will require strong effort. The Chinese leadership has given strong indications that the pledge is being taken seriously, and policies to promote low-carbon energy sources, to improve energy efficiency and to shut down inefficient industrial plants are being strengthened.

In short, the Copenhagen pledges by developing countries go much further than what was generally expected just a few years ago. They imply meaningful ambition, and are comparable with developed country targets in important dimensions. And importantly, as was evident from the recent Asia Climate Change Policy Forum, key countries are preparing for implementation of their targets, quite independently of stalemate in the UN climate negotiations.

The upshot for developed countries is that presumed inaction by developing countries can no longer be an excuse for delaying their own mitigation action. A case can be made that both the EU and Australia should move to a more ambitious position within their stated range of emission targets, based on the pledges made by other countries – and other developed countries will find little justification internationally for backsliding on their Copenhagen targets.

See related articles: 1, 2, 3, 4 and 5

Frank Jotzo is Director of the Centre for Climate Economics & Policy at the Australian National University’s Crawford School of Economics and Government.

1. What China really delivered at Copenhagen
2. Comparing key proposals for climate change mitigation
3. The politics of climate change: Waiting for Copenhagen

If the government is re-elected, can it deliver a carbon price for Australia? Prime Minister Julia Gillard has flagged that a consensus about climate action needs to be reached first. A broad community consensus of this kind existed about two years ago, then it eroded amid a global campaign against the science of climate change, disappointment about Copenhagen, confusion about emissions trading, and political mud-slinging. But there is a clear way forward.

The temptation for the Gillard government might be to announce some climate projects before the election, and go slow on the issue after the election. But that would fail the country on a long-term issue that simply will not go away, and would guarantee political pain if the Greens hold the balance of power in the Senate, as is highly likely.

Policymakers, economists, industry and environmentalists all broadly agree that Australia needs to move to a lower emissions trajectory, and that the single-most important tool is to put a price on carbon emissions. And there is increasing realisation that our collective Copenhagen hangover stems mostly from overblown expectations and misperceptions. In particular, the mistaken notion that China is not doing anything has been put to rest with an ambitious target to cut the carbon intensity of China’s economy.

US President Barack Obama has been facing an uphill battle on emissions trading, but still it is likely there will be federal US legislation to cut carbon emissions, in addition to the policies already in place in many states. And emissions trading itself is far from dead, with the EU pushing on, New Zealand just having introduced it, and other countries preparing it.

Australian industry has been factoring in for years that there will eventually be a price on carbon. Most industry players want an end to policy uncertainty. Industry fought hard over the carbon pollution reduction scheme, but just like with the mining tax, the fight is over the rules and over who pays how much, not over the need for reform itself.

Amid the wrangling with business, the government failed to explain its scheme to the public, but made ever more concessions to emitters. NGOs, think tanks and universities also missed the mark, spending most of their effort arguing over nuances rather than explaining fundamentals. Add to that the fact that both major parties used climate policy as a political wedge, and it is easy to see why public support for the scheme evaporated.

The next government has the chance to cut through the confusion and complexity of the scheme, and make a start with a simpler way of pricing carbon. There are several ways of doing this, including charging a carbon tax to large emitters, or at the point of production or import of coal, gas and oil. And there is a middle way between the carbon pollution reduction scheme and a carbon tax. It is to use the basic building blocks of the emissions trading system, but bring it online with a predetermined (and rising) carbon price. ”Fixed-price emissions trading” along these lines was proposed by Ross Garnaut as a viable second-best option, and it is now supported by the Greens. It gives certainty about carbon prices in the near term, and allows shifting to a fully market-based system down the track, without the need to then begin a completely new system. And it could be implemented quickly.

The next government will also have the chance to revisit industry assistance, and to allocate more of the revenue to consumers rather than shareholders – which would be in line with Gillard’s emphasis on fairness and economic opportunity for all.

If the Coalition wins the election, then carbon pricing is ostensibly off the agenda. But despite the ”great new tax on everything” rhetoric, it is a fair guess that a Coalition government would not be able to escape the logic of carbon pricing for long. It is worth remembering that the Howard government supported emissions trading during its last year in office.

Both major parties have endorsed a 5 per cent cut in emissions from 2000 to 2020, with the possibility of cuts up to 25 per cent. The emissions targets other countries have put on the table at Copenhagen imply Australia should move to a target of around 15 per cent, according to the government’s criteria submitted to the international community. Achieving those kinds of reductions will mean a bigger effort than many people think, because Australia’s economic and population growth means the underlying carbon trend is up.

A range of policies will be needed to turn around Australia’s emissions trajectory, including support for the development of clean energy and the deployment of renewables, standards for energy efficiency, research and regulation to retain more carbon in forests and soils, and investment in cutting emissions in developing countries such as Indonesia.

But carbon pricing is the central plank of any viable strategy to cut carbon throughout the economy and to do it without unnecessary cost. Consensus on that is all but inevitable. But it will take some political will.

This article originally appeared in The Age here.

Frank Jotzo is fellow at the Australian National University Crawford School of Economics and Government and deputy director of the ANU Climate Change Institute. He was economic advisor to the Garnaut Climate Change Review.

1. Tiddlywinks on climate change
2. Climate change policy resurrected in Australia
3. Regional movement on the global problem of climate change

China has pledged to reduce the emissions intensity of its economy (tonnes of CO2 per yuan) by 40-45 per cent from 2005 to 2020. It seems that the Chinese government is serious about this target, and it is fair to expect that China will strive to meet the targeted reductions. In fact, the expectation among observers in Beijing is that the 12th Five Year Plan, which is under development now, will contain a 2015 emissions intensity target as a half-way mark. But how will China go about trying to meet it?

First up, it is important to note that effort will be needed to achieve the target. Some observers claim the target is ‘not much different from the efficiency improvements that they would probably be achieving anyway’, but this is unlikely to be so. Bringing emissions intensity down by those rates will require substantial policy efforts by China, as shown here and here.

The fact that, despite a number of policies in place to curb energy use, China is struggling to meet its current target to reduce energy intensity of the economy by 20 per cent from 2005-2010, is another indication of the ambition inherent in the 2020 target. And the amount of carbon emitted per unit of total energy supply has kept increasing, according to IEA estimates for the years to 2007.

It is often thought that China has a detailed policy blueprint ready to meet its 2020 target. But a different scenario is that the target was determined at a high political level, perhaps with technical analysis to back it up, but without a detailed roadmap for policy. The challenge then is to work out the policy settings – and the clock is ticking.

A crucial question is what role carbon pricing, probably by way of a carbon tax, might play. It would generally be the most cost-effective instrument to dampen carbon emissions growth, as it can be applied comprehensively and create uniform incentives to cut energy use and switch to low-carbon alternatives, and the carbon tax revenue can be used to assist households and industry where need be, and to raise revenue if governments desire. But recent experience in the United States and Australia shows just how politically difficult carbon pricing is, and how political pressures and public perceptions can work in favour of less efficient regulatory policies.

China, despite its very different political system, might well face similar pressures. It would be a new concept to levy a tax predominantly to discourage consumption and implement it in a largely revenue-neutral fashion. By contrast, there is a strong tradition of specific interventions, such as the administrative closure of specific types of plants or levies on specific products and processes. Such measures can be quite effective, but they tend to be patchy and will cause higher, possibly much higher costs to achieve the same aggregate outcome in terms of carbon emissions reductions.

The regional dimension of energy and climate policy could also become important. There is an anticipation that the 2020 target (and possibly a 2015 interim target) will be disaggregated and differentiated between China’s 33 provinces, administrative regions and municipalities. If so, then some important and possibly sensitive decisions will have to be made about which region is expected to do how much. Views about what is the right target differentiation between provinces could diverge greatly, on the basis of differing technical and economic opportunities to curb emissions, and highly disparate levels of development across China. Even decisions about which policy instruments to use could potentially be devolved to the Province level.

Finally, the question of transparency of commitments and actions, which was a major stumbling block in the Copenhagen talks, is unlikely to go away. It is unrealistic to expect China to sign up to an international system of ‘monitoring, reporting and verification’ of emissions if this is seen by China as intrusive in its domestic affairs. But by the same token, the international community needs to be able to have trust in China’s accounting. The current apparent lack of clarity about data on progress towards the 2010 energy intensity target illustrates that there is some distance to travel yet on transparency. For the world to have trust in China’s future reporting on how it is tracking toward its 2020 target, robust data will be needed on both carbon emissions and GDP.

Frank Jotzo is an environmental economist, Senior Lecturer at the ANU Crawford School, and deputy director of the ANU Climate Change Institute.

1. China’s energy intensity target: On-track or off?
2. Financial crisis driving emissions up or down?
3. What China really delivered at Copenhagen

China has been portrayed as the Copenhagen spoiler for its hard stance in the finale of the UN climate negotiations. China only reluctantly agreed to some transparency on  emissions accounting, reportedly insisted on numbers for emissions targets being taken out of the Copenhagen Accord, and demonstrated its strength in various ways that did not please some (mainly Western) countries.

But what really matters is what commitments it made for emissions reductions and the policies to implement them.

China has committed to lower the emissions intensity of its economy (carbon per real yuan) by between 40 to 45 per cent from 2005 to 2020. This would be a big reduction below reasonable scenarios of what would happen under business-as-usual. Based on analysis of China’s prospects for economic growth, energy and carbon intensity over the next decade, done for the Garnaut Review, China’s emissions would come in 25 per cent lower under this target than if no action was taken to constrain them.

China’s carbon emissions would still almost double between 2005 and 2020, and make them twice the size of America’s. But on a per person basis they would remain below those in Europe, and be only half the US or Australian per capita levels.

The cut would be substantially bigger than what China would be required to do as its fair share of global action as defined by the Garnaut Review, even for an ambitious agreement. The Chinese emissions intensity reduction target is in fact similar to annual emissions intensity reductions envisaged in the Review. But it starts much earlier, in 2005 rather than in 2013, and this makes a large difference by 2020.

In terms of the absolute amount reduced below business-as-usual, China’s effort would be larger than America’s proposed cut, and would far exceed the absolute contributions committed to by Europe and Japan. This is of course a reflection of the size and underlying growth of China’s economy and carbon output, but also a measure of the ambition of the policy action.

The upshot is that developed countries need to lift the ambition of their climate change commitments and policies. Finger-pointing at China is no longer good enough.

Nevertheless China really does need to pull through with its commitment, to reduce the risk of dangerous climate change for the world. That means an innovative and sustained policy effort to bring China’s economy on to a low-carbon growth path, going well beyond the measures already in place. It will not be easy – but China now has the chance to lead the world on climate change.

1. Comparing the Copenhagen climate targets
2. How might China achieve its 2020 emissions target?
3. China and climate change in the post-Copenhagen era