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Long run emissions goals Shorter run emissions targets for developed countries

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Long run emissions goals Shorter run emissions targets for developed countries

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  1. Climate change: international funding for the global dealTony VenablesUniversity of OxfordProject Catalyst: http://www.project-catalyst.info/Climate Works Foundation, supported by McKinseys- unofficial and independent support for policy makers & negotiators pre-Copenhagen- lay out facts and generate some ideas

  2. The global deal: 5 key elements • Long run emissions goals • Shorter run emissions targets for developed countries • Domestic mitigation ( = abatement) • Offsets – purchasing reductions in developing countries • ‘Nationally appropriate’ mitigation actions by developing countries • Financing for developing country actions • International architecture for financing This talk • What has to be done • How, where, and at what cost • Financing needs and sources • International architecture for financing 1

  3. Global temperature change (relative to pre-industrial) 0°C 1°C 2°C 3°C 4°C 5°C Food Falling crop yields in many areas, particularly developing regions Falling yields in many developed regions Possible rising yields in some high latitude regions Funding requirements Water Significant decreases in water availability in many areas, including Mediterranean and Southern Africa Small mountain glaciers disappear – water supplies threatened in several areas Sea level rise threatens major cities Sources of funds Carbon market interventions Ecosystems Extensive Damage to Coral Reefs Rising number of species face extinction Institutional arrangements Extreme Weather Events Rising intensity of storms, forest fires, droughts, flooding and heat waves Risk of Abrupt and Major Irreversible Changes Increasing risk of dangerous feedbacks and abrupt, large-scale shifts in the climate system 1) What must be done

  4. What must be done: 650ppm  4o, 550 3o, 450 2.5o, 400 1.8o Stock – flow dynamics NB: currently around 380ppm, increasing 2.5ppm  550ppm by 2035

  5. 75 75 Reference pathway ‘BAU’ 70 70 70 65 65 60 61 -35 55 60 -17 50 55 52 45 50 40 45 450ppm pathway(with overshoot) 44 0 40 35 1990 2000 2010 2020 2030 0 1990 2000 2010 2020 2030 17 Gt of emission reductions required for a 450ppm pathway Gt CO2e per year Change relative to 1990 +17% -7% Change relative to BAU -28% -50% Source: McKinsey Global GHG Abatement Cost Curve v2.0; Houghton; IEA; US EPA; den Elzen, van Vuuren; Project Catalyst analysis

  6. Breakdown by abatement type: • 9 Gt for terrestrial carbon • 6 Gt for energy efficiency • 4 Gt for low carbon energy supply • Breakdown by geographic location: • 5 Gt in developed country geographies • 14 Gt in developing country geographies 2) How, where and what cost? Opportunities for the 17 Gt required to reach a 450ppm pathway McKinsey global GHG abatement cost curve, 2020* (up to costs of €60/t, excluding transaction costs, 4% discount rate) 70 60 Solar PV 50 Reduced intensive agriculture conversion Solar conc. 40 Organic soil restoration Wind (high penetration) Pastureland afforestation Biomass 30 Grassland management Wind (low penetration) Reduced deforestation from pastureland conversion 20 Nuclear Reduced deforestation from slash-and-burn agriculture conversion 10 0 10 15 20 17 Gt 19 Gt Rice management -10 Shift coal new build to gas Abatement potential Gt CO2e -20 Electricity from landfill gas New waste recycling -30 -40 Cars ICE improvement -50 -60 Cars aerodynamics improvement Retrofit building envelope (commercial) -70 -80 Lighting – switch incandescents to LED (residential) -90 -100 5 Source: McKinsey Global GHG Abatement Cost Curve v2.0

  7. Breakdown by developed/ developing The Split of the required abatement in 2020 Gt CO2e, 2020 Abatement receiving additional financing (to meet incremental costs) from developed world 17 5 9 Required abatement for 450ppm pathway Abatement feasible in developed countries <60 €/t CO2e Abatement in developing countries receiving incremental cost financing from developed world Abatement in developing countries with negative cost (NPV positive) * Amount will depend on size of emissions cap adopted. Under a 25% aggregated developed country cap this will equal 3 Gt; under a 40% cap, 6Gt Source: McKinsey Global GHG Abatement Cost Curve v2.0, team analysis 6

  8. Capital intensity and abatement cost Size of the bubbleindicates the abate-ment potentialin each sector Abatement cost € per tCO2e, 2030 30 25 20 Power Iron and steel 15 Forestry 10 Agriculture 5 Cement -5 5 10 15 20 25 30 75 80 Capital intensity* € per tCO2e -5 Transport -10 Waste -15 -20 -25 -30 Buildings -35 -40 * Defined as the additional upfront capital investment compared to the BAU technology divided by the total amount of emissions avoided during the lifetime of the low carbon investment. For measures/technologies where upfront investments decrease over time with a learning rate, the weighted average investment over time has been used. Source: Global GHG Abatement Cost Curve v2.0

  9. Societal perspective Investor perspective From the ‘investor perspective’; (incl taxes and higer interest rate) McKinsey global GHG abatement cost curve including investor perspective 2020* 200 Higher interest rates result in a further increase in cost for many positive cost levers 150 100 50 0 5 10 15 19 -50 Abatement GtCO2e per year -100 Inclusion of energy taxes results in a further reduction in cost for many negative cost levers Capex subsidies cause a modest price reduction in Transport Road, Power, Buildings and Waste -150 Feed-in tariffs cause large reduction in costs in renewable energy levers in certain regions -200 -250 Source: McKinsey Global GHG Abatement Cost Curve v2.0

  10. 0 BAU energy price – oil price at $60 per barrel Effect of high energy prices (oil price at $120 a barrel) High energy price – oil price at $120 per barrel Global abatement cost curve, 2030 Abatement cost€ per tCO2e 100 100 100 100 50 50 50 50 0 0 0 0 5 10 15 20 25 30 35 40 Abatement potentialGtCO2e per year -50 -50 -50 -50 Alternative energy measures become cheaper Energy efficient measures become more profitable -100 -100 -100 -100 -150 -150 -150 -150 -200 -200 -200 -200 Source: Global GHG Abatement Cost Curve v2.0

  11. Key messages: what has to be done, where, and cost • 17 Gt of emissions reductions required to limit warming to 2 degrees: • Marginal cost high • Average cost – depends on whether negative cost measures can be implemented • Add transactions costs • Eg: what does it take to persuade people to save money by changing their light bulbs? • High capital costs • 17 Gt of emissions reductions: 5 Gt is in the developed world and 12 Gt in the developing, of which 9 is to be financed 10

  12. 3) Funding: needs and sources Under the UN Framework Convention, Annex II countries have committed to provide financial resources to meet incremental costs Article 4.3. The developed country Parties and other developed Parties included in Annex IIshall provide new and additional financial resources to meet the agreed full costs incurred by developing countryParties in complying with their obligations under Article 12, paragraph 1. They shall also provide such financial resources, including for the transfer of technology, needed by the developing country Parties to meet the agreed full incremental costs of implementing measures that are covered by paragraph 1 of this Article and that are agreed between a developing country Party and the international entity or entities referred to in Article 11, in accordance with that Article. The implementation of these commitments shall take into account the need for adequacy and predictability in the flow of funds and the importance of appropriate burden sharing among the developed country Parties Source: United Nation Framework Convention on Climate Change, entered into force 21 March 1994

  13. Costs of 12 Gt of abatement indeveloping countries Adaptation cost Funding needs: €65-100 billion required in developing countries(similar magnitude to current aid flows) Developing country financial requirements, € billion on average p.a. 2010–20 (excluding self-financing) ~65–100 10-20 10-20 55–80 5 5–30 10 55-80 Required flows for abatement at cost to society* Additional cost for higher dev-eloping country financing rate (10%) Estimated transaction costs for the whole curve of €1–5 per tonne of carbon abated Financing need for technology deployment with high learning potential Total financ-ing require-ment for abatement in developing countries Adaptation estimate** Total financing requirement for developing countries * Assumes all abatement delivered at average cost; 4% discount rate ** Based on increased financing for global public goods (incl. research), expected funding required for priority investments for vulnerable countries (based on NAPA cost estimates), and provision of improved disaster support instruments (based on MCII work) Source: McKinsey Global GHG Abatement Cost Curve v2.0; ‘Bosetti; Carraro; Massetti; Tavoni’; UNFCCC; Project Catalyst analysis

  14. Financing flows by sector and region Financing flows, 10% discount rates, including transaction costs of €1–5 per tonne € billion, average p.a. 2010–20 China 16–22 Forestry 20–31 Rest of Developing Asia 15–23 Power 16–20 Rest of Africa 5–7 Industry 6–10 India 4–6 Middle East 3–4 Agriculture 5–9 Brazil 3–6 Buildings 1–2 Rest of Latin America 2–3 Transport ~1 Mexico ~1 South Africa ~1 Waste ~1 Rest of Eastern Europe Technology Technology Total 55–80 Total 55–80 Source: McKinsey Global Cost Curve v2.0, Project Catalyst analysis

  15. Breakdown of adaptation cost estimates: public sector only Average annual adaptation cost 2010–2020, € billion Text 20–45 10–25 0–15 10–15 10–20 5–10 0–5 ~1 Investments in knowledge1 Preparation, planning2 Disaster preparedness & insurance3 Soft adaptation4 Hard adaptation5 Social adaptation6 Gross adaptation cost Discount for co-benefits from other resources Net adaptation cost Proactive adaptation 1 Based on benchmarking of existing leading institutions (e.g. NOAA, NASA, Met Office, CGIAR) 2 Calculated on the basis of costs of Pilot Programme for Climate Resilience in ten countries, scaled to all developing countries 3 Based on Munich Climate Insurance Initiative proposal 4 Based on annualised NAPA cost estimates – using median NAPA cost to scale to all developing countries 5 Derived from UNDP cost estimates for ‘climate proofing investment’ 6 Derived from UNDP cost estimates for social adaptation Source: NASA; UK Met Office; NOAA; CGIAR; UNFCCC; NAPAs; Munich Climate Insurance Initiative; EM-DAT International Disaster database

  16. FINANCING REQUIREMENT TO REACH 450 PPM PATHWAY The financing needs ramp up over the 2010-20 period Developing country financing needs, € billion (annual averages) 90-145 15-30 65-100 10-20 40-55 5-10 75-115 55-80 ~15-30 35-45 Capacity building 3 Adaptation 3-9 11-17 Mitigation 2010-12 2010-15 2015-20 2010-20 Source: McKinsey Global GHG Abatement Cost Curve v2.0; Project Catalyst analysis

  17. Sources of funds: where does the $100bn pa come from? Carbon markets Direct trade (ie purchase of offsets) Carbon market interventions Public funds raised by auction of permits Other public funds BUT: politically feasible in developed countries? ‘new and additional’? ‘adequate and predictable’? Want to get as much as possible from carbon markets

  18. Sources of funds: the arithmetic Financing needs and sources assuming 25% caps (< 1990) in developed countries, € billion, annual average 2010–20 rounded to nearest € 5 billion 10–20 65–100 10–15 5–15 55–80 5–20 45–50 10–20 4–8 22-31 Mitigation Adaptation Total need Direct carbon markets Carbon market inter-ventions ETS auction revenues Other public and inter-national sources Internat- ional transport levies Concess-ional debt Public fiscal revenues ETS markets Source: Project Catalyst analysis

  19. Public finance needs depend on the cap adopted by developed countries:25% aggregate developed world cap could deliver 3 Gt of offsets The Split of the required abatement in 2020 Gt CO2e, 2020 Abatement receiving additional financing (to meet incremental costs) from developed world Required abatement for developed country Under 25% aggregate cap 17 Abatement in developing countries financed through carbon markets (counting towards developed country caps) 5 9 3 6 Abatement in developing countries financed through public finance Required abatement for 450ppm pathway Abatement feasible in developed countries <60 €/t CO2e Abatement in developing countries receiving incremental cost financing from developed world Abatement in developing countries with negative cost (NPV positive) 18 Source: McKinsey Global GHG Abatement Cost Curve v2.0, team analysis

  20. 40% aggregate developed world cap could deliver 6 Gt of offsets The Split of the required abatement in 2020 Gt CO2e, 2020 Abatement receiving additional financing (to meet incremental costs) from developed world Required abatement for developed country Under 40% aggregate cap 17 Abatement in developing countries financed through carbon markets (counting towards developed country caps) 5 9 6 3 Abatement in developing countries financed through public finance Required abatement for 450ppm pathway Abatement feasible in developed countries <60 €/t CO2e Abatement in developing countries receiving incremental cost financing from developed world Abatement in developing countries with negative cost (NPV positive) 19 Source: McKinsey Global GHG Abatement Cost Curve v2.0, team analysis

  21. Surplus Opportunity cost Carbon market intermediation: capturing the surplus ILLUSTRATIVE • Carbon markets under 25% target, €bn2010-20 p.a.* Forest sector cost curve Non-Annex 1, 2020 • FORESTRY EXAMPLE Offsets are only purchased for cost positive abatement (i.e., right hand side of cost curve) Cost€/t CO2e • 40 20-40 • 30 15-20 • 20 5-20 • 10 • 0 Price paidfor offsets Cost of abatement Potential surplus to investors/ Interme- diaries • 0 • 1,000 • 2,000 • 3,000 • 4,000 • 5,000 • 6,000 Abatement potential Mt CO2e Source: Project Catalyst analysis, UNFCCC

  22. Link between sources and different ways to deliver financing Sources of financing Way to deliver financing Direct carbon markets (ETS) – offset purchases Offset markets (demand driven by developed country caps) Carbon market interventions (ETS) Funds (bilateral and international) Carbon markets (ETS) – auction revenues Government Public balance sheet/ credit rating Public fiscal revenues Other public finance commitments International maritime and aviation levies

  23. Key messages: funding; sources and needs • Substantial funding to the developing world (€65-100bn pa) is required over the next ten years • The ability of markets to provide effective financing is a function of the emissions targets set by the government regulating the market. • The targets need to be sufficient to create domestic mitigation potential in the developed world and create demand for off-set carbon credits to finance mitigation efforts in the developing world. • Even under a 40% reduction commitment from the developed world, significant public financing will be required • Intermediation in the carbon markets (either internationally or nationally) will be required to limit the pressure on public finances 22

  24. 4) International architecture: how to channel $100bn pa? Issues: Allocation between developing countries? Allocation within developing countries? Formula based or responsive? Alternatives could range from: World body selecting projects World body funding sectoral programmes Countries bidding for funds and spending as they see fit

  25. International architecture: Overarching structure Criteria: Legitimate Accountable Effective Centralised? UN World Bank Carbon Bank Decentralised? Existing aid architecture Delivery channels Criteria: Need, Efficiency, Additionality, MRV, Scalability, Technology transfer • Clean Development Mechanism – project level • Pay to not emit (when otherwise would have (?)) • Weak on virtually all criteria? • Programmatic/ sectoral: • Better on scalability • technology transfer • National programmes – ‘budget support’: • Learn from experience with aid: countries must develop their own credible plans for mitigation & adaptation – Low Carbon Growth Plans • Bid for funds on basis of these plans

  26. Low Carbon Growth Plans (LCGPs) as a way to operationalise developing country mitigation and adaptation actions Focus: Development, mitigation + adaptation LCGP (=Low Carbon Growth Plans) “Under the Copenhagen agreement, all developing countries, except least developed countries (LDCs), should commit to adopting low-carbon development strategies by the end of 2011” EU COM/2009/0039 final Differentiation: Both developing + developed Time horizon: Long term and short/medium term Process: Support, best practices, review, MRV Content: Priorities, policies/measures and international support

  27. Many countries have started designing national strategies to get onto low-carbon pathways NOT EXHAUSTIVE United Kingdom China United States • ‘Building a Low-carbon Economy’ report released in December’08 • Contains recommendations on the 2050 emissions reduction target (80% relative to 1990) • Follow up launched in July 2009 – Low Carbon Tranistion plan • National Climate Change Program released in June’07 • Provides a policy framework that outlines actions that China will take in the future to address climate change • The Obama plan aims to reduce GHG emissions 80% below 1990 levels by 2050 through a market-based cap and trade system Mexico • Special Program on Climate Change (PECC) will be launched in 2009 • Includes a voluntary commitment to reduce emissions 50% relative to2000 baseline by 2050 • Includes specific short-term and long-term initiatives to achieve this South Korea • South Korea has already launched 3 plans and it is preparing the forth one • The lesson learned from the previous plans is the need for some long-term goals India • National Action Plan on Climate Change launched in June’08 • Plan identifies eight “national missions” and directs ministries to submit implementation plans to the Prime Minister’s Council on Climate Change • Ultimate goal is to never reach Annex I level of per capital emissions EU • European Parliament approved Climate Change Plan in Dec’08 • Includes three goals - GHG emissions reduction 20% below 1990 levels by 2020; double the renewable electricity generation by 2020; and increased use of biofuels Brazil • National Plan on Climate Change launched in December’08 • Includes initiatives such as promoting sustainability in the industrial and agricultural sectors, maintaining a high share of renewable in power production, encouraging biofuels in transportation and reducing deforestation South Africa • Framework for Climate Policy released in July’08 • Aims to implement three strategic options derived from government's long-term mitigation scenario analysis Source: Project Catalyst analysis

  28. Funds: global, regional, national? Eg national • Intermediation on supplier and /or demand side • Markets primarily in form of sector programmes, plus some sector (no-lose) caps Coordination/Oversight/ Registry for LCGPs – UN? Sources of funding Allocation/aggregation mechanisms Delivery CER,€ CER,€ Carbon market (sectoral & programmatic) CCGP/LCGP/NAPA Market ( ETS) Power, afforestation Intermediary Intermediary Energy efficiency € € Contributor trust funds Recipient trust funds Public finance Deforestation, agriculture € Adaptation € Global fund • Recipient trust funds compete for funding based on quality of LCGPs/NAMAs/NAPAs • Recipient funds could be national or regional • They are sole issuer of credits • Contributor countries provide financing in form of cash to contributor funds • Contributor and recipient funds go through ‘matching’ process • Global fund (~20%) created for • Adaptation • Mitigation action not funded by national contributor funds 27

  29. Key messages • Of the 17 Gt of emissions reductions required to limit warming to 2 degrees, 5 Gt is in the developed world and 12 Gt in the developing • Substantial funding to the developing world (€65-100bn pa) is required over the next 10 years • Targets for developed countries need to create domestic mitigation and also create demand for off-set carbon credits to finance mitigation efforts in the developing world. • Even under a 40% reduction commitment from the developed world, significant public financing will be required • Intermediation in the carbon markets can limit the pressure on public finances • The architecture for transferring funds should build on existing institutions and draw on experience with development aid • All countries should produce Low Carbon Growth Plans. These provide the basis for bidding for resources and are ‘country led’. 28

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