Climate Finance: Regulatory and Funding Strategies for Climate Change and Global Development

Chapter 12 Engaging Developing Countries by Incentivizing Early Action

Climate Finance 111 Chapter 12 Engaging Developing Countries by Incentivizing Early Action Annie Petsonk International Counsel, Environmental Defense Fund with Dan Dudek, Alexander Golub, Nathaniel Keohane, James Wang, Gernot Wagner, and Luke Winston Key Points • To encourage developing countries to move to low-carbon development paths as swiftly as possible, Environmental Defense Fund’s CLEAR proposal (Carbon Limits + Early Actions = Rewards) offers developing countries Clean Investment emissions budgets (CIBs) that can enable developing countries to access a pool of emissions allowances initially greater than their business-as-usual expected emissions, if they place domestically enforceable absolute caps on the emissions of their major emitting sectors. • By promoting early, broad-scale access to carbon markets, CLEAR seeks to help emerging economies gain access to the capital needed to finance this transition. • CLEAR provides a measurable, reportable, and verifiable mechanism that rewards any developing country making a firm commitment to reduce emissions early, applying the benefits of carbon trading on a scale far greater than a project-by-project basis. • CLEAR could also help build capacity early on in a number of areas (technology; abatement opportunities; infrastructure; financial institutions , products, and expertise in the mitigation sector) in developing nations. 112 annie petsonk et al. Introduction The world’s collective effort to curb climate change will rely heavily upon the global marketplace—the only force large and strong enough to drive the needed innovation and carry through the necessary reductions in greenhouse gases (GHG). This approach is being taken seriously around the world, as evidenced by the success of the European Union Emissions Trading System (EU ETS), the passage of the American Clean Energy Security Act (ACES) through the House of Representatives in June 2009, and proposals under development in a number of industrialized and emerging economies such as Australia, New Zealand, the Republic of Korea, and Mexico. Proposals under discussion in the latter aim to engage in carbon markets much more broadly than avenues currently available through the Kyoto Protocol’s Clean Development Mechanism (CDM). Enactment of strong US cap-and-trade climate legislation could, more than any other single step, unite industrialized nations in demonstrating the opportunities presented by low-carbon economic growth. The effort to prevent the worst effects of global warming will require, however, not just serious emissions cuts by industrialized countries but also early emissions reductions by many others—including, most importantly , the two dozen or so largest, fastest-growing, and most influential emerging economies. This proposal is directed at the this group, offering a framework that can address concerns about limiting emissions without constraining economic growth, and can help generate financing to facilitate the swift and early shift towards low-carbon pathways. The Basic Idea CLEAR (Carbon Limits + Early Actions = Rewards) invites developing nations that do not yet have emissions reductions obligations to adopt a Clean Investment Budget (CIB), a multi-year absolute emissions limit covering either the whole economy or the major emitting sectors. Reflecting the negotiations underway in the context of the UN Framework Convention on Climate Change and legislative developments in the United States, nations that undertake nationally appropriate mitigation actions (NAMAs) could propose to the international climate treaty body a Clean Investment Budget (CIB) initially set at levels at or below their anticipated NAMA emissions pathway (Fig. 12.1). Nations could be given access to Engaging Developing Countries by Incentivizing Early Action 113 the resulting pool of CIB emissions allowances early, resulting in CIB allowances in excess of the country’s emissions at the beginning of the CIB period (Fig. 12.2). These allowances could help provide funding to assist the nations with the transition to a low-carbon economy by allowing developing countries to dock into the carbon market swiftly and efficiently. Many developing countries lack the financing to implement such trajectories . CLEAR taps the power of carbon markets to help nations move swiftly and early to low-carbon pathways. CIBs would be made transparent, feasible, and enforceable via domestic legislation that binds covered sectors to the declared path. CIBs would need to be determined in advance for at least two successive commitment periods (with the second limit lower than the first), to ensure incentives exist early on to transition to a high-technology, low-carbon economy (Fig. 12.3). Figure 12.3 illustrates a hypothetical CIB over two five-year commitment periods starting in 2013. The upper darker areas indicate the portion of allowances available above current emissions. Initially...