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July 02, 2008

International Relations|Climate Change

Financing Climate Correction

By Nitin Desai


On Monday 30 June, 2008 Prime Minister Manmohan Singh released the long awaited National Action Plan on Climate Change (NAPCC).   The statement of principles at the beginning of the NAPCC modulates growth and poverty reduction objectives by speaking of achieving “national growth objectives through qualitative changes in direction that enhances ecological sustainability, leading to further mitigation of greenhouse gases.”


The NAPCC  is organized around eight missions dealing with solar energy, energy efficiency, sustainable cities and villages, water, forests, agriculture, the Himalayan systems threatened by glacier melt, and support for climate change related science and R & D.  It marks an important shift of stance.  Till recently there was a tendency to argue that we should not be diverted from our pursuit of growth and respond to climate risks with the simple message to the West: you caused the problem-you fix it.  But over the past year attitudes have changed. The Prime Minister set up the Council on Climate Change and appointed Shyam Saran as his special envoy thus conveying that this issue was as important in his eyes as the nuclear deal. (Hopefully it will not go the same way!)


The NAPCC does not give away much on India’s negotiating position. It does not include any commitment on emission caps but  repeats the Prime Minister’s  promise at last year’s G-8 meeting at Heiligendamm that India would keep its per capita emissions below the average for the developed countries at all times. 


This is not as innocuous as it sounds.  It means that we cannot reach current patterns of energy consumption in the West ever. As Western economies become less material intensive and shift to low carbon energy patterns, their per capita consumption will decline and our self-imposed ceiling will keep coming down. Europe is proposing 30-40% reduction in emissions by 2030 and 80-90% by 2050 which would take it to about 5-6 tonnes in 2030 and 2 tonnes or less in 2050 against India’s current level of 1 tonne, focussing on fossil fuel related carbon dioxide only.  Our per capita consumption, which may double every10-12 years with high growth, would have to start declining just about the time when urbanization and motorization will be reaching a peak.  (China, with per capita fossil fuel related carbon dioxide emissions of around 4 tonnes is much closer to this point of inflexion).    


There is general recognition that the primary responsibility for cutting back on emissions rests with the developed countries; but China and India, as large fast growing emitters are under pressure to show some commitment, which they are stoutly resisting.  The Action Plan will help in conveying our sense of global responsibility.  But it will not deflect the pressure to act and we need to start thinking about how we should flesh out the compensatory mechanisms for the provision of finance and technology.


The Bali agreements clearly envisage a financing and technology transfer arrangement for promoting mitigation actions by developing countries.  This is the space which the World Bank is trying to occupy with its battery of Climate Funds. With this, the provision of finance for mitigation would be a project or programme based transaction with the usual routine of consultant’s reports, appraisal missions, loan agreements, conditionalities, monitoring, evaluation and so on. 


A far simpler approach would be to use the market for carbon credits that has emerged as part of the Kyoto protocol’s Clean Development Mechanism-- an off-set mechanism that allows entities in the developed world to meet their obligations by buying carbon credits from developing country entities.  The CDM  itself does not involve any additionality of mitigation effort.  What the developing country does is counterbalanced by a corresponding reduction in the developed country obligation. 


This need not be the case. Instead of putting money into the World Bank Trust Funds for mitigation, the developed countries could simply buy carbon credits in the CDM market and retire them without using them for setting off their own obligations.  If they decide to auction emission caps within their borders, they could use the proceeds of the auction for additional purchase of carbon credits.  There would be a net increase in the global mitigation effort and the developing country contributing to this would get additional finance. Purchasers can always ensure that their purchases are geographically balanced and lead to savings where they are wanted.  This may require some coordination but no new international bureaucracy would be required.  The machinery of registration and certification of GHG savings set up for CDM projects would suffice


The CDM as such must continue, since flexibility is important to reduce the costs of mitigation. The CDM has already played an important role in introducing “carbon consciousness” at the enterprise level in China, India and some other developing countries.  It has helped to establish an infrastructure of agents for working a carbon market. But it must move beyond bilateral project based trades to a system that allows a more programmatic “wholesaling” approach to reach the masses of small producers and consumers. Procedures need to be simplified by relying on standard norms and baselines rather than a case by case approach for registration and verification.


Funding for mitigation is only half the answer.  Adaptation actions to cope with the impact of climate change on water regimes, agriculture, health and human settlements will also require additional resources.  The actions that have to be taken are a part of the general development effort and the additional funding has to come as a fungible amount that can be added to the pool of investment resources.  One way would be to levy a charge based on some measure of responsibility for the problem (say cumulative emissions) and disburse it in proportion to some measure of adverse impact (say a climate vulnerability index).  But this is going to require a lot more analytical work before it becomes a live political option. 


The same is true for venture capital funding to support experiments and innovations which will not pass muster in the funding mechanisms constrained to work with predictable technologies.


The Action Plan is the first step towards putting our offer on the table. The next must be to persuade developed countries to put their money where their mouth is and use the carbon credit market for additional mitigation by developing countries.

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