The COP 20 in Lima is over, having delivered to the world, like so many COPs before it, yet another awkward acronym. The latest for the pile is ‘INDCs’, that’s “Intended Nationally Determined Contributions.” Presumably different from Nationally Determined Contributions of the unintended variety.
By the COP 21 in Paris, countries of the world are to put forward their own plans (“INDCs”) for reducing or slowing the growth of greenhouse gas emissions in future years. While not all targets have been submitted or solidified, indications from major economies—the European Union, China, and the United States—are that commitments will not be enough to keep the world from breaking the two-degree barrier. Cambridge University professor and PAGE climate modeler Chris Hope, estimates that total commitments will give the world just a 1.1 percent chance of staying within two degrees Celsius of warming. The most likely trajectory for the world is still a warming 3.8 degrees Celsius by 2100.
First, a quick refresher about where that level of warming will likely leave us; between 3 and 4 degrees C of warming, the world faces high risk of coastal flooding causing hundreds of millions of climate refugees, Chinese food production will be at significant risk of collapse, Europe could regularly face summer temperatures of 45 degrees C, the Amazon will be in danger of collapse, and there is a reasonable likelihood of triggering the melting of the permafrost.
Chris Hope’s PAGE model estimates that damages will cost $US 19 trillion by 2100 at the current rates of emissions. Given the uncertainties and the scale of the events involved, putting a real number to damages is nearly impossible. But whatever the real number is, it is not small.
It is thus appropriate that at a debriefing on the COP 20 this week held at the Center for European Policy Studies in Brussels, Joss Delbeke, the European Commission’s director general for climate cited ‘climate financing’ as one of the major hurdles to the next year’s Paris negotiations—if ambitions are so low, the need for adaptation money will be high, the means of getting it fraught with difficulty.
The problem with climate financing is the same as it ever was: the bulk of climate financing won’t—can’t—come from public finance. In response to some questions on levels of climate financing from the NGO community, Delbeke acknowledged this reality, further stating that it was member states, not the European Union, that would ultimately be in control of commitments. The European Commission had very little role or jurisdiction in that area.
True, but as it happens, the more critical source of financing, private finance, does, indeed, fall under the Commission’s sphere of influence. The elephant in the room when it comes to private sector climate financing has long been how to generate returns from climate mitigation and adaption projects that have insufficient or no cash flow. Whether the project is a renewable energy project, land remediation, or conservation project, the answer often comes back to carbon markets—the cash flow must be created through a carbon price; a mechanism that monetizes the political will to stop climate change.
The European Emissions Trading Scheme is currently the world’s largest and oldest emissions trading institution, and it is failing. The price is not currently high enough to drive investment in climate change. Granted, all of the climate financing in the world cannot be driven by the European Emissions Trading Scheme, but Europe’s setting a high price would not just set an example for other trading schemes, but would also create an incentive for them to match Europe through harmonization requirements. These things are still a ways off—linking markets and using domestic carbon pricing to drive overseas investment are enormously difficult tasks, fraught with difficulties. But setting a high carbon price is the first step that the world’s flagship ETS is not taking, and it should.
Prices in the EU-ETS currently languish around 7 euro. The European Union has put forward numerous measures to improve the ETS, the first being a back loading scheme temporarily removing 900,000 million EUAs to be withheld from the market between 2019 and 2020. The next stage, a more permanent fix in making the ETS effective is the Market Stability Reserve (MSR). In its current proposed form, the MSR will withhold 12% of the surplus from the market each year as long as the surplus is in excess of 833 million allowances. When the surplus dips below 400 million allowances, then 100 million allowances will be released from the market.
Organizations like Sandbag have done an excellent job underlining the weaknesses of the Market Stability Reserve, not the least of which is that, as it is currently designed, the ETS will remain until well after 2027. There are several obvious ways to strengthen the ETS; the early start of the MSR, the cancelation or continued withholding of back-loaded allowances, and the cancellation of unallocated allowances. There are also less obvious fixes, such as adjustments to the formula used to calculate the size and the trigger points of the MSR which will ensure greater price stability and create better investment signal. There is a reasonable chance that the EU Parliament will pass a proposal for an early start to the MSR.
It will not be enough. London-based consultancy Energy Aspects estimates that even with an early start and continued withholding of back loaded allowances, allowance prices will only reach 10 euro per ton by 2020. This is hardly an amount that will drive emission reductions, let alone private investment.
If the Directorate General for Climate Action feels that its task at the international negotiations will be weighed down by disagreements over climate finance, it should leverage its mandate for the administration and policy development for the EU-ETS to affect the economics of private climate financial markets. In some ways the weakness of the ETS is ironic, given that when the DG Climate Action was established, some groups feared it would protect the the ETS at the expense of other climate policies. While the Directorate General cannot make changes to the ETS without the consent of the Commission and Parliament, it could advance and advocate for the passage of more effective reforms than those that it currently has on offer, which, even if executed in full, will not leave the ETS an effective instrument for driving either emission reductions or pro-climate investment. But a stronger EU-ETS could do both.
Through the EU-ETS the European Union has the currently has infrastructure in place to do more to more than any other region of the world to catalyze international climate finance. But this will mean nothing if it chooses not to use it.