COP-12 COP/MOP-2 Side Event 11 November 2006 The Sao Paulo Proposal

S B A I C COP-12 COP/MOP-2 Side Event 11 November 2006 The Sao Paulo Proposal for an Agreement on Future International Climate Policy

S B A I C BASIC Project • Building and Supporting Institutional Capacities in Climate Change • Initially a 2.5 year project to: • Support implementation of UNFCCC/KP by Brazil, India China and South Africa • Assist developing countries with post 2012 climate negotiations • Link national & international components of climate policy • Main funding: European Commission • Extra funding from UK DEFRA, Australia plus co-financing/in-kind support from IDS & WRI, China, IDDRI

S B A I C Building And Strengthening Institutional Capacities in Climate Change • Network of over 20 research & policy institutions, mostly from BASIC countries, working with international experts on wide range of issues: • Task 1: Mitigation, SD & energy, modelling (China Team) • Task 2: Vulnerability & adaptation (India Team) • Task 3: Carbon markets & national institutional issues (S.Africa Team) • Task 4: Future international climate policy & negotiations (Brazil Team) • Task 5: Establishing a DC focused experts network (Full Team) • Project activities comprise a mix of policy analysis, briefings, workshops, conferences, mentoring and training

S B A I C

S B I C A Environment Directorate General of the European Commission MARGAREE Consultants Inc.

S B A I C Sao Paulo Proposal • Not a consensus BASIC document & not the views of BASIC governments but part of on-going work under BASIC Task 4 which focuses on: • Designing international climate change policy and enhancing negotiations skills (BASIC Brazil Team) • Still under development & further discussion • Sao Paulo workshop in August 2006:first discussion of this “package” – more detailed work on-going • Papers and presentations from Sao Paulo & other BASIC workshops download from: : http://www.basic-project.net/;

S B A I C Summary of Core Proposal Elements • Goal for the Regime • Medium and Long Term Goals • Annex I/B Parties Quantified Commitments • Automatic Extension of Annex I/B Commitments • Options for Non-Annex I Parties • Limits on Cumulative Transfers of CERs and VERs by Non-Annex I Parties • Carbon Markets • Adaptation • Technology • Universality & Stability • Summary

S B A I C Goal for the Regime • Create a comprehensive, stable, long-term, universal regime to address climate change • Respect principles of equity and common but differentiated responsibilities and respective capabilities • Establish stable, long-term regime for technological and structural change • Flexibility to cope with changing circumstances

S B A I C Medium & Long Term Goals Goals help assess progress toward UNFCCC’ ultimate objective in five year reviews Possible goals • a maximum temperature increase of 2oC by 2100 • a maximum atmospheric concentration of CO2 such as 450 or 550 ppmv by 2050 • greenhouse gas emissions by Annex I Parties at least 15 per cent below their combined 1990 emissions in 2020 • maximum loss of natural ecosystems of X% by [date ] • Others? Parties’ commitments are not directly linked to these goals

S B A I C Annex I/B Parties Quantified Commitments • 2008-2012: Kyoto commitments and compliance features retained • 2013-2018: annual commitments, expanded to cover net LULUCF emissions • More flexibility in the form of the annual commitments • Automatic 1 year extension of annual commitments of all Annex I/B Parties each year • With unrestricted carryover of all compliance units (proposed) annual commitments are equivalent to five year commitment periods • Compliance still assessed at five year intervals

S B A I C Annex I/B Parties Quantified Commitments • Annex I/B Parties negotiate absolute annual emission limits for 2013 through 2018 • Then each Party may express its commitment as a combination of: • an absolute emissions limit (tCO2e/year); • emissions intensity limit (tCO2e/unit GDP); • new and additional funding (USD per year) to a maximum of 10% of its commitment (based on international carbon price) • All intended to have same stringency over time • intensity coefficient declines by 3% per year • funding rises by annual increase of real GDP

S B A I C Automatic Extension of Annex I/B Commitments • Post 2018, commitments automatically extended 1 year every year e.g. 2019 commitments agreed in 2013 • Commitments for next year (2019) reduced by equivalent of 1% absolute (from 2018) if compliance in past year (2012) easier or less costly • Otherwise commitments for next year unchanged from previous year (2018) • Annual commitments always known for next 5 years with a range of 0 to 5% reduction for the following 5 years

S B A I C Automatic Extension of Annex I/B Commitments • Annex I/B commitments for next year (2019) more stringent if either: • Total quantity of compliance units in all registries carried over has increased over the past year (2012) or • The international price of AAUs has not increased by more than inflation during the past year (2012) • Enforcement Branch of Compliance Committee makes determination annually before COP/MOP session • Same adjustment to commitment of every Annex I/B Party

S B A I C Economic Hardship • An Annex I/B Party whose real GDP has declined by more than 1% during a year may request that its target be equal to its emissions for that year • An Annex I/B Party may request a change in the form or level of its commitment. Needs approval of ¾ of Parties present and voting at next COP/MOP. • Financial payments divided between Adaptation and Technology Funds by COP/MOP decision

S B A I C Options for Non-Annex I Parties • Principles of equity and common but differentiated responsibilities and respective capacities mean Non-Annex I Parties adopt Annex I/B commitments later • Annex I/B type commitments not appropriate: limited capacity, rapid economic, social and demographic changes • For developing countries CC is part of many other problems • Options for Non-Annex I Parties: • Host CDM projects • Quantify emission reductions due to sustainable development policies (SD-PAMs) • Adopt sectoral (excluding LULUCF) or national “no lose” commitment

S B A I C Non–Annex I Parties SD-PAMs • Create a new annex listing Non-Annex I Parties that agree to quantify and report the emission reductions achieved by their SD actions • Methodologies developed by e.g. Consultative Group of Experts; results reported in national communications • Actions earn political recognition but do not generate tradable credits (programmatic CDM and “no lose” commitments can be used for that) • Participating Parties can use simplified procedures to access Adaptation and Technology Funding Mechanisms • By lowering per capita emissions, SD actions defer the date at which a Party reaches its limit on cumulative transfers • Secretariat produces compilation & synthesis report on SD-PAMs with quantified reductions where possible

S B A I C Non–Annex I Parties “No Lose” Commitments • A Non-Annex I Party may propose a sectoral (except LULUCF) or national “no lose” commitment • Proposal reviewed by CDM Executive Board which makes a recommendation to COP/MOP • Commitment must be more stringent that emissions that would otherwise occur • Methodology for calculating emissions achieved must be suitable (address possible leakage, double-counting) • Must be accepted by ¾ of Parties present and voting • Party earns Voluntary Emission reductions (VERs, equivalent to CERs) for difference between commitment and actual emissions certified by an accredited DOE • Commitment must be maintained until Party becomes an Annex I/B Party

S B A I C Limits on Cumulative Transfers of CERs and VERs by Non–Annex I Parties • An overall limit on transfers of CERs and VERs by Non-Annex I Parties since 2005 is set • Overall limit allocated among Non-Annex I Parties based on responsibility, capability and potential to mitigate; allocation revised every 5 years to reflect changing circumstances • Once the cumulative transfers by a non-Annex I Party reach its current limit, it is expected to adopt an Annex I/B emissions commitment • If it decides not to, it is deemed to withdraw and loses access to benefits

S B A I C Limits on Cumulative Transfers of CERs and VERs by Non–Annex I Parties • Limit of 20 billion tCO2e means 16 to 40 years before Non-Annex I Parties adopt commitments • Share of each Non-Annex I Party based on its: • Population • Responsibility – emissions per capita since 1990 • Capability – current GDP per capita • Mitigation potential – current emissions per capita • Higher cumulative emissions, GDP, current emissions per capita = lower share of the limit • Larger population = bigger share of the limit • CERs and VERs retained by host government do not count as transfers • A Party can reach its limit with no transfers due to increases in per capita emissions, GDP

S B A I C Limits on Cumulative Transfers of CERs and VERs by Non–Annex I Parties • Ensures Annex I/B Parties undertake significant commitments before Non-Annex I do so • Allows Non-Annex I Parties to participate in carbon market and use Adaptation and Technology Funds before adopting commitments • Creates incentive for Non-Annex I Parties to adopt SD policies that reduce per capita emissions • Equitable distribution of CDM benefits in the long run • Recognizes changing circumstances of individual Non-Annex I Parties • Gives each Party some control over when it “graduates” to Annex I/B

S B A I C Limits on Cumulative Transfers of CERs and VERs by Non–Annex I Parties • Limits set and revised by Facilitative Branch of the Compliance Committee using procedure approved by COP/MOP • Countries likely to have a limit of zero based on recent data include: Cyprus, Israel, Singapore and wealthier OPEC countries • Countries likely to reach their limits soon based on CDM projects in the pipeline include South Korea (2 years) and Chile (12 years) • Other DCs can use CDM/VERs for another 20-100 years • tCERs and lCERs also count toward the limit

S B A I C Carbon Markets • Clean Development Mechanism continues with minor changes • current CDM levy could provide €325million up to 2012 • 2% levy extended to VERs • 2% levy on Joint Implementation and to International Emissions Trading transfers out of the issuing registry for Technology Fund • Failure to ratify by 30 Sept 2012 stops issuance and transfer of all units 31 Dec 2012 to encourage entry into force on 1 Jan 2013

S B A I C Compliance • Compliance system retained • Compliance of Annex I/B targets assessed every five year • Penalty remains the same: 30% of excess emissions deducted from AAUs in the year after non- compliance determined • Payment of financial component must be received in full before compliance deadline

Adaptation Proposals • Inclusion increases chances of agreement • A new Adaptation Committee of Experts (ACE) to provide coherence/guidance • A pilot phase of “adaptation activities implemented cooperatively” in 2008 • A “pilot phase” shifts emphasis from • Inaction/workshops and • Funding stand alone projects • towards learning-based policy approach that promotes implementation of programmatic action

Adaptation Proposals • All Parties revise design parameters and standards for infrastructure and equipment to address climate change, energy efficiency and water efficiency • Develop an insurance or risk management mechanism to address the impacts of extreme weather events by 2010 • Develop vulnerability & adaptation tools & methods to target vulnerable human populations and natural ecosystems • Focus financial support by the Adaptation Fund on assisting the most vulnerable human populations and natural ecosystems • Increased funding goes to AF from share of the proceeds from CDM, JI and ET & from Annex I/B financial commitments

S B A I C Technology Transfer • Proposal distinguishes between existing & new technologies; • Most existing technologies are proprietary so transfer will occur on commercial terms • Work with qualified institutions to improve access to information on available technologies • Any Party can complain to the Facilitative Branch that another Party is restricting technology transfer

S B A I C Technology Research and Development • New Technology Funding Mechanism resourced by JI/ET levy, & funds from Annex I/B Parties’ financial commitments • Funding provided to Non-Annex I Parties to: • Participate in international research projects to develop technologies to reduce emissions of to adapt to climate change • Buy down the cost of mitigation or adaptation technologies to enhance their diffusion • Technology Funding Mechanism to recommend to COP/MOP how best to use any intellectual property rights acquired

S B A I C Universality and Stability • Memoranda of Understanding(MOUs) could also be agreed to extend scope of regime by including agreements covering: • aviation and marine • global industries e.g. aluminium • Non-Parties • Proposal allows national or sub-national governments of non-Parties to agree a MOU which could ensure they are making comparable efforts & do not benefit from staying out (as the Montreal Protocol does) • USA could approve MOU easier than treaty ratification • Trade restrictions could be imposed on countries that are not Parties and do not have an MOU by ¾ vote of the COP/MOP

S B A I C Legal Form of the Agreement • Propose amendment of Kyoto Protocol and COP/MOP decisions • Advantage – retains existing institutional structures • Disadvantages – Non-Parties are observers during the negotiations and need to ratify the Protocol to be part of the new agreement • New Protocol to the Convention also possible. Opposite advantages and disadvantages. Also raises numerous transition issues • Mix of Convention and Kyoto Protocol actions also possible but more complex

S B A I C Summary Elements that may appeal to Annex I/B Parties • Future commitments by Non-Annex I Parties • Flexibility in the form of their emissions limitation commitments • Predictable emissions limitation commitments for the next decade • Relief for economic hardship • Flexible participation through an MOU • Likelihood of a stable, long-term, universal regime

S B A I C Summary Elements that may appeal to Non-Annex I Parties • Likelihood of a stable, long-term, universal regime reducing avoidable climate risks • Equity - Annex I Parties continue to take the lead in combating climate change • Equity: Enhanced geographical benefits for LDCs/SIDs as more CDM goes to them • Equity: Emissions limitation commitments by Non-Annex I Parties depend on stringency of Annex I commitments • Additional options for participation by Non-Annex I Parties • Enhanced approach to adaptation assistance • Financial support for technology research and development

COP-12 COP/MOP-2 Side Event 11 November 2006 The Sao Paulo Proposal