Forging Closer Ties: Transatlantic Relations, Climate Change and Energy Freie Universität Berlin

1. Prices versus Quantities: HOW DO DIFFERENT EMISSION REDUCTION STRATEGIES PERFORM IN COUNTRIES AT DIFFERENT LEVELS OF DEVELOPMENT Forging Closer Ties: Transatlantic Relations, Climate Change and Energy Freie Universität Berlin November 28 – December 5, 2009

2. Policy or Political Failure? • Commonplace to hear criticisms of the Kyoto Protocol • If only we had the right “policy” in place things, we’d be on the right track… • Global carbon tax • Increased international development financing

3. The more countries involved, the lower the costs (Carbon Group 2009)

4. Controlling Costs Will, Politically, Be Important • Costs • Mitigation • $200 Billion USD/an • Adaptation • $50 to 109 Billion USD/an Sources British Anti-Slavery –Kaufmann & Pape 1999 ODA – WB 2008 Adaptation – IIED 2009 Mitigation – UNFCCC 2007

5. Kyoto’s Approach to Lowering Costs • “Cap-and-Trade” • Quota-based System • Price of climate change policy to be “revealed” on the carbon market • Carbon Market • “Emissions Trading” • Only between industrialized countries • “Joint Implementation” • Only between industrialized countries • “Clean Development Mechanism” • Between industrialized and developing countries “Offsets”

6. Location of CDM Projects (Source: UNFCCC 2009)

7. Is the CDM a Success? • A 4,763 des projets liés à 2,800 millions de tonnes de crédits carbone (Oct 2009) (Source: CDM - UNEP Risoe Centre 2008)

8. Prices versus Quantities

9. Two Basic Options to Regulate Carbon • Regulate QUANTITY of carbon • Cap-and-trade • Uncertainty surrounding the cost of reducing below cap necessitates emissions trading as an escape mechanism • Regulate PRICE of carbon • Carbon tax or carbon bounty • Much easier to administer (theoretically) • Uncertainty in effects on emissions

10. Symmetry of Prices and Quantities Price = $5 Quantity = 10 tonnes

11. Climate Change Policy Under “Uncertainty” Marginal Benefit Curve “Flat” Marginal Benefit Curve “Steep" If a patient’s health deteriorates only slowly, care should be managed such that each day the patient remains without treatment the hospital should pay a fine. If the medical condition is serious and prone to deteriorate rapidly, then the hospital only has d days to administer the treatment or the patient dies P P MC MC actual actual MC MC expected expected P P q uantity q uantity P* P* P P t ax t ax MB MB Q Q Q Q * Q Q Q * Q tax q uantity tax q uantity

12. Climate Change Policy Under “Uncertainty” Marginal Benefit Curve “Flat” Marginal Benefit Curve “Steep" If a patient’s health deteriorates only slowly, care should be managed such that each day the patient remains without treatment the hospital should pay a fine. If the medical condition is serious and prone to deteriorate rapidly, then the hospital only has d days to administer the treatment or the patient dies P P MC MC actual actual MC MC expected expected P P q uantity q uantity P* E Q E Q P* P P t ax t ax MB MB Q Q Q Q * Q Q Q * Q tax q uantity tax q uantity

13. Climate Change Policy Under “Uncertainty” Marginal Benefit Curve “Flat” Marginal Benefit Curve “Steep" If a patient’s health deteriorates only slowly, care should be managed such that each day the patient remains without treatment the hospital should pay a fine. If the medical condition is serious and prone to deteriorate rapidly, then the hospital only has d days to administer the treatment or the patient dies P P MC MC actual actual MC MC expected expected P P q uantity q uantity E P* P P* E P P P t ax t ax MB MB Q Q Q Q * Q Q Q * Q tax q uantity tax q uantity

14. Climate Change Policy Under “Uncertainty” Marginal Benefit Curve “Flat” Marginal Benefit Curve “Steep" If a patient’s health deteriorates only slowly, care should be managed such that each day the patient remains without treatment the hospital should pay a fine. If the medical condition is serious and prone to deteriorate rapidly, then the hospital only has d days to administer the treatment or the patient dies P P MC MC actual actual MC MC expected expected P P q uantity q uantity E P* P E Q E Q P* E P P P t ax t ax MB MB Q Q Q Q * Q Q Q * Q tax q uantity tax q uantity

15. Clean Development Mechanism (CDM)

16. CDM Criticisms • Transaction Costs • Complicated and bureaucratic project development system often means only big projects make there way through • Additionality • A CDM project is additional if GHG emissions are reduced below those that would have occurred in the absence of the CDM • Sustainable Development • Is the CDM really making a contribution? • “CO2lonialism”

17. Transaction Costs • Complicated project cycle… CDM Development Phase CDM Implementation Phase

18. Transaction Costs • Complicated project cycle… CDM Development Phase CDM Implementation Phase Project Developer Host country DNA 3rd Party Auditors CDM Executive Board

19. Transaction Costs • Project Developers, Brokers, Regulators Transaction Costs Deadweight Loss

20. Additionality Baseline No Project CDM Project Carbon Offset Tonnes CO2 CDM Project Emissions Year0 Year7 Crediting Period

21. Bogus credits? Non-Carbon Project Started Baseline No Project Bogus Carbon Offset No Project CDM Project Tonnes CO2 Genuine Carbon Offset CDM Project Emissions Year0 Year4 Year7 Crediting Period

22. Sectoral CDM…

23. « CO2lonialism » E Example of FACE reforestation project in Mt Elgon National Park, Uganda

24. 2009 Fieldwork & Preliminary Results

25. Where in the world…. • Tanzania • Uganda • Moldova

26. CDM reforestation project in Tanzania Area:13,450 ha planted (of 18,000 ha acquired) Carbon Credits: 6.4 million tCO2e over period 2000-2019 Topography:grassland with the landscape dominated by undulating ridges with steep slopes.

30. CDM cookstove project - Tanzania Location:Karatu District, Arusha Region Project Summary: The project involves improved household stoves and intends to build and install stoves in 22,000 households. On average 45,000 tCO2e annually over 2009-2012.

32. Improved Cookstove Project 70% Emissions Reduction

33. Sugarcane “bagasse” bioenergy - Uganda • Location:Jinja District • Project Summary: • The project involves increasing bagasse co-firing of the sugarworks, sending extra power generated back into the grid and thereby displacing fossil fuel generated electricity • Extra sugarcane purchased from outgrowers who grow cane on their own land

35. Reforestation Project - Moldova • Area:20,000 ha • Project Summary: • Reforestation of degraded forest land spread out across the country • Degraded lands identified scientifically and managed in a nation-wide cadastral system • 594 villages involved

38. Additionality:Preliminary Assessment Tanzania – Improved Cookstoves Tanzania – Reforestation No large-scale government or private sector policy for improved cookstoves Project undertaken in Tanzania’s forest belt; therefore likely to have gone ahead without carbon finance but maybe not as early nor as large Uganda – Bioenergy Moldavia – Reforestation Government would not have had money to undertake the scale of reforestation without carbon finance Carbon finance only a fraction of the total project financing; therefore project would have gone ahead but probably not as soon.

39. CDM Administration • Bureaucratic bottle-necks in Africa • “Cork in the bottle” syndrome • CDM authorities often in small “units” in the technical wing of Ministry of Environment • Do not appear to have the authority for nation-wide changes that could be necessary for CDM • Might be other govt agencies (planning) that are better equipped to address the issues sectoral CDM requires

40. Price-mechanism Alternatives to the CDM

41. Price-mechanism • Carbon Tax • Taxation already difficult in developing countries • Unconscionable  high incidence on the poor • Carbon Bounty • Payment for carbon abatement at a set price • Would be important to set the correct price for the bounty in different sectors • Could use Carbon Cost Efficiency (CCEff), which measures the costs in $/tCO2e • CCEff could be used to determine the price at which to set a carbon bounty in order to achieve a desired emission reduction for a specific project or programme

42. Carbon Cost Effectiveness (McKinsey & Co. 2009)

43. Carbon bounty? • Tanzania example • Ministry of Natural Resources & Tourism sets the price of forest products • Government plantations (Sao Hill) are largest player domestic market and determine price • Price of forest products coming from government plantations is not determined by the market but a result an act of Parliament – “totally political” • Recent price increase • 2002: royalty rates set under Forestry Act • 2006: unsuccessful attempt by MNRT to raise prices • 2007: “New Royalty Rates for Forest Products”

44. Reforestation effort in Mufindi District, Tanzania Big leap in reforestation

45. Limits on a price strategy • Many sources of emissions are non-monetized and not amenable to a price change policy • African Firewood • Often collected from forest commons which are un-regulated • Price manipulation and supply shocks • Low fossil fuel prices disincentive to bioenergy in Moldova • Russian gas subsidized • Gas viewed as “modern” energy source

46. Conclusion

47. Ditch the CDM? • Sometimes prices, sometimes quotas • Price strategies are more appropriate in developed countries because prices for fossil fuels are relatively stable and predictable • Need to reform the post-Kyoto agreements in a manner that adds price-based instruments in addition to, not in replacement of, the current quota-based design.

48. Moral Limits of Climate Change Policy?

49. Another thought…Climate Realism • Response from industrialized countries to climate change will be based on a political calculation that weighs the costs of mitigation versus those of domestic adaptation in industrialized countries • Disquieting hypothesis: it is not necessarily in the interest of the industrialized countries to prevent a level of climate change that is “dangerous” for least developed countries. • UNFCCC ultimate objective: “Stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.”

50. Moral Limits of Climate Change Policy Horizon of thought on climate change policy World Socialism Neoliberalism If not the CDM, then what?