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G L O B E

EU

Breakthrough or Breakdown?
How the EU action could resolve
the climate deadlock
7 December 2009

Table
of
Contents


Summary ............................................................................................................................2


1. Introduction .....................................................................................................................3


2. 2˚C: A challenge for global emissions that can be met...................................................3


3. EU climate policy: Raising the level of ambition will bring domestic and
international benefits...........................................................................................................6


4. Europe’s role in financing transition in the developing world ........................................12


5. Conclusions ..................................................................................................................15

















Summary


Time is running out to clinch a decisive deal on global climate action in Copenhagen.

Climate change beyond 2ºC presents a severe threat to the world’s future development
and security – but current commitments and proposals fall short of what is needed to
stand a reasonable chance of remaining below this threshold.

A catalyst is urgently needed to create a positive negotiating dynamic where


policymakers worldwide feel able to take a more ambitious stance.

The EU is in a position to play this pivotal role, by indicating now that it is ready to raise
the level of ambition of its own domestic emissions cuts to 30% from 1990 levels, by
signaling that it will increase its ambition further still over the coming months, and by
ensuring it makes a fair contribution to the financing of the international effort.

In light of recent science and emissions trends, 30% is yesterday’s 20%. In any case, a
more ambitious climate policy is in the EU’s own self interest, and will have a catalytic
impact on international action – a shift to 30% is achievable at low cost, will bring
widespread domestic benefits, and will result in a more dynamic, efficient and competitive
economy.


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1.
Introduction

With the UNFCCC negotiations in Copenhagen just starting, success hangs in the
balance. Despite important advances, including China’s commitment to take on a carbon
intensity goal and Japan’s adoption of a 25% emissions reduction target for 2020, the
scale of current commitments still falls well short of what the science tells us is needed to
avoid dangerous climate change exceeding 2˚C.

The EU’s political leadership has been critical in advancing the international debate in the
past. European leaders were the first to adopt the 2˚C limit, which has now been agreed
by the G8 nations – a major foreign policy victory for the region. Its policy actions to date
have also been world-leading, from feed-in-tariffs for renewables, to standards for a
range of energy-using products, to a comprehensive emissions trading system.

But the overall level of ambition of the EU’s policy lags what the latest science now says
is needed to remain below a 2˚C threshold. Now, in the first days of Copenhagen, it is
time for the EU to take a bold step in raising its level of ambition to match the scale of the
challenge ahead, by indicating its intention to step up its domestic target from a 20% cut
from 1990 levels to a 30% cut irrespective of the outcome of the Copenhagen
negotiations, and in addition by ensuring that it makes a fair financial contribution to
international action.

This would provide a much-needed catalyst ahead of Copenhagen, and would be in the
EU’s own self interest – creating the foundations for a more efficient, dynamic and
sustainable European economy.

2.
2˚C:
A
challenge
for
global
emissions
that
can
be
met


Limiting the global temperature rise to less than 2˚C requires radical cuts in
emissions

Concentrations of CO2 in the atmosphere are currently around 385 parts per million
1
(ppm), and rising by approximately 2.5ppm per year . A concentration of 450ppm means
there is approximately a 40-60% chance of the average global temperature increase
remaining below 2˚C. At 400ppm, the odds improve to 75%; at 550ppm, there is only a
15-30% chance of avoiding this temperature rise.

The Intergovernmental Panel on Climate Change (IPCC) states that to limit the global
temperature rise to 2˚C, global greenhouse gas emissions will have to peak within the
next decade, fall by at least 50-85% from 2000 levels by 2050 and continue to fall
thereafter – for lower concentration levels, net emissions will need to be negative by the
end of the century through mechanisms such as afforestation and large-scale biomass
use with carbon capture and storage.

G8 leaders have already agreed on the need to cut global emissions by at least 50% by
2050, with a cut in developed country emissions by at least 80%. Reductions on this
scale represent a fundamental shift in the global economic structure, including the


























































1
Fourth Assessment Report, Intergovernmental Panel on Climate Change, 2007; “Stern Review on
the Economics of Climate Change”, Stern et al, 2006. This excludes non-CO2 greenhouse gases.
Including all greenhouse gases, concentrations are 436ppm.


 3


complete decarbonisation of energy generation systems, the phasing out of oil as a


2
transport fuel, and the development of new ultra-efficient industrial technologies .

However, the science indicates that a global 50% cut still leaves very significant risks of
dangerous impacts, and that an even greater effort may be needed to reach lower
greenhouse gas concentration levels. Analysis of the output of the scientific community
since the IPCC’s latest report suggests that climate change is proceeding at a more rapid
3
rate than anticipated by previous estimates or model projections . Research by the
Hadley Centre suggests that if intensive use of fossil fuels continues on current trends,
4
this could lead to a 4ºC temperature rise as soon as the 2070s . And recent research
updates indicate that the current UN negotiations towards Copenhagen are based on
5
substantial underestimates of what it will cost to adapt to climate change impacts.
Several key thinkers in the area, including Rajendra Pachauri and James Hansen, have
6
indicated that concentrations should fall back to 350ppm .

The trend in emissions needs to be reversed now, with deep cuts by 2020

Looking at the short-term action needed to stay on track for a 450ppm long-term
concentration target, the IPCC found that developed nations as a group will need to cut
7
their emissions by 25-40% from 1990 levels by 2020 .

Work by Project Catalyst, which brings together climate experts to provide support to the
on-going international negotiations, shows a significant divergence from business as
usual (BAU) – although noting that business will never be “as usual” in the future – is
needed globally from now onwards to achieve a reasonable probability of remaining on a
450ppm trajectory. Globally, this requires 17GT of reductions compared to 2020 BAU
8
emissions.


























































2
See, for instance, “Transformational Change Model: Achieving a low climate risk economy”,
University of Cambridge Programme for Sustainability Leadership, 2009
3
“Key scientific developments since the IPCC Fourth Assessment Report”, Pew Center Science
Brief 2, June 2009
4
“4ºC global warming: regional patterns and timing”, Met Office Hadley Centre, September 2009
5
“Assessing the costs of adaptation to climate change”, International Institute for Environment and
5
Development, August 2009 http://www.iied.org/climate-change/key-issues/economics-and-equity-
adaptation/costs-adapting-climate-change-significantly-under-estimated
6
As quoted on www.350.org
7
“Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental
Panel on Climate Change”, Box 13.7. Note that the 450ppm scenario assumes a temporary 50ppm
overshoot.
8
See www.project-catalyst.info


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This is achievable – but current commitments fall short

The scale of action required is impressive – but emissions cuts on this scale are
achievable, and at reasonable cost. The Stern Review estimated mitigation costs of
9
around 1% of GDP to meet a target of 500-550ppm CO2e , avoiding costs of inaction that
could be 10-20 times higher. Technology-based analysis by McKinsey identifies 19GT of
emissions reduction potential globally at under €60/t by 2020 from a range of sources,
with 5.8GT achievable at net negative cost (in other words, providing an economic
benefit), mainly through efficiency improvements in transport and buildings. Compared
with the benefits of avoiding the devastating impacts of unabated climate change, the
case for action is overwhelming.

As Copenhagen approaches there have been hopeful signs, particularly as individual


countries make meaningful progress. China is on track to meet the ambitious energy
efficiency targets in its 11th Five Year Plan and has announced its intentions to do more,
including a carbon intensity target. India has unveiled a very ambitious solar and nuclear
program and is working on new national legislation. Brazil, South Africa, Mexico, and
other developing countries have also taken positive unilateral steps with domestic policy.
Indonesia is ready to cut emission by 26% from business as usual (BAU). Russian
President Medvedev has declared the countries aspiration to cut its energy intensity by
40% by 2020. Norway has raised its emissions reduction target from 30% to a world-
leading 40% below 1990 levels by 2020. And the new Japanese government recently
announced an ambitious plan to cut emissions 25% by 2020, matching an earlier
announcement by Australia.

Taken together, this adds up to considerable momentum. However, considerable


uncertainty still surrounds US policy, which represents a major stumbling block in


























































9
The trajectory for limiting greenhouse gas concentrations to 500ppm is similar to that for a
450ppm overshoot scenario in the short term – the latter then requires net negative emissions to
return to equilibrium.


 5


negotiations. Although the Administration has a clear commitment to implementing


climate change legislation, difficulties in reaching agreement in the Senate mean that the
US is very unlikely to enter final negotiations with an agreed domestic policy position on
key issues, including in particular its 2020 target.

Despite the progress made so far – and even under the assumption that US legislation is
passed - policies put forward by governments so far still fall short of what is needed to
remain on track for limiting the ultimate temperature rise to less than 2˚C.Taking together
all targets and policies proposed by developed and developing countries to date – and
assuming these are implemented in full – emissions in 2020 are still projected to be 3-
10
5GT short of the required 17GT of mitigation , amounting to an aggregate cut of only 10-
11
24% from 1990 levels, well short of the 25-40% range indicated by the IPCC . Analysis
of policy proposals by the US, EU and Japan shows that none yet meets an estimated
12
benchmark based on a fair share of the global effort required to reach 450ppm .

To make further meaningful progress, a true leader is urgently needed to re-invigorate the
international negotiations, increase the pressure on Congress by demonstrating that the
rest of the world is committed to moving ahead, and raise the level of ambition to match
what the science tells us is required.

3.
EU
climate
policy:
Raising
the
level
of
ambition
will
bring

domestic
and
international
benefits

The EU’s climate and energy package, agreed in 2008, commits the region to a 20% cut
in emissions from 1990 levels by 2020, rising to a 30% cut if other nations commit to
comparable action. This overall target includes a commitment to 20% renewable energy
by 2020 and a 20% improvement in energy efficiency – the so-called “20-20-20” strategy.

However, the unilateral 20% emissions goal falls short of the IPCC’s range of 25-40% for
consistency with a 450ppm trajectory, and there is scope for the EU to do more.
Independent research by the Netherlands Environment Assessment Agency
demonstrates that at least a 30% cut is needed for consistency with a 2 degree target,
13
based on comparable effort by other developed countries . By indicating now that it is
ready to start the process of moving to a 30% emissions cut, the EU would demonstrate
its commitment to domestic action, creating renewed goodwill amongst developing
countries and improving the chances of success in the negotiations. EU leaders should
also stand ready to build on this, bearing in mind that many, in the light of recent scientific
reports, stress that the European Union should actually aim for a 40% emissions target
by 2020. A domestic reduction target of 30% should be considered a start and an
absolute minimum.

There is now a considerable weight of evidence to suggest that such a move would be in
the EU’s own domestic interests, bringing significant economic, social and environmental
benefits to the region which more than outweigh any additional costs. In other words, it
makes environmental, business, and political sense for the EU to commit to a minimum of
30% emissions reductions, whether the rest of the world follows suit or not.


























































10
“Managing climate change and overcoming poverty: Facing the realities and building a global
agreement”, Nicholas Stern, September 2009
11
“Comparability of Annex I emission reduction pledges”, World Resources Institute, October 2009
12
“Setting a benchmark: How developed countries might equitably contribute towards a 450ppm
pathway”, Project Catalyst, September 2009
13
“Exploring comparable post-2012 reduction efforts for Annex I countries”, M.G.J. den Elzen et
al, Netherlands Environmental Assessment Agency (PBL), December 2008


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Reaching a 30% goal is achievable at low cost – there may even be net benefits
14
New research published by the European Commission has analysed around 650
individual low-carbon technologies to assess the technical potential of implementing more
ambitious EU-wide emissions reductions. It finds that taking together the technological
and efficiency improvements already in the pipeline as a result of existing policies, and
adding in the impact of new emissions reduction policies, the net cost of achieving a 30%
reduction in EU-wide emissions from 1990 levels by 2020 is broadly neutral, with the
gains from energy savings outweighing the additional investment costs.

Other studies confirm the potential for the deployment of known technologies to achieve a
30% emissions cut by 2020. The Öko-Institut identifies a “vision scenario” in which a 30%
emissions reduction is achieved through measures including a rise in renewable energy
and gas power generation, transport policies such as a modal shift from cars to public
15 16
transport, and energy efficiency in buildings . The Wuppertal Institute identifies the
impact of specific policies and measures on emissions performance, concluding that
there is clear potential for a range of feasible and cost-effective policies to lead to a cut in
emissions of 33% by 2020.

The findings of studies based on “bottom-up” technology-based analysis are reinforced


by another recent study, which is based on “top-down” macroeconomic modelling. Work
by the “Breaking the Climate Deadlock” coalition considers the impacts on GDP when
different parts of the world adopt more ambitious emission reduction targets by 2020. At a
global level, it finds that collective action produces significant gains to GDP – even before
the benefits from avoiding dangerous climate change are taken into account. Looking at
the results at an EU level, the modelling shows a gain in GDP in every scenario that
assumes a 30% emissions cut – with the greatest gain comes when the EU acts alone (a
1.36% rise in GDP by 2020). This, the study finds, is attributable to “the advantage in
acting first and acting fast”.

Moreover, the current economic circumstances have made an ambitious domestic goal
more achievable. Modellers at New Carbon Finance have estimated that as a result of
the reduction in emissions caused by the recession, the cost of achieving a 20%
emissions cut within the EU emissions trading scheme has fallen by about a half – and
that a 30% cut in the traded sector is now achievable at a lower cost than they had
17
estimated for the 20% cut just a year ago .

Many of the studies cited also identify the specific policies required to achieve deeper
cuts in EU emissions. They agree that the basic foundations of policy are already in place
– but that what is needed is a faster pace of change. 


Economic models tend to understate the benefits of action

Being technology-based analyses, these studies conservatively understate the true


potential for emissions reductions as most exclude the potential for behavioural change,
such as decisions by individuals to reduce their heating or air conditioning use. They do
not take into account co-benefits including avoided health costs and decreased energy
import-dependence, which are discussed in more detail below.

And the focus on 2020 costs does not take into account the considerable benefits of
investing in low-carbon infrastructure now, in order to pave the way for the deeper
emissions cuts that will be needed in the future. The emissions reductions over the

























































14
Blueprint for emission allowance allocation methodology in the EU Emission Trading Scheme
(2013 - 2020), ECOFYS, 28 October 2009
15
“The Vision Scenario for the European Union”, Öko-Institut, November 2006
16
“Target 2020: Policies and measures to reduce greenhouse gas emissions in the EU”, Wuppertal
Institute, September 2005

17
“Recession lowers cost of EU Emissions Trading Scheme by a half”, New Carbon Finance,
March 26 2009


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coming decade are only the start of a lengthy process that will ultimately need to
culminate in an almost totally decarbonised economy. Investments over the coming
decade in critical infrastructure such as improved electricity grids, and in new
technologies such as carbon capture and storage, will prepare the EU for the challenges
ahead.

“Economic development will not be sustained in the longer term unless the
climate is stabilised. It is critical that we exit this recession in a way that lays the
foundation for low-carbon growth and avoids locking us into a high-carbon future”
18
– The Copenhagen Communiqué

Costs will be felt by some sectors – but these can be mitigated, and the EU will see
growth in the industries of the future

Even if the costs at an economy-wide level are low – or negative – climate change policy
will inevitably have distributional impacts, with carbon-intensive sectors being hardest hit.
However, the transitional costs can be eased, and good climate policy will result in growth
and job creation in other areas of the European economy.

Climate policy will have an impact on industries with a high carbon intensity, such as
cement, aluminium and steel. If similar carbon constraints are not imposed outside the
EU then the competitiveness of these sectors may be reduced. However, industrial
activities with significant value at risk from carbon pricing make up a relatively small share
of European GDP and an even smaller one of jobs – studies estimate their share at
19
around 1% in the UK, and 2% in Germany . And the impacts on competitiveness can be
addressed: in the short term these sectors will continue to benefit from free allocations
under the EU emissions trading scheme, and some may be able to pass through at least
part of the carbon price to customers. In the medium term, global sectoral agreements
have the potential to equalise impacts across companies inside and outside the EU.

Over time, innovation will allow sectors affected by climate change legislation to continue
to grow in a less carbon-intensive way. A study of six pieces of EU environmental
legislation found that in four cases, estimates of the cost impact were at least double
what subsequently turned out to be the case – largely due to the acceleration of
20
innovation that followed the policy change .

Whilst policies to constrain emissions will impact Europe’s high-carbon industries, the
decarbonisation of the global economy creates enormous opportunities for companies
providing climate solutions that will more than compensate for jobs and Euros lost in
carbon-intensive industries. Climate change is set to have a transformational impact on
the global economy as the world moves away from a carbon-based model. In a similar
way to the Industrial Revolution and the development of IT, the process of
decarbonisation is set to lead to the destruction of old ways of doing business and the
creation of new technologies and methods – creating opportunities for the companies
involved in this revolution.

No longer a niche market, the renewable energy sector is now one of the fastest-growing
industries in the world. Global revenues for companies involved in the wind, solar and
biofuels markets reached $116 billion in 2008 – an almost tenfold rise over five years.
Although 2009 is likely to see a dip in revenues due to the global recession, the long-term
21
prognosis is still for a rapid rise, to over $300 billion annually by 2020 . With the
demonstrated need to ultimately decarbonise the power sector fully, the growth prospects


























































18
www.copenhagencommunique.com
19
“EU ETS impacts on profitability and trade”, Carbon Trust, January 2008; “Competitive distortions
and leakage in a world of different carbon prices”, European Parliament, July 2008
20
“Ex-post estimates of costs to business of EU environmental legislation”, IVM Institute for
Environmental Studies, April 2006
21
“Clean Energy Trends 2009”, Clean Edge, March 2009


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go well beyond 2020. And opportunities extend well beyond renewable energy alone.
One estimate based on a broader definition of climate change-related sectors, including
energy efficiency, waste and water, suggests that global revenues already exceed $530
22
billion and could grow to $2 trillion by 2020 , – which would make the sector comparable
in size to the global oil and gas industry today.

This rapid growth in revenues has been accompanied by significant job creation. The
International Labour Organization estimates that over 2 million people worldwide are
currently employed in roles related to renewable energy (including production of biomass)
23
– and that this could grow to at least 20 million by 2030 . Clean Edge report that in 2008
there were over 600,000 jobs in the wind and solar industries alone, and predict that this
24
will rise over threefold to over 2.6 million by 2018 . One estimate of potential job creation
in Europe suggests that the region could have 2.5 million jobs in the renewable energy
25
sector in the EU by 2020 . Energy efficiency measures likewise are potential jobs
creators; it is estimated that by 2020, up to 450,000 jobs can be created through suitable
26
EU efficiency in buildings policy alone .

To date EU has been at the forefront of these new markets, driven by its ambitious
domestic policies. But other parts of the world are also seeking to capitalise on these
opportunities,. China, for instance, has set – and is on course to meet – rigorous
renewable energy and efficiency targets, including a 20% reduction in the energy
intensity of GDP growth by 2010 and a 15% share of renewables by 2020. Backed by tax
incentives and what is, according to HSBC, the largest green stimulus package adopted
27
by any government following the financial crisis , such targets provide a highly attractive
environment for clean technology companies to operate in.

Therefore the EU can no longer be complacent about being the natural home for the
industries of the future. A more ambitious domestic policy agenda would provide a much-
needed boost for the region’s clean technology sector, which has been hit by reduced
credit availability and fierce overseas competition, and bolster the EU’s status as a
supportive, dynamic market for companies investing in low-carbon technologies.

Delaying a decision on a shift to a higher level of ambition is costly

There is currently considerable uncertainty over the timing and process of any EU
decision to move to a higher level of ambition. Being subject to co-decision, the process
of achieving agreement for a move to a 30% goal could be a lengthy one. A significant
amount of work would also be needed to decide exactly how the goal would be
implemented – including decisions at EU level about how to share out the additional
effort, and policy changes at member state level to implement new targets. At present,
however, this process has not even got underway.

With 2020 only a decade away, delays to the implementation of a new goal could
seriously put its achievement at risk. Businesses need long-term clarity over the direction
of policy in order to make investment decisions. Uncertainty over key issues such as the
level of ambition in the EU emissions trading scheme could lead to delays in investment
decisions – putting economic growth and energy security at risk – or investment in the
wrong technologies, possibly resulting in the expensive scrapping or retrofitting of high-
carbon infrastructure when higher targets are agreed later.


























































22
“Climate Change Index annual review”, HSBC, September 2009
23
“Green jobs: Facts and figures”, International Labour Organization, September 2008.
24
“Clean Energy Trends 2009”, Clean Edge, March 2009
“Low Carbon Jobs for Europe: Current Opportunities and Future Prospects”, WWF, June 2009

25
26
“Proposal for a recast of the Energy Performance of Buildings Directive: Summary of the Impact
Assessment”, European Commission, November 2008
27
“A Climate for Recovery”, HSBC, February 2009


 9


Well-designed climate measures can promote other EU and national policy


objectives

Climate change policy cannot be viewed in isolation – it is closely interlinked with other
European policy objectives, most obviously in energy policy but also in agricultural policy,
health, and international relations. To the maximum extent possible, therefore, climate
policy needs to be designed in an integrated manner, in order to exploit the considerable
co-benefits that can result from policies to cut emissions.

Climate change policies can achieve broader energy policy objectives

Climate and energy policy are inextricably linked, and well-designed climate policy can
have significant benefits for other energy objectives, particularly security of supply.

The key to more secure and stable energy supplies is diversity – and climate change
policies tend to deliver this, by increasing the share of alternative energies in the mix.
Aggressive energy efficiency policies deliver both climate change and energy security
goals simultaneously, by decreasing energy demand and reducing pressure on supply.

“Climate change and energy security are two sides of the same coin. The same
remedies must be applied to both problems” – Andris Piebalgs, EU Energy
Commissioner, March 2009

A key concern is the impact of climate change policy on electricity and fuel prices.
Undeniably, ambitious policies to decarbonise energy generation systems will tend to
raise energy prices, at least in the short term when technologies are immature. However
the impact will be relatively modest, certainly compared with the increases that were seen
as a result of oil prices peaking at over $140 per barrel in 2008. The UK government
estimates, for instance, that consumer bills are likely to rise by 8% as a result of meeting
28
its 2020 climate change goals, with industrial energy prices rising by 17% ; this
compares with a rise of almost 30% in domestic electricity bills in 2008 as a result of high
oil prices. The costs to the consumer of climate policy are kept down by the fact that
policies to improve energy efficiency will more than offset energy price rises, by reducing
energy consumption and bills. And over time, as renewable energy scales up further,
innovation will continue to bring down costs.

Moreover, the diversification of European electricity


A 450ppm stabilisation generation sources will tend to protect the consumer
scenario could cause fossil against future fluctuations in fossil fuel prices, as will
fuel prices to be 15-18% lower efficiency measures leading to an overall lower energy bill.
than its “business as usual” And an often neglected factor in calculating the cost of
scenario
 climate policies is that at a global level, fossil fuel prices
cannot be taken as given. Policies to tackle climate change
are starting to have an impact on the demand and price. The International Energy Agency
estimates that lower demand associated with a 450ppm stabilisation scenario could
29
cause fossil fuel prices to be 15-18% lower than its “business as usual” scenario ,
resulting in a $7 trillion saving in global fuel costs. Again this will help to relieve the
pressure on electricity and transport fuel prices for industry and for the consumer.

“BP is unlikely to sell more gasoline to Americans than it sold in the first half of
2008. Energy efficiency means demand from OECD countries will continue to
decline.” – Tony Hayward, CEO of BP, June 2009

Climate change measures can benefit the EU agricultural agenda…


























































28
“The UK Low Carbon Transition Plan”, Department of Energy & Climate Change, [mm] 2009
29
“World Energy Outlook 2008”, IEA, 2008


 10


The impact of climate change extends beyond energy policy. Agricultural policy is also
highly interlinked with climate policy – agriculture is a significant source of greenhouse
gas emissions, and will itself be impacted by changes to the climate such as temperature
rise and water availability. Measures to reduce greenhouse gas emissions could include
more sophisticated and targeted use of fertilisers, the increased use of grazing in
preference to imported soy feed, replacing beef protein with other proteins, improved soil
management and an accelerated switch to organic farming. These shifts have potential
30
benefits for health, biodiversity, the landscape and local environments .

…and have benefits for health

The reduction in greenhouse gas emissions resulting from a 30% EU domestic emissions =
more ambitious domestic climate change policy would also reductions in emissions of
have co-benefits in terms of reduced local air pollution – SO2, NOx and particulate
largely the result of a move away from coal-based generation. matter = reduced incidence of
Reductions in emissions of sulphur dioxide, nitrogen oxide and respiratory health conditions =
particulate matter would reduce the incidence of respiratory €20 - €76bn saved

health conditions such as asthma and bronchitis. Monetised,
these benefits have been estimated at €20 - €76bn, based on
31
a 30% domestic emissions target .

Climate policy is an investment in peace and security

Climate change is now a core part of the global geopolitical agenda. By showing its
willingness to take unilateral domestic action, and by funding action abroad, the EU will
build international goodwill and strengthen its political and economic relations with key
emerging economies. Adequate funding of adaptation policies is also essential to the
achievement of the EU’s development policy objectives, with climate change presenting a
32
severe threat to the achievement of the Millennium Development Goals .

And the ultimate objective of avoiding dangerous climate change is closely aligned with
the achievement of broader foreign policy and security objectives. Much of the world’s
conflicts are rooted in the scarcity of resources, and the poverty and desperation this
causes. Often called a “threat multiplier”, climate change will exacerbate this scarcity,
potentially leading to deeper and more severe unrest, failing states, and to an
acceleration of international migration – estimates of the number of people likely to be
33
displaced range from 25 million to 1 billion . Decreasing global competition for oil, often
from unstable parts of the world, will also be positive for Europe’s long-term political
security. Reducing EU’s own oil consumption and supporting developing countries’
climate action in mitigation and adaptation is therefore not only a matter of international
equity, but a core investment in long term security and stability.

“Just a glance at a map showing the areas most likely to be affected [by climate
change] and you are struck at once by the fact that they’re exactly those parts of
the world where we see fragility, instability and weak governance today. It seems
to me rather like pouring petrol onto a burning fire.” – Air Chief Marshall Sir Jock
Stirrup, Chief of the UK Defence Staff, June 2007


























































30
“Food Security, Climate Change and Biodiversity: the role of European agriculture in a changing
world”, BirdLife International, April 2009
31
“The co-benefits to health of a strong EU climate change policy”, HEAL, CAN and WWF,
2008200x

32
“Stern Review on the Economics of Climate Change”, 2006; “Poverty and climate change:
Reducing the vulnerability of the poor through adaptation”, Poverty-Environment Partnership, 2003
33
“Migration and climate change”, International Organization for Migration, 2008


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4.
 Europe’s
 role
 in
 financing
 transition
 in
 the
 developing



world

Out of the 19GT of the global emissions reduction potential available at under €60/t by
2020, only 5GT are in the developed world. The EU must therefore make sure it adopts a
set of ambitious policies to deliver its full domestic abatement potential, from power and
energy efficiency to transport and agriculture. This is not only an imperative in order to
stick to the 450ppm pathway with corresponding 40-60% probability of global warming
not exceeding catastrophic 2°C, but also to give its position credibility and to build trust in
the international negotiations. Ambitious domestic policy by developed countries is thus
an essential condition for the success of international climate negotiations

However, and bearing in mind the principle of common but differentiated responsibilities
and respective capabilities, the core principle around which international climate
negotiations are articulated, this can by no means be considered as a sufficient
contribution from developed countries. Based on articles in the UN Framework
Convention on Climate Change that all countries have ratified, developed countries –
which bear in large part historic responsibility for emissions and the rise in global
temperatures – have a duty to contribute to the costs of reducing emissions in the
developing world, and to help them adapt to climate change.

Significant finance is needed for mitigation and adaptation in the developing world

Rapid action to change the emissions trajectory in developing countries is absolutely


critical to the chances of limiting global temperature rise to less than 2˚C. Out of a total of
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19GT of abatement opportunities available , more than 12GT are located in developing
countries. According to Project Catalyst analysis, the incremental cost of achieving the
necessary emissions reductions in the developing world is estimated at €55-80bn per
35
year on average in 2010-2020 . Even if some developing countries are willing and able
to self-finance part of their mitigation efforts, developed nations will still need to make a
major contribution to enhance the resolve of the developing world to act with the speed
required, and to spare them the difficult choice between short term needs of poverty
eradication and long term investments in climate change.

Predicting the likely cost of adaptation is very challenging. Project Catalyst work assumes
36
a cost of €10-20 billion on average from 2010-2020 , rising further thereafter. This is a
conservative estimate: the UNFCCC, for instance, estimates costs of anywhere between
37
$49 and $171bn by 2030 .Under these assumptions, Project Catalyst estimate the total
cost of mitigation and adaptation in the developing world to €65-100bn per year on
average between 2010 and 2020, very similar to a number of other estimates that have
38
been put forward .

Substantial sums of money will therefore need to flow from developed to developing
countries, whatever the means by which they are delivered. How much funding will be on
the table is thus as crucial for the success of international climate negotiations as are
ambitious domestic policies. EU leadership on climate change must include adequate
funding figures.


























































34
Includes all measures costed at under €60 per tonne
35
”Scaling up Climate Finance”, Project Catalyst, September 2009 – www.project-catalyst.info
36
Ibidem
37
“Investment and financial flows to address climate change: An update”, UNFCCC, November
2008
38
For instance“Adapting to Climate Change to Cost US$75-100 Billion a year”, World Bank, 30
September 2009


 12


The EU needs to contribute its “fair share” of the global effort

The European Commission recently set out its view on how the region should contribute
towards developing country costs. Based on an estimate of the total cost of developing
39
country mitigation and adaptation of €100bn per year by 2020 , it suggests that domestic
financing by developing countries could cover 20-40% of this amount, and flows from
international carbon markets up to 40% (assuming an aggregate target for the developed
world of 30% below 1990 levels by 2020), with the remaining 20-40% being met by public
finance contributions from developed countries. The latter, it suggests, should be split
according to each region’s ability to pay and responsibility for historical emissions.
Accordingly, it proposes a public finance contribution by the EU of between €2bn and
€15bn by 2020. Discussions are now taking place on this proposal – including whether it
constitutes a “fair share” of the international effort.

Assuming the EU cover all its domestic abatement potential under €60/t by 2020, the
debate on the level of national emissions reduction targets for 2020 becomes a debate on
the split in the EU’s fair financial contribution between carbon markets and public finance.
40
Recent benchmarking work by Project Catalyst has tried to estimate what a “fair share”
for the EU and other key regions would look like on a consistent basis, considering the
totality of effort from domestic action, carbon market finance, and the public finance
41
contribution to developing country needs . This analysis indicates that with an aggregate
developed country target of only 25% below 1990 levels, the EU should set an emissions
cap of 34% from 1990 levels (met by domestic abatement and imported carbon credits),
and contribute €18bn - €29bn of public money on average from 2010-2020 to close the
financing gap for developing countries. If matched by comparable action by other
developed countries, this would be sufficient to fund mitigation consistent with a 2ºC
target and adaptation in the developing world.
42
On this basis, current EU policy falls short of what the benchmark suggests is needed
by 66%. Even if the emissions cap rises to 30%, the level of effort is only around one-half
of what is required.

This analysis suggests that in order to contribute its fair share, therefore, as well as
increasing its domestic ambition to a 30% emissions cut, the EU also needs to tighten the
cap on the emissions trading scheme significantly beyond 30%. This will ensure that
offsets come on top of real domestic efforts of at least 30% emissions reductions;
generate carbon finance flows to the developing world; and increase the public finance
contribution above the indicated €2bn – €15bn range to around €30bn/year for
developing country mitigation and adaptation. Current discussions over the €2 - €15bn
offer should, therefore, see this as only a starting point, and should aim to front-end load
this initial contribution, recognising the urgency of the need to get substantial flows of
public finance underway.


























































39
“Stepping up international climate finance: A European blueprint for the Copenhagen deal”,
European Commission, September 2009
40
“Setting a benchmark: How developed countries might equitably contribute towards a 450ppm
Pathway”, Project Catalyst, September 2009
41
This assumes that developed nations pay the incremental the incremental costs of developing
country mitigation (in line with UNFCCC provisions); that in addition, they undertake domestic
abatement up to a marginal cost of €60/t; that aggregate developed country emission targets under
a global deal should fall within the IPCC range of 25-40%, generating carbon finance flows over
and above the domestic abatement potential; and that the public finance contribution of developed
countries should be shared
according to measures of ability to pay and “polluter pays”, with ability to pay measured as real
GDP in 2010, and polluter pays as emissions in 2010.
42
This analysis pre-dates the EU’s announcement on its public finance contribution. However, even
including this, the EU effort still falls considerably short.


 13


A more ambitious emissions trading scheme could generate significant finance


flows

Part of the financing need can be met through flows of carbon market finance, as
currently delivered at relatively small scale by the Clean Development Mechanism. More
ambitious caps by developing countries including the EU, if accompanied by reforms to
scale up carbon market mechanisms, could deliver a significant proportion of developing
country needs. Withcaps by developed countries as currently proposed, demand for
credits will be limited and carbon markets are only likely to deliver around €3bn of finance
flows. If the level of ambition by developed countries rises to an average 25% cut below
1990 levels, then €10-15bn could be generated. This contribution could be scaled up
43 44
through interventions in the market, such as discounting and intermediation , which
45
could generate up to €5-15bn additionally. Earmarking the revenues from auctioning
carbon credits could provide a further €5-20bn. The EU ETS is already the largest source
of demand for carbon credits globally; by considering these options as it reviews the
trading scheme ahead of its third phase, EU policymakers could scale up this demand
much further.

Innovative mechanisms are emerging to help raise public finance…

Even under the most ambitious assumptions, though, carbon markets can only meet part
of the need, and are simply unsuitable for some sectors and essential purposes such as
capacity building, long-term technology development and adaptation. Public finance
contributions from developing countries must play a central role in financing developing
46
country mitigation and adaptation .

This need not be all, or even primarily, taken from general taxpayer revenues. Money
raised from a range of climate change policies can be hypothecated and used as a
contribution towards developing country needs. Possible revenue sources include permit
auctioning for emissions trading schemes; carbon taxes; levies on the aviation and
maritime sectors; and levies on CDM and JI transactions. A small levy on the CDM
transactions already contributes to an adaptation fund. The auctioning of AAUs (the
Norwegian proposal) would be one way to ensure that all developed countries make a
reasonable contribution. Such mechanisms are likely to be more acceptable than further
contributions from general taxation at a time when many governments are facing
spending cuts.

A range of proposals exist for utilising the bond market to raise finance. Revenues from
bonds, backed by government guarantees, could be used to provide concessional debt to
developing countries, leveraging private sector investment. Energy efficiency bonds could
help to overcome the capital constraints that often prevent otherwise profitable
investment in technologies to improve energy efficiency.

…and to ensure that public funds leverage private investment

Greater flows of funds will need to go hand in hand with a reform to existing delivery
mechanisms, in order to ensure they deliver genuine emissions reduction and adaptation


























































43
Discounting means that one tonne of developing country emission reduction is worth something
less than one tonne when sold for compliance into an emissions trading scheme.
44
Intermediation means capturing the difference between the cost of projects and their market price
(“rent”), which is currently earned by private sector intermediaries.
45
“Scaling up climate finance”, Project Catalyst, September 2009
46
For more details on specific financing proposals see “Scaling up climate finance”, Project
Catalyst, September 2009; ““World Development Report 2010: Development and Climate Change”,
World Bank, September 2009; “Non-carbon financing mechanisms for climate change mitigation
and adaptation in developing countries”, IIGCC, May 2009; “Meeting the climate challenge: Using
public funds to leverage private investment in developing countries”, Grantham Institute, September
2009


 14


benefits, and that they leverage action by developing country governments, and by the
private sector.

To the maximum extent possible, the EU should seek ways to ensure that public money
is used to improve the financing environment for the private sector, so that each euro of
public money leverages several euros of private investment. This is particularly critical at
a time when public finances globally are under huge pressure. Private finance is, in
principle, available for investment in low-carbon projects and companies – as evidenced
by the growing number of climate change funds in the public equity and private equity
spaces – but investment is often constrained by concerns that the risks of investing may
be too high, in particular the risk that policy changes may undermine the business case
for new ventures. Mechanisms such as loan guarantees, concessional finance and
47
public-private partnerships can be highly effective ways to use public funds to tip the
risk-reward balance, overcome failures in private capital markets and shift the economics
of emission reduction projects and policies.

5.
Conclusions

30% is yesterday’s 20%. Copenhagen is the moment to be bold. An indication that the
EU is willing to raise the level of domestic ambition to a 30% emissions cut, and does not
need to wait for the final outcome of UN negotiations and US climate policy discussions,
will re-invigorate negotiations, reassuring developing countries that the EU is taking a
strong leadership position. Greater domestic ambition should go hand-in-hand with an
openness to further raise the EU’s financial contribution to developing country mitigation
and adaptation – recognising the range of innovative ways to raise and use revenue that
are now on the table.

Leaders should recognise that a move to a 30% emissions cut would be in the EU’s own
self interest, even setting aside its impact on international action, and stand ready to up
the ante further over the coming months. Whilst there will be costs, these will be modest
compared with the very considerable domestic benefits that a more ambitious climate
change policy will bring – leadership in the industries of the future, substantial co-benefits
to a range of other EU policy objectives, and a more efficient economy, ready for the
deep emissions cuts needed to 2050 and beyond.

“We need to start working now on a radical pathway to reaching a far more
sustainable Europe by 2020. We have the political will to do this, now we need to
find the right mix of regulation, technological development and funding to make it
48
happen.” – Jose Manuel Barroso, August 2009


























































See, for instance, “Meeting the Climate Challenge: Using public funds to leverage private
investment in developing countries”, Grantham Research Institute on Climate Change and the
Environment, September 2009
48
“Political guidelines for the next Commission”, Jose Manuel Barroso, September 2009


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