8 Nov 2010

Funding the Low-Carbon Revolution

by Trevor Manuel and Nicholas Stern

The two defining challenges of our time are managing climate change and overcoming world poverty. We cannot succeed on one without succeeding on the other. With international collaboration and sound policies, we can achieve that success by launching a new era of low-carbon economic growth while adapting to the climate change that is on the way.

Financial support for developing countries will play a vital role in any integrated action. The new proposals in this week’s report by the High-Level Advisory Group on Climate Change Financing, commissioned by the United Nations Secretary-General in February, can help make progress towards agreement at the UN climate-change conference in Cancun, Mexico, later this month.

The report outlines a coherent structure of policies through which, by 2020, at least $100 billion a year could be generated from public and private sources for international action on climate change. This goal is laid out in the Copenhagen Accord, which now has the agreement of 140 countries. The measures described can be scaled up if a bigger target becomes necessary.

Unmanaged climate change would so transform the planet that by the end of this century hundreds of millions of people would need to move, probably leading to severe and extended conflict. Poor countries and communities are the most vulnerable and have done the least to create the problem. Rich countries have a clear obligation to provide additional resources.

The scale and urgency of this issue for developing countries was recognized by every member of the Advisory Group, which included heads of government, finance ministers, leading figures from the private sector, and policy experts, most of them with direct and serious experience in public finance and policy.

The Group’s report this week concluded that raising $100 billion a year for developing countries is a feasible goal if the political will is there. And it identified a set of sound and mutually reinforcing policies.

One key element is setting a price on carbon emissions, which would address the massive market failure resulting from the fact that products and services that involve emissions of greenhouse gases do not reflect the cost of the damage that they cause through climate change.

The Group’s report showed that a modest price on emissions, in the range of $20-25 per ton of carbon dioxide, would push incentives in the right direction, raise substantial public revenue, and foster private investment crucial to the new industrial revolution needed to make the low-carbon economy a reality.

If rich countries introduce domestic carbon taxes or auction emissions permits based on this price level, they could potentially provide $30 billion a year for developing countries by using just 10% of the revenues. A carbon tax on international shipping and aviation set at the same level (or auction revenues from emissions caps, if that pricing route is followed) could generate $10 billion annually for international climate action from just 25-50% of the revenues, even after ensuring that costs borne by developing countries are covered.

Other policies, such as redirecting subsidies paid by rich countries to the fossil-fuel industry, or levying a tax on financial transactions, could provide a further $10 billion each year. All these measures together could raise about $50 billion annually in net public funding to help developing countries adapt to climate change.

In addition, the multilateral development banks (MDBs), including the regional development banks and the World Bank, could raise an additional $20-30 billion in gross public financing through higher contributions from rich countries.

Private-sector flows will be vital to the entrepreneurship and innovations that must be at the heart of the new industrial revolution. Sound policies in developing countries, a price for carbon, and risk-sharing and co-financing with MDBs and other national and international institutions can yield private flows that are many times the public resources involved in fostering them.

The Group suggested that its proposed policies could generate annual private flows of $100-200 billion. With a price of around $25 per ton of carbon dioxide, and providing incentives for private sector flows, increased flows from carbon markets could be $30-$50 billion.

Resources are more likely to be generated in rich countries and be acceptable in developing countries if they are provided in ways that promote effective spending. The Global Fund to Fight AIDS, Tuberculosis, and Malaria has shown how much can be achieved through adopting a results-oriented approach to financial support.

The MDBs have learned from experience how to use resources well. The productivity of aid has also improved because of progress in the policy environment and the investment climate in developing countries. An African Green Fund for both adaptation and mitigation could put resources and experience to good use in one of the most vulnerable parts of the world– and one that is full of opportunity in the new low-carbon era.

While resources for climate-change adaptation and mitigation may have different fiscal origins from more traditional development resources, it would be damaging to keep them separate in their use: from agriculture, construction, and power to technology and deforestation, the simple fact is that development, adaptation, and mitigation are often inextricably intertwined.

The next steps in implementation should include consideration of the proposals on international transport by the International Civil Aviation Organization, the International Air Transport Association and the International maritime Organization, with the multilateral development banks working on proposals for new green funds and enhanced collaboration with the private sector.

New financing could unlock today’s policy inertia over climate change. Delay is as dangerous as the gathering greenhouse gas concentrations. Now is the time to translate good ideas into concrete action.

Trevor Manuel is South Africa’s Minister for Planning and was formerly Minister of Finance; Nicholas Stern is Professor of Economics and Government and Chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics. Both authors served as members of the Advisory Group on Climate Change Finance in a personal capacity.

Nicholas Stern is Chair of the Grantham Research Institute on Climate Change and the Environment and Professor of Economics and Government at the London School of Economics and Political Science, and a member of the UK House of Lords. He was formerly head of the UK Government Economic Service and chief economist at the World Bank.

Copyright: Project Syndicate, 2010.

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