Next steps towards a workable and effective climate regime

March 2016

On December 12, 2015, 188 countries accounting for 98% of Green House Gas (GHG) emissions committed themselves to controlling emissions under a new ‘bottom up’ approach through goals pledged at the national level (the Nationally Determined Contributions (NDCs)). On the heels of the failed Kyoto Protocol, the Paris Agreement is really the first important step taken to limit temperature increase, as pledges, if sustained beyond 2030, would limit temperature increase to around +30 C above pre-industrial levels. This falls short of the +1.50 to +20 as set out in the Agreement so more needs to be done. Compact contributions by 49 experts in a recent book financed by Ferdi discuss next steps to build a regime for limiting climate change that would be both workable and effective.

The Agreement is to come into effect in 2020 with a review process starting in 2023 -repeated on a 5-year cycle – that will assess contributions to mitigation, adaptation and finance in the light of future scientific results from the IPCC. Rules for Monitoring, Reporting and Verification (MRV) and a move forward towards climate finance for adaptation and mitigation in developing countries all represent steps in the right direction. Yet, building and sustaining a workable and effective climate regime is a daunting challenge requiring changes on many fronts. Contributions, collected in seven parts, present ideas on how to ramp up and build on the Paris Agreement (overview here). Some key suggestions are summarized below.

 I. Quantifying the challenge. Co-chairs of the fifth report of the Intergovernmental Panel on Climate Change (IPCC) for Working Group I (on science) and for Working Group III (on mitigation policies) stress the urgency of getting started and that preserving key resources for human subsistence (land, food and water), as defined in UNFCCC Article 2, calls for greater efforts than if temperature increase were the only goal. Sustainability thus lowers our remaining carbon budget for the century by 30% beyond the level if temperature change was the only target. Urgency remains: to reach the +2°C relative to the pre-industrial level by the end of the century would require a pathway with emissions falling at 4.4% a year if the start date is 2015, but at 6.3%, if the decline starts in 2020, and it would be an (unreachable) 20% annual decline if started in 2030.

 II. Divergent views from the regions. Differences in perceptions about the relevance of historical emissions for future obligations and about the political processes leading to countries negotiating positions are great. These will surface in the next round of discussions on mitigation commitments – scheduled for 2018 – and beyond. Descriptions on differences in perspectives from Africa, China, India, Japan, the EU and the US reveal why a ‘hybrid’ solution including a legally binding part establishing common rules complemented by elements left to the national legislation of each State had to be adopted in Paris. These differences also show the difficulties ahead when more ambitious measures will have to be taken. Converging on perceptions is a challenge ahead.

III. Dealing with architecture and governance. We have a ‘decentralized regime complex for climate change’ rather than an integrated regime for climate change. Hopefully the Paris Agreement has set up a process that promotes learning and cooperation to deal with challenges ahead. Are similar countries making similar pledges? How can MRV be effective and low-cost so as to ensure net benefits and encourage participation? How much can we expect from ‘experimental governance’ and from a ‘building blocs’ strategy? Both involve mobilizing stakeholders beyond central governments to include the private sector and civil society at large and should be complements to the UNFCCC approach. How should one ‘green the GATT’ to help avoid a clash of the trade and climate communities by tackling ‘trade leakage’ and free-riding?

IV. A plethora of policy options. Experience shows that many approaches to implementing the NDCs can be effective. An example is the regulatory approach followed by the US under the Clean Power Plan (CPP) that mirrors the one adopted for the Paris Agreement. The CPP may lead to a cost-effective outcome brought about “through the back door.” Four variations to direct carbon pricing, the pillar of Sweden’s successful climate policy, can also be envisaged: (1) the removal of fossil fuel subsidies; (2) fuel taxation; (3) cap and trade, and direct regulation; and (4) the promotion of renewable energy, as has been done by Germany over the last 15 years.

The hybrid architecture that is emerging from the Paris negotiations includes bottom-up (NDCs) and top-down (MRV) elements. Instruments will differ across jurisdictions calling for linkages. For this architecture to be effective, the pros and cons of diverse forms of linkages across jurisdictions (e.g., acceptance of allowance or credits in another jurisdiction or crediting for compliance) need to be evaluated. This will reduce mitigation costs which, in turn, should encourage greater ambition later on.

V. Difficult choices on technology options. Stabilizing GHG concentrations requires progressively reducing emissions to zero, and/or offsetting positive emissions with an equivalent removal of CO2 directly from the atmosphere. These are the only possibilities. There is scope for reducing emissions with existing technologies, but new technologies will be needed to close the gap between the cost of fossil fuels and alternative energy sources as the scale of effort increases over time. Adoption of carbon pricing will help, but ‘disruptive’ innovation with funding many times greater than current levels will be needed. This gap needs to be addressed in the next round of negotiations.

Emissions can be reduced through energy conservation and the substitution of nuclear power for fossil fuels but, because these approaches are limited, attention has focused on renewable energy (solar and wind). These will need to be scaled up to a much higher level. In addition, CO2 will need to be removed from the atmosphere. Carbon capture and storage is another option with high advantages like reducing leakage-related issues, but it faces high economic and social costs of storage. Hurdles are also faced by solar and carbon geo-engineering, the latter which is very cheap but faces governance problems and does not limit acidification of oceans.

VI. Burden sharing will be critical. The poorest countries have been the most severely hit by climate shocks and are projected to be the most vulnerable in the future. They have contributed the least to our current situation and have the least resources to deal with climate change. Improved access to health care and well-targeted social safety nets will be necessary but building low-carbon cities will be primordial as urban growth will be occurring in Africa. (Applying the average carbon replacement value for key construction materials of developed countries to all new urban construction expected to take place in the 21st century would require one-third of the available carbon budget for limiting climate change to +2°C). Obtaining finance and using it effectively is a big challenge for developing countries where governance and institutional capacities are usually weakest.

VII. Mobilising climate finance. A “redirection” of investments towards low-carbon options of around $5-6 trillion per year will need to be invested in infrastructure in the world’s urban, land use, and energy systems in the next two decades. Additional investments to cope with the societal transformations required to achieve the +2°C target amount to about 0.75 percent of world GDP in 2013. By contrast, limiting climate change to +2°C by means of carbon pricing would generate revenues equal to about 2.1 percent of OECD aggregate GDP in 2013. Carbon pricing and the removal of fossil fuel subsidies is urgent since the “alternative sources” of finance identified in 2009 (carbon markets and prices, taxes on transport and international financial transactions, and the green bond market) have been disappointing. Strong government leadership will be needed to steer finance towards a low-carbon future.

Cooperation must therefore occur in multiple areas simultaneously. New financial tools like the creation of “climate remediation assets” based on governments’ public guarantee of an attractive return on investing in low-carbon activities would help meet the needs of the developing world, estimated by the World Bank (2010) as 140-175 billion dollars a year by 2030 for mitigation actions and another 75-100 billion for adaptation. These estimates, necessary to address the fairness issue are two to three times the $100 billion per year commitment agreed at Copenhagen in 2009.

In conclusion, these contributions show that the scale, breadth, and complexity of the task are unprecedented, so that we have no alternative but to face this challenge directly. The Paris Agreement is a stepping stone that needs to be developed and improved upon. The UNFCCC process will remain central to any global effort, but it will not be the only game in town. The climate problem is too complex, too far-reaching, and too important for any one institutional arrangement to address it on its own. The contributions in this book provide some guidance for how the world can navigate the unchartered territory that lies ahead of us.

Jaime de Melo is a member of the E15 Expert Group on Trade, Finance and Development. He is an Emeritus professor at the University of Geneva, the Scientific Director of FERDI, a non-resident fellow of the Brookings Institution, and an invited professor at the Johns Hopkins University Bologna Center.

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