Copenhagen – Show me the money . . .

With the second week of Copenhagen now upon us and the days rapidly counting down to the conclusion of the summit, the true meaning of climate change politics is showing its hand – money. At issue are two things; how much should developed countries effectively compensate developing countries for past emissions by helping them adapt to the changing climate and how much should developed countries pay developing countries to get them to reduce future emissions. The first of these I find impossible to make any judgement on at all, in part because I struggle to understand just what such money might be spent on (save for the expatriation of residents of some island states now literally disappearing) and then how it might be divided so that the world gets meaningful benefit that is actually related to the issue at hand.

But the second issue is not quite as difficult, so I will venture an opinion on it. A view on this comes from considering the abatement curve (a chart of cost and volume for emission reduction activities, see below) for the potential emission reduction opportunities in developing countries.

Abatement Curve

The left side of the chart (A) shows a range of projects that give positive returns over time. They are largely energy efficiency plays in one form or another and are things we should be doing anyway at current energy prices, but we shy away from them for all sorts of reasons ranging from capital allocation to plain laziness. Such projects exist in every country (well perhaps not Denmark which seems to thrive on finding energy efficiency opportunities) and are found in every sector. They range from home insulation to excellence in operation of industrial facilities.

The right hand side of the abatement curve (C) features projects that really need a carbon price to deliver positive returns over time. The best example is carbon dioxide capture and storage (CCS), which can never be revenue positive without a carbon market. A number of renewable energy technologies will continue to need the additional revenue that a carbon market can deliver, at least for some years, as might advanced biofuels with their low carbon footprint and more distant technologies such as hydrogen.

Coming back to the issue at hand, money, the abatement curve offers a mechanism for judging just what type of help should be given to the rapidly developing economies (for the poorest countries help is desperately needed simply to provide energy in the first place, which is yet again another issue and arguably not one for a climate change conference). Energy efficiency projects should not really be funded by the developed economies given that they are attractive projects to do anyway. So the emphasis here needs to be on accelerating the uptake of such actions through loans, foreign investment and domestic policy initiatives.

But projects requiring a carbon price are different. A carbon price is an artificial construct, which effectively delivers actions that the economy would not otherwise take. This does impose a cost on the economy and it is this cost that could be borne for a period of time by the developed countries for developing country projects. With per capita incomes often a fraction of those in developed economies it is a big ask to expect a developing economy to do this itself. But as incomes rise there should also be an expectation that developing countries eventually implement their own carbon price policies.

Looking at a technology such as CCS, this would mean developed country cap-and-trade systems accepting credits from CCS projects in developing countries as well as providing some up-front capital for the early projects (depending on the cost of abatement and the prevailing cost of carbon). The story would be similar for some renewables. Possibly the simplest way to steer this is to focus the money flow to developing countries on the electricity sector only, with the aim of accelerating decarbonisation. This has a number of benefits; results are likely to be very tangible for questioning voters in developed economies (e.g. xx coal fired power stations in South Africa had CCS fitted this year),  major project opportunities result for technology companies and it has limited impact on competitiveness concerns emanating from developed countries – i.e. there is little appetite to fund projects in developing economies which simply enhance their industrial competitiveness. All of this means that future offset mechanisms should be targeted on the electricity sector and not across all emission activities within a developing economy.

Finally, there is the major issue of forestry / deforestation (B). This will also require assistance from developed economies in that it is really about land and land has a value. Dictating how land should be used changes its value, so some compensation will be necessary in that area. This can come both through government-to-government deals and via the private sector using carbon markets.

As the debate in Copenhagen continues, there is some sense of this structure. Developing country NAMA (Nationally Appropriate Mitigation Actions) are broadly seen as A, although the AWG-LCA draft text does link the transfer of money with their implementation. The REDD discussion is of course B. Finally, there is the discussion about the carbon market mechanisms, but important technologies like CCS and Nuclear are hotly contested as being suitable, yet these are the two big low carbon electricity base-load technologies. A distinct focus on electricity in developing countries is also lacking.

So much remains to be done in just four days.