A global deal

Power Efficiency Guide

Ultimate Guide to Power Efficiency

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The United Nations Conference of the Parties in Copenhagen in late 2009 will be decisive in determining the post-2012 polices. It is the most important international gathering since World War II. The risks that it must grapple with and the politics it adopts must be truly global. The devastation that climate change can cause are still higher than those two world wars and the Great Depression, which prompted the establishment of the Bretton Woods institutions. Delay in coming to an agreement would be dangerous. First, the relentless flow-stock process would take us into ever more difficult territory and, second, market confidence, crucial for the necessary investment, would be undermined.

It is important that the agreement be guided by clear principles based on rigorous analytic foundations and a common understanding of the key challenges. The following describes an outline of a possible global deal based on the preceding analysis and on intensive experience and public discussion.

Any global deal must contain three basic principles:

1 Effectiveness - it must lead to cuts in GHGs on the scale required to keep the risks from climate change at acceptable levels.

2 Efficiency - it must be implemented in the most cost-effective way, with mitigation being undertaken where it is cheapest.

3 Equity - it must take account of the fact that it is poor countries that are often hit earliest and hardest, while rich countries have a particular responsibility for past emissions.

Effective action requires:

• Global emissions to fall by at least 50 per cent relative to 1990 levels by 2050. Emissions will need to decline to less than 20Gt per annum in 2050 and to less than 10Gt by the end of the century to hold concentrations below 500ppm CO2e and allow eventual stabilization around 450ppm CO2e. 2

• Global average per capita emissions that will, as a matter of basic arithmetic, need to be around 2 tonnes by 2050 (20Gt divided by 9 billion people). This figure is so low that there is little scope for any large group to have emissions above it (since it would be difficult to be below).1

• Agreement by developed countries to take on immediate and binding national targets of 20 to 40 per cent by 2020, and to commit to reductions of at least 80 per cent by 2050. Where past policy neglect has made the 2020 target very different, there could be strong contribution to reductions elsewhere and strong targets for 2025 and 2030.

• By 2020, demonstration by developed countries that they can deliver credible reductions, without threatening growth, and that they can design mechanisms and institutions to transfer funds and technologies to developing countries.

• Subject to this, a formal expectation that developing countries would also be expected to take on binding national targets of their own by 2020, but benefit from one-sided selling of emissions credits in the interim. This means rewards for reductions but not necessarily penalties for rises.

• Fast-growing middle-income developing countries with higher incomes will need to take immediate action in order to stabilize and reverse emissions growth, including sectoral targets and, possibly, earlier national targets.

• A commitment by all countries, regardless of targets, to develop the institutions, data and monitoring capabilities, and policies to avoid high GHG infrastructural lock-in.

These are essentially the requirements for 'effectiveness'.

Let us turn to efficiency and equity. Only sound, measured and coordinated policy and timely international collaboration can deliver strong and clean growth for all at reasonable cost. No strategy that requires a slowdown in the fight against poverty would be either equitable or politically viable. But it must also be clearly recognized that weak or delayed action will eventually choke off growth and be a far more costly option.

Backed by strong developed country targets for reductions, carbon prices can be maintained at levels that will provide incentives both for reductions at home and purchases from abroad. The cheapest mitigation options often reside in developing countries, which should take advantage of carbon markets from the outset. The current structure of the Clean Development Mechanism (CDM) makes it difficult to create market flows to developing countries on the scale required. Moving from a project-based to a wholesale mechanism, perhaps based on sector-specific efficiency targets and credible sector de-carbonization plans, would permit scaling-up in a number of emissions and energy-intensive industries. Standardized international benchmarks on emissions-output relationships or technologies would help to reduce the risk of emissions diversion and relocation, and to alleviate competitiveness concerns in internationally traded sectors.

By putting an appropriate price on carbon, policy-makers will oblige consumers and producers to face up to the full social cost of their emissions.

Economic efficiency points to the advantages of a broadly comparable global price and coordinated policy based on carbon trading, with openness to international trade so that emissions reductions take place wherever they are cheapest. It is possible to put a price on carbon, explicitly through tax or trading, or implicitly through regulation.

It is important to weigh up the competitiveness risks and opportunities for firms, countries and sectors, especially where some countries or sectors apply GHG policies earlier and more ambitiously than others. There will be losers, and the impacts of transition will need to be managed. However, transition to a GHG-constrained world will create opportunities for companies and sectors that anticipate new markets. Moreover, the evidence to date suggests that few firms are likely to relocate activities to less restrictive jurisdictions. Overstating the problems relative to the opportunities risks prompting parties to wait for others to move before taking action. By contrast, the expectation of a credible global agreement would sharpen the incentives for companies and governments to move quickly and efficiently.

The key areas for action are deforestation, energy efficiency and low-carbon technologies. Reducing emissions from deforestation and degradation is a potentially cost-effective method of limiting emissions. Indeed, rapid results here are absolutely crucial to achieving reductions on the scale required. Furthermore, they can yield significant benefits in terms of biodiversity, watershed management and local livelihoods. Policies must be framed by the countries where the trees stand and set in the context of, and consistent with, their own circumstances and plans for development. But strong international support is essential: tropical deforestation is an international problem needing urgent international action. Addressing deforestation requires large-scale public resources and must form part of a development strategy that raises agricultural productivity, creates alternative opportunities and improves governance. There should be a long-term aim of integration within carbon markets so that private flows can take an increasingly large share.

Options for energy efficiency are everywhere and many firms and sectors have found that strong savings are immediately available if there is a clear focus on the issue. Others depend upon investments, such as insulation, many of which show high returns. Technological progress in energy efficiency (e.g. in light bulbs) is moving quickly.

For emissions to have been reduced to around 2 tonnes per capita in 2050, most of the world's electricity production will need to have been decarbonized, while emissions from transport, land use, buildings and industry will need to have been cut sharply. The importance of technological innovation in delivering this transformation can hardly be overstated. Some cost-effective emissions reductions can be undertaken immediately using known technologies (e.g. in energy generation and transmission). In the medium to longer term, however, the task is to deliver next-generation low-carbon technologies, especially for the power, transport, industry and building sectors. Different policy frameworks will be required for different technologies at different stages of development. This will require a major scale-up in public research and development (R&D) on a global basis, support for demonstration projects, global efficiency or emissions standards, and new public-private partnerships to share risk efficiently. It is particularly important that a systematic plan for the development of carbon capture and storage technologies is developed quickly. Efficient technology policy requires globally coordinated action to pool risks and rewards, exploit economies of scale and avoid duplication. Early action to develop and deploy technologies enhances the gains from learning and experience, and promotes cost reductions through induced innovation. In addition to progressively tougher targets and a global cap-and-trade regime, any global policy framework should also aim to expand the market for low-carbon technology. Above all, it is vital that as technologies are developed they are very quickly shared across countries.

Implementation must be structured, phased and managed. A credible global institutional structure is essential in order to manage the proposals and the various different steps outlined in this chapter. Institutions need to be able to match the scale of the challenge and build trust between members, while being flexible enough to adjust to changing circumstances. Any new structure should build on the expertise of existing institutions and more detailed policy and micro-economic analysis will be required to underpin an effective, efficient and equitable global deal in Copenhagen in 2009. But the first task is to create an agreement. The institutional structures should be created around the functions necessary to implement the agreement.

An equitable agreement requires strong support for the development of poor countries. They have been least responsible for the past accumulation of GHGs and are hit earliest. This means finance for their shift to low-carbon growth. Much of this can come from carbon markets. But of great importance, too, is funding for adaptation. It is simply more costly to pursue development goals in a more hostile climate. This finance should be centred on national development plans embodying low-carbon growth and adaptation. These can only be constructed by the developing countries: they set their own goals and understand their own circumstances. But there is much that others can do beyond the vital finance. In particular, the sharing of technologies and know-how should be at centre stage. This means first delivering on existing commitments on aid and then going beyond to take account of the extra costs of a more hostile climate and the medium-term investments in low-carbon technologies.

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