Introduction

This chapter examines the financial dimension of climate change - how much money is needed, where the money might come from and what policy options are available to fill the finance gap between what is currently available and what is required. It also examines the potential role of the Climate Change Convention in the financing of climate change technologies.

The chapter reports on a programme of research and policy advice commissioned in Bali at the 13th Meeting of the Conference of Parties (COP 13) in December 2007. The Bali Action Plan (Decision 1 and 3/CP.13), which provides the road map for a post-2012 climate change agreement, places finance at the heart of a successful negotiated outcome. In particular, it emphasizes the need for adequate resources and the redistribution of financial resources from developed to developing countries.

The plan (paragraph 1(e) Decision 3/CP.13) calls for 'enhanced action on the provision of financial resources and investment to support action on mitigation and adaptation and technology cooperation, including . mobilization of public- and private-sector funding and investment, including facilitation of carbon-friendly investment choices'. The plan directly links developing countries' emissions reduction actions with the scale of financial support provided by developed countries.

It is not possible to rely upon developed country emissions reduction commitments - even if it were possible to totally eliminate developed country emissions. Only with a combination of deep cuts in developed country emissions (in the order of 25 to 40 per cent below 1990 levels by 2020, greater than 50

per cent by 2050, with developed country emission reductions in the order of 80 to 90 per cent by then), with developing country actions to limit emissions by 15 to 30 per cent below business as usual over the same time period, will it be possible to avert dangerous climate change and keep global warming to around 2°C (den Elzen and Höhne, 2008; Metz, 2008).

The Bali Action Plan (Decision 1/CP.13 paragraph 1(a) (i) and (ii))2 committed developing country parties to negotiate nationally appropriate mitigation actions (NAMAs) that are measurable, reportable and verifiable (MRV), and developed country parties to quantified emission limitation and reduction objectives, commitments and actions that are MRV.

For developed countries the MRV requirement also includes commitments to technology, financing and capacity-building support for developing countries. If developed countries fail to provide adequate financial support, there can be no chance that developing countries will commit to limit their emissions; consequently, there can be no chance of preventing dangerous climate change.

According to the secretariat of the United Nations Framework Convention on Climate Change (UNFCCC), additional investments in climate technologies of US$441.5 billion to $1436 billion will be required, on average, each year from 2010 to 2050 (IEA, 2008b; Higham, 2009). While investment needs by sector change over time, on average the investment needs double after 2030 compared with investment needs from 2010 to 2030. Current annual investment in climate change mitigation technologies is estimated at US$70 billion to $155 billion (UNFCCC, 2009). A total of 40 to 60 per cent of the increase, an additional US$177 billion to $862 billion per annum, is projected to be needed in developing countries, much of which will require support and financial transfers from developed countries. This reflects the scale of the emissions reduction potential estimated to be available in developing countries. In summary, upfront investment in climate change mitigation technologies will need to increase fivefold to tenfold.

The type of finance will be important depending upon how the incremental costs are defined. If the fuel savings and co-benefits of investments are taken into account, then loans might become more feasible depending upon the cost of abatement and the prevalent carbon price, and assuming the absence of some defining barrier to financing technology in developing countries.

Much of the upfront investment will be returned over time to the owners and operators of the investments and technologies in the form of reduced fuel costs or greater efficiency or productivity. Full savings from upfront investment costs at a discount rate of 10 per cent reduces the overall cost of achieving a 500 to 550 part per million (ppm) carbon dioxide equivalent emissions stabilization scenario by 2050 to 800 billion, or just over 50 billion per year on average.

It will also be necessary to invest heavily in adaptation to the unavoidable impacts of climate change in all nations, but particularly in the more vulnerable developing countries. These investments are likely to be financed largely by the public sector as many will not derive a financial return or are sub-economic (UNFCCC, 2008a). The World Bank estimated that adaptation will cost US$10 billion to $40 billion and Oxfam International estimated it will be more than US$50 billion annually (Raworth, 2007). In 2007 the United Nations Development Programme (UNDP) projected the annual adaptation investment needs as US$86 billion by 2015. Christian Aid estimates adaptation costs at US$100 billion per year in developing countries (Flam and Skj^rseth, 2009, Table 1, p110). The UNFCCC estimates the additional investment and financial flows in 2030 as US$49 billion to $171 billion globally, of which US$28 billion to $67 billion is for developing countries (UNFCCC, 2007, Table IX-65, p177). These estimates of investment needs are in stark contrast with current adaptation investments in developing countries of US$0.4 billion to $0.6 billion per year (Haites et al, 2009). Therefore, investment in climate change adaptation technologies will need to increase by at least 100-fold.

Negotiations under the Climate Change Convention have identified several feasible opportunities to raise new financial resources that do not rely upon voluntary contributions from nations to a total value of US$20 billion per annum (UNFCCC, 2007, 2008a, 2009). The options include auctioning national emission rights (known as 'assigned amounts' in the lexicon of the convention), placing levies on international shipping, air freight and travel, and taxing the transactions that occur through the flexibility mechanisms of the convention - the Clean Development Mechanism (CDM), joint implementation (JI) and international emissions trading. Whether or not governments will agree to introduce these new financing options is uncertain. Clearly, it will not be possible to achieve a transition to a low-carbon and climate change-ready world with just an additional US$20 billion per annum. However, the less money that is raised internationally, the more that will be required through voluntary contributions from governments and the more the convention will be dependent upon national policies and measures.

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