#26: Oxfam’s Solution

July 2, 2009
by phil
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The global deal on climate change has two main requirements. That it is guided by the latest science and that it is fair. Without fairness there will be no deal, as 192 countries need to agree and most of these countries are poor. We take a look at Oxfam International’s proposal for a fair deal that could break current deadlock in the talks, in an interview with Oxfam researcher Richard King . Like the proponents of Climate Debt and Greenhouse Development Rights, Oxfam says the rich world has a “double duty” to both make radical cuts at home and to pay for the poor world to adapt to climate change and develop in a low carbon way. Oxfam’s key recommendations are:

  • Copenhagen must deliver a fair and adequate climate deal: one that keeps global warming as far below 2°C as possible, and that reflects the historical responsibility for emissions and the economic capability of developed countries
  • Rich countries must agree binding individual country targets that cut greenhouse gas emissions to at least 40 per cent below 1990 levels by 2020.
  • A UN Fund should be established by raising $150bn per year as an absolute minimum from the sale, auction or levy of rich country emissions allowances (AAUs). $100bn of this would fund low-carbon development in poor countries and $50 would fund adaptation measures in poor countries
  • Additional funds would be raised from fines if rich countries fail to meet their targets; and from the purchase of “premium reductions” which would replace the Clean Development Mechanism and ensure that poor countries rather than rich countries take advantage of the cheapest low-carbon options first

Is Oxfam’s idea of “premium reductions” a possible solution to the problems with the Clean Development Mechanism? We aksed Richard King to expand on this idea and how it relates to the CDM in the explanatory note which follows…

EXPLANATORY NOTE

How will ‘premium reductions’ be priced and verified?
Under Oxfam’s proposal, premium reductions would be those emissions reductions generated through projects or sectoral programmes that deliver emissions reductions above the target level of reductions defined for each country by the Global Mitigation and Finance Mechanism. While incentive financing would be provided for reductions achieved (and described in the country’s national mitigation plan) up to the target threshold, any cuts achieved above the threshold could be sold on the international market as ‘premium reductions’.

Premium reductions would be privately financed, just as Clean Development Mechanism (CDM) projects are at present. As such, the market would determine price. We can expect that the price of these reductions would be significantly higher than current market rates (hence the ‘premium’). This is because such a large volume of low cost reductions would be delivered through incentivised national reduction plans, leaving scarce opportunities for low-cost reductions. So in terms of supply, the remaining emissions reduction opportunities will lie farther up the cost curve.

Premium reductions would need to be verified through a third-party verification system just as CDM credits are verified now. They would not necessarily need to be verified by the Global Mitigation and Finance Mechanism although this could be one option. A simpler option may be to use the structures already existing under a reformed CDM.

What role for the CDM in the Oxfam financing mechanism / model?
The CDM is deeply flawed in its current form.  There are three major problems:

  • It is fundamentally flawed in its design, as it provides no guarantee of net global emissions reductions. While reductions are verified at project level, developing countries currently face no limit on overall emissions, and so reductions in one CDM project can easily be offset by greater emissions growth elsewhere in the economy.
  • There are also problems with ensuring that the CDM actually provides emissions reductions above business as usual (additionality).
  • Finally the CDM is very difficult to access for many poor countries because it is highly technical and is biased towards providing funds for relatively high emitting emerging economies. For example, the vast majority (over 90%) of CDM projects in Africa are in South Africa – because of its capacity and because of its high emissions intensity.

Even without these flaws the CDM is unlikely to be able to provide the scale of emissions reductions needed in developing countries. One way or another, it will need to be reformed to play a useful role in the post-2012 international climate regime.

The concept behind the CDM – allowing developed countries to achieve their targets by paying for reductions in developing countries instead of through domestic reductions – is included within the proposed Mechanism in the form of ‘premium reductions’. By ensuring that “low hanging fruit” (low cost emissions reductions) are delivered by developing countries’ national mitigation plans and communications – and not used as offsets for developed countries – Oxfam’s proposed Mechanism helps ensure that any ‘premium reductions’ truly deliver net global emissions reductions. Accordingly, one option would simply be for the CDM to be reformed with a focus on delivering such ‘premium reductions’.

Hang Together or Separately
Video of Press Launch at UNFCCC in Bonn
EcoEquity – various writings

Oxfam’s Key Recommendations:
  • Copenhagen must deliver a fair and adequate climate deal: one that keeps global warming as far below 2°C as possible, and that reflects the historical responsibility for emissions and the economic capability of developed countries
  • Rich countries must agree binding individual country targets that cut greenhouse gas emissions to at least 40 per cent below 1990 levels by 2020.
  • A UN Fund should be established by raising $150bn per year as an absolute minimum from the sale, auction or levy of rich country emissions allowances (AAUs). $100bn of this would fund low-carbon development in poor countries and $50 would fund adaptation measures in poor countries
  • Additional funds would be raised from fines if rich countries fail to meet their targets; and from the purchase of “premium reductions” which would replace the Clean Development Mechanism and ensure that poor countries rather than rich countries take advantage of the cheapest low-carbon options first
EXPLANATORY NOTE
How will ‘premium reductions’ be priced and verified?
Under Oxfam’s proposal, premium reductions would be those emissions reductions generated through projects or sectoral programmes that deliver emissions reductions above the target level of reductions defined for each country by the Global Mitigation and Finance Mechanism. While incentive financing would be provided for reductions achieved (and described in the country’s national mitigation plan) up to the target threshold, any cuts achieved above the threshold could be sold on the international market as ‘premium reductions’.

Premium reductions would be privately financed, just as Clean Development Mechanism (CDM) projects are at present. As such, the market would determine price. We can expect that the price of these reductions would be significantly higher than current market rates (hence the ‘premium’). This is because such a large volume of low cost reductions would be delivered through incentivised national reduction plans, leaving scarce opportunities for low-cost reductions. So in terms of supply, the remaining emissions reduction opportunities will lie farther up the cost curve.

Premium reductions would need to be verified through a third-party verification system just as CDM credits are verified now. They would not necessarily need to be verified by the Global Mitigation and Finance Mechanism although this could be one option. A simpler option may be to use the structures already existing under a reformed CDM.

What role for the CDM in the Oxfam financing mechanism / model?
The CDM is deeply flawed in its current form.  There are three major problems:

  • It is fundamentally flawed in its design, as it provides no guarantee of net global emissions reductions. While reductions are verified at project level, developing countries currently face no limit on overall emissions, and so reductions in one CDM project can easily be offset by greater emissions growth elsewhere in the economy.
  • There are also problems with ensuring that the CDM actually provides emissions reductions above business as usual (additionality).
  • Finally the CDM is very difficult to access for many poor countries because it is highly technical and is biased towards providing funds for relatively high emitting emerging economies. For example, the vast majority (over 90%) of CDM projects in Africa are in South Africa – because of its capacity and because of its high emissions intensity.

Even without these flaws the CDM is unlikely to be able to provide the scale of emissions reductions needed in developing countries. One way or another, it will need to be reformed to play a useful role in the post-2012 international climate regime.The concept behind the CDM – allowing developed countries to achieve their targets by paying for reductions in developing countries instead of through domestic reductions – is included within the proposed Mechanism in the form of ‘premium reductions’. By ensuring that “low hanging fruit” (low cost emissions reductions) are delivered by developing countries’ national mitigation plans and communications – and not used as offsets for developed countries – Oxfam’s proposed Mechanism helps ensure that any ‘premium reductions’ truly deliver net global emissions reductions. Accordingly, one option would simply be for the CDM to be reformed with a focus on delivering such ‘premium reductions’.

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