Climate finance - it's still the one

Climate finance is one of the four issues on which a future climate regime will rest (the others being mitigation, adaptation, and technology development and transfer). It will also prove to be the main stumbling block during the Copenhagen meeting on climate change this December.

This weekend came the news that the Commonwealth Heads of Government Meeting (CHOGM) in Trinidad had agreed to UK Prime Minister Gordon Brown's and French President Nicolas Sarkozy's proposal to establish a $10 billion fund to help developing countries reduce their emissions and adapt to a changing climate. The fund, expected to kick in by 2010, is an important step - one more push towards securing at least a political outcome in Copenhagen.

But several issues remain unresolved. The most important is the 'additionality' of funding. This is jargon for the demand from developing countries that funding made available for climate change should be over and above existing allocations for official development assistance. In other words, they do not want climate change finance to simply substitute money intended for education, health and other development aspirations. Today, The Guardian reports that it has evidence that the European Union is trying to delete references to additional funding from the Copenhagen text. The United Kingdom supports additional funding, but even its climate-related aid allocations have come from existing aid budgets, not as extra money. As a clarification, a Department for International Development spokesman said, 'Additional funding for climate change would be made available from 2013...'

At one level, the question of additionality is problematic because it is difficult to distinguish between assistance for general development programmes, say improving water management systems, and activities geared towards climate adaptation.

But the bigger problem is that the funds required are several multiples of what is currently spent (only $1 billion a year on adaptation). On mitigation, too, scholars suggest that at least $50 billion might be needed annually in the form of public financing support (see my paper with Kevin Watkins; Lord Nicholas Stern repeats the point in an op-ed today). But current levels of public financing are much lower (since 1991, the Global Environment Facility has cumulatively provided only $2.5 billion for climate financing and leveraged another $15 billion).

A further problem - and related problem - is the long history of unmet commitments on development assistance, which has resulted in an atmosphere of sheer mistrust and bad faith between rich and poor countries. Moreover, the richest country (the United States) has yet to table any offer regarding climate financing. President Obama admitted at the G8 summit in July this year that the United States had 'sometimes failed to meet its responsibilities so let me make it clear those days are over.' It doesn't look like those days are over yet.

So, why will climate finance prove to be the stumbling block? Because all other actions will be contingent on the available funding. Over the last few weeks, we have seen one country after another offering unilateral commitments to reduce emissions (Brazil; Russia; South Korea; United States) or carbon intensity (China; even India is considering an announcement). Fast growing developing countries are adopting measures that they believe to be in their interest anyway. But any additional actions will depend on additional funding. As one developing country delegate in climate negotiations earlier this year complained, asking poor countries to take on climate-related actions without promised financing was like selling lottery tickets without announcing the prize! Such tickets would not find many buyers, he noted.

No toilet, no bride

Women in rural north India are demanding toilets before consenting marriage. The Washington Post reported today about a 'No toilet, no bride' campaign, whereby parents of girls are insisting that their prospective grooms have toilets in their homes. In Haryana state, 1.4 million toilets have been built since 2005. The local government subsidises the costs incurred.

Globally, some 2.6 billion people do not have access to improved sanitation facilities. In India, alone, that number is closer to 700 million, with a greater proportion of Bangladeshis having access than Indians, even though per capita incomes in India are 1.6 times higher. Women are worst affected by this condition, facing a loss of dignity in conjunction with health problems. In addition there is an economic cost in the time spent to walk to a safe place to defecate or to collect water. In 2006 the Human Development Report argued, '[T]he weak voice of women in shaping spending priorities within the household means that the constituency with the strongest expressed demand for sanitation has little control over expenditures...Empowering women may be one of the most successful mechanisms for increasing effective demand.' The ability to say no to a hand in marriage is turning out to be a significant source of such empowerment.

Supported by the Total Sanitation Campaign, in Haryana the idea has caught on in the popular imagination. A radio jingle teases, 'No loo, no "I do"!' Soap operas are using the the campaign for plot lines. And it seems to be having an effect. Christian Science Monitor reported in May that there was at least one case of a woman who divorced her husband for lying that he had a toilet in his house. According to the local representative of Sulabh International (the sanitation advocacy organisation) in the past four years the proportion of rural households in Haryana with a toilet has reached 60% (up from 5%). The Hindu reports that one-third of these toilets have been built by households under the poverty line.

In his autobigraphy, Mahatma Gandhi recounted a meeting in 1896 with the Rajkot Sanitation Committee. At the meeting, members of the 'untouchable' caste voiced their frustration: 'Latrines for us! We go and perform our functions out in the open. Latrines are for you big people.' More than a century later that message is still not heard widely enough but there are signs of change.

G8, G17 or G192?

Last week I wrote a column about the G8 summit in L'Aquila, Italy and the climate change discussions that were held there under the Major Economies Forum umbrella (comprising 17 economies). I argued that for the climate negotiations to succeed, much greater levels of trust is needed between developed and developing countries. And in order to build such trust, I suggested that joint activities are needed more than ever - activities to develop and diffuse technologies, to collect and share satellite-based emissions information, or cooperation to reform multilateral financial institutions.

I received a range of comments, some of which focused on the need for sticks and carrots, some of linkages between climate and other regimes, others on domestic politics, and finally on the issue of trust. Let me elaborate a bit on these points.

Carrots and sticks are of course necessary. The main carrot is financing but the U.S. has yet to put something on the table, something that Obama acknowledged in L'Aquila. So, China and

India are playing a wait-and-see game. Another carrot is through access to markets, particularly in environmental goods and services (already a $500bn market). But we're not going to get a deal on that without a comprehensive conclusion of trade talks under the Doha Round.

Meanwhile, the sticks could also be employed through linkage with other regimes, particularly trade sanctions. But that would raise the threat of protectionism, in the least, and make the trade regime ungovernable, at worst. More on this in a future post.

Therefore, in addition to the carrots and sticks approach, there is a need to shift domestic politics in developing countries, a point I have been trying to push via the technology and renewable energy investments route. I am just sceptical (given India's WTO experience) whether the interests in favour of curbing emissions will line up that easily. In the WTO case, the interests that benefited from participation in the trade regime realised it post hoc, not during the Uruguay Round negotiations. Similarly, there will be interests in the new energy sectors that would benefit from a higher carbon price, stronger regulation on emissions, cap & trade, etc. But I do not yet see a strong enough lobby to shift the official position. It has not moved beyond the

North-South posturing.

Trust is not a fluffy term. In international relations, it is the basis for any agreement, no matter how we line up the incentives. The question is how we build trust. I see joint technology development (with public-funded R&D and of course private investments, like GE's investments in China on cleaner coal tech) as one of the ways forward, so that the win-win benefits become more obvious to the actors. Otherwise, the competitiveness concerns of individual economies could overwhelm the public good benefits of responding to climate change.

Ultimately, the G8 or the 'G17' cannot substitute for the G192, namely the full membership of the United Nations for a comprehensive deal on climate change. Smaller negotiating groups might deliver a bargained outcome (although they failed to do so in L'Aquila). But such an outcome will neither enjoy trust nor legitimacy in the wider international community, unless an inclusive process engages with the wide range of governance issues plaguing the climate regime, from negotiations to implementation to monitoring and enforcement.

Growth, energy and climate change - no easy reconciliation

In her speech to Parliament last week, President Patil declared that one of the top priorities for her government would be ‘energy security and environment protection’. The intention is commendable. India and other developing countries face a triple challenge of increasing income growth, building energy infrastructure and confronting climate change. Reconciling these challenges would depend on financing, regulatory and institutional reforms, and international cooperation. Continue reading my article, published today in The Financial Express, here.

Powering a change - cleaner coal technologies for India

Is it possible for India to make a significant contribution towards mitigating climate change without undermining its growth and poverty-reduction imperatives?

Indian policymakers view calls for reducing India’s greenhouse gas emissions as both illegitimate and a threat. They are illegitimate because rich countries are primarily responsible for the historic stock of emissions. The calls are a threat because curbing emissions could undermine growth, necessary to lift millions out of poverty.

But the fact remains that despite historically low per capita emissions, India will increasingly become a major source of emissions. Developing countries (led by China and India) will account for three quarters of the projected increase in emissions up to 2050. Unless developing countries’ emissions are also stabilized by 2020-25, any meaningful action by rich countries would be negated.

The transfer of cleaner coal technologies to India holds one of the keys to reconciling these competing concerns.

Continue reading my latest article, on the transfer of cleaner coal power technologies to India, which has been published in Indian business newspaper, Mint.

Reserve Bank of India Governor explains India's response to economic crisis

Central bankers are in the lecturing mode. Soon after I wrote about the Chinese central bank governor calling for a new reserve currency, I came across this speech by the Governor of the Reserve Bank of India (RBI) on how India is managing the impact of the financial crisis.

Addressing the Confederation of Indian Industry today, Governor Duvvuri Subbarao explained that, although India's banking sector had no direct exposure to sub-prime mortgages, India has been hit by the crisis because of its 'rapid and growing integration into the global economy'. India's trade (merchandise exports plus imports) to GDP ratio increased from 21.2% in 1997-98 (when the Asian financial crisis hit) to 34.7% a decade later. More significantly, India's financial integration with the global economy has accelerated: the ratio of total external transactions (current and capital account flows) to GDP jumped from 46.8% to 117.4% in the same period.

The financial and real economies in India have had to take the blow. Since a large proportion of corporate investments was financed by incoming capital flows, the global credit crisis has badly hit Indian firms. Demand from India's major export markets (US, Europe and Middle East) has slumped simultaneously. The dominant services sector will see slow growth. And remittances have fallen.

India responded with a relaxed monetary policy and a fiscal stimulus. On the monetary policy side, the RBI reduced interest rates, reduced bank reserve ratios, relaxed external commercial borrowing for firms, allowed non-banking financial companies (NBFCs) and housing companies to tap into foreign debt. RBI also established a rupee-dollar swap facility to help banks with their short-term funding requirements. More importantly, it has established exclusive refinance facilities with increased resources for vulnerable sectors: micro, small and medium enterprises, the housing sector, the export sector, and NBFCs (plus a special purpose vehicle for the latter).

On the fiscal side, the government used emergency provisions in the Fiscal Responsibility and Budget Management Act to offer stimulus packages in December 2008 and January 2009 (amounting to 3% of GDP). The stimulus includes funding guarantees for infrastructure, indirect tax cuts and support to exporters. (The government has also offered farm loan waiver package and is hoping social safety nets like the rural employment guarantee programme will insulate the poor, but it is too soon to tell.)

The RBI expects these strategies to succeed. For the moment, although bank lending rates have dropped, bank credit has not grown as fast as in previous years and not fully cushioned the impact of lower NBFC lending. But Governor Subbarao expects that with the refinance facilities, lower interest rates and higher government spending, India will be able to manage its balance of payments. He remains optimistic that 'once the global economy begins to recover, India's turn around will be sharper and swifter, backed by our strong fundamentals and the untapped growth potential.'

Economic crisis complicates climate crisis in more ways than one

California is a leader in the United States when it comes to environmental regulation. But the economic crisis threatens to undermine its climate-friendly plans. The New York Times gives the example of CalPortland, a cement company in Colton, which is struggling to find the resources to retrofit its plant to reduce CO2 emissions. Whereas lawmakers had estimated it would cost $200 million to upgrade all eleven cement plants in the state, now it looks like that much would be needed just for the Colton plant. And with the economic crisis, cement prices have fallen to levels that force a revision of the cost-benefit calculus for climate-related investments.

I think the bigger lesson is that the economic crisis presents policymakers with a "double distributive" burden: the distribution of costs and benefits resulting from a process of decarbonising our economies, complicated further by the loss of jobs and economic opportunities during a severe recession. It's one thing to claim that 'green' jobs can be created; quite another when the pressure of job losses in other sectors builds up. Any economic restructuring would involve distributive questions; this time it's just doubly challenging.

Which brings me to my final point: what happens when developing countries try to reduce their emissions? One feasible pathway for countries like China and India is to increase the efficiency of their coal-fired power plants, using already available improved technologies (more on those details in a few days). While improved efficiency would have economy-wide benefits, it is hard to find good estimates of how the incremental costs of upgrading plants would affect individual sectors of the economy (power generation, cement, iron and steel, etc.). Without such estimates, it would be harder still to measure the distribution of costs and benefits across sectors. And, more importantly, it would undermine developing countries' efforts to secure guaranteed financing from rich countries for technological upgrades.

First signs from Obama on climate change

The Obama administration has signaled intent on climate-related issues within its first week. The New York Times reported this morning that the new President favours allowing states to set their own automobile emission and fuel efficiency standards, which are sometimes higher than federal standards. California and thirteen other states in the United States wish to regulate tailpipe emissions, but their request had been rejected by President Bush. Obama's memorandum to the Environmental Protection Agency to review Bush's order opens up the possibility that more states will take the lead. Obama has also ordered the Department of Transportation to issue new nationwide fuel efficiency standards, raising them from the current 27 miles per gallon to 35 miles per gallon by 2020.

Another idea is that of a 'smart grid', which would use information technology to manage the flow of power through the electricity grid. The objective is to reduce the irregularities associated with renewable energy sources like wind and solar, thereby actually increasing the potential for their use and also cutting transmission losses. Further, 'smart meters' would monitor energy consumption and are expected to reduce household use by 10-15%. The project has the support of Obama's new energy secretary, Nobel laureate Steven Chu.

But Obama is also insisting on action by India and China. While saying that 'America is ready to lead' he also warned that 'we will ensure that nations like China and India are doing their part.'

India has its own complaints, particularly the unwillingness of rich countries to commit more money to help developing countries adapt to the adverse impacts of climate change. As India's negotiator, Prodipto Ghosh, put it, 'Obama's announcement of US$15 billion a year - for ten years - is significant but is probably far from enough.'

Here lies the real tension. For rich countries, climate change action means the reduction of emissions globally. For poor countries, the responsibility of causing global warming lies with rich countries who should also bear the burden of financial transfers, technology transfers and accelerated action on adapation. As I've written before, these tensions raise many governance questions. Despite Obama's initial signals, 2009 is not going to be an easy road for climate negotiations.