In search of transformational change (part 1)

Aug 4, 2017 | Transformational change

There is an ambition gap at the heart of the world’s mitigation efforts. This is most clearly evident in the gap between the emission reductions pledged in countries’ Nationally Determined Contributions (NDCs) and the emission reductions required to hold global temperature increase at no more than 2°C – a gap that UN Environment estimates as being roughly 13 GtCO2e by 2030.

But there is also an ambition gap evident in the tools at our disposal. It is revealing that the Montreal Protocol, an international treaty devoted to the reduction of ozone-depleting substances, has achieved greater reductions of greenhouse gases than the UN Framework Convention on Climate Change, and its associated Kyoto Protocol, has managed.

Missing from the panoply of mechanisms, instruments and funds associated with the climate architecture has been a sense of urgency and, above all, a pursuit of genuine transformational change.

‘Transformational change’ is a phrase that’s easily invoked and rarely defined with any clarity. Here, it is understood to mean a change that disrupts established high-carbon pathways and overcomes persistent barriers to low-carbon development.

The Clean Development Mechanism (CDM), hitherto the most successful international carbon crediting mechanism created, has many positive virtues (and a few glaring weaknesses) but few would claim that it has been genuinely transformational. Its focus on project-level interventions and an explicit decision at the outset to exclude policies and measures (as opposed to investments) from being credited mean that it is only ‘awkwardly scalable’.

Increasing emission reductions under the CDM means, of necessity, increasing the number of investment projects (wind farms, landfills, industrial plants and the like), with all of the search costs, transaction costs and diminishing returns that suggests, not to mention the fact that underlying emission drivers such as consumer awareness, behavioural change, technological innovation, fossil fuel subsidies and environmental policies are utterly neglected (sometimes explicitly). Programmes of Activities (PoAs) and standardised baselines are moves in the right direction but cannot fully overcome the intrinsic limitations of a project-based mechanism.

It is certainly true that CDM Certified Emission Reductions (CERs) have found a role as a fungible currency to help other mechanisms reduce emissions – witness their (diminished) role in the EU Emissions Trading Scheme (EU-ETS), the Korean ETS and in the three auctions to date of the World Bank’s Pilot Auction Facility for Methane and Climate Mitigation.

There has been plenty of speculation that the CDM could play a similarly supportive role for the Green Climate Fund (GCF), providing a ready-made, off-the-shelf engine of (relatively) robust emission reductions that could be purchased and retired by the GCF.

While such an approach could offer plenty of benefits – broadening the geographical coverage of the CDM, for example, and resuscitating existing registered CDM projects, many of which are struggling – it’s difficult to sustain the argument that adopting an incremental project-by-project approach is the easiest or most cost-effective means of achieving the GCF’s stated aim of paradigm shift.

Emissions trading – the exchange of Assigned Amount Units (AAUs) under the Kyoto Protocol – suffered from the outset from the problem of ‘hot air’: Parties such as Estonia, Romania and Ukraine could sell surplus allowances without even having to consider transformational emission reduction strategies, let alone implement them. Green Investment Schemes (GIS) did, in some cases, link AAU transfers with on-the-ground mitigation actions, some of them genuinely ambitious in character. But such greening was voluntary and, in many cases, poorly implemented and opaquely reported.

There is nothing in principle to stop Nationally Appropriate Mitigation Actions (NAMAs) from catalysing truly transformational change, largely because nowhere is the term NAMA actually defined. But early hopes that NAMAs would become vehicles for scaled-up carbon finance (as exemplified by excited talk of a ‘PoA2NAMAs’ transition and an optimistic early typology that included credited NAMAs in the mix) quickly evaporated and even the term NAMA has been dropped from the Paris Agreement (the new formulation of choice is ‘mitigation actions’).

To be fair, the NAMA Facility, which finances 70% of the NAMAs that succeed in receiving funding for implementation, does impose a ‘potential for transformational change’ eligibility criterion when selecting NAMAs for funding. And the NAMA Facility’s portfolio contains a set of NAMAs – such as building sector NAMAs in Mexico and Tunisia – that genuinely combine scale, innovation and ambition. But NAMAs have always suffered from the lack of a structured ‘market’ and a reliance on ad hoc donor funding; only 9% have ever been funded and most linger in NAMA Registry limbo.

Number of NAMAs under development and implementation, 2011-2017. Credit: Mitigation Momentum

Despite its inexplicably low profile, the Global Environment Facility (GEF) has a strong claim to being a true champion of scaled-up mitigation approaches. Although it is a project-based mechanism, in the sense that the GEF Council allocates funding to projects (some of which are aligned with broader Integrated Approach Pilots (IAPs) and, in the future, potentially Impact Programmes), such projects are, in fact, often sectoral in scope and ambition, seeking to introduce and support – for example – national auction processes for renewable energy, appliance and building energy efficiency standards, and vehicle fuel efficiency standards.

A typical GEF project incorporates a blend of investment, capacity building and policy-level work, and is therefore intrinsically more holistic than a CDM project can aspire to be. Moreover, with its four-year funding cycles (currently GEF-6, with GEF-7 due to start in June 2018) and country (STAR) allocations, the GEF can provide greater funding certainty than is available to NAMAs. (Actually, through its projects the GEF is in fact one of the largest NAMA financiers).

A weakness of the GEF, and one that stems from its holistic approach, lies in its MRV of project emission reductions. Unlike the CDM, which has only to account for on-site, investment-related activities, a GEF project’s mitigation benefits tend to be more nebulous, stemming from investments certainly but also from the introduction (or better enforcement) of policies and regulations, from financial instruments such as revolving funds and on-granting programmes, and from changed consumer and producer behaviour.

A GEF methodological framework exists to accommodate these various sources of emission reductions but inevitably it is rather broader and less prescriptive than a CDM methodology (there is no fixed baseline-setting approach, for example) and relies on subjective judgement (for instance, in the form of GEF causality factors). Moreover, assessment of a project’s mitigation performance takes place only three times in the project cycle – during project design, at the project mid-term and at the end of the project – which inevitably limits the granularity of performance data.

Under the Warsaw Framework and earlier UNFCCC decisions, Reducing Emissions from Deforestation and Degradation (REDD+) has from the outset adopted a national accounting perspective – in contrast with voluntary sector forestry projects (such as those of the Verified Carbon Standard), which are project-based and generally small-scale. And, unlike the GEF, REDD+ benefits from a standardised baseline-setting procedure in the form of Forest Reference Emission Levels (FRELs; or, also permitted, Forest Reference Levels, FRLs). FRELs are essentially UNFCCC-assessed (if not quite formally approved) sector-wide standardised baselines.

To date, most REDD+ work under the UNFCCC rubric has focused on Phases 1 and 2 – that is, readiness and pilot projects, with only limited emission reduction activity – but a cohort of countries is now approaching Phase 3, results-based payments for verified emission reductions (i.e. for bringing the rate of deforestation below the baseline rate).

The three phases of REDD+ implementation. Credit: UN-REDD Programme

The potential supply of emission reductions is considerable, possibly as much as 2.5 billion tCO2e from 5 countries over the past 4 years. Whether a structured market for such reductions will emerge – via the World Bank’s Forest Carbon Partnership Facility, for example, or through a GCF-supported purchase programme or demand from airlines operating under CORSIA – remains to be seen but, like the GEF, REDD+ stands out as being a rare example of a mitigation instrument that can be genuinely transformational.

Which brings us to the Paris Agreement…

To be continued in Part 2.