Kyoto2 a framework for an effective, efficient, equitable Climate Agreement
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Kyoto2 and forestry

This short paper was initially written as notes for a presentation to the Oxford Forestry Society on 8 May 2007, and subsequently to the WWF-UK Forest Team on 27 July 2007. It has since received minor amendments, updates and additions.

The Kyoto Protocol is notable for three things:

But perhaps the worst aspect of the Kyoto Protocol is that this deeply flawed, ineffective and unreformable instrument has come to define the landscape for carbon regulation. From that point of view, it would have been better had the Kyoto Protocol never happened. Now, as we look forward to a post-2012 settlement, most people are thinking within the context of the Kyoto Protocol, and how it might be updated ... say to include China, India, Brazil, Mexico.

However for environmental groups including WWF this is a counsel of despair. There is no reason to believe that a "reformed" or updated Kyoto Protocol will be any more effective than the one we have already got. We need to begin again from the ground up and develop a framework for a new Protocol which really will be effective - as well as equitable and compatible with a successful global economy. This is what Kyoto2 is all about.

At present we have a conundrum:

Kyoto2 aims to resolve this conundrum by using the carbon market to raise these funds, so desperately needed but as yet unforthcoming. Thus it proposes to raise significant funds from the sale of greenhouse gas (GHG) production rights (Rights) within a global cap defined for each year. Each Right would grant the owner the right to produce 1 tonne of CO2, or equivalent. In the specific case of fossil fuels, the Rights would be applied to the production of the fossil fuels, in terms of their carbon content, and would thus be assessed close to the point of production, or "upstream".

Based on current carbon prices in the various markets active today such as the EU-ETS and the CDM, the global sale would raise in the region of $500 billion to $1,000 billion a year. These funds would then be applied to dealing with the causes, and the consequences, of climate change - in other words, climate change mitigation and adaptation.

The preferred way of selling the Rights is by way of an Ascending Clock Auction, subject to both reserve and ceiling prices, creating what economists know as a "hybrid instrument", that is to say a system that combines the pure "price" approach - a carbon tax - and the pure "quantity" approach - an auction.

Under this hybrid approach, a failure to achieve the reserve price for a given allocation would cause the supply to be cut until the reserve was achieved - so sending a firm minimum price signal to guide long term investments. Conversely, the ceiling price would trigger additional releases of Rights for sale - so limiting the economic impact of a very high Rights price.

Note that the parties needing to obtain Rights would not be Governments as under the existing Protocol, but the producers of fossil fuels and of non-fossil GHGs, such as the producers of PIGGs, cement producers (calcination of lime) and airlines (non-CO2 GHGs such as NOx, particulates, steam). The main role of Governments would be to adminster the system within their terrotories.

Back to forests ... Current estimates (quoted for example in the Stern Report) are that about 20 percent of current GHG production arises from deforestation. In addition, climate change itself may lead to significant deforestation as a result of changes in rainfall and temperature. So it is appropriate to devote a significant portion of the funds raised to both preventing deforestation, and to recreating lost forests.

The UNFCCC's Report on the second workshop on reducing emissions from deforestation in developing countries relating to the 26th session of the Subsidiary Body for Scientific and Technonological Advice in Bonn, 7-18 May 2007 quotes the World Bank's estimate that "to achieve a 10-20 percent reduction in rates of deforestation, the amount of financing required would be in the range of $2-25 billion per year".

The figure is useful - though the objective laughably inadequate. If we are to save the world from catastrophic climate change, we need to deploy all possible means to the greatest achivable extent. Our objective would be to bring about a halt to deforestation, indeed to reverse deforestation and bring about a net recreation of forests.

Taking a price at the upper end of the range offered by the World Bank, to reflect the fact that we would have to aim at high-hanging fruit as well as low, we assume that a 15 percent reduction in deforestation would cost $20 billion, and thus a 100 percent reduction would cost some $120 billion. Of course this is an order of magnitude estimate. But the cost could credibly come in in the region of $100 billion per year. This represents 10-20 percent of the sum that could be raised at the global Rights auction - a level investment that would therefore be available under the Kyoto2 approach.

The next question is how best to spend these funds to achieve the desired result. We need an approach which is simultaneously:

A number of mechanisms have been proposed, which are set out in the UNFCCC report referred to above. These are known under the heading of REDD or "Reducing Emissions from Deforestation and Degradation". They include (from Vanuatu) the "carbon stock approach", the "sectoral crediting baseline approach", the "direct barter approach", (from Tuvalu) the "Forest Retention Incentive Scheme", (from India) "Compensated Conservation".

In the meeting, Brazil emphasised the need for "robustness, completeness, comprehensiveness, transparency and verifiability", Costa Rica, speaking on behalf of a number of Latin American countries, proposed an "Avoided Deforestation Carbon Fund" to cover specific activities that directly reduce emissions from deforestation and maintain forest cover in countries that have low rates of deforestation, and supported an "Enabling Fund" to support capacity-building and pilot activities. Papua New Guinea, on behalf of the Coalition for Rainforest Nations, suggested a REDD mechanism and two funds, the "Enabling Fund" and the "Stabilization Fund".

To try and cut through the complexity of the discussions, which I have barely begun to do justice to, there are two main approaches:

Both these have problems:

Accordingly the approach now forming part of the Kyoto2 proposals is to develop Forest Agreements specific to individual countries or even regions of countries, which would incorporate both elements, and indeed others besides. These plans would include areas:

The level of recompense payable under the Forest Agreements would be made based on such factors as:

The Forest Agremeents would then take the form of a contract between the UNFCCC and the country in question. Payment would be made based on performance of the whole contract, giving a strong incentive to the recipient country to implement it in all parts. This principle would be interpreted sympathetically where the country was making best efforts to comply but was faced with unforeseen difficulties, but a country wilfully violating its contractual obligations would face the loss of a disproportionate element of its entire payment.

The main stumbling block to progress expressed in the Bonn discussions was where the finance would come from. For example, it could arise from a levy on transactions under the CDM, or a mechanism might be found to allow industrial (Annex 1) countries to offset their excess emissions by forest conservation. However these both have problems:

The Kyoto2 proposals resolve these problems, raising sufficient finance to pay for the world to retain its forests without the need for dubious "offset" or CDM mechanisms. And they also offer a clear, equitable and resilient approach to resolve the problems of climate change in the broader global context.

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