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Reflections ahead of Copenhagen climate negotiations

Written by Dirk Willem te Velde

There are several initiatives and ideas on the road to Copenhagen. There are three key issues which emerged from the Conservative Plan on Climate Change and Development launched at ODI on Monday. Each of these requires some reflection forcing us to think about the complex world of climate negotiations and development in more detail.

First, according to the plan, a Copenhagen deal must prioritise global fossil fuel subsidy reform. On the face of it, this seems a useful proposal, which has been endorsed by the G-20 already. At present, developed and developing country governments subsidise products that have a negative effect on the environment, therefore, on growth. When the government does not pass on the full price of energy, it has to bear the financial burden of the implicit subsidy, with macroeconomic consequences in terms of reduced expenditure on other items, which could have benefited the poor in general, and growth in particular. Subsidies are provided mainly by such countries as Iran, China, India, Russia and Saudi Arabia. In some cases, a removal of subsidies would hit the poor disproportionately, but in other cases it is the subsidies themselves that are harmful for the poor. There are estimates that India, for example, spends $17.5 billion or 2% of GDP on fuel subsidies each year to keep oil prices low. Some of these subsidies are progressive, e.g. a kerosene subsidy is used, in general, by the poor, but other subsidies are regressive, e.g. the richer Indian urban consumers capture three-quarters of the benefits of subsidised liquefied petroleum gas. The amount spent on subsidising oil products may be diverted (as was the case for the kerosene subsidy) and never reaches the poor. And all the while, it could have been spent more directly on their needs and growth more generally. The reform of subsidies to energy pricing structures is sensitive and may lead to protests, as happened in Indonesia (1998), Nigeria (2000) and Yemen (2005). In short, it might be a good idea in developed countries, but more thought needs to go about addressing the consequences in poor countries.

Second, the Conservatives would end the use of the Export Credit Guarantee Department ( ECGD ) to promote 'dirty' fossil fuel power stations around the world, and instead make it a champion of green technology. The ECGD's Overseas Investment Insurance ( OII ) scheme is one way in which the UK promotes investment in developing countries. It provides political risk insurance for investments by UK firms overseas. But its latest annual report states that no new investments were insured in the space of a year. The maximum liability for OII stood at £81 million on 31 March, 2009, down from £138 million in 2007-2008 and close to £1 billion at the beginning of the decade. Our research into the effectiveness of ECGD , including econometric research, does indeed suggest that this scheme was not particularly effective. The demand for political risk services provided by the ECGD is unlikely to be a key bottleneck to investment deals. Instead, development finance and investment-related aid in developing countries might be more effective in pulling investment into developing counties. This may well be one of the solutions to finding climate finance that is not based on traditional official development assistance or ‘other official flows' (OOF) and that is an additional mechanism to aid (another key plank of the conservatives approach to climate change and development). Additional finance needs for mitigation and low-carbon strategies in developing countries run into the tens and hundreds of billions, and private sector investment may be facilitated by a variety of approaches – e.g. hydropower investment needs equity, loans and guarantees – implemented by various agencies.

Third, the Conservatives suggest that rich countries must take steps to give poor countries a bigger voice in global climate negotiations. The parallel can be seen in trade talks, where small and poor countries are under-represented and their voices are not properly heard. The UK government supports the African Union in G-20 and climate talks. There is an interesting point here. Trade negotiators are being supported by aid for trade schemes. How do environmental negotiations compare? There are benefits of more open trade regimes, and the current Doha round is estimated to add less than half a percentage point to African and global GDP. But looking at possible scenarios for a Copenhagen Framework Agreement by my colleagues Nicola Cantore, Leo Peskett and myself, it seems that Africa could gain some 6% of GDP through ambitious developed country cuts in emission, technology transfer and additional climate finance. To promote a bigger voice for poor countries in climate negotiations, but avoiding a direct conflict of interest (e.g. the EU directly funding negotiators on the other side of the table), developing countries may need indirect support via a multilateral channel or perhaps even a World Environment Organisation to ensure that negotiations are conducted efficiently, something proposed in 2000 by the then Prime Minister of France, Lionel Jospin and academics such as John Whalley . It is an idea that is gaining new attention, most recently by African negotiators .

How can developed countries best support poor countries in climate negotiations? Is a World Environment Organisation with specific support for poor countries negotiations the answer? Views are welcome.