(7) Funding global action
Providing sufficient funds for reducing emission growth in developing countries is among the
biggest unsettled issues on the agenda. Industrialized countries will most likely take on binding
caps, and developing countries most likely will not. The key question for mitigation funding is
then who pays for abatement in developing countries (the implementing country, or developed
countries – whether through public funds or private carbon market transactions), and who
receives credit for the reduction in emissions (the implementing country, or the one that pays).
Three scenarios (and mixtures between them) are possible. Firstly, (1) NAMAs could receive
public funding from developed countries, with emission reductions credited to the implementing
country. Alternatively, the system could expand the use of market mechanisms beyond the CDM
process. With this option, (2a) NAMAs could receive (partial) public funding from developed
countries, and reductions could be (partially) credited to the financing country as offsets; and/or (2b) NAMAs could generate certified offsets which could be sold in the private carbon market. In
terms of burden sharing, the two latter mechanisms are a priori equivalent, since the market
buyers would be private entities from developed countries that purchase credits to meet their
domestic cap requirements. It would of course also be possible for (3) NAMAs to be funded by
developing countries, who then retain the credits.
Adaptation and mitigation funding involve different considerations and tradeoffs. Adaptation
presents a tradeoff between equity and willingness to pay in developed countries. It hence
resembles traditional aid negotiations, although the ethical obligation on developed countries to
provide funds is particularly compelling in the context of climate change, since the ability to
assist meets responsibility for damage inflicted. The EU’s, Japan’s and the United States’ current
negotiating texts are quite forthcoming on adaptation funding.
By way of contrast, in mitigation funding, important effectiveness and efficiency questions are
also at play. One may find it appealing on principle for developed countries to conduct most
emission abatement domestically, and technology development may be fostered by vigorous
domestic action. Yet, action may be more cost-efficient, and technology transfer may be deeper,
if there is a market element to international action. Furthermore, many studies illustrate how little
excess capacity there exists in mitigation opportunities in the near term, and hence, how little
room for error the global community has in implementation. (McKinsey, 2009) The implication
may be that flexibility mechanisms are indispensable not just in terms of economic efficiency, but
indeed in terms of environmental effectiveness.
The relative role in financing NAMAs of market mechanisms, public funds from industrialized
countries, and developing countries’ own resources will be a key negotiation issue. The Parties
agreed in Poznan to retain the CDM mechanism, so there is no doubt that some market
mechanism will still be in place under the new regime. Yet, the volume of the CDM is small
compared to emission reduction needs, and the important question remains whether the market
will be scaled up, through offset credits generated by NAMAs, or through some other version of
programmatic and policy-based CDM.
Disagreement over the use of offsets may be driven by genuine worries among developing
countries that developed countries are not taking on sufficiently deep emission reduction
commitments. In light of the relatively low emission cuts proposed by the United States and some
other developed countries, this is a legitimate concern. In addition, major developing emitters
may be concerned that selling today’s emission credits generated from comparatively cheap
mitigation action may leave them facing higher marginal cost in meeting commitments they may
have to take on themselves post-2020. (Observers have called this the ‘low hanging fruit’
problem’ of mitigation.) Yet, it may be in the interest of many developing countries, and LDCs in
particular, to seek a compromise that would allow for a broader use of offsets in exchange for
higher than expected developed country commitments – a trade-off that Indonesia and Mexico, for instance, have suggested. Such a compromise might help promote core interest of LDCs,
namely reducing future climate change impacts, preserving scarce international funds for
adaptation expenses, and attracting investment for NAMAs.