Why INDCs can be a firm foundation for a climate deal
You may be forgiven for thinking that Intended Nationally Determined Contributions or INDCs are just another UNFCCC requirement to add to a long list of reports and official submissions on the UNFCCC website which consume resources in hard-pressed finance, planning and environment ministries.
In fact, whether or not Parties make any significant progress at CoP21 in Paris in December, the mitigation element of INDCs could become the roadmap for public and private sector funded development and for this reason, it is vitally important that all nations take their INDCs seriously and build in, inter alia, realistic emission projections.
Any financing institution specializing in large scale infrastructure these days will face tough questions around the financing of fossil fueled energy infrastructure and with an increasing number of funds divesting from fossil fuel, the costs of capital will be going up. All very well for wealthy investors who want now to secure their future, but what about developing countries who have access to fossil fuel reserves, believe that they have a right to use such reserves and remain skeptical of the advertised costs and benefits of renewable energy?
Thanks to the advent of the INDCs, and with progress in Paris increasingly likely as more Parties submit their INDCs, the decision of when to invest in fossil fuel is about to get easier. Question number one on the latest due diligence questionnaire should read “Is the project included in the INDC?” If the answer is “Yes” and the INDC is part of a negotiated agreement on a post-2020 climate regime, then it means that the country has successfully laid claim to the atmospheric space required to dispose of the GHG emissions associated with the operation of the technology in question – in simple terms, it’s in the country’s GHG budget. If the project is not included in the INDC then funding it potentially undermines the international climate agreement.
What are INDCs?
In conceptual terms, the mitigation element of INDCs is an “air-grab” in which the last of the global commons is being divided amongst 196 nations. At stake is a share of the remaining 2°C atmospheric space in which to dispose of GHG emissions. Developed countries argue they need a big share because they have existing infrastructure which they cannot afford to shut down overnight whilst developing countries can leapfrog conventional technologies and go green. Developing countries argue that they have the right the use cheap, reliable and available fossil fuels to power their development, why should they be saddled with renewables?
In practical terms, INDCs incorporate bottom up commitments from all nations towards the agreed objective of limiting average surface temperature increase to 2°C. They are voluntary in nature but will become binding in the event of successful agreement in, or after Paris. All nations were requested to submit an INDC before the end of March 2015 with an absolute deadline of end October 2015. The UNFCCC Secretariat will consolidate the submissions in time for CoP21 in Paris but there is, as yet, no formal agreement to “add up” the commitments and compare them against the global target; and there is no formal review process. Unfortunately, adding commitments up is complicated by the fact that they can be expressed in a number of different units – like after a long journey when your plug doesn’t fit and you don’t have an adaptor, only worse.
To date the 20th of August 2015, there have been 26 submissions from 53 countries (EU combines 28 countries in 1 submission). You can see full details here.
Top of my list for effort and ambition is Ethiopia. Consistent with their Climate Resilient Green Growth Strategy and Growth and Transformation Plans, Ethiopia has already declared that their baseline is renewable energy and that with sufficient support, they will reduce their emissions by 64% compared to business as usual in 2030 and actually reducing their total emissions from 150 million tonnes per annum today to 145 million tonnes per annum in 2030. With a population of 90 million today and growing, this will make their annual emissions around 1.1 tonnes per person.
How might financial institutions use INDCs in the future?
INDCs should present some form of a development roadmap and GHG emission budget for major sectors of the economy from now to 2030. If CoP21 in Paris produces a climate agreement, those budgets will become binding and every funder will need to ask the question “Is this project part of your INDC?” Even if Paris fails to reach an agreement, funders may elect to refer to INDCs as an indicator of “acceptable” investments.
- Public and private sector funds will want to ensure their infrastructure plans are consistent with submitted INDCs;
- In the event that a post 2020 agreement makes provision for a market based mechanism under which carbon assets (e.g. allowances to emit or emission reductions) can be transferred between Parties (perhaps like the Kyoto flexibility mechanism “Joint Implementation”), or via internal carbon pricing, projects which reduce emissions below the INDC could potentially access new sources of finance;
- The publication of INDCs will inevitably lead to the creation of ambition indices and ranking of countries by the level of their contribution to the global target. The implication is that countries which make greater commitments to the global target will potentially receive more attention from climate finance providers.
INDCs are expected to form the basis of a post-2020 climate agreement and they also present a snapshot of every county’s planned development pathway. Countries preparing INDCs should take these submissions very seriously and understand that they are negotiating their development “budget” that will give them space to emit GHG emissions from fossil fuels and hence, their energy mix. Financial institutions should likewise consider the INDC’s with great care. Infrastructure projects that are consistent with the INDC are “in the budget”. And you all know what happens when your project is not in the budget.