Consumption-based Targets: the Secret Ingredient for Climate Finance

Disclaimer: I should probably note from the outset that I don’t expect- or think it’s realistic- that a transition to consumption-based targets would ever be adopted and written into the final text at the COP21 negotiations. I hope, however, that if a deal is reached it might be flexible or open enough that it could be seriously discussed before these targets come into effect.

“Finance is the bedrock of the negotiations here in Paris” was how the Gambian head delegate opened his update on how Least-Developed Countries (LDCs) were reworking the COP draft text. If we didn’t know how big of a sticking point climate finance would be—we do now. Wednesday’s sessions brought the conference’s first public scuffle as Indian officials accused the OECD of greatly exaggerating their mobilisation of climate finance; the OECD reported that $57bn of their pledged $100bn per year by 2020 had been achieved, meanwhile Indian officials suggested this figure was as low as $2.2bn.

The debate around climate finance will not just be crucial in terms of adaptation, but will also be an important feature for mitigation efforts. India, for example, has reported that it will only curb its projected coal consumption if sufficient aid is transferred for it to provide cleaner alternatives instead. I suspect the debate around climate finance—how much, by when and who from—will persist throughout the whole negotiation process (and beyond).

If there’s one amendment to the whole process that would facilitate the flow of climate finance, it’s surely a transition to consumption-based targets. It’s probably worth me giving a very brief background on production versus consumption-based targets for those who might be unfamiliar with the jargon [if you’re already familiar, feel free to skip to the next paragraph]. A nation’s targets and contribution to the collective greenhouse gas budget are currently based on how much it produces within its borders. It takes no account for products which are imported, and doesn’t subtract the emissions associated with those that it exports. This means that if a country imports a lot of carbon-intensive goods from elsewhere, these aren’t included in its reported emissions or targets. This way of measuring emissions has been a blessing for a number of developed nations as they’ve offshored their industries to developing ones: since other countries are now producing a large chunk of our goods, we’ve managed to avoid their associated emissions. It’s through this accounting trick that many countries (the UK, for example) has managed to boast reasonable emission reductions in recent years; our real progress is far less impressive. We’ve simply transferred them elsewhere, onto another country’s budget. Consumption-based accounting corrects for this by re-adjusting for imports and exports: a nation’s footprint is given as a more realistic reflection of how carbon-intensive its economy and citizens really are.

consumption trade

Source: Davis, S.J. & Caldeira, K., 2010. “Consumption-based accounting of CO2 emissions”.

Anyone who knows me knows that I’m in favour of consumption-based accounting for a number of important reasons—not least in interests of fairness and transparent accountability (I’ll probably discuss this more fully in another blog sometime). But for now, I’m just going to focus on how consumption-based targets could be the secret ingredient to climate finance transfers.

Currently, under a production-based system, climate finance is largely viewed as a goodwill gesture (or an atonement gift, depending on which way you look at it). Regardless of how you want to label it, it operates as an aid package. A reliance on “aid” comes with a range of issues—even if governments agree on the size of the compensation package, there’s absolutely no guarantee they’ll see it through. Overall aid budgets change, governments switch hands, and aid packages get slashed when domestic economies falter. There’s also the sticky issue of labeling: because energy and emissions are so intrinsically linked to development, it can be easy to re-banner some of the current “development aid” budgets as “climate aid” with no additionality.

How would a consumption-based accounting system change this? It would change this financial transfer from being a charity case to an investment. If I am a developed country and I’m buying goods from a developing nation, it’s very important to me how carbon-intensive their infrastructure and industries are. I’m importing their emissions, meaning that how much coal versus low-carbon energy they’re using, how efficient their processes are, how effectively they’re using resources have a direct influence on my own emissions and progress in meeting national targets. I will invest money in mitigation in developing countries because I also reap the benefits. It’s a win-win. It’s no different from the drive to invest in low-carbon energy and efficient technologies/practices at home—both will move me towards my target [note: this only helps with the financial transfer for mitigation, not for adaptation which is a separate issue]. If India wants finance to develop a lower-carbon grid, it’s in the interest of nations who buy from them to provide it.

For the hard-nosed who are reluctant to give financial handouts, or politicians struggling to get support from their parliamentary cronies, we re-frame the issue of climate finance as a rational business case. It doesn’t matter whether they care about climate change or overseas development—it’s a solid, necessary investment they need to achieve their targets. It just happens to have mutual benefit for both parties tacked on.

One of the UNFCCC’s founding principles was to facilitate a mechanism for technology, financial and knowledge transfer from developed to developing nations for a path to cleaner development. It has, thus far, been pretty unsuccessful in doing so. Its current production-based framework closes each nation’s borders. But this isn’t how a globalised economy works. We need to re-align this system with our economic one if we want the money to flow. If we want developed nations to really step up to their financial promises we can’t rely on goodwill alone; it’s fickle, unreliable and short-term. We have to develop something co-operative that works to the benefit of both parties.

The time of finger-pointing for who’s to blame and therefore who should pay is over; although completely valid, it’s totally unconstructive to an already difficult process. It’s time to develop long-term solutions that force us to work together. For climate finance, consumption-based targets could be the secret ingredient in helping us do so.

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