SA’s path on the steep and rocky road to Copenhagen

20th February 2009 By: Laura Tyrer

The stage has been set for what could be dramatic climate-change negotiations at the fifteenth United Nations Climate Change Conference, to be held in Copenhagen, Denmark, in December. However, whether the key actors will show moral courage and rectitude, or whether they will allow the talks to descend into tragedy, or even a farce, is still far from certain.

Four formal negotiating meetings, and possibly a fifth, will be held this year to pave the way for Copenhagen.

The goal for COP 15 is to enter into a binding global climate agreement that will apply to the period after 2012. However, after the inadequate deliveries at last year’s COP negotiations in Poznan, Poland, the list of what needs to be achieved at Copenhagen and beyond has grown longer.

University of Cape Town Energy Research Centre associate professor Harald Winkler, speaking in his personal capacity, comments that negotiations this year will need to resolve four key challenges if the climate change debate is to move forward. These include deeper cuts in greenhouse-gas (GHG) emissions in the North, the slowing of GHG emissions in the South, the support of development through finance, technology and capacity, and the paying for those having to adapt to the unavoidable effects of climate change.

Given developed countries’ slow rate of reductions and recent backtracking by some on emissions targets, he proposes that the politics among developed countries require fundamental adjustment. Rather than shirking their responsibilities by blaming developing countries, such as China and India, for their lack of action on climate change, Winkler suggests that developed countries need to take responsibility for past emissions and compete to see who can reduce emissions the fastest.

Nevertheless, developing countries also have a substantial role to play in GHG emission reductions, as future emissions are likely to be dominated by growth in developing countries. In this, Winkler comments that these countries must take common responsibility for the future and slow their rates of growth to bend their emissions curves downward.

He points out that the topic of mitigation, or reducing GHG emissions, will form a pivotal theme in 2009, given the failure of negotiators to even agree to discuss the subject in numerical terms last year.

Beyond discussion, Winkler points out that mitigation is largely dependent on establishing a deal around development itself. Such a deal would need to be supported by finance, technology and capacity building, as well as a substantial increase in the voluntary monetary contributions by developed countries, which need to be quantifiable as much as the mitigation actions, or measurable, reportable and verifiable, in negotiating language.

Winkler comments that developed economies such as the European Union and the US will also need to agree on the amounts of cash they can mobilise to support climate change action. He explains that financial agreements need to be made to effect meaningful technology and capacity talks and that international negotiations will need to pay attention to financial support.

Winkler also points out that, although progress has been made in the setting up of the adaptation fund, the scale of funding will need to increase tenfold to a hundredfold if meaningful action is to take place.

For these four issues to move forward, he says, political will and bold leadership from the North and the South will be needed. “Heads of State will need to send a very clear political signal on ambitious reductions and seriousness about finance and technology for both mitigation and adaptation,” Winkler comments.

OPPORTUNITY FOR HOPE

Meanwhile, WWF South Africa climate change manager Richard Worthington says that the Copenhagen conference is an opportunity for hope.

The conference offers an opportunity for the recognition of the realities of the world’s life support systems, which are often expressed as ‘limits to growth’. “We’ve misconceived growth as bean counting on currencies, rather than quality of life, including the environment, the time you get to spend with the people you want to be with, your pastimes, whether you’re a family person or not. It’s not about limits to growth – it’s about redefining what is desirable, what constitutes progress and what ‘growth’ means within those frameworks,” Worthington comments.

“There’s opportunity to come up with a totally new kind of multilateral agreement in light of the credit crunch and a certain amount of disillusionment with unregulated speculation,” he adds.

Nevertheless, the Copenhagen conference could alternatively result in “the most awful compromise”, which, out of desperation to sign a deal, perpetuates the problem while appearing to manage it. Such a compromise, says Worthington, would be unacceptable.

Thus far, however, the United Nations Framework Convention on Climate Change COP process has positioned parties to conclude an effective and equitable multilateral agreement. “We have a commitment to negotiating text by June 1, 2009. That commitment is not set in stone, but there seems to be consensus and certainly the mandate for chairs is to table negotiating text,” he comments.

The outcome of Poznan was that there should be a convergence and divergence text as the first step towards moving to a negotiating text by June 1, 2009, to go into the intercessional meeting. “This will look at where things are coming together, what can be put into a more legally binding text and highlighting issues where we need to go head to head,” says Worthington.

A further consideration is the position of the US within the climate change debate. While the US has avoided commitments at every stage of the negotiations, Worthington explains that the Bali Action Plan (BAP), which set the scene for the two-year lead-up to Copenhagen, served as a pivotal moment, where the US was made to agree with the consensus under the BAP. “Developing countries showed their metal and Canada, Japan and Australia, which are usually similarly positioned to the US, came in with consensus and left the US isolated. With Barack Obama in the White House, the hope is that Canada, Japan and Australia may no longer be able to hide behind the US,” he comments.

The question remains, however, whether or not the US economy can be brought round to a low-carbon development pathway.

Worthington says that 2008 was a disappointing year on the road to Copenhagen. “We did notch up successful little milestones, but didn’t move as far along the road as we needed to. However, this is not surprising, nor is it a disaster. The road ahead has become a little bit steeper, maybe a bit rougher, but we’re still travelling along the road.”

One advance, says Worthington, was the recognition of the need for a different system to manage funds for developing countries. Developed countries are beginning to understand that, under the convention, non-Annex 1 countries are not prepared to move forward without a more democratic global financial governance system.

Negotiations have also been coloured by a myriad of other issues, including intercountry power struggles. Worthington says, however, that, while the “momentum of negotiations is too slow, the care over the details is not inappropriate”. Given the need to consider the issue surrounding climate change negotiations, he is doubtful that the move towards a democratic global financial governance system will be achieved at Copenhagen.

“The second round of multilateral agreements on climate change, under whatever name it goes, should see a significant shift, but mustn’t overload climate negotiations either and expect that it will solve all trade inequalities and other issues,” he notes.

He says that last year witnessed growing agreement around governance of the adaptation fund and that this kind of approach is going to be needed with finance for mitigation efforts.

Meanwhile, developing countries are starting to recognise that it is in their own interest to establish an effective and equitable system. While emphasis has been on the equitable aspects of such a system, Worthington says that many more positive initiatives are coming from developing countries. This attitude was, unfortunately, not met by developed countries at Poznan and has created what Winkler refers to as a “trust deficit”.

Worthington says that a clearer picture of where convergence and divergence are emerging will hopefully result from the first round of working groups.

The bigger question, however, is whether Copenhagen will see amendments being made to the Kyoto Protocol alone, or if an additional legal instrument will emerge for developing countries and the US, as proposed by South African Minister of Environmental Affairs Marthinus van Schalkwyk in Poznan. He cautions that signatories to Kyoto may look to such an instrument to excuse their failures to meet Kyoto restrictions. Winkler adds that measures may have to be put in place to prevent them from jumping ship. Nevertheless, Copenhagen will decide on the legal structure and whether the protocol will follow a unitary or two-track structure.

SA IN GREEN TRANSITION

Given South Africa’s reputation as a source of cheap coal-based energy and its position among the top 20 GHG emitting countries, mitigation poses a significant challenge for the country. While South Africa does not carry explicit emissions-reduction targets as a non-Annex 1 country, there is international pressure on big non-Annex 1 polluters to initiate their own mitigation strategies.

South Africa is bearing its climate change responsibilities and, following the issuing of the country’s long-term mitigation scenarios (LTMSes) in 2008, has made a commitment that will see the country make the transition to a low-carbon economy.

Faced with the options of growth without constraints (GWC) or doing what is required by science (RBS), South Africa has recognised that GWC is internationally unacceptable and has, therefore, recognised that RBS must be its goal.

Cabinet has stated that South Africa’s emissions will need to peak between 2020 and 2025, plateau for about a decade and then decline by at least 30% to 40% below current levels by 2050. Engineering News (June 20, 2008) reported that strategic mitigation options were available for immediate implementation, including energy efficiency, electricity supply options, carbon capture and storage, transport efficiency and shifts, as well as people-orientated strategies.

South Africa’s policy options offer regulatory and economic instruments in the reduction of GHGs, and the LTMSes suggest that with an escalating price on carbon, economic instruments are the best way to close the gap between the GWC and RBS scenarios. Winkler comments that, while a carbon tax was modelled for LTMSes, domestic emissions trading or other forms of tradable permits should also be considered. It has been indicated that market-based measures will be needed, as will regulation, if GHG emission reductions are to be meaningful.

MITIGATION STRATEGIES

Two primary mitigation options exist, namely a carbon tax and a ‘cap and trade’ scheme.

While a tax would be charged in proportion to an emitter’s GHG emissions, the cap and trade scheme would set emissions quotas for carbon polluters, but allow these to be traded on the market.

While a carbon tax seems to be the preferred option by government and business, tax management consultancy Deloitte & Touche has released research arguing in favour of carbon trading over a carbon tax as an initial mitigation strategy for South Africa.

Deloitte climate change solutions director Duane Newman says that the report, entitled ‘Is a carbon tax the best way to reduce carbon emissions?’, is intended to stimulate debate in business around the effectiveness of a carbon tax as an appropriate mitigation strategy for South Africa.

He points out that for mitigation to be effective, private- sector buy-in is needed, and for this to happen, climate change and mitigation need to become business imperatives and offer opportunities for business.

“Our big drive is to make sure that we raise the awareness of what tax and carbon credits mean for business. There seems to be a lot of misinformation in the market as to how it works and what the benefit to your business might be,” says Newman. This has been evident from the slow uptake of Clean Development Mechanism (CDM) projects.

The report suggests that a cap and trade scheme would be more effective for South Africa than a carbon tax as it would be more likely to effectively reduce GHG emissions.

A cap and trade scheme is advantageous as it targets polluters, promotes business-friendly competitiveness, is more efficient, enjoys more support from industry and is more likely to stimulate the behavioural changes needed for climate change mitigation.

The report also suggests that a carbon tax is more likely to reduce competitiveness, has limited environmental effectiveness, unfairly burdens consumers rather than the polluters, and does not incentivise behavioural shifts towards a more balanced energy policy.

Newman says that South Africa’s taxes over the past few years have moved from a high tax jurisdiction to become increasingly competitive internationally. The concern is that if an additional tax, such as a carbon tax, is added, this could, once again, make the country uncompetitive, taking into account that there are many other barriers that the country has to deal with in the form of inadequate logistics, crime and potential political instability.

The carbon tax mechanism also failed when evaluated against the Margo Commission principles of a ‘good tax’, which measures tax against ten principles, namely equity, neutrality, simplicity, certainty, administrative efficiency, cost effectiveness, flexibility, stability, distributional effectiveness and the balance between direct and indirect tax, comments Deloitte manager Kimberly van Niekerk.

She points out that a carbon tax would also be hard to measure and monitor, whereas a cap and trade scheme would raise international perceptions of the country and keep South Africa investor friendly, given the current imperative to reduce emissions and the value placed on this by top decision-makers. “The reality is that investment decisions are now taking into account the broad range of incentives, including carbon credits and CDM projects,” adds Newman.

He also comments that a carbon tax would be considered a heavy-handed approach within a milieu where foreign direct investment often prefers a market-based system where investors can deal with the market whether it’s through different types of investment or through market mechanisms.

A further argument against carbon tax and the first measure to mitigate GHG emissions is that a tax is unlikely to alter behaviour, but, instead, just collects tax.

Deloitte & Touche climate change solutions senior manager Paul Devine says that a tax is more likely to feed down to consumers as it will be built into the cost of the commodity. As such, a tax constitutes a punitive measure to reduce GHG emissions, rather than a cap and trade mechanism, which the report suggests could create employment through the development of renewable energy industries.

“In Germany, wind farms are estimated to have created 40 000 jobs. We have huge potential for job creation and natural resources in abundance, but we’re not leading the pack here,” comments Newman.

Devine notes that clean technology is positioned to become the fifth-largest sector in terms of job creation and investment.

Nevertheless, the report is not entirely against the implementation of a carbon tax. “Some market interpretations of our report seem to be saying that we are against carbon tax. That’s not true. We’re just not in favour of a carbon tax for South Africa now,” says Newman. He explains that the report advises that the market make use of existing policy instruments, including incentive programmes and grants, modifying them where necessary, providing the time to develop an appropriate cap and trade system.

TAX OVER TRADE

Department of Environmental Affairs and Tourism (Deat) chief director of air quality management and climate change Peter Lukey takes a different stance on these findings.

Of the available economic solutions to assist in GHG emissions mitigation, Lukey says that the LTMSes found a carbon tax to be the simplest and easiest to institute, especially given the vaguaries of the market within a cap and trade mechanism. “Tax is a transparent and known number, not subject to changes in the market. The idea would be to use a carbon tax as the principal emissions reduction instrument, but other instruments could also come into play, such as subsidies and feed-in tariffs,” he comments.

LTMS-modelled scenarios suggest that the institution of a carbon tax offers some elasticity, which, in turn, can alter behaviour. Consumers are unlikely to alter their habits if there are minor tax changes, but will change their behaviour when the tax becomes expensive.

The carbon tax option was modelled to identify the point at which the tax would necessitate a behavioural change. Lukey explains that if carbon is taxed at R100/t, it is unlikely to change behaviour. However, if the tax is increased to R250/t, this starts to affect consumers and renewables become increasingly attractive. At R750/t, there is little change as industry would have moved away from a heavy carbon industry by this point. In other words, the carbon tax would achieve South Africa’s peak, plateau and decline trajectory as indicated by the LTMSes.

Such a tax would thus enable control over the price of carbon and would be a highly effective strategy to ensure that by 2050, coal-fired power will be financially unviable.

Lukey points out that regardless of the strategy used to reduce GHG emissions, the expense is likely to filter down to consumers, regardless of whether it is a tax or cap and trade mechanism. This means that a trade strategy is no more equitable for the poor than a tax.

The advantage of a tax, however, is that tariffs can be controlled and carbon tax can be structured in such a way that the rich subsidise the poor.

Lukey says that the main reason industry prefers a tax strategy is that it is the easiest and most effective to administer. Revenues are predictable and, thus, there may be greater certainty on monetary amounts available for the recycling of revenues to assist affected consumers and exposed industries.

“Businesses already understand it and consider it a good tax rather than a bad tax. A carbon tax enables companies to reduce the amount of tax they pay by doing the right thing and reducing GHG emissions,” he comments. Further, business is in favour of a strategy that would be administered by South Africa’s most effective government department, the South African Revenue Service.

Lukey says that business and industry do not object to a carbon tax, provided that the funds are allocated to developing renewable-energy technology.

The predominant concern of business and industry, how- ever, lies in avoiding a double tax. It has been suggested that government should reduce company tax if the company implements GHG reduction mechanisms to lower its carbon tax payments. In this way, the company has a positive incentive to reduce its tax.

Lukey explains, however, that government is unwilling to ring-fence a carbon tax, arguing that government policy is undermined by ring-fencing. Money derived from taxes should be paid to an elected government’s revenue stream, which it uses as it sees fit.

Further, if business were to have its way and company taxes were to be reduced in favour of a carbon tax, the carbon tax would constitute fiscal replacement and could, therefore, not be ring-fenced.

One tax that is to be specifically allocated to alternative energy, renewables and demand-side management is the 2c/kWh tax announced last year. The only reason why this money will be ring-fenced, says Lukey, is that it constitutes an additional tax and is, therefore, additional money that government would not have had before, meaning that ring-fencing it will not affect policy.

Lukey comments that while carbon trading mechanisms are popular with consultancies, the system is highly complex and hard to measure and implement. Also, given the substantial transaction costs involved, carbon trading is not the most effective strategy to generate money to plough into other technologies, as much of the money generated is more likely to go towards consultancy fees.

Nevertheless, Lukey says that government will continue to examine the tax regime and consider all the other economic instruments that are available in the mitigation of climate change. Deat is in communication with the National Treasury and other stakeholders to determine diffe- rent policy development mechanisms to implement in the next two years.

Lukey says that the most likely effect that mitigation strategies will have in South Africa is to substantially reduce fossil-fuel- based industries in favour of renewable and nuclear energy.

He comments that South Africa has more solar energy than any other place in the world and the country’s total energy reserves of coal, some 1,2 TJ, constitute a mere 15% of the country’s yearly solar potential of about 1,6 TJ.

“We cannot keep labelling ourselves as a coal country. Countries that do this will become international pariahs. Instead, we need to be leaders in the climate change issue,” he says.

Mitigation strategies could also lead to the resuscitation of South Africa’s high technology industries, says Lukey. Industries with substantial capacity and little to sustain them, such as the defence industry, could be redirected into the development and manufacture or renewable- energy technology.

Finally, solar can be implemented in some of the country’s most resource-poor and poverty- stricken areas, bringing much- needed job creation to these areas.

“The only thing holding us back is our lack of courage and our resistance to change,” says Lukey.

He says that, while there is no need for South Africa or other developing countries to commit to absolute emissions reductions under Kyoto, it is their duty to take mitigation measures against climate change and reduce GHG emissions in ways that are measurable, reportable and verifiable, while developed countries must commit to deepening their emissions cuts.

He comments that the negotiations in Copenhagen are still likely to centre on the debate between the responsibilities of the North and the South.

“The fact remains that wealthy, developed countries achieved this status on the power of fossil fuels, while developing countries suffer the consequences. The negotiations are still around global justice, although it is our duty to play our part. The fact is that the globe has to change,” Lukey emphasises.

The National Climate Summit and Science Conference, in March, will formally launch the policy process that will translate Cabinet’s climate change policy decisions and directives into fiscal, regulatory and legislative packages.

The summit will also present the most recent climate change research and current South African initiatives and interventions.