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Net calculation for carbon markets
63. The Advisory Group also discussed the concept of net flows for carbon
markets. These were defined as the inframarginal rents of carbon market
flows.
64. Inframarginal rents are the difference between the average cost of a given
mitigation measure or project compared with the market price (in a
competitive market, the market price equals the marginal supplier’s cost). If
positive, this difference constitutes a rent available to the owners of the asset
or project that can reduce emissions at less than the market price.
65. While in theory this concept is easy to define, both estimating the magnitude
of inframarginal rents and establishing who captures them is not a trivial
matter.
66.
Measuring rents is challenging. Estimates of both the average cost of
abatements of different technologies and carbon prices are necessary in order
to establish the magnitudes of the rents. While assumptions on carbon price
levels can be used, estimates of cost across technologies in different countries
require extensive analysis of the projected cost structures of technologies
across geographical areas; such information, which is strategic to companies
operating in this field, is not easily accessible. In addition, inframarginal rents
could be captured by a range of players across the value chain.
6
Example for calculating inframarginal rents
There is currently no widely accepted concept or methodology for calculating inframarginal
rents; however, using the McKinsey marginal abatement cost curves, the average cost of
mitigation measures for cost-positive measures under a carbon price of US$25 per ton of CO
2
equivalents was estimated at US$15 per ton. This suggests an inframarginal rent of US$10 per
ton (the difference between carbon price and average cost). Assuming that a US$3 transactional
cost is extracted, rents are reduced to US$7 per ton. The Advisory Group assumed a strong offset
demand and a volume of 1.5-2 Gt, with resulting inframarginal rents (i.e., the net flows
associated with carbon offset finance) of US$10 billion to US$14 billion, compared with US$38
billion to US$50 billion in gross flows. If, however, transaction costs were higher, at US$5, the
rents would be reduced further, to US$5 per ton, and the total net would be only US$8 billion to
US$10 billion.
6
A concrete example of a wind farm in a developing country helps to illustrate. Developers will need to buy
land, which they are likely to bid up to a price level at which their projects barely break even. In this case, the
landowner will make the bulk of the profits and hence capture any available inframarginal rents. From an
outside point of view, it would be very difficult to identify whether the price of the land has indeed been
higher than an alternative price and whether the landowner captured inframarginal rents. Therefore, depending
on the market structure across the value chain, inframarginal rents could be captured by a range of players.
Depending on the owners of the assets across the value chain, rents could be captured by foreign companies or
publicly owned companies. Governments of developing countries could capture these rents, through
ownership or taxation, but this will depend on domestic market structure and policies. It is impossible to
determine a priori that such rents would be extracted by developing countries and would hence constitute a net
flow. The reverse is also true: some projects might only be viable because of support from the developing
country Government, e.g., if such Governments pay feed-in tariffs for wind generation. These projects might
be highly profitable as a result, and it might appear that inframarginal rents exist. In that case, however, all of
the inframarginal rent would have been paid for by the developing country and should clearly not qualify to be
counted as a net flow.
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25
67. Given this range of perspectives and the need at this stage to base the work
on well-defined metrics covering the full range of flows, the revenues from
the four types of sources were estimated as follows:
(a) All public sources were estimated at face value. Estimates exclude
any likely primary incidence on developing countries and reflect only
the revenues that are generated by contributions from developed
countries, that is, only net resource transfers to developing countries.
In addition, estimates reflect the fact that only a share of revenues
raised with a source will be used for international financing purposes,
with a portion remaining in the developed countries;
(b) Multilateral development bank sources were estimated on both a gross
and a net basis. Gross revenue estimates were based on the 2020
potential for expanded lending arising from paid-in capital, split
between concessional and non-concessional lending (for example,
towards adaptation and mitigation investments, where the former is
assumed to require greater concessional finance). Net transfers were
then estimated, based on the OECD DAC methodology to define the
grant equivalent element of these flows based on methodologies
proposed by some members of the Advisory Group when applied to
non-concessional flows;
(c) Carbon market offset flows were measured on a gross basis (i.e., total
flows). Net carbon market flows were also indicated;
(d) Private sector financial flows were measured as gross international
flows (i.e., excluding capital mobilized domestically in developing
countries). Net private flows, as proposed by some members of the
Advisory Group, were also indicated.
68. The 2020 carbon price was a key driver of revenue estimates across multiple
sources. This is relevant both for sources directly related to carbon prices
(such as AAU/ETS auction revenues) and for those indirectly related to
carbon prices (e.g., bunker fuel taxes). Scenarios were therefore created
around three carbon prices for these sources: a low carbon price (US$15 per
ton of CO
2
);
a medium carbon price (US$25 per ton of CO
2
);
and a higher-
price scenario (US$50 per ton of CO
2
). The scenarios were built around a
simple set of illustrative quantities and related prices, informed by the
literature review of a broad range of models.
7
Estimates in section IV are
based on these three carbon price scenarios, while revenue potentials referred
to in section II reflect a price range of US$20-US$25.
69. Efficiency: Efficiency has two parts: carbon-related efficiency is defined as
how well or poorly a given source contributes to creating a “price” to correct
for the carbon externality; overall efficiency is interpreted from a broad,
dynamic perspective, taking into account the potential impact on growth and
the risk of the proposed measures.
8
For example, instruments that impose
7
See annex II for a more detailed account of the review.
8
Given the limited time available for the Advisory Group to test the different sources against this criterion, only
qualitative assessment was carried out by the Advisory Group. Further work will be required to assess more
formally, including through suitable models, the quantitative impact on growth of the different proposals.
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26
significant deadweight costs or that significantly distort trade flows would
therefore score negatively on the efficiency criteria.
70. Equity: Considerations of equity in terms of the distributional impact of
different measures were addressed under the incidence criteria.
71. Incidence: Incidence refers to “who really pays” for revenue for any given
source among countries. Given the focus of the Advisory Group on revenue
raised by developed countries for developing countries, the Advisory Group
sought to address the issue of whether direct burden is imposed on
developing countries for any given source. Some members emphasized that
this notion of direct burden referred only to implied payments by developing
countries towards the overall goal of mobilizing US$100 billion. Revenue
for each source was therefore estimated on a basis that sought to: (a)
recognise potential primary incidence on developing countries, and (b)
exclude any revenue arising from developing country contributions so as to
include only net flows from developed to developing countries. Some
members were interested in secondary “economic” incidence, but absent
good information on, for example, supply- and demand-side elasticity data in
relevant markets, did not believe reliable estimates of this measure could be
generated.
72. Practicality: Practicality is considered in terms of the feasibility of
implementation, for example, in the required institutional design and in
relation to rules and laws in different countries. The assessment of
practicality includes an initial assessment of how rapidly different sources
could ramp up by 2020.
73. Reliability: This criterion is taken to mean the extent to which the source of
finance is likely to lead to a predictable revenue stream.
74. Additionality: Additionality refers to the extent to which new resources add
to the existing level of resources (instead of replacing any of them) and result
in a greater aggregate level of resources. Operationalization of additionality,
including through defining a reference case against which “greater” can be
determined, is politically and analytically very difficult. Given likely
pressures on existing sources and the difficulty of specifying a 2020 reference
case against which additionality could be measured, a potential perspective is
to treat the newness of a source as a useful, if partial, proxy for additionality.
There are also other interpretations, however, such as taking the view that the
US$100 billion target should be measured in a way that would be additional
to a 2020 official development assistance (ODA) reference case.
75. Acceptability: Acceptability refers to the extent to which a given source is
politically acceptable to both developed and developing countries. Since a
source may be more controversial in one country and less so in another, this
criterion also illustrates the importance of having a variety of instruments
available.
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27
IV. Assessment of sources
76. The present section provides an overall assessment of the different sources
against the agreed criteria. Carbon prices indirectly affect several sources of
climate finance; estimates of potential revenues have been provided against
various carbon price scenarios. The section separately addresses how sources
can be described in terms of potential ramp-up speed across different time
horizons and how the funds might be spent wisely.
A. Revenue estimates and analysis
International auctioning of emissions allowances and auctioning of allowances in
domestic emissions trading schemes (AAU/ETS)
Low carbon price
Medium carbon price
High carbon price
2020 estimates for
AAU/ETS auctions
US$2-US$8 billion
US$8-US$38 billion
US$14-US$70 billion
Overview of assumptions (with calculation for a medium carbon price)
·
Total market size approximated by forecast developed country emissions of 15 Gt by 2020;
·
Assumption that between 2 and 10 per cent of total market size would be auctioned and
allocated for international climate finance;
·
Carbon price in medium scenario of US$25/t equates to market size of US$375 billion;
2-10 per cent auctioning provides a total of US$8-US$38 billion in revenues.
77. Both international auctioning of emissions allowances and auctioning of
allowances in domestic emissions trading schemes would clearly be sources
of revenue for new and additional resources. They would have strong carbon
efficiency attributes, and would not have any direct incidence on developing
countries. The revenue potential of this source depends on the volume of the
carbon market, the carbon price and the percentage of emission allowances
auctioned and the resulting revenues set aside for international climate
finance. The governance of international auctioning would need to be
resolved. In the case of revenues from domestic auctioning, a mechanism to
allocate these revenues for international purposes would be needed in order
for them to become a reliable source. This would be particularly important
for developed countries that do not participate in the international auctioning
of emissions allowances. It seems unlikely that countries would introduce
auctioning at both the international and domestic levels in such a way that it
could result in double taxation of carbon emissions.
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28
Offset levies
Low carbon price
Medium carbon price
High carbon price
2020 estimates for
offset levies
US$0-US$1 billion
US$1-US$5 billion
US$3-US$15 billion
Overview of assumptions (with calculation for a medium carbon price)
·
Assumes a levy of between 2 and 10 per cent on offset market transactions;
·
Offset market size assumed at 1.5-2 Gt in medium scenario, or US$37.5-US$50 billion at
an estimated carbon price of US$25/t;
·
Total levy amounts to between 2 and 10 per cent of US$37.5 billion-US$50 billion, or
US$1billion-US$5 billion.
78. This source is potentially reliable, but the magnitude of the revenues that
would be generated would depend on the volumes of the carbon market, the
levy applied to offsets and the carbon price. While the measure is directly
linked to carbon markets, concerns exist about the incentives it creates by de
facto taxing action to reduce emissions. Also, depending on the elasticity, the
instruments may have some incidence in developing countries. The offset
levy already exists in the CDM and therefore could be operationally scaled
up in the short or medium term.
Revenues from international transportation
Low carbon price
Medium carbon price
High carbon price
2020 estimates for
maritime
US$2-US$6 billion
US$4-US$9 billion
US$8-US$19 billion
2020 estimates for
aviation
USS$1-US$2 billion
US$2-US$3 billion
US$3-US$6 billion
Overview of assumptions (with calculation for a medium carbon price)
Maritime
·
Assumes 0.9-1 Gt of emissions, priced at US$25/t of carbon (captured through auctions or
levies), equivalent to between US$22.5 billion and US$25 billion;
·
Subtracting incidence on developing countries, estimated at 30 per cent, and estimating that
of the remainder between 25 and 50 per cent could be used for international climate finance
leads to a total estimate of between US$4 billion and US$9 billion.
Aviation
·
Assumes total passenger and freight emissions in 2020 of 800 Mt, of which 250 Mt are
considered for the revenue estimates in the different price scenarios (due to the exclusion of
flights within the European Union and the incidence on developing countries);
·
Total revenue pool at a carbon price of US$25/t on 250 Mt equates to US$6 billion;
·
Assuming that between 25 and 50 per cent of these revenues can be earmarked for climate
finance delivers an estimate of between US$2 billion and US$3 billion.
79. Carbon-related instruments coordinated internationally, for example on
international transportation, could potentially mobilize significant public
resources for climate action in developing countries. The variation in the
level of revenues depends on the different options to create such funds: a fuel
levy/emissions trading system for maritime bunker fuels, and either a fuel
levy/emissions trading system or a passenger ticket tax for the aviation
sector. Both would promote environmental efficiency by taxing carbon
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29
emissions, but it could result in a cost impost on global world trade in the
order of 0.25 per cent. These instruments may present difficulties, however,
in terms of political acceptability and incidence on developing countries.
Some members were of the view that political acceptability and incidence on
developing countries should be addressed by the Parties to the UNFCCC and
the Kyoto Protocol. These members believed that further discussion on the
design and implementation should depend on the decision by these Parties.
Other members were of the view that universal application of instruments on
international transportation was necessary, inter alia, in order to avoid
significant competitiveness issues. These members were of the view that
incidence issues, particularly on developing countries, could be addressed by
mechanisms other than selective application, for example through the
appropriate collection and distribution of revenue. Any mechanism should
not blunt abatement incentives or distort competitiveness. Further work on
such instruments should be taken forward in the International Maritime
Organization and the International Civil Aviation Organization.
Carbon-related revenues (other than auctions of assigned amount units and
emissions trading schemes)
2020 estimates for:
Carbon tax
Approximately US$10 billion from a carbon tax of US$1/t of CO
2
equivalent
Wires charge
US$5 billion for a charge of US$0.0004/kWh or US$1/t of CO
2
equivalent
Removal of fossil
subsidies
US$3-8 billion
Redirection of fossil
royalties
Approximately US$10 billion
Overview of assumptions
Carbon Tax
·
Calculates that US$1 of tax on 11-13 Gt of energy-related emissions translates roughly into
US$10 billion of revenues; assumes 100 per cent is used for international climate finance.
Wires charge
·
Calculates potential revenue from power-generated emissions in OECD countries (4.7Gt in
2020) based on a tax rate of US$1/t of CO
2
equivalent, resulting in a total of US$5 billion.
It is assumed that 100 per cent of revenue is used for climate finance;
·
Equivalent to wires charge of US$0.0004/kWh on ~12,000 TWh of power generated in
OECD countries in 2020.
Removal of fossil fuel subsidies
·
Fossil fuel subsidies estimated at up to US$8 billion in Annex 2 countries within Group of
Twenty (G-20) nations; assumes 100 per cent is used for climate finance.
Redirection of fossil fuel royalties
·
Estimated at billions to tens of billions of United States dollars based on survey of self-
reported receipts of five key oil-producing developed countries.
80. This category covers a number of measures (a carbon tax, a wires charge, the
removal of fossil fuel subsidies in developed countries coupled with the
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