- Extensive background information and analysis -PART 1-

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2 COMMISSION OF THE EUROPEAN COMMUNITIES Brussels, SEC(2009) 101 COMMISSION STAFF WORKING DOCUMT accompanying the COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Towards a comprehensive climate change agreement in Copenhagen - Extensive background information and analysis -PART 1- {COM(2009) 39 final} {SEC(2009) 102}

3 Table of content Executive summary Glossary 1. Procedural issues and consultation of interested parties Organisation and timing Stakeholder Consultation Background Global temperature increase needs to be limited Urgent need for global action The EU and Commission's role in the international negotiations Problem definition: Reaching an agreement within the multilateral context of the UNFCCC, ensuring that average global temperature does not increase by more than 2 C GHG reduction targets for developed countries LULUCF accounting rules Accounting rules for a surplus of Assigned Amount Units Appropriate action by developing countries The development of a global carbon market Action to reduce emissions from deforestation and forest degradation Addressing emissions from international maritime transport and aviation Assistance through finance and technology Objectives General objectives Specific objectives Operational Objectives Policy Options Distribution of a 30% reduction target for developed countries LULUCF accounting rules on the 30% reduction target for developed countries Accounting rules for a surplus of Assigned Amount Units Actions/technologies to achieve the reduction targets for developed countries and a substantial deviation from baseline in developing countries by 2020 and the development of the global carbon market to stimulate these actions... 38

4 5.5. Action to reduce emissions from deforestation and forest degradation Actions to address emissions from international aviation and maritime transport Sources of financing complementing the carbon market Analysing the impacts of the different policy options Description of the baseline scenario and its assumptions Assessment of the economic impacts of various allocation options in reaching a 30% reduction target for developed countries Impact of different options for LULUCF accounting rules on the 30% reduction target of developed countries Accounting rules for a surplus off Assigned Amount Units Actions/technologies to achieve the reduction targets for developed countries and a substantial deviation from baseline in developing countries by 2020 and the development of the global carbon market to stimulate these actions Actions to achieve the reduction targets for developed countries and a substantial deviation from baseline in developing countries by The role of the carbon market Actions necessary in the forestry sector and agriculture sector to reduce emissions and associated costs Actions for REDD, estimating costs Actions for REDD and their relationship with emission reductions from the energy and industrial sectors Impact REDD on agriculture Mitigation action to reduce Non-CO2 greenhouse gases in agriculture: nitrous oxide and methane Sources of financing complementing the carbon market Impact of the financial crisis Assessment of co-benefits of climate change policies Air pollution Energy supply security Can the specific and operational objectives set by the EU meet the requirement to limit temperature increase to 2 C List of references List of tables: Table 1 Baseline emissions, comparison POLES GEM E

5 Table 2 Key indicators of the four options for allocating the mitigation efforts among developed countries Table 3 Example of targets for developed countries resulting from the four allocation options Table 4 Results for 4 indicators and the example of related targets for developed countries Table 5: Example of a distribution of targets for developed countries, example in GEM E3 using 4 indicators Table 6: Impacts resulting from targets based on a combination of indicators Table 7: Impact on growth over the period Table 8 Accounting options assessed Table 9 Impact of different LULUCF accounting options on developed countries targets Table 10 Potential annual surplus or deficit of AAUs over the period Table 11 Costs in developed and developing countries Table 12 Impact of gradual development of the carbon market, POLES Table 13 Reductions in developed and developing countries and trade in emissions rights Table 14 Costs in developed and developing countries and trade in emissions rights Table 15 Resulting allocation of mitigation efforts compared to baseline for key developing countries (in % compared to baseline) Table 16 Impact of gradual development of the carbon market, GEM E Table 17 GHG emissions/removals from land-use change involving forests in baseline. 78 Table 18 Deforestation and afforestation in baseline Table 19 GHG emissions/removals from land-use change involving forests in baseline. 79 Table 20 Deforestation and afforestation in baseline Table 21 Costs to the energy system and industry if there is no action on REDD Table 22 Possible distribution keys for countries' contributions to finance Table 23 Average annual cost of reductions in CO2 from energy and Non CO2 emissions from industry in 2020, for the case with and without financial crisis... 88

6 Table 24 Benefits in terms of reduction in life years lost compared to baseline in 2030 without additional air pollution policies in place (scenario 1) Table 25. Reduction in emissions and in air pollution control costs in India, China and the EU27 due to climate mitigation measures Table 26 Oil and gas consumption expenditures List of figures: Figure 1 Key impacts as a function of increasing global average temperature change Figure 2 Diversity in GHG intensity, per capita income, population and emission trends in developed countries Figure 3 Carbon price developments over time in the global carbon market ( /ton CO 2 ) Figure 4 Baseline emissions all sectors Figure 5 Developed/developing countries GHG emissions in POLES baseline & appropriate global action scenario Figure 6 Contribution of different technologies to reduce CO2 emissions Figure 7 Power Generation by fuel type Figure 8 Share of power sector emissions captured through Carbon Capture and Storage Figure 9 Annual Power Generation Investments Figure 10 Changes in the mix of power generation Figure 11 Additional, new capacity in Power generation compared to Figure 12 GHG reductions per sector, World Regions Figure 13 Global Non-CO2 GHG emission from agriculture Figure 14 Emissions for all sectors in the appropriate global action scenario Figure 15 Global temperature increase for different emission profiles up to

7 Executive summary This staff working document assesses different policy options for main issues under negotiation for a new international climate change agreement to be reached in Copenhagen in December It builds on earlier analysis been undertaken for two earlier Commission communications on international climate change policies 1 and especially on then Spring Council conclusions 2007 setting the overall objectives for the EU s climate policy. In this working paper the following key issues have been assessed: Comparability of individual GHG emission reduction targets for developed countries; LULUCF accounting rules; Surpluses of Assigned Amount Units from the 1 st commitment period ( ) and the implications for future targets; Appropriate action to be undertaken by developed countries to achieve their target and by developing countries to deviate substantially from baseline; Further development of the global carbon market ; Reduction in emissions from deforestation and forest degradation in developing countries; Addressing international maritime transport and aviation; Assistance for appropriate mitigation and adaptation by developing countries through finance and technology; Individual GHG emission reduction targets for developed countries A selected number of key criteria which are currently under international discussion for setting comparable and effective reduction targets for developed countries for the period after 2012 have been analysed, i.e. GDP/capita, GHG/GDP, GHG emission trends since 1990 and Population trends. The analysis clearly shows that using a single indicator for the allocation of individual country efforts leads often to disproportional costs or gains for single countries. Using GDP per capita as the sole criterion can lead to very high costs in countries with high incomes that are relatively efficient. At the same time, using GHG intensity of the economy or population trends for those economies that have a high GHG intensity or a decreasing population trend, respectively, while their GDP per capita is relatively small, leads to high costs for those economies. 1 Winning the battle against global climate change (COM(2005) 35 final), and Limiting Global Climate Change to 2 degrees Celsius - The way ahead for 2020 and beyond (COM(2007) 2 final).

8 Therefore, it is unlikely that an allocation option based on a single criterion will gain political consensus. Using a combination of criteria in order to define a target instead of a single indicator will lead to a fair outcome in terms of cost per unit of GDP. LULUCF accounting rules The current accounting rules for Land-Use, Land-Use Change and Forestry (LULUCF) for developed countries are temporary and will have to be decided on for the period after The working document analyses the impact of various accounting options for the accounting of LULUCF that are currently under international discussion on the amount of removals and emissions that can be reported. In fact, four options have been assessed next to the existing accounting rules: 1. No changes to the current accounting rules. Existing arbitrary caps would be continued. 2. Based on the current regime except replacing the cap on sinks from forest management by a discount factor. 3. Accounting for the difference in annual absorptions/emissions compared to the absorption/emissions of a base year, the so called net-net approach. 4. Eliminating the impact of natural disturbance, age-class effect and indirect humaninduced effects in the sector by comparing annual net absorption/emissions with the projected net absorption/emissions, using a forward looking baseline. Such a baseline is adapted over time to take into account the natural disturbance that do occur and have an impact on the absorption/emissions. 5. Full land based accounting as done at present under the UNFCCC inventories with a net-net accounting approach for all LULUCF land use categories reported under the Convention inventories. The analysis clearly points out that the risk of large sinks credits coming into the system, potentially overwhelming the reductions needed in the other sectors, is limited for most of the options as long as absorptions from forest management are accounted for through an approach (options 2 and 4) or constrained gross-net approach through a cap or discount factor (option 0 and 1). However, from a qualitative point of view and not a mere quantitative point of view the current rules are not satisfactory because the simple capping of forest management does not stimulate and reward real additional action in this sector but merely rewards business as usual action. The preferred option should meet criteria such as simplification, comprehensiveness in the accounting of emissions and removals in the LULUCF sectors in order to avoid leaving substantial greenhouse gases sources of emissions outside of the accounting while at the same time crediting potentially large (ensuring environmental integrity), broader coverage of managed land, and encouragement of national policies to deliver the full contribution of agriculture and forestry to climate change mitigation. Option 4 seems the one that delivers on most of these criteria. However, this approach is likely to require additional reporting efforts by Parties, especially to estimate emissions and removals from agricultural soils. Issues of compliance risks, due among other to natural disturbances, inclusion of harvested wood products, and national circumstances also need to be considered in this option.

9 Surplus of Assigned Amount Units and the impact on future targets When setting targets for the 1st commitment period under the Kyoto Protocol it was assumed that the US would become a full Party to the Protocol. Targets were set in a way that a reduction of a little more than 5 % would have been achieved. However, with the US not being a Party, these reductions will not be realised. Instead, there might be significant surplus of national emission budgets (so called Assigned Amount Units or AAU). This working paper assesses the potential implications for the -30% target for the group of developed countries as surplus AAUs are allowed to be banked into the period after Surplus AAUs from the period constitute a significant risk for the environmental effectiveness of the reduction targets for the period after Should this not be taken into account when setting the overall ambition level, the -30% reduction target compared to 1990 by 2020 might result in real emission reduction of only -26% or even less compared to 1990 by 2020 depending on the number of actual surplus AAUs. Appropriate global action to be undertaken Actions in the energy system and industrial sector on a truly global scale are crucial to ensure that the 2 C limit can still be met. In developing countries, around two third of the reduction potential compared to baseline in the energy system and in the industrial sectors comes from measures typically related to efficiency improvements, that can be realised at no or low cost in the short and mid term because of the significant energy savings. On a global level energy efficiency improvements represent around 50% of the actions until They might require substantial upfront investments which might pose a cash flow problem to those countries where private sector does not have the necessary financial/loan capacity. Energy efficiency improvements are by far the single most important action until But there is no single silver bullet technology. Next to energy efficiency improvements, there are other cost efficient opportunities of using low-carbon energy sources (renewables & nuclear), to switch to lower carbon content fossil fuels, and gradually develop and implement CCS for all large remaining point sources on a global scale, especially those newly build after Further development of the global carbon market Three options for the further development of the carbon market have been assessed: i) a gradual expansion of the global carbon market; ii) no global carbon market and iii) a perfect global carbon market. The analysis shows that a gradually developing global carbon market decreases costs significantly to reduce GHG emissions, also if targets are 'fairly' allocated. Without a gradual development economic costs to fight climate change could become very high. The gradual expansion can be supported by using offsetting mechanisms that are environmentally effective. In future, these should only compensate costs for reductions that are over and above low cost mitigation options. Offsetting mechanisms can as such provide an

10 incentive for reductions that are not credited. These new types of offsetting mechanisms would only credit reductions that go beyond a reference emission level that reflects own appropriate mitigation actions in developing countries. Reduction in emissions from deforestation and forest degradation (REDD) in developing countries The EU s policy objective is to halve emissions from gross deforestation by By 2030 net forest loss has to be reversed, reducing to zero the emissions from net deforestation. It has been assessed at what costs this objective can be met and what the impact will be on other land uses, most importantly agriculture. The analysis shows that it is essential and cost efficient to reduce gross tropical deforestation by at least 50 % by 2020 compared to current levels, and that it is feasible and affordable as well. Not reducing emissions from deforestation would lead to a significant cost increase for additional action required in the energy and industry sectors amounting to an increase of costs of around three times the cost of action on REDD. The analysis shows that increased demand for bio-energy may turn out to be an important driver for afforestation and reforestation. However, in the short term, reducing emissions from deforestation is more cost efficient than increased afforestation or reforestation. Thus, the deforestation of areas for the purposes of biomass extraction for bio-energy production needs to be minimised. If crediting of REDD actions would be fully allowed for offsetting purposes, then targets for developed countries would need to be made much more stringent. In the above assessment they would need to be cut further from -30% to -38% compared to 1990 by To achieve the REDD objectives through providing a performance-based financial incentive, an estimated 18 billion in 2020 (2005 prices) will be necessary, if leakage can be limited to a regional scale. Leakage is an important cost factor for the efficiency of REDD policies. In addition to the expected population growth, it will be crucial to address pressures on agriculture stemming from climate policies, i.e. REDD and increased demand for bio-energy, through increasing agricultural productivity in a sustainable way. Agriculture itself offers a substantial mitigation potential, often through intensification of the agricultural production. Such practices will need to take into account local ecosystem characteristics and respect water, soils, biodiversity. They could include shifting from traditional grassland based livestock production systems to landless ones, progressive switch from low input and rain-fed agricultural practices towards higher input and sustainable irrigation systems as well as improving soil management practices in croplands and grazing lands areas. Increasing agricultural productivity in a sustainable manner will require support for capacity building and rural development in developing countries. Addressing international maritime transport and aviation Since 1990, emissions growth from these sectors has been high and is expected to continue to rise, even when action on GHG emissions is undertaken. So despite the need for global

11 emissions to peak by 2020, reductions from these sectors to below 1990 levels by 2020, as discussed for developed countries, are unrealistic. Due to the internationally mobile nature of emissions from these two sectors, and risks of profound carbon leakage, it is preferable to address these emissions globally. Therefore, meaningful global goals should be set to limit the further growth of emissions from these sectors and those goals should be achieved by implementing an appropriate global sectoral approach. However, if such approach can not be agreed within ICAO and IMO by the end of 2010, those emissions should be counted towards national totals under the Copenhagen agreement. The latter should ensure comparable action in all developed countries. Incremental costs related to a global pathway to meet the EU's 2ºC objective Additional costs in the energy system are estimated at 152 billion in 2020 (2005 prices) of which 81 billion can be attributed to mitigation costs in developed countries. 71 billion comes from mitigation costs in developing countries, of which, however, 38 billion are compensated through carbon credit trades in the carbon market. In practice this means that significant shifts in investment flows need to be realised, with some sectors/technologies receiving much higher investments compared to baseline (e.g. energy efficiency) and some much lower (e.g. primary energy production). To achieve the REDD objectives through an incentive-based approach, an estimated 18 billion in 2020 (2005 prices) will be necessary, if leakage can be limited to a regional scale. Not taking this action would see a little more than twofold increase in costs in the energy and industry sectors because of additional action to be taken in these sectors. Global net incremental investments to reduce global emissions in the energy, industry and deforestation sectors need to increase gradually to around 170 billion per year in While this represents only a small fraction of global GDP, it remains a significant injection of additional finance into the global economy, requiring significant larger investments in growth areas such as energy efficiency and renewables and reducing carbon intensive investments. It is estimated that more than half of the additional net investments (around 90 billion in 2020) will have to be realised in developing countries. Costs for mitigation to reduce emissions from agriculture, are estimated at an 6.5 billion in 2020, of which developing countries represent 5.0 billion. Significant increases in agricultural productivity will require support for capacity building and rural development in developing countries. Assistance for appropriate own action by developing countries through finance and technology As stated in the problem definition, further support by developed countries for developing countries action on mitigation and adaptation will be necessary. Several options have been assessed as to how such new contributions could be generated and how to determine the relative shares for the financial contribution of different countries, including i) actual contributions for Official Development Assistance; ii) actual scale of assessment for the UN budget, iii) polluters pays principle, i.e. emitted GHG emissions, which could be applied only on developed countries or on a global scale; and iv) share of total GDP.

12 Depending on the distribution key, the EU's contribution could range between % of total funding. Again, building a composite index that reflects responsibility and capability might be the most suitable and political acceptable way forward. Furthermore, there is no doubt, that the larger the number of contributors, the higher the amounts that will be able to be mobilised, especially in view of the current economic recession.

13 Glossary 2 Assigned Amount Units (AAU) - Under the Kyoto Protocol, developed countries reduction The Kyoto protocol sets an absolute emission cap at country level for developed countries (QELRO or Quantified Emission Limitation and Reduction Objective). This absolute cap get translated into a total absolute amount of allowed emissions over the entire commitment period ( ), called a country's Assigned Amount. This Assigned Amount is issued into a country's registry in individual Assigned Amount Units (AAUs), each representing 1 ton of CO2-equivalent emissions. These are the emission rights that can be transferred under the Kyoto Protocol's emission trading mechanism and these are also used to demonstrate compliance with a country's Kyoto Protocol target. Adaptation - Adjustment in natural or human systems in response to actual or expected climatic stimuli or their effects, which moderates harm or exploits beneficial opportunities. Adaptation Fund - was established to finance concrete adaptation projects and programmes in developing countries that are Parties to the Kyoto Protocol. The Fund is to be financed with a share of proceeds from clean development mechanism (CDM) project activities and receive funds from other sources. Afforestation - Planting of new forests on lands that historically have not contained forests. Annex I Parties - The industrialized countries listed in this annex to the Convention which were committed return their greenhouse-gas emissions to 1990 levels by the year 2000 as per Article 4.2 (a) and (b). They have also accepted emissions targets for the period as per Article 3 and Annex B of the Kyoto Protocol. They include the 24 original OECD members, the European Union, and 14 countries with economies in transition. AWG-KP - Ad hoc Working Group on further commitments for Annex I Parties under the Kyoto Protocol. The AWG-KP was established by Parties to the Protocol in Montreal in 2005 to consider further commitments of industrialized countries under the Kyoto Protocol for the period beyond 2012, and is set to complete its work in Copenhagen in AWG-LCA - Ad hoc Working Group on Long-term Cooperative Action. The AWG- LCA was established in Bali in 2007 to conduct negotiations on a strengthened international deal on climate change, set to be concluded in Copenhagen in Capacity building - In the context of climate change, the process of developing the technical skills and institutional capability in developing countries and economies in 2 For a more extensive glossary on climate change acronyms used in the UNFCCC, see:

14 transition to enable them to address effectively the causes and results of climate change. Cap and trade - Mechanisms that set a cap on emissions and allocated a number of emission rights to entities to cover for their emissions. Those entities can use the emission rights to demonstrate compliance and can trade these emission rights among them. Examples of cap and trade system are the one set up by the Kyoto Protocol for countries with a reduction target (Annex I countries) via the creation of Assigned Amount Units and possibility to trade them via the "Emissions Trading" mechanisms. The largest private sector example is the EU Emission trading system (EU ETS) Carbon Leakage - That portion of cuts in greenhouse-gas emissions by developed countries (countries trying to meet mandatory limits under the Kyoto Protocol) that may reappear in other countries not bound by such limits. For example, multinational corporations may shift factories from developed countries to developing countries to escape restrictions on emissions. CDM - Clean Development Mechanism: a mechanism under the Kyoto Protocol through which developed countries may finance greenhouse-gas emission reduction or removal projects in developing countries, and receive credits for doing so which they may apply towards meeting mandatory limits on their own emissions. COP - Conference of the Parties: the supreme body of the UNFCC Convention. It currently meets once a year to review the Convention's progress. The word "conference" is not used here in the sense of "meeting" but rather of "association," which explains the seemingly redundant expression "fourth session of the Conference of the Parties." Conference of the Parties serving as the Meeting of the Parties (CMP): The UNFCCC s supreme body is the COP, which serves as the meeting of the Parties to the Kyoto Protocol. The sessions of the COP and the CMP are held during the same period to reduce costs and improve coordination between the Convention and the Protocol. Credits - Emission entitlements generated in offsetting or carbon crediting mechanisms that can be used for compliance in cap and trade systems at country or private sector level. Deforestation - Conversion of forest to non-forest. Emission rights - Emission entitlements generated in cap and trade systems. Two examples of emission rights generated through cap and trade systems are Assigned Amount Units (AAU) and EU Allowances (EUA) ETS - Emission trading systems are cap and trade systems set up to regulate emissions at private entity level. At present the largest ETS is the EU ETS. EUA - EU Allowances: The EU Emission Trading System sets an absolute emission cap for large point source emitters in the EU and allows for trade. The emission rights traded are called EU allowances.

15 Flexible mechanisms - Generic terms for the 3 mechanisms under the Kyoto Protocol that allow for flexibility across borders to achieve reduction targets by Annex I parties. The 3 flexible mechanisms are 'Emissions Trading' between Parties, Joint Implementation (JI) and the Clean Development Mechanism (CDM) GEF - Global Environment Facility: an independent financial organization that provides grants to developing countries for projects that benefit the global environment and promote sustainable livelihoods in local communities. The Parties to the Convention assigned operation of the financial mechanism to the Global Environment Facility (GEF) on an on-going basis, subject to review every four years. The financial mechanism is accountable to the COP. GHGs - Greenhouse gases: the atmospheric gases responsible for causing global warming and climate change. The major GHGs are carbon dioxide (CO2), methane (CH4) and nitrous oxide (N20). Less prevalent --but very powerful -- greenhouse gases are hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6). Global carbon market - The transfer of emission rights or credits that has the objective to be used for compliance purposes by both public and private authorities. GWP - Global warming potential ICAO - International Civil Aviation Organisation IEA International Energy Agency IIASA - International Institute for Applied Systems Analysis IMF International Monetary Fund IMO - International Maritime Organisation Intergovernmental Panel on Climate Change (IPCC) - Established in 1988 by the World Meteorological Organization and the UN Environment Programme, the IPCC surveys world-wide scientific and technical literature and publishes assessment reports that are widely recognized as the most credible existing sources of information on climate change. The IPCC also works on methodologies and responds to specific requests from the Convention's subsidiary bodies. The IPCC is independent of the Convention. International carbon crediting mechanisms Mechanisms that generate credits for emission reductions in countries or sectors that are not subject to a quantified emission reduction or limitation target. Like offsetting mechanisms, they allow for the transfer of these credits to other countries or private sectors entities in other countries for compliance with binding emission caps. More broadly than offsetting mechanisms, carbon crediting mechanisms include also those mechanisms that provide credits for emission reductions only beyond a certain target level that is more ambitious than business as usual. An example for such mechanisms is the so called "no-lose" target that rewards emission reductions below a crediting target, but does not require countries or sectors to acquire credits if the target is not met.

16 JRC/IPTS - Joint Research Centre's Institute for Prospective Technological Studies, European Commission Kyoto Protocol - An international agreement standing on its own, and requiring separate ratification by governments, but linked to the UNFCCC. The Kyoto Protocol, among other things, sets binding targets for the reduction of greenhousegas emissions by industrialized countries. LULUCF - Land use, land-use change, and forestry. A greenhouse gas inventory sector that covers emissions and removals of greenhouse gases resulting from direct human-induced land use, land-use change and forestry activities. Marrakesh Accords: Agreements reached at COP-7 which set various rules for "operating" the more complex provisions of the Kyoto Protocol. Among other things, the accords include details for establishing a greenhouse-gas emissions trading system; implementing and monitoring the Protocol's Clean Development Mechanism; and setting up and operating three funds to support efforts to adapt to climate change. Mitigation - In the context of climate change, a human intervention to reduce the sources or enhance the sinks of greenhouse gases. Examples include using fossil fuels more efficiently for industrial processes or electricity generation, switching to solar energy or wind power, improving the insulation of buildings, and expanding forests and other "sinks" to remove greater amounts of carbon dioxide from the atmosphere. Net deforestation difference between afforestation and deforestation & reforestation Non-Annex I Parties - Refers to countries that have ratified or acceded to the United Nations Framework Convention on Climate Change that are not included in Annex I of the Convention. QELROs - Quantified Emissions Limitation and Reduction Commitments. Legally binding targets and timetables under the Kyoto Protocol for the limitation or reduction of greenhouse-gas emissions by developed countries. Offsetting mechanisms - Mechanisms that generate credits for emission reductions in countries or sectors that have themselves no emission cap and allow for the transfer of these credits to countries or sectors that have an emission cap under a cap and trade system in order to be used for compliance purposes. At present the only offsetting mechanism is the CDM that can be used by countries with a reduction target under the Kyoto Protocol for compliance and is also allowed within the EU ETS for compliance in the EU ETS. Also the proposals discussed in the US congress on a US ETS foresee offsetting mechanisms. But these also include internal ones in sectors not covered by the US ETS. Private carbon market - This covers a set of activities, i.e. the investment by the private sector in credit generating activities in offsetting mechanisms, the transfer of emission rights or credits as intermediates and the use of emission rights or credits for compliance purposes by private entities under an ETS.

17 Public carbon market - The transfer of emission rights or credits that has the objective to be used for compliance purposes by public authorities, such as Annex I parties under the Kyoto Protocol. REDD - Emissions from deforestation and forest degradation Reforestation - Replanting of forests on lands that have previously contained forests but that have been converted to some other use. RMU - Removal unit: A Kyoto Protocol unit equal to 1 metric tonne of carbon dioxide equivalent. RMUs are generated in Annex I Parties by LULUCF activities that absorb carbon dioxide. SRES - Special Report on Emissions Scenarios: emissions scenarios used, among others, as a basis for the climate projections in the IPCC the Third and the Fourth Assessment Reports. Subsidiary Body for Implementation (SBI) :The SBI makes recommendations on policy and implementation issues to the COP and, if requested, to other bodies under the UNFCCC. Subsidiary Body for Scientific and Technological Advice (SBSTA): The SBSTA serves as a link between information and assessments provided by expert sources (such as the IPCC) and the COP, which focuses on setting policy. Technology transfer - A broad set of processes covering the flows of know-how, experience and equipment for mitigating and adapting to climate change among different stakeholders UNFCCC - United Nations Framework Convention on Climate Change.

18 1. PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES 1.1. Organisation and timing This staff working document gives background information to the Communication "Towards a comprehensive climate change agreement in Copenhagen". This Communication further specifies the Commission s climate change policy as outlined in the 2005 Communication Winning the battle against global climate change and the 2007 Communication Limiting global climate change to 2ºC. This Communication is a strategic initiative in the Commission Legislative and Work Programme 2009, "Acting now for a better Europe". It is a non-legislative action with the aim to further refine the EU s negotiating position towards achievement of the EU objective of limiting the average increase of global temperature to 2 C above pre-industrial levels within the mandate as defined by the European Council in Spring It is meant as an input for further discussions in order to shape a comprehensive EU position ahead of the UN Climate Change Conference in Copenhagen 3 in December This staff working document also builds further on the analysis of two earlier impact assessments 4, and presents the results of examining different options for engaging all countries in taking further action against climate change, including investment and financing options. Work on this staff working document started in March The Joint Research Centre's Institute for Prospective Technological Studies (JRC/IPTS) was requested to further improve its global climate change mitigation models. A draft outline of the Communication and annotations to it were distributed in the Inter-service Group on the international climate change negotiations, and this group was regularly updated on the work on the communication. The staff working document made use of several models to assess the impact on GDP and other relevant socio-economic factors of low carbon emission scenarios and certain specific elements of interest to the future international agreement on climate change. The global POLES model was used by JRC/IPTS to analyse the impact on the energy system and industry. It assesses the mitigation potential for GHG emissions in the energy system and industrial emissions including other gases than CO 2. The direct emissions and the potential for mitigation from agriculture were estimated using the land use change model of the integrated assessment model IMAGE of the Netherlands Environmental Assessment Agency (PBL, Planbureau voor de Leefomgeving). IIASA s 5 G4M and GLOBIOM models were used to assess the potential for mitigation from both reduced deforestation and increased afforestation, mainly to foresee increased demand from bio-energy. Also indirect emissions from deforestation due to agriculture, including increasing demands for bio-energy, were assessed with this set of models The 15 th Conference of the Parties to the UNFCCC and the 5 th Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol COM(2005) 35 final, COM(2007) 2 final International Institute for Applied Systems Analysis (IIASA)

19 The GEM-E3 model of JRC/IPTS is a general equilibrium model that was employed to assess the macro-economic effects of various mitigation scenarios covering all economy-wide emissions except those from land-use change. The TM5 model from JRC/IES was employed to estimate the effects of different GHG emission scenarios and their corresponding energy consumption on local air pollutants. The GAINS Europe and GAINS Asia models from IIASA were used to assess the interlinkages between GHG and local air pollution abatement policies and their respective costs if applied in parallel. Finally JRC/IES provided a spreadsheet based tool to assess the impact of different accounting rules for the Land Use, Land Use Change and Forestry (LULUCF) sector for the current developed countries under the Kyoto Protocol based on historic data for the base year 1990 or the base period A more detailed description of the models can be found in Annex 1 of this Staff Working Document (Part 2) Stakeholder Consultation An internet consultation "Towards a comprehensive and ambitious post-2012 climate change agreement" was conducted from 4 August to 10 October It received 324 responses, out of which 59% were from individuals and 41% from organisations. From organisations most contributions were received from non-governmental organisations (37%) and organisations representing private sector (36%). Most active respondents were from Germany (21.5%), followed by Belgium (15.5%), France (12.9%) and the United Kingdom (12.6%). Furthermore a stakeholder conference was held on 15 October Over 200 participants from public authorities, business community, trade unions, consumer organisations, academia and NGOs from developed and developing countries shared their views on the key elements of a global post-2012 climate regime 6. The event in particular focused on mitigation commitments by developed countries, mitigation actions by developing countries and adaptation to climate change. Underneath a summary is presented on the main issues raised by stakeholders in the consultation and the conference. For specific elements regarding the issues raised in the stakeholder conference, see also Annex 2 of this Staff Working Document (Part 2). Most stakeholders agreed that the goal of reducing global greenhouse gas emissions by at least 50% below 1990 levels by 2050 is needed to tackle the climate change challenge. In addition, it was often stated that to make this long-term target credible, there is a need for (1) interim emission reduction targets for 2020 and 2030 to ensure 2050 goal attainable; (2) a commitment by industrialized countries to reduce their own emissions by at least 80% below 1990 levels by 2050; (3) financial and other support by industrialized countries to developing countries to ensure that the transition to low carbon economy is compatible with development and poverty reduction goals. Some stakeholders expressed concerns that current objectives are not ambitious enough as 450ppmv scenario provides only for 50% probability to stay below 2 degree target. Therefore, 6 For background information, see:

20 it was suggested that the emission reduction goals should be revised over time in the light of the latest available scientific research. A need for broad and comprehensive post-2012 climate change agreement was expressed, including fast developing countries like China and India. Among other elements of shared vision, the need to tackle emissions from deforestation was commonly mentioned. Importance of energy efficiency and necessity for lifestyle changes was also emphasised. Most stakeholder recognised that based on the historical responsibility, developed countries must take the lead by committing to binding absolute emission reduction targets reflecting comparable efforts. Need for redefinition of developed countries was pointed out by some stakeholders. Emission reductions made up to date (since 1990), capacity to pay for emission reductions (GDP per capita) and GHG emissions per capita were among the criteria most often mentioned for determining comparable efforts. Other criteria included emission intensity of the economy, technological potential to reduce emissions, historic responsibility and the UN's human development index. Regarding developing country mitigation actions, most stakeholders considered that all countries should undertake sustainable policies and measures as a means of realizing low carbon development. Recognising wide differences among developing countries, many stakeholders considered that different types of mitigation actions are appropriate for different developing countries. However, many noted that all countries should stop subsidising fossil fuel extraction and use, and nuclear power, that could increase the cost of the energy sector. Even though emission reduction actions would differ among developing countries, there should be a common monitoring, verification and reporting system. Technology and financial assistance for mitigation in developing countries should be measured, reported and verified according to actual and additional mitigation achieved (e.g. tons of CO2 equivalent avoided) as a result of assistance given by developed countries. Carbon leakage is a concern for many stakeholders. Most commonly proposed measures to avoid relocation of industries were a comprehensive global agreement, sectoral approaches, free allocation in EU ETS for industries concerned and border adjustment measures. Some stakeholders considered that a stronger cooperation between the UNFCCC and ICAO (International Civil Aviation Organisation) and IMO (International Maritime Organisation) would be is needed to effectively address emissions from international air and maritime transport. It was also mentioned that sectoral approaches could play a positive role in this context. Since emissions from deforestation and forest degradation (REDD) account for some 20 % of global GHG emissions, necessary incentives to reduce these emissions should be found. Forest-based carbon credits and auction revenues were among most commonly mentioned financing sources to reduce emissions from REDD. However, some stakeholders expressed concerns that allowing forest-based carbon credits in the EU ETS will drastically reduce allowance prices. Many stakeholders considered that there are solutions to non-permanence, leakage and liability issues in monitoring emission reductions from REDD. To address leakage, any

21 REDD regime must be nationally based. Countries should take on obligations to reduce emissions from deforestation and countries instead of private companies should be responsible for delivering those emission reductions. Since the national approach will not eliminate international leakage, it is important that participation in any REDD regime is as broad as possible. It was considered crucial that funding for adaptation is predictable and sustainable. Auctioning of Assigned Amount Units (AAU) was most commonly mentioned as a key measure for generating finance on the scale necessary to support adaptation in developing countries. International funds like Adaptation Fund or Least Developed Countries Fund were mentioned appropriate vehicles for financing adaptation. Adaptation activities should be conducted in a transparent way, and should draw on knowledge and learning from similar programmes, while formulating locally appropriate programmes. Adaptation decisions should be made at the lowest possible level. Coordinating the work of other international organisations, overseeing establishment of regional adaptation centres and regional information systems on climate change risks in developing countries were mentioned as potential roles of UNFCCC in adaptation. Stakeholders views on necessity of support schemes for development, demonstration and deployment of certain technologies were divergent. Some argued for some kind of technology cooperation mechanism. However, first of all it would be necessary for developing countries to identify the most critical technologies for their low carbon development and to assess gaps in domestic capacities to be able to benefit from this technology cooperation mechanism. Few argued that governments should ensure that existing policy tools such as carbon markets, CDM, tax incentives, regulations, and efficiency standards are applied appropriately to contribute to development, demonstration and deployment of technologies, but no specific support schemes are needed. International standards (e.g. for energy efficiency) as a way to facilitate the diffusion of modern technologies were commonly mentioned. Renewable energy technologies and carbon capture and storage were among most commonly mentioned technologies for which support schemes would be needed. Intellectual property rights, removal of existing barriers and capacity building were stated as important elements for strengthening enabling environment for the deployment of the existing clean technologies. Auctioning Assigned Amount Units was among the most commonly mentioned means of organising additional public financing. Establishing a system of micro credits for measures to enhance energy-efficiency and deployment of less GHG intensive technologies seemed useful to some stakeholders. Adaptation, leveraging massive clean technology uptake and reducing emissions from tropical deforestation and forest degradation were among priority areas for financial support in developing countries. Legal certainty and improved governance were mentioned among important factors to mobilise private sector financing. Most stakeholders considered that the first step to good compliance is a new globally accepted agreement, which includes also all countries that did not sign up to the Kyoto Protocol. Many stakeholders thought that non-compliance with reduction commitments should be subject to sanctioning mechanisms. Such mechanisms could include a financial penalty, exclusion from international climate finance vehicles and limited trade sanctions (border tax adjustments).

22 2. BACKGROUND 2.1. Global temperature increase needs to be limited Climate change is happening and will have large and irreversible impacts if global temperatures continue to increase significantly. Already in 1996, the EU Council of Ministers put 2 C forward as the upper limit for this rise in temperatures compared to pre-industrial times 7. This was based on the 2 nd Assessment Report of the Intergovernmental Panel on Climate Change (IPCC). The most recent IPCC 4 th Assessment Report published in 2007 strengthens the scientific evidence of the need and the urgency to act against climate change given the wide variety of negative effects that will affect on a global scale our ecosystems that will in turn gravely affect our socio economic fabric. The figure below gives an overview of the type of impacts that can be expected when temperatures continue to increase. Figure 1 Key impacts as a function of increasing global average temperature change EU s 2 C Source: Adapted from IPCC, 4 th Assessment Report, Working Group II Report "Impacts, Adaptation and Vulnerability, Summary for Policymakers, Figure SPM2 Consistent with the findings of the IPCC, the EU Heads of State and Government reaffirmed the 2 C objective in their conclusions in March th Council Meeting, Luxembourg, 25 June European Council, 8-9 March 2007.

23 Recent scientific publications that came out since the cut off date for the IPCC's 4 th Assessment not only confirm the IPCC s earlier findings but are often even bleaker. For instance, research indicates the need to further increase global warming projections if geological and ecosystem feedbacks would be included in warming projections. One such feedback is the release of methane from decaying Arctic permafrost. New measurements of methane emissions from Siberian thaw lakes revealed that these emissions are already five times greater than previous estimates. Also recent measurements of ice loss in the Arctic are worrisome. The observed sea ice decline is about three times faster than the mean model projections, which suggests that melting of Arctic sea ice is likely to happen much faster than projected by current climate models. Sensitive mechanisms have been identified with respect to Arctic summer ice and the Greenland ice sheet, where the thresholds for an abrupt change of the earth system was estimated in a range from 1 C to 2.5 C above pre-industrial level. For more detailed information on the recent scientific findings, see Annex 3 of this Staff Working Document (Part 2). Similarly it is clear that even if temperature increase is limited to 2 C, there will be significant impacts from climate change. Some of these effects are already occurring. Therefore, there is not only a need to limit climate change to 2 C, but there will also be a need to adapt to inevitable changes. While developed countries can be expected to mobilise sufficient resources to adapt to these impacts domestically, developing countries, in particular the Least Developed Countries LDCs and most vulnerable countries, will be much less capable of doing so Urgent need for global action The driver behind global climate change is the increase in anthropogenic greenhouse gas (GHG) emissions. The mean baseline projections 9 included in recent IPCC's 4 th Assessment Report all see the 2 C limit surpassed within this century with a maximum of around 5 C and more for two baseline scenarios 10. Recently recorded global emissions levels have tended to fall in line with the 'high emission' scenarios. Historically developed countries were the largest source of GHG emissions, but in recent decades growth in emissions has been rising significantly in developing countries. The IPCC 4 th Assessment Report estimated that developed countries accounted in 2004 for 46% of global GHG emissions, and developing countries for 54% 11. This includes emissions from deforestation accounting for around 20% of global GHG emissions. Projections indicate that emission growth is expected predominantly in developing countries in the coming decades. The IPCC 4 th Assessment Report projects emissions growth from energy up to 2030 to come These are the potential future scenarios as defined in the IPCC Special Report on Emission Scenarios. Based on the results presented in the IPCC, 4th Assessment Report, Working Group II Report "Impacts, Adaptation and Vulnerability, Summary for Policymakers, Figure SPM2 for the projected increase in temperatures for the A2 and A1FI scenarios. These scenarios were defined in the IPCC Special Report on Emission Scenarios IPCC, 4th Assessment Report, Working Group III Report " Mitigation of Climate Change", Technical summary

24 for two thirds to three quarters from developing countries 12. The IEA's World Energy Outlook 2008 projects that almost the entire increase in fossil fuel consumption in the baseline up to 2030 occurs in non-oecd countries. However, per capita emissions in developed countries continue to be significantly higher than even those of rapidly industrialising developing countries. At the same time emissions would need to peak globally by 2020, and then would have to be reduced by up to 50% compared to 1990 in 2050, if a 50% chance to limit temperature increase to 2 C is to be achieved 13. In order to arrive at a higher likelihood that temperatures will not surpass 2 C, global GHG reductions will need to be significantly more than 50% by 2050 compared to It is obvious that such emission limitation and subsequent reductions on a global scale can only be achieved if there is global participation in the fight against climate change. The 2005 Communication 14 "Winning the Battle Against Global Climate Change" already highlighted the need for global action. It also pointed out that reducing deforestation will have to be part of the answer and that it is not possible to continue a situation where two of the fastest growing global sectors, i.e. aviation and maritime transport, are continued to be excluded from any type of action. The 2007 Communication 15 "Limiting Global Climate Change to 2 degrees Celsius - The way ahead for 2020 and beyond" assessed the type and level of action that would be required. It concluded that developed countries should take the lead and commit as a group to a reduction target of -30% compared to 1990 by But the Communication also underlined that in developing countries the rate of growth of overall emissions will have to start to fall, followed by an overall absolute reduction from 2020 onwards. The IPCC's 4 th Assessment Report 16 indicated that in order to have a 50% chance to limit climate change to 2 C 17, developed countries as a group would have to commit to GHG emission reduction targets in the order of 25% to 40% below 1990 levels by The IPCC concluded that in addition to developed countries action, developing countries emissions need to substantially deviate from baseline in a number of key regions. The authors of this part of the 4 th Assessment Report have since then quantified the necessary range of this deviation 18. They estimate that a deviation of 15% to 30% compared to business as usual emissions by 2020 is necessary for all sectors excluding deforestation. If emissions IPCC, 4th Assessment Report, Working Group III Report " Mitigation of Climate Change", Summary for Policy Makers This is in line with emission scenarios where GHG concentrations first overshoot 450 ppmv and then reduce back to 450 ppmv over time. In 2006 concentration of the six GHG included in the Kyoto Protocol had reached already 433 ppmv CO2 equivalent. COM(2005) 35 final SEC(2005) 180 IPCC, 4th Assessment Report, Working Group III Report " Mitigation of Climate Change", Chapter 13 Policies, instruments, and co-operative arrangements, Box 13.7 Stabilising GHG concentrations in the atmosphere at 450 ppm CO2-eq would give around 50% chance of limiting global temperature rise to 2 C compared to pre-industrial times. den Elzen Michel, Höhne Niklas, 2008

25 from deforestation were to be reduced below baseline the deviation from baseline for the other sectors could be lower 19. The European Spring Council of 9 March 2007 confirmed the -30% target for developed countries as a group and also endorsed an EU objective of a 30% reduction in GHG emissions by 2020 as its contribution to a sufficiently ambitious global agreement on climate change. The Council of the European Union also noted in its conclusions 20 the need for a deviation from baseline in developing countries of 15 to 30 % below business as usual in order to be consistent with the global emission reduction goal to stay within the 2 C objective. Part of this effort by developing countries to deviate with 15 to 30% from the baseline needs to be achieved by reducing emissions from deforestation. Recently the Commission addressed the need to tackle these emissions in its Communication "Addressing the challenges of deforestation and forest degradation to tackle climate change and biodiversity loss" 21. It proposes that in the UNFCCC negotiations on the future climate regime the EU aims to halt global forest cover loss by 2030 at the latest and to reduce gross tropical deforestation by at least 50 % by 2020 compared to current levels, delivering major climate change and biodiversity benefits by The aim was endorsed by the EU Council of Ministers 22 and will be pursued within the UNFCCC negotiations The EU and Commission's role in the international negotiations The EU is widely seen as one of the parties with a leadership role in the international negotiations. This is underpinned by ambitious domestic action, for instance by creating the largest emissions trading system (EU ETS) globally, and by putting in place a 20% unilateral reduction target by 2020 to be increased to 30% if the international agreement is sufficiently ambitious. The EU speaks with one voice in international environmental negotiations, and the Community is a full signatory to the UNFCCC and its Kyoto Protocol. This requires internal coordination in the EU Council to establish a common EU position. EU Environment Ministers lead on the coordination, but relevant dimensions are also discussed by Energy, Development, Finance and Foreign Ministers. In recent years EU Heads of State and Government increasingly provide overall guidance on key elements of the EU position. This underlines the significance and political priority the EU attributes to global climate change policy. The Communication aims at contributing to the further development and refinement in the EU s position towards the negotiations at COP15/MOP5 in Copenhagen. In the light of the current stage of the negotiations and taking into account proposals that have been tabled by other Parties up to now, it will need to address all the building blocks included in the Bali Roadmap. One focus will be on developing a comprehensive strategy for providing financial support as requested by the European Council in June The 15 to 30% range assumes that emissions from deforestation remain at baseline, so the range for emission deviations from baseline for those sectors excluding deforestation reduces when deforestation emissions reduce below baseline nd Council Meeting, Brussels, 4 December COM(2008) 645 final of 17 October th Council meeting, Luxembourg, 30 October 2007.

26 Box 1 gives an overview of the key elements that have been set out by the EU as building blocks of a global agreement in order to ensure that average global temperature increase does not surpass 2 C above pre-industrial levels: Box 1: Building blocks for a Copenhagen agreement proposed by the EU Developed countries as a group should commit to GHG emission reductions of 30% compared to 1990 by The EU is willing to take on a 30% reduction target itself provided that other developed countries commit themselves to comparable emission reductions and that economically more advanced developing countries contribute adequately according to their responsibilities and respective capabilities. Developing countries need to commit to appropriate mitigation action that leads to a deviation of GHG emissions from business as usual by about 15 to 30 % by Part of this action will need to be supported by developed countries as appropriate by finance, technology and capacity building. As part of this, appropriate action by developing countries it is needed to halt global forest cover loss by 2030 at the latest and to reduce gross tropical deforestation by at least 50 % by 2020 compared to current levels. Adaptation action is needed in all countries. The new agreement needs to provide support for effective adaptation especially for the poorest and most vulnerable developing countries. A new global agreement needs to address emissions from international aviation and shipping sectors that show fast growing GHG emissions.

27 3. PROBLEM DEFINITION: REACHING AN AGREEMT WITHIN THE MULTILATERAL CONTEXT OF THE UNFCCC, SURING THAT AVERAGE GLOBAL TEMPERATURE DOES NOT INCREASE BY MORE THAN 2 C The global fight against climate change is coordinated within the United Nations Framework Convention on Climate Change (UNFCCC) and its Kyoto Protocol, with the participation of more than 190 countries, at the annual Conference of the Parties (COP) to the UNFCCC that since its 11 th meeting in Montreal in 2005 also serves as the Meeting of the Parties to the Kyoto Protocol (COP/MOP). Under the UNFCC all countries are expected to contribute to the protection of the climate system in accordance with their common but differentiated responsibilities and respective capabilities. On the basis of this principle, Parties agreed that the developed countries should take the lead in combating climate change and the adverse effects thereof. The leadership role of developed countries was translated in 1997 in the Kyoto Protocol into quantitative emission limitation and reduction objectives (QELROs) for those developed listed in its Annex B. The reduction targets for developed countries in Annex B only apply for the period In 2005, at the UN climate change conference in Montreal, negotiations started on new commitments for developed countries under the Kyoto Protocol for the period after As the US is not a Party to the Kyoto Protocol, it does not participate in these negotiations. At the same time, it was recognised that the current framework under the Kyoto Protocol will not suffice to limit climate change to 2 C, even with further targets for developed countries, but that further action on both mitigation and adaptation is needed. At the Bali UN climate change conference in December 2007 Parties therefore agreed to launch a comprehensive negotiating process, referred to as the Bali Roadmap. This process is set to conclude in 2009 at the UN climate change conference in Copenhagen. Following the decisions taken in Montreal and Bali, the UN climate change negotiations are now taking place under two tracks: The first track, started in Montreal, focuses on further emission reduction commitments by developed countries under the Kyoto Protocol (Ad-hoc Working Group on the Kyoto Protocol or AWG-KP). This includes discussions on the future use and design of the flexible mechanisms that can be used by developed countries for compliance with their targets, the accounting rules for Land Use, Land Use Change and Forestry (LULUCF) in developed countries, and the future coverage of emission reduction targets (i.e. sectors, sources and gases). The second track, started in Bali, focuses on further actions to strengthen the implementation of the UNFCCC. It is exploring building blocks for an agreement on further action that affect all countries, including the USA and the developing countries (Ad-hoc Working Group on Long-term Cooperative Action, AWG-LCA). These building blocks focus on: a shared vision for long-term co-operative action to address climate change mitigation commitments of developed countries

28 nationally appropriate mitigation action by developing countries enhanced action on adaptation technology cooperation investment and financial flows Since Bali, four negotiating sessions have taken place during the course of 2008 (Bangkok, Bonn, Accra and Poznan), where Parties presented their views on the different elements under negotiation. These four meetings have revealed significant differences between the Parties expectations for the Copenhagen agreement. At the same time, this first year of negotiations has provided Parties with a comprehensive overview of ideas and proposals and allows for substantive negotiations during the remaining four sessions until Copenhagen. Key problems that will need to be tackled to obtain the necessary consensus on the different building blocks of the Bali Roadmap at Copenhagen are elaborated in sections 3.1 to 3.8 below. They cover the following elements: Individual GHG emission reduction targets for developed countries LULUCF accounting rules Surplus of Assigned Amount Units and the impact on future targets Appropriate action to be undertaken by developing countries Further development of the global carbon market Reduction in emissions from deforestation and forest degradation in developing countries Addressing international maritime transport and aviation Assistance for appropriate own action by developing countries through finance and technology Annex 5 of this Staff Working Document (Part 2) gives a more detailed overview of the views of key parties on these different issues including the role of the G8 and the Major Economies meeting GHG reduction targets for developed countries By Copenhagen, an agreement needs to be reached on the GHG emission reduction targets for developed countries (including for the USA). The EU has proposed that developed countries as a group should commit to a 30% reduction of GHG emissions by 2020 compared to The EU has, however, yet to define specific method for how this target should be distributed among different developed countries. Other developed countries seem reluctant to engage in the discussion on the level of reduction targets necessary to stay within the 2 C objective or are only willing to do so if they see clear re-engagement by the US and sufficient engagement from developing countries. As the US will start to re-engage in these negotiations, the comparability of efforts between developed countries will become a key element of the discussions. At the UN climate change negotiations in Poznan in December 2008, Parties

29 already agreed that further developed country targets should be "informed by the consideration of, inter alia, the analysis of mitigation potential, effectiveness, efficiency, costs and benefits of current and future policies, measures and technologies at the disposal of [developed country] Parties, appropriate in different national circumstances". In setting further reduction targets for developed countries, two important sets of accounting rules must be taken into account, in view of their large impact on the potential of developed countries to meet their reduction target. These are the accounting rules for the Land Use, Land-Use Change and Forestry sector (LULUCF, see chapter 3.2 for problem definition) and the accounting rules for any surplus of emission rights carried forward by developed countries from the period into the next commitment periods (see chapter 3.3 for problem definition) LULUCF accounting rules The LULUCF sector covers all activities related to land use (e.g. forests, croplands, grasslands, wetlands) and can be responsible for emissions (for example when a forest is converted into an agricultural pasture) and removals of GHG emissions (for example when a long existing pasture is reforested). For some countries, like the US and most EU Member States, the total balance of all GHG fluxes from the LULUCF sector results in a net sink, i.e. the sequestration rather than emission of greenhouse gases 23. But the LULUCF sectors are not static and in some countries sometimes constitute a sink and sometimes a source. These variations can be very large and are linked to for instance large forest fires or insect pests which vary from one year to another 24. Under the Kyoto Protocol countries need to take into account these LULUCF sectors when they report on compliance with their targets. When these sectors are a net source, emissions needs to be added to the total GHG emissions of a country, and when the sectors are a net sink, then the country can issue additional emission rights ( removal units or RMUs) which can be used for compliance or be traded via the emission trading mechanism under the Kyoto Protocol. The present rules that govern LULUCF in developed countries are inconsistent and provisional due to the lack of data at the time they were agreed. There is no mandatory reporting for all LULUCF sectors. For some it is obligatory (afforestation, reforestation and deforestation) while others are optional (revegetation, forest management, cropland management and grazing land management.). For different sectors there are different accounting rules. Forests activities are accounted for using the so-called 'gross-net' accounting method while for agricultural activities (cropland and grazing land management) the 'net-net' accounting approach was adopted 25. In the case of forest management, 'national caps' were For example: In 2005, net removals from the LULUCF sector were estimated to amount to 315 MtCO2 for the EU 27 (8% of the EU GHG emissions) and 10 Mt CO2 in the USA (11% of USA s GHG emissions). For example: In 2004, the Canadian LULUCF sector resulted in a net source, estimated to 11% of Canada s overall GHG emissions for the year 2004 whereas in 2005, the Canadian LULUCF sector was estimated to be a net sink (2% of Canada s overall GHG emissions for the year 2005). For more background information on these specific issues, including what the difference is between 'gross-net' and the 'net-net' accounting approach, see annex 8.10

30 agreed in the Marrakech accords, which were in part politically motivated and which are due for review before The cap for forest management often limits the incentives to look for and develop climate friendly practices, rewarding mainly business as usual. These rules were meant to undergo some revision after The following are the main problems that will need to be tackled in this sector in an international agreement: There is a clear need for better harmonising the approach to account for LULUCF across all developed countries, ensuring that no sector can be left out that poses a considerable risk of the release of the enormous quantities of GHG stored in soils and biomass into the atmosphere. In the current set of rules for the LULUCF sector, countries lack consistent incentives to develop climate-friendly policies in the LULUCF sector. Rules often do not encourage real additional action in the LULUCF sector to mitigate GHG emissions and increase GHG removals. The forest management cap is a good example where to a large extent business as usual behaviour is credited. A future international agreement should set real incentives for additional mitigation action. The accounting rules needs also to encourage national policies and actions that promote an effective contribution of agriculture and forestry to climate change mitigation, including through the reduction of emissions, the protection and enhancement of sinks and carbon stocks and the development of sustainable supply of bioenergy and wood material. The complexity of the natural processes, high uncertainties in the measurement, the difficulty in differentiating between anthropogenic and natural emissions, and high inter-annual fluctuations (part of them outside, or only limited, human control) need to be recognised in the accounting rules. This needs to be done in a conservative manner to ensure that real incentives are created for additional action from land managers Accounting rules for a surplus of Assigned Amount Units Under the Kyoto Protocol, developed countries reduction targets get translated into a total absolute amount of allowed emissions over the entire commitment period ( ), called a country's Assigned Amount. This Assigned Amount is issued into a country's registry in individual Assigned Amount Units (AAUs), each representing 1 ton of CO 2 -equivalent emissions. These are the emission rights that can be transferred under the Kyoto Protocol's emission trading mechanism and these are also used, together with other units created under the Kyoto Protocol, to demonstrate compliance with a country's Kyoto Protocol target. If countries have lower emissions than their target provides for, they have a surplus of AAUs, which they can transfer to other countries with a reduction target or bank into a next commitment period after 2012 to be used for compliance purposes. The present accounting rules under the Kyoto Protocol foresee that developed countries that reduce emissions below their target for the period , can bank any unused emission rights to the next commitment period for compliance purposes. Some developed countries have at present large excess quantities of such emission rights because their emissions are well below their reduction targets as foreseen for the first commitment period.

31 The excess emission rights that can be transferred to the period after 2012 are much larger than expected at the time the Kyoto Protocol was agreed. When the Kyoto Protocol was agreed, the expectation was that the US would purchase a large part of this surplus. The US non-ratification of the Kyoto Protocol means that a large excess of emissions rights may be banked into a future commitment period. This would make it significantly easier for developed countries to achieve future reduction targets without taking additional mitigation action in the period after 2012, thereby potentially creating a problem in relationshiop to the environmental integrity of targets in a next commitment period Appropriate action by developing countries The Bali Action Plan (paragraph 1,b,ii) recognises that developing countries need to undertake nationally appropriate mitigation action. The EU has indicated that developing countries should undertake nationally appropriate mitigation action that leads to a deviation of GHG emissions with 15 to 30% from business as usual by Developing countries however oppose taking on quantified emission reduction commitments as envisaged for developed countries. Most importantly, the Bali Action Plan draws a clear link between the ability for developing countries to take nationally appropriate mitigation action and the need to support and enable that action by technology, financing and capacity-building. In the context of the negotiations up to Copenhagen, the EU needs to specify in more detail, what action it is expecting from different developing countries, what instruments need to be included in the Copenhagen agreement that can ensure that developing country action is sufficiently ambitious and how developing country actions and support for it can be measured, reported and verified under the UNFCCC.. As The EU should explore options to support developing country action by technology, financing and capacity building and ensure that the carbon market will also support part of this action by developing countries through offsetting mechanisms that go beyond mere crediting compared to a baseline The development of a global carbon market Large differences in the marginal abatement costs between regions and sectors and in the ability to pay or the responsibility to reduce emissions often imply that those countries or sectors that take on ambitious reduction targets do not always have the most cost efficient reduction options. These differences are a key driver for the creation of market-based mechanisms that allow for trade in emission rights between countries or sectors that have a cap and trade system in place or the trade in credits generated in countries or sectors that have no reduction obligation but can generate credits for reductions beyond a certain level which can then be used for compliance in countries/sectors that have a reduction obligation (i.e. socalled offsetting mechanisms) 26. In theory, perfect trading mechanisms, including the link between cap and trade systems and offsetting mechanism, lead to equalisation of the marginal abatement costs which in turn ensures cost-efficient reductions. The benefits of such market mechanisms are twofold. Firstly, they guarantee the environmental outcome set by the cap. Secondly they allow for the 26 See annex for a glossary of carbon market terms used in this staff working document.

32 differentiation of efforts in accordance with the ability to pay or other allocation criteria 27 while achieving a cost-efficient outcome. This makes emissions trading a superior policy tool in an international framework compared to international carbon taxes, which in principle would also allow for the equalisation of marginal abatement costs and thus cost efficiency provided that such an international tax would be set at an equal level across all countries/sectors. Furthermore, an international tax does not guarantee ex ante a certain environmental outcome. Apart from these disadvantages, it is also politically inconceivable that a common level of international taxes would be accepted at a global scale that is sufficiently ambitious to stay within the 2ºC objective. This option will therefore not be further analysed. Since the ratification of the Kyoto Protocol both the public carbon market (mainly through acquisitions of CDM credits by governments but lately also to some extent through trades in AAUs) and the private carbon market (through the creation of the EU ETS) have boomed. In 2007 global trade was estimated to reach US$ 64 billion of which trade in EU ETS allowances represented US$ 50 billion. But the current market is not perfect and marginal abatement costs have not equalised across the globe. In the coming year it is to be expected that the carbon market will further develop. Individual countries or regions are setting up emissions trading systems for their domestic sectors, for instance in the US, Australia and New Zealand (see Annex 5 of this Staff Working Document (Part 2) for more information). These country-specific systems all have access to some degree to some type of offsetting mechanisms and are likely to be linked up over time, and by doing so increasing cost efficiency. This will create a better functioning carbon market in the coming decade, certainly between those regions that have set a reduction target and introduce cap and trade systems within their country. The global carbon market is often put forward as the mechanism of choice to reduce global costs of mitigating GHG emissions and at the same time realise GHG reductions in developing countries through offsetting mechanisms. This can be problematic. While it is correct that the global carbon market reduces costs through access to offsetting mechanisms, there are problems with the continued use of offsetting mechanisms such as the Clean Development Mechanism (CDM) in its present form. These include problems of scale, where it is questionable whether the project-based format of the current CDM can deliver a sufficiently large amount of offsets, but also of quality, where questions have been raised on the environmental benefit of specific types of CDM projects. In addition to that, a continued use of purely offsetting mechanisms may increasingly undermine incentives for developing countries to implement actions that reduce their emissions without producing offsets. Therefore the international agreement will need to ensure that offsetting mechanisms evolve in such a way that they go beyond mere crediting and also stimulate appropriate own action in developing countries that does not generate credits. In addition to that, offsetting mechanisms should not lead to double counting. Any reductions that generate credits in developing countries that can be used to offset targets in developed countries cannot be counted towards the mitigation efforts by developing countries. 27 Effort can be set differently by varying the cap per country/installation in a cap and trade system or by setting more or less ambitious levels that need to be met before crediting can happen in offsetting mechanisms.

33 3.6. Action to reduce emissions from deforestation and forest degradation Part of the appropriate action by developing countries consist out of reducing GHG emissions from deforestation and forest degradation (REDD). These are often seen as a relatively cheap reductions option, with large co-benefits through decreased biodiversity loss, however with a large uncertainty in relation to the costs to achieve these reductions. In practice there are large uncertainties on costs. If developing countries need to be compensated for decreasing their deforestation rates, costs can vary widely depending on the amount of leakage that occurs. Leakage happens when the activity causing deforestation in one project area is shifted to a different location outside the boundaries of the project area. If no leakage occurs, only the forest area targeted for avoided deforestation ("the frontier forests") needs to be included in the system, as such leading to relatively low costs per ton of CO2 emissions avoided. If leakage occurs, cost can however greatly increase, because of the need to compensate a larger area than the one that would have been deforested. Leakage on a global scale would translate into the need to compensate for the continued conservation of all standing carbon stocks globally. Therefore leakage is a key problem to be addressed in an international agreement. Furthermore there is dual pressure on deforestation due to climate change mitigation policies. On one hand, climate change mitigation policies try to reduce emission from deforestation directly. On the other hand, without appropriate sustainability criteria and proper enforcement of the relevant national law, the increased demand for biofuels and biomass might increase pressure on land use and induce deforestation and the conversion of virgin forests into plantation. The international agreement will have to ensure that the right balance can be found between these opposing forces Addressing emissions from international maritime transport and aviation Emissions form international aviation and maritime transport are one of the fastest growing sources of GHG emissions globally. Yet, those emissions are not controlled under the UNFCCC and its Kyoto Protocol. The Kyoto Protocol provides for Parties to work through the International Civil Aviation Organisation (ICAO) and the International Maritime Organisation (IMO) to address emissions from these sectors. However, over the past decade, work performed within these organisations did not result in concrete actions to address appropriately the growth in emissions in these sectors which continues to threatens to significantly impair global emission reduction effort in other sectors The EU has therefore called upon all Parties to agree clear and meaningful targets for these sectors within the framework of a future global climate agreement. 28 Stronger leadership by the UNFCCC and more concrete actions from ICAO and IMO are needed in this matter. There isalso disagreement among Parties on the respective future role of the different relevant organisations to regulate emissions from international aviation and maritime transport Assistance through finance and technology The UNFCCC explicitly foresees that developed countries should enable developing country actions to mitigate GHG emissions and adapt to climate change through financial and technological assistance. Emissions reduced in developing countries through such type of 28 Council of the European Union, Brussels, 19 October 2007

34 assistance can be counted for as appropriate action by developing countries because it does not lead to credits that can be used for compliance with reduction targets in developed countries. The carbon market is likely to be the main source of finance for mitigation solutions in the longer run. It will, however, neither be sufficient in the short term and nor be the most appropriate means of support for all types of actions. As a consequence, new and additional sources of financing need to be identified to kick-start the transformation to a low-carbon economy for which assistance for developing countries will be necessary.

35 4. OBJECTIVES 4.1. General objectives The general objective of the EU is to limit global average temperature increase to not more than 2 degrees Celsius above pre-industrial level Specific objectives In support of the general objective, the EU wants to achieve an ambitious and comprehensive international agreement at the UN climate change conference in Copenhagen in December This international agreement will have to cover all the building blocks of the Bali Roadmap Operational Objectives The international climate change negotiations in the coming year will focus on the level and type of required mitigation commitments and actions by developed and developing countries, and the necessary support to developing countries for both adaptation and mitigation, as well as the institutional architecture required to govern these actions and support Building on the problem definition as set out in chapter 4 the operational objectives that are assessed through different policy options are the following: a) Set fair, comparable and effective emission reduction targets for individual developed countries To agree in the international agreement upon individual GHG reduction targets for developed countries in a fair, comparable and transparent manner that ensure that the group of developed countries takes on a reduction target equal to -30% by 2020 compared to 1990 b) Define LULUCF accounting rules that respect the environmental integrity of the agreement To reach an international agreement that foresees new harmonised rules for accounting of LULUCF in developed countries that rewards real additional action in this sector. c) Accounting rules for a surplus of Assigned Amount Units Address the impact on the environmental integrity of the reduction targets for the period after 2012, when surplus amounts of assigned amount units could be banked under the international agreement. d) Appropriate action by developing countries Ensure that policy instruments are included in the international agreement that lead to measurable, reportable and verifiable mitigation actions under the UNFCCC, leading to a deviation of GHG emissions with 15 to 30% from business as usual by e) Gradual development of a global carbon market Improve the CDM and develop other international carbon crediting mechanisms that go beyond mere offsetting, as such strengthening the environmental integrity of the CDM and

36 ensuring that the global carbon market not only reduces global mitigation costs but also stimulates mitigation action in developing countries that does not lead to the creation of offset credits. f) Action to reduce emissions from deforestation and forest degradation Ensure that policy instruments are included in the international agreement that would reduce gross tropical deforestation by at least 50 % by 2020 from current levels and halts global forest cover loss by 2030 at the latest. g) Addressing emissions from international maritime transport and aviation Ensure that policy instruments are included in the international agreement that would address the emissions from international maritime transport and aviation appropriately. h) Assistance through finance and technology Define adequate and predictable sources of assistance through finance and technology to support appropriate mitigation action and adaptation in developing countries. 5. POLICY OPTIONS This staff working document will assess different policy options to ensure that the operational objectives can be met. This assessment is focused on the quantitative assessment of these policy options. Elements related to the further aspects of the institutional architecture are described in the annexes of this staff working document Distribution of a 30% reduction target for developed countries In order to split the reduction target for developed countries in a fair and efficient manner, several criteria could be used, and some have already been proposed. Still, most developed countries have not yet expressed themselves what mid-term reduction target could be acceptable for them. The EU has proposed a 30% reduction target by 2020 compared to 1990 for the group of developed countries as a whole. The EU is willing to take up itself a reduction target of 30% if the future international agreement is sufficiently ambitious (see also Annex 8 of this Staff Working Document (Part 2) on the EU position on absolute reduction targets and the view of other developed countries on the issue of target setting). Cost-efficiency Cost efficiency is seen by a majority of countries as a key aspect when allocating targets. Reductions should take place where they are cheapest. However, when using cost efficiency as the sole rule for allocating efforts between different countries it raises serious issues as regards fairness. For the EU's 20% unilateral target the Commission analysed in its impact assessment 29 a cost efficient policy case. This assessment demonstrated clearly that allocation of the effort to the EU Member States only on the basis of cost efficiency would lead to substantial differences in 29 SEC(2008) 85/3

37 the total economic costs that each of them would have to face. Because of the large number of low cost emission reduction options in Member States with lower GDP per capita they would incur relatively higher costs while having the least financial capacity to invest in GHG abatement. The Commission therefore concluded that these large national cost differences are not consistent with the need to share the effort in a fair and equitable way, which was agreed by the Spring European Council. Within the group of developed countries, similar differences exist in economic development as can be found between EU Member States. A cost efficient approach is analysed in chapter on the global carbon market. To determine the cost efficient allocation of the target in developed countries it's assumed that there is no emission trading at all with developing countries but that the carbon price does equalise within developed countries at a level that assures that the group of developed countries achieves the 30% reduction target internally. As can be seen in Table 12, if targets would be set cost effectively (with no global carbon market), then the 30% reduction target leads to very high relative costs compared to GDP for those developed economies with a low GDP per capita but a high potential to reduce, e.g. for Russia. In Russia costs would be at around 2,5 times the global average. Furthermore, a cost efficient allocation of the target does not give any information on the ability of countries to pay for emission reductions in developing countries through offsetting mechanisms. For these reasons, the cost efficient approach will not be further analysed as an option to distribute the 30% reduction target among developed countries. Allocation according to a set of simple indicators The IPCC defines 4 main drivers for GHG emissions, i.e. changes in energy and carbon intensity, population growth, and global per capita income growth. While these are often seen as drivers for emission growth, they can also be looked at as indicators for the ability to mitigate. 1. GDP per capita The income level of a country determines to a large extent the ability to pay for mitigation action. Rich countries have a higher ability to invest in reductions than poor ones and have a higher ability to invest in GHG reductions in other countries through offsetting mechanisms. GDP/capita is selected as a first simple indicator that could be used to attribute a reduction target to a country. The higher the indicator, the more stringent the reduction target is set. This indicator measures the ability to act today on climate change. As such there is no need to project GDP/capita but one can simply use recent available data. For this assessment data for the year 2005 was used. One can measure GDP/capita in current prices or in purchasing power parity (PPP). As most clean environmental technologies and services required for large scale investments in a low carbon energy infrastructure are traded internationally at world market prices, the GDP/capita in current prices reflects more appropriately the ability to allocate the necessary financial resources.

38 2. GHG emissions per GDP The amount of emissions a country needs in order to produce a certain amount of goods or services also indicates whether there is high or low potential to reduce emissions. Low carbon productivity can often be attributed to a carbon intensive energy mix or a high degree of energy inefficiency. This generally offers substantial mitigation potential at lower cost than those economies that have a low carbon energy mix or are highly energy efficient. GHG emissions per unit of GDP is selected as a second simple indicator that could be used to attribute a reduction target to a country. The higher the indicator, the more ambitious the reduction target can be. This criterion measures the ability to mitigate today. As such there is no need to project changes in GHG/GDP but one can simply use recent available data. For this assessment data for the year 2005 were used. 3. Population growth Countries with an increasing population will have more difficulties to reduce their emissions than countries with stable or declining populations, assuming per capita income, carbon and energy intensity are all stable. Population trend is, therefore, selected as a third simple indicator that could be used to attribute a reduction target to a country. The higher the indicator, the less stringent the reduction target can be. The data used in this assessment are the historic population trends over the period Early action Since 1992, developed countries have the obligation under the UNFCCC to act on climate change. Over the period 1990 to 2005 total GHG emissions of the group of these countries has actually declined. But there have been huge differences in the country by country performance within this group with large reductions in some while others have increased their emissions substantially. By taking early action many emission reduction options have already been realised in the past. At the same time, taking early action into account provides a reward and an incentive for the future. The observed GHG emission trend is selected as a fourth simple indicator that could be used to attribute a reduction target to a country. The steeper the reduction was since 1990, the less ambitious the future reduction target is set. The data used in this assessment are the historic GHG emissions trend over the period , excluding the LULUCF sector. The figure below gives an overview of the large diversity for the four indicators in the group of developed countries Figure 2 Diversity in GHG intensity, per capita income, population and emission trends in developed countries

39 7 6 UKR CO2 intensity (kg/us$'00) RUS 1 0 NZ EU27 AUS CAN JPN USA SWICE NOR GDP per capita (1000 ) 25.0% 20.0% 15.0% ICE USA NZ AUS CAN Population % NOR SWI 5.0% EU27 JPN 0.0% -60% -40% RUS -20% 0% 20% 40% -5.0% -10.0% UKR -15.0% GHG trend The options to distribute the -30% reduction target for developed countries that are assessed in chapter 6.2 are: Allocation on the basis of GDP per capita, addressing the capacity to pay for emission reduction within a country and through the global carbon market Allocation on the basis of GHG per GDP, addressing the opportunities to reduce GHG emissions within one economy Allocation on the basis of the change of GHG emissions between 1990 and 2005, rewarding early action by developed countries to reduce emissions Allocation on the basis of population trends over the period , recognising different population trends between countries and as such different pressures on the projected emission evolution Allocation on the basis of a combination of the criteria GDP/capita, GHG/GDP, GHG emission trends and Population trends LULUCF accounting rules on the 30% reduction target for developed countries The options presented in chapter 5.1 and assessed in chapter 6.2 to distribute the 30% reduction target for developed countries do not take into account the land use, land use change and forestry sector (LULUCF sector) and thus might overestimate the cost impact if the LULUCF sector is a net sink for that country, or vice versa.

40 Using historical LULUCF data reported by countries through the UNFCCC reporting process, an assessment of the potential for different accounting options to reward business as usual actions and the potential impact on the environmental integrity of the reduction targets for developed countries was carried out. The accounting options assessed are based on different proposals that have been tabled over the course of last year in the international negotiations. These are (see Annex 10 of this Staff Working Document (Part 2) for more detail on different options): Option 0: no changes to accounting rules and the forest management cap set at the same level as the one applied up to The optional sectors are accounted for in the same manner as countries have opted for at present. Option 1: option based on the current regime with no changes to accounting rules except an evolution by 2020 towards mandatory accounting for all activities, also for the Article 3.4 activities which are optional at present. For the forest management sector different discounts rates are applied instead of the present 'arbitrary' cap. Option 2: option based on the current regime but with net-net accounting for the forest management sector compared to a base period. There would also be an evolution towards mandatory accounting for all activities by 2020, also for the Article 3.4 activities which are optional at present. Option 3: option based on the current regime but the emission flux of the forest management sector would be compared to a forward looking baseline for forest management. Option 4: Full land based accounting as done at present under the UNFCCC inventories with net-net accounting. These options are assessed in chapter Accounting rules for a surplus of Assigned Amount Units The operational objective is to ensure that the environmental integrity of the reduction targets for developed countries are not jeopardised when surplus amounts of Assigned Amount Units (AAU) are transferred (banked) into the post-2012 period of an international agreement. The assessment establishes what the potential impact would be on the -30% target for the group of developed countries if surplus AAUs are allowed to be banked to the period after 2012 without special provisions. As a sensitivity analysis, a second policy option is analysed. In this policy option the amount of surplus AAUs to be banked into the post-2012 period is reduced by the amount that might have been used before 2012 if the USA would have ratified the Kyoto Protocol. The result of this assessment gives a more informed view on what the expected amount of surplus AAUs was for the period after 2012, in 1997 when the Kyoto Protocol was agreed upon. These 2 options are assessed in chapter 6.4.

41 5.4. Actions/technologies to achieve the reduction targets for developed countries and a substantial deviation from baseline in developing countries by 2020 and the development of the global carbon market to stimulate these actions In the context of the negotiations up to Copenhagen, the EU needs to clarify in more detail, what level and what types of actions it is expecting from different developing countries and to what extent this action could be supported by different means, including through public and private funding or offsetting mechanisms that go beyond mere crediting. On the level of ambition for this action the EU has proposed that developing countries should undertake appropriate mitigation actions to reduce the growth of their GHG emissions, resulting in a deviation of GHG emissions from business as usual trends of about 15 to 30% by 2020 whereas developed countries as a group should take on a reduction target of -30% compared to 1990 by In order to evaluate the type of actions/technologies that would be required, a policy option needs to be assessed that simulates mitigation action on a global scale that achieves these levels of GHG limitations leading to a global peak in GHG emissions from energy and industry after 2015 and then a decrease from 2020 onwards. The following policy instruments are assumed to be in place to achieve this (similar to the policy assumptions in the 2007 impact assessment 30 ): 1. A reduction of the global energy intensity is realised through energy efficiency policies such as setting standards. These are motivated by concerns about energy security and high energy prices. This includes specific measures to decrease the average energy consumption of new road vehicles. These measures have negative or low costs over the life time of the investment but they do have upfront costs which are included in the cost estimates Developed countries take on a collective emission reduction target in the range of 30% compared to Developed countries set up a trading system such as the EU ETS or similar policy measures that establish a carbon price for the energy intensive industrial sectors, including the power sector. 4. Developing countries are not compensated (through instruments like the CDM) for all reductions they achieve in economical or low cost energy efficiency improvements or increase in vehicle fuel efficiency for vehicles because these Impact assessment accompanying the Communication "Limiting Global Climate Change to 2 degrees Celsius The way ahead for 2020 and beyond" Energy efficiency improvements that are not introduced through increases in the carbon price, related to the different energy transforming equipments and/or to the final energy use in the industrial, residential and services sectors, are modelled through autonomous energy efficiency indicators (AEEIs). For road transport the impact of measures, including standards, on the efficiency improvements of the whole transport fleet is modelled in the transport module of the POLES model, based by the assessment on their impact on fuel efficiencies of the newly introduced vehicles in the future. Estimates are made for the upfront costs of these energy efficiency improvements. These are based on studies by JRC for EU energy efficiency measures, a study by Resources for the Future on demand side energy efficiency policies, work for the 2007 US Energy Independence and Security Act and other energy efficiency related programs (e.g. Energy Star).

42 generate significant monetary co-benefits through reduced energy bills, increased energy security and improved air quality on the short and mid term. 5. A carbon market exists for the sectors included in the EU ETS but it is not perfect and thus not equalise Marginal Abatement Costs for the involved sectors on a global scale. Instead of this, the effective carbon prices are assumed to vary between the various regions in the world because of differences in transaction costs (see figure below), and they converge over time. Carbon prices are similar across markets in developed countries by Economies in transition follow suit but carbon prices would be equal as of Energy intensive sectors in developing countries are exposed to a low carbon price in 2012, simulating the limited penetration or visibility of a carbon price for all individual firms through policy instruments such as the CDM. However, differences in the carbon prices become smaller over time as a result of a strengthened regulatory framework in close relationship with the state of development of the economy. Between 2025 and 2030, these differences in carbon prices become relatively smaller for all groups of countries apart from low income countries. Figure 3 Carbon price developments over time in the global carbon market ( /ton CO 2 ) EU Developed countries Economies in transition High Income DCs Developing countries Low Income DCs Source: POLES, JRC, IPTS 7. Transport, residential and services sectors do not participate in the global carbon market. For these sectors, developed countries introduce in addition to energy efficiency improvements, policies that reduce emissions at a rate similar to the introduction of a carbon price. In developing countries, only energy efficiency policies in these sectors are implemented. 8. Emissions from aviation bunker fuels are included in the national/regional total emissions and thus costs estimates include also those for action in the aviation sector. On the contrary emissions from maritime bunker fuels are not included in the national totals.

43 This policy option is assessed in chapter An important assumption to estimate the potential to mitigate GHG emissions and reduce costs is to what extent the global carbon market is further developed by In order to assess the potential of the carbon market to reduce costs 2 additional policy options will be assessed. One where there is no global carbon market at all and one where there is a perfect global carbon market that equalises Marginal Abatement Costs on a global scale in the energy and industry sectors. These two extreme policy scenarios give the upper and lower bound of the cost estimates on a global scale. These policy options are assessed in chapter together with a analysis to what extent the results demonstrate that offsetting mechanisms, such as CDM, can also be used to give incentives for action that do not lead to crediting, as such given incentives for own appropriate action by developing countries Action to reduce emissions from deforestation and forest degradation The EU has formulated a policy objective to halve emissions from gross deforestation by By 2030 net forest loss has to be reversed, reducing to zero the emissions from net deforestation 32. It needs to be further assessed at what costs this objective can be met and what the impact will be on other land uses, most importantly agriculture. Chapter 6.6 assesses the actions necessary in the forestry sector to reduce emission from deforestation and forest degradation (REDD) and associated costs but ensuring at the same time that any bio-energy demands due to increase climate change action are met. The same chapter also assesses if this is compatible with the need to apply also mitigation actions in the agricultural sector Actions to address emissions from international aviation and maritime transport Due to the internationally mobile nature of emissions from these two sectors, it is preferable to address these emissions globally. Emissions growth for international aviation and shipping since 1990 has been high. Several policy instruments could be used to ensure that these sectors contribute to the global emission reduction effort. Due to the limitations of the modelling framework, no separate quantitative modelling analysis was undertaken for policies that specifically address and single out bunker fuels (see below for further explanation). For the modelling exercise, aviation bunker fuels are included in the national/regional emissions in the analysis of chapters 6.5.1, Energy statistics for aviation bunker fuels are available. In the POLES model they are included in the transport sector. As such all analysis in chapter 6 includes aviation emissions 32 Emissions from net deforestation are equal to the emissions from gross deforestation reduced with the net uptake of CO2 from afforestation and reforestation.

44 in national/regional emission data and thus also in the analysis of policies or impacts per country/regions. For Maritime bunkers fuels, data is not readily available in a consistent way in the national energy statistics and the modelling could not be done in POLES on a national/regional scale. It should also be noted that there is currently no international agreement on the methodology to allocate international bunker fuels emissions to national/regional emission data, putting limitations on the modelling framework, most notably for maritime bunker fuels. In the POLES model, reduction potential for both sectors is more limited than for other sectors. This confirms that absolute emission reductions compared to a base year are unrealistic for these sectors by But it is crucial that also they contribute to the reduction effort. They constitute one of the fastest growing sectors globally in terms of GHG emissions. A qualitative discussion on the treatment of bunker fuels can be found in Annex 19 of this Staff Working Document (Part 2) Sources of financing complementing the carbon market As stated in the problem definition, further support by developed countries for developing countries action on mitigation and adaptation will be necessary. Several options are on the table as to how such new contributions could be generated, as listed below: Argentina has proposed that funding would come mainly from developed countries governments who would contribute according to the UN scale. China and the G77 are calling for new national commitments from developed countries to spend 0.5% to 1% of their GDP on climate change - on top of existing ODA commitments. Mexico has proposed that all countries would be invited to contribute according to a formula based on principles such as: polluter pays (emissions); equity (per capita emissions); efficiency (emissions per unit of GDP); ability to pay (GDP per capita) population. Norway has proposed to auction a certain percentage of AAUs at international level. The revenues of this auction can be used to finance adaptation or other needs, such as technology development and deforestation in developing countries. The Argentinean and the Chinese proposals push the responsibility towards the developed countries, the disadvantage is that the contributors would only include developed countries and therefore not involve, for instance, the emerging economies. The Norwegian proposal has the advantage that it uses the carbon market to ensure new finance. For financing of adaptation this seems acceptable as it would mean that the assistance for adaptation becomes the responsibility of the economies who have historical responsibility, however, when it comes to mitigation a better option would be to choose a mechanism that also makes future emitters responsible. In order to realistically reflect the principle of common but differentiated responsibilities and respective capabilities, one possible option would therefore be to work further on defining a distribution key on the basis of the Mexican proposal by using indicators that reflects the polluter pays principle (emissions); equity (per capita emissions); efficiency (emissions per unit of GDP); ability to pay (GDP per capita) and population. Whether the setting up of new funds or structures is the best way forward or whether existing vehicles with existing experiences could be used for the same purposes needs to be further

45 analysed as well as the potential sources to feed mitigation initiatives. Experience with the funding in the fight against AIDS already shows that a combination of multi-lateral and bilateral funding targeted towards solving specific issues seems to be the most effective route. In the case of adaptation and mitigation that even cover a all economic sectors an even more diversified approach might be necessary in order to reach those areas where funding is mostly needed. The analysis in chapter 6.7 will specifically assess the following options to raise international public finance based on different scales of contribution: Official Development Assistance contributions UN scale Polluters pays principle, i.e. emitted GHG emissions, both applied only on developed countries or on a global scale GDP Furthermore the analysis in chapter 6.7 will briefly touch upon the option to use the carbon market as a source of financing by using the revenue from auctioning.

46 6. ANALYSING THE IMPACTS OF THE DIFFERT POLICY OPTIONS 6.1. Description of the baseline scenario and its assumptions The main GHG emission baseline for this assessment is constructed using a number of models. This is necessary to ensure that all relevant GHG sources are covered. The following models are used: The POLES model for GHG emissions from the energy system and industrial processes; The land use change module of the integrated assessment model IMAGE for the emissions from agriculture; The forestry models G4M and GLOBIOM models for the emissions from deforestation, and uptake through afforestation and reforestation. The GEM-E3 model assesses the macroeconomic effects of the various policy scenarios. Are climate change policies incorporated in the baseline? Emissions from the energy system and industry estimated with POLES in the baseline do not take into account any particular climate change policies with the exception of a 5 /tco2 carbon price in developed countries in the same sectors that are included in the ETS in the EU. This aims to simulate the fact that also in developed countries that presently lack ambitious climate change policies, investment decisions are already influenced by the prospect of future mitigation policies. For the EU, the carbon price in the baseline is put at a higher level given the existence of an ETS in the EU. The carbon price in the EU ETS starts at 20 /tco2 in 2010 and increases linearly to 24 /tco2 in This is similar to the approach that was used in the baseline scenario to assess the impact of the EU climate change and energy package. It should be noted, however, that the baseline for the EU used for this assessment does neither include the implementation of the unilateral GHG reduction target (-20% compared to 1990 by 2020) nor the renewables target (20% by 2020) as proposed in the EU energy and climate change package, both of which were still under discussion when this assessment was made. Therefore the baseline used in this analysis does not include the outcome of the approved policy changes under the adopted climate change and energy package GDP growth and oil prices Average yearly growth is projected to be equal to 2.4% for developed countries and 5.3% for developing countries over the period resulting in a yearly average global growth of 3.9%. The baseline takes into account the current financial crisis. The growth projections were adapted when the deterioration of growth prospects became obvious in autumn Growth rates were reduced using most recent IMF economic forecasts for the main regions for the coming 2 years. Afterwards, it is assumed that growth will pick up again and return to the same yearly level as before the economic recession. See also Annex 7 of this Staff

47 Working Document (Part 2) for the difference between the growth projections in the baseline and earlier growth rates not taking into account the economic crisis of autumn Oil prices in the updated baseline scenario differ from the ones in the 2007 Impact Assessment 33. In the 2007 assessment, prices of 53.2 US$/bl in 2020 and 61.5 US$/bl in 2030 were assumed while for this assessment projected prices are expected to increase to 73 US$/bl in 2020 and to 91 US$/bl in 2030 (in 2005 prices). The proposed oil price scenario entails also higher coal and gas prices than those presented in the 2007 Impact Assessment. For comparison, these oil prices are lower than the most recent ones projected by the IEA in its World Energy Outlook 2008 that estimates price levels of 110 US$/bl in 2020 and 122 US$/bl in 2030 (in 2007 prices). Total emissions in baseline Despite the high oil price, total GHG emissions of energy and industry grow as fast in the new baseline than in the 2007 one. They increase by 69% above 1990 levels in This is mainly due to slightly higher economic growth forecasts for developing countries which have a high share of coal in their energy mix and also globally a slightly higher share of coal in the total primary energy mix. Global emissions of energy, industry and agriculture, excluding LULUCF, increase by 63% over the period They increased in the modelled baseline by 23% over the period and are projected to increase by a further 33% over the period The best estimate 34 of resulting global average temperature increase in the baseline in 2050 is projected to be already around 2 C above pre-industrial level and continues to further increase afterwards. Figure 4 Baseline emissions all sectors GT CO2-eq LULUCF Agriculture Energy & industry CO2 Energy & industry other GHG Impact assessment accompanying the Communication "Limiting Global Climate Change to 2 degrees Celsius The way ahead for 2020 and beyond" The best estimate temperature projection was done using the MAGICC model, version 5.3

48 Source: POLES (JRC, IPTS), G4M (IIASA), Image (PBL) Emissions in developing countries increase much faster than in developed countries. In developed countries GHG emissions of energy, industry and agriculture, excluding LULUCF, decline over the period but increase again afterwards. By 2020 these result inbaseline emissions of around 1.5% below 1990 level. Emissions of energy, industry and agriculture, excluding LULUCF, in developing countries increase significantly over the period 1990 to 2005 and are projected to increase at a slightly lower rate resulting in an increase of 166% over the entire period Annex 6 of this Staff Working Document (Part 2) gives further information how this baseline relates to baseline projections of other studies, e.g. those used by the IPCC assessment reports that are based on the scenarios described in the Special Report on Emissions Scenarios (SRES). Energy emissions in the baseline Emissions from energy use increase faster than emissions from other sources. On a global level they are projected to increase by 71% over the period For comparison, the IEA baseline for the World Energy Outlook 2008 projected an increase of energy related global CO 2 emissions between 1990 and 2020 of 74%. Energy GHG emissions are projected to increase by 6% and by 68% in 2020 compared to 2005 in developed countries and developing countries, respectively. Energy GHG emissions from developing countries overtake those of developed countries before By 2020 they are 43% above those of developed countries. Baseline emissions from agriculture and deforestation Emissions from agriculture are estimated by the IMAGE model. Global emissions from agriculture grow at a lower speed than those of energy and industry. They increase by 30% over the period Agricultural emissions in developed countries decreased substantially over the period and are projected to remain fairly stable over the period , while those in developing countries are reported to have grown by 23% over the period and are projected to continue to grow by 51% over the period Finally, annual emissions from gross deforestation decrease in the baseline from a level of around 4.3 Gigaton CO 2 per annum in 2005 by around 20% by 2020 to around 3.5 Gigaton CO 2. This means that by 2020, the size of emissions from deforestation are about twice as high as the proposed EU ETS cap in the same year 35. Almost all these emissions stem from deforestation in developing countries. The baseline for the macro-economic assessment 35 Proposal for a Directive amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the Community (2008/0013 (COD))

49 The GEM-E3 model complements the sectoral analyses in this staff working document. The GEM-E3 is a computable general equilibrium model that can assess the macroeconomic effects of the various scenarios. It models the interactions between all the sectors and agents in the economy taking as well the trade-related effects into account. The GTAP 6 database has been used to calibrate the GEM-E3 model to its base year The baseline scenario to the year 2030 has been established by taking into account the GDP and CO 2 emissions of the POLES baseline scenario and also the agricultural Non-CO2 emissions which are not included in POLES. The resulting baseline is similar to the baseline based on the POLES + IMAGE models, even though the GEM-E3 baseline is slightly higher (see table below). Note that the world version of the GEM E3 model provides less country level details. For the Commonwealth of Independent States (excluding Ukraine, Australia & New Zealand and the non-eu OECD countries in Europe aggregates have to be used. Table 1 Baseline emissions, comparison POLES GEM E3 Increase of emission levels compared to 1990 in 2020 in % 2020 Developed countries vs 1990 Developing countries vs 1990 Baseline POLES + IMAGE (energy sector, industry and agriculture) -2% 166% Baseline GEM E3 model (energy sector, industry and agriculture) 2% 156% Source: POLES, IMAGE, GEM-E Assessment of the economic impacts of various allocation options in reaching a 30% reduction target for developed countries Comparability of efforts of developed countries is one major issue in the current negotiations. Therefore, the economic impacts of the various options for sharing the effort between developed countries were assessed with the help of the GEM-E3 model. All GEM-E3 emission reduction scenarios respect the following assumptions: 1. Developed countries take on a combined reduction commitment of 30% below 1990 levels by Developed countries set up a cap and trade system for the sectors which are at present in the EU ETS, equalising the carbon price in these sectors among developed countries. Developed countries also have access to the global carbon market including carbon credits from developing countries. However, this global carbon market is not perfect but has significant transaction costs in transactions with developing countries. 3. Developing countries undertake nationally appropriate actions themselves both in the sectors typically in the ETS and the Non ETS.

50 4. In developing countries, policies are introduced allowing them to participate in the global carbon market. Firstly, it is assumed that the use of the offsetting mechanisms is limited to the sectors which are typically part of the EU ETS. Secondly, implementing project based mechanisms carries significant transaction costs. This means that the developing countries offer fewer reduction credits to the global carbon market than they would do without transaction costs. As a consequence, carbon prices in each of the developing countries remain below those in developed countries. Thirdly, the richer a developing country is the more advanced its policies/mechanisms are, and the lower the transaction costs. Hence, its carbon price gets closer to the one in the ETS markets of developed countries. On the basis of recent UNFCCC emission data for the year 2005, developed countries need to reduce their emissions as group by about 27% between 2005 and 2020 in order to meet the EU's proposed 30% reduction target compared to In the following analysis the necessary effort is shared among developed countries according to the four options indentified in chapter 5.1. Table 2 gives an overview of these options for the main developed countries. Table 2 Key indicators of the four options for allocating the mitigation efforts among developed countries GDP per capita in 1000, 2005 GHG/GDP, 2005, in kg of CO2 per US$(2000) GHG trend 1990 to 2005 % Population trend 1990 to 2005 % EU Australia Canada Iceland Japan New Zealand Norway Russia Switzerland Ukraine USA a Adapted from World Bank and Eurostat b Data from IEA2007 c Data database UNFCCC website d UN population data Using each of the four indicators targets were defined as shown in Table 3. In total, the individual country targets of all options add up to reach the overall -30% emission reduction target in 2020 compared to 1990.

51 Table 3 Example of targets for developed countries resulting from the four allocation options GDP/cap criterion GHG/GDP criterion Early action criterion Population trends criterion GDP per capita in 1000, Target compare d to 2005 GHG/G DP, 2005, in kg of CO2 per US$(200 0) 2020 Target compare d to 2005 GHG trend 1990 to 2005 in % 2020 Target compare d to 2005 Populatio n trend 1990 to 2005 in % 2020 Target compare d to 2005 EU % % -8% -22.4% 4.0% -38.1% USA % % 16% -41.5% 17.1% -13.1% Japan % % 7% -36.1% 3.5% -38.4% Canada % % 25% -46.8% 16.5% -14.4% Australia, New Zealand % % 27% -47.9% 20.3% -6.2% Other OECD Europe % % 5% -35.1% 9.1% -30.5% Commonwealth of Independent % % -35% 6.0% -4.6% -42.7% States Average Developed countries -27.3% -27.3% -27.3% -27.4% Source: JRC, IPTS, GEM-E3 Table 4 below summarises the estimated economic impacts resulting from the different targets. The allocation option that leads to the least economic impact for the group of developed countries is the one that uses GHG intensity of the economy, but this is also the one that has the highest negative impact on the Commonwealth of Independent States reflecting the very high mitigation potential but relative low GDP. If one looks at the impact on welfare 36, US, Canada and Australia & New Zealand all would favour population trend as the preferred option to allocate targets, whereas the EU, Japan and Other OECD Europe would prefer the option based on the GHG intensity of the economy. Welfare in the Commonwealth of Independent States could even increase if targets were set only in accordance with the option using early action or GDP/capita. Europe would be faced with the highest economic impacts with the option using population trends as the sole indicator. USA, Japan and Other OECD Europe would incur highest welfare losses when using GDP/capita. Relative impacts on GDP are very similar to the relative impact on overall welfare. Note that GDP decreases in the Commonwealth of Independent States, even when early action or GDP/capita is used as the indicator to establish the targets while economic welfare increases. The reason is that the Commonwealth of Independent States becomes a net seller in the carbon market, and uses the revenue rather for extra consumption than for investments that 36 Note that in the GEM-E3 model the consumers optimise their welfare (which is a function of Private consumption and leisure), whereas firms maximize their profits. GDP as such is not optimised; it results from the interaction between firms, consumers, the public sector, and the external sector.

52 would increase GDP growth. For employment and private consumption similar relative differences can be noted. Another observation is that some of the policy options result in large differences in targets across developed countries resulting in very large differences in the economic impact. Most notably, the indicators for GHG intensity in the economy or population trends lead to very ambitious targets for the Commonwealth of Independent States, and their respective impacts become unacceptably high. Similarly, GDP per capita leads to very high impacts for Other OECD Europe. The same is true but to a lesser extent for Canada using the early action indicator. Table 4 Results for 4 indicators and the example of related targets for developed countries Change in 2020 compared to baseline Impact on economic welfare if targets are based on: GDP/Cap GHG/GDP Early action Population trends EU27-1.6% -1.1% -1.3% -2.6% USA -1.2% -0.5% -1.0% -0.3% Japan -1.0% -0.1% -0.9% -0.9% Canada -2.2% -1.6% -3.1% -0.8% Australia & New Zealand -1.8% -1.7% -2.6% -0.7% Other OECD Europe -5.7% -0.5% -1.9% -1.5% Commonwealth of Independent States 1.2% -8.5% 0.8% -7.7% Average Developed countries -1.3% -0.9% -1.1% -1.4% Impact on GDP if targets are based on: GDP/Cap GHG/GDP Early action Population trends EU27-1.5% -1.0% -1.3% -2.1% USA -1.2% -0.5% -1.0% -0.5% Japan -1.0% -0.2% -0.9% -0.9% Canada -2.0% -1.5% -2.7% -0.9% Australia & New Zealand -2.0% -1.8% -2.8% -1.0% Other OECD Europe -4.8% -0.3% -1.3% -1.0% Commonwealth of Independent States -2.6% -7.3% -2.5% -6.6% Average Developed countries -1.4% -0.8% -1.2% -1.2% Impact on employment if targets are based on: GDP/Cap GHG/GDP Early action Population trends EU27-0.4% -0.4% -0.4% -0.7% USA -0.5% -0.3% -0.4% -0.2% Japan -0.4% -0.1% -0.4% -0.4% Canada -0.7% -0.6% -0.9% -0.4% Australia & New Zealand -0.7% -0.8% -1.1% -0.4% Other OECD Europe -1.8% 0.1% -0.2% -0.2%

53 Commonwealth of Independent States -1.6% -2.2% -1.5% -1.9% Average Developed countries -0.7% -0.7% -0.7% -0.8% Impact on private consumption if targets are based on: GDP/Cap GHG/GDP Early action Population trends EU27-2.1% -1.4% -1.8% -3.3% USA -1.9% -0.8% -1.6% -0.6% Japan -1.6% -0.3% -1.5% -1.5% Canada -3.4% -2.5% -4.7% -1.3% Australia & New Zealand -3.0% -2.8% -4.3% -1.3% Other OECD Europe -8.3% -0.6% -2.5% -2.1% Commonwealth of Independent States -0.2% -12.5% -0.7% -11.2% Average Developed countries -2.1% -1.2% -1.8% -1.8% Source: JRC, IPTS, GEM-E3 Conclusion Using an allocation option based on a single indicator leads often to disproportional costs or gains for single countries. Most notable, using GDP per capita as the sole criterion can lead to very high impacts in countries with exceptionally high incomes. The same is true for using GHG intensity of the economy or population trends for those economies that have a high GHG intensity or a decreasing population trend, respectively, while their GDP per capita is small within the group of developed countries. Therefore, it is unlikely that an allocation option based on a single criterion will gain political consensus. Using a combination of criteria in order to define a target instead of a single indicator seems to have a much higher likelihood of being accepted by all developed countries. Alternatively, it might be necessary to cap the extreme values of certain indicators in order to ensure a fair allocation of economic efforts. Table 5 illustrates one allocation option which is a composite of four indicators in order to define the target per country. In this illustrative case, the target is set as follows: For the indicator GDP per capita the country with the highest level (i.e. Norway) is attributed a -20% target by 2020 compared to The country with the lowest level (i.e. Ukraine) gets a target equal to 0%. A country that is around the average gets around -11.5% attributed for this indicator. For the indicator GHG intensity of GDP the country with the highest level gets a target of -20% by 2020 compared to 2005 while the country with the lowest level (i.e. Switzerland) gets -4%. A country that is around the average gets around -11.5% attributed for this indicator. The maximum level of the indicator is -20 % in order to avoid allocation of extremely high targets to Russia and Ukraine. For the indicator early action, the country with the lowest level of early action (i.e. Australia) gets a target of -20% by 2020 compared to The country with the highest level of early action is allowed to increase its emissions by 8%. A country that is around the average early action gets around -8.5% attributed for this indicator.

54 The minimum level of the indicator is capped, to avoid allocation of extraordinary high targets to Russia and Ukraine. Both Russia and Ukraine get a +8% attributed for this indicator For the indicator population trend, the country with the highest decreasing population trend (i.e. Ukraine) gets a target of 0% by 2020 compared to The country with the fastest increasing population (i.e. Australia) is allowed to increase its emissions by 10%. A country that is around the average population trend gets around 2% attributed for this indicator. The total target by 2020 compared to 2005 is simply the sum of the 4 targets attributed for each of the indicators (for further details see Annex 9 of this Staff Working Document (Part 2)). Table 5: Example of a distribution of targets for developed countries, example in GEM E3 using 4 indicators Share according to GDP/cap Share according to GHG/GDP Share according to GHG Share according to Population Target relative to 2005 (e) = (a+b+c+d) (a) (b) (c) (d) EU % -10.1% -5.2% 1.7% -24% USA -14.3% -12.3% -15.9% 8.2% -34% Japan -12.8% -5.6% -12.5% 1.7% -29% Canada -12.6% -14.6% -19.3% 7.8% -39% Australia & New Zealand -12.2% -16.3% -19.9% 10.0% -38% Other OECD Europe -17.9% -4.4% -11.9% 3.7% -30% Commonwealth of Independent States Average developed countries -1.0% -20.0% 8.0% 0.6% -12% -10.5% -12.8% -8.5% 4.5% -27% Table 6 below reports on the impacts projected for each region of the composite allocation option. The most important conclusions from this exercise are: For every country, impacts are between the extremes of impacts of the policy options based on single indicators (see Table 4). Overall impacts for the group of developed countries are very close to the outcome when GHG intensity would have been used as an indicator. From a cost perspective, a composite target seems to lead to an acceptable outcome. Impacts on welfare are highest for Canada and Australia & New Zealand who have also the highest targets compared to But also for the Commonwealth of Independent States it has a relatively high impact, certainly on GDP, even with relatively low targets compared to the rest of the group. The Commonwealth of Independent States still has a relatively low GDP, so even low absolute costs have relatively higher impacts than in the richer countries. It is important to note that for these countries where the economic impact looks relatively high compared to baseline in 2020, growth rates are also higher and thus impacts appear less

55 significant when compared in terms of overall GDP growth over the period (see Table 7). The US and Japan face the lowest economic impacts. For Japan this is partly due to the fact that it has a very low GHG intensity per GDP. So even if marginal costs are relatively high per ton of CO2 reduced, total costs are small compared to GDP. The US has a similar GHG/GDP intensity as EU-27 in Moreover the domestic production and exports of energy intensive products is higher in the EU-27 than in the US. Concerning Canada, Australia & New Zealand, these countries face higher impacts because their GHG emissions/gdp and energy consumption/gdp shares are rather high compared to the rest of developed countries. Furthermore, domestic production and exports of energy intensive industrial products are higher in Canada, Australia & New Zealand leading to higher macro-economic costs. Table 6: Impacts resulting from targets based on a combination of indicators Target vs 2005 Economic Welfare GDP Employment Private Consumption Change compared to baseline EU27-24% -1.4% -1.2% -0.4% -1.8% USA -34% -0.7% -0.8% -0.4% -1.2% Japan -29% -0.6% -0.6% -0.3% -1.0% Canada -39% -2.2% -2.0% -0.7% -3.4% Australia & New Zealand -38% -1.9% -2.0% -0.8% -3.2% Other OECD Europe -30% -1.5% -1.0% -0.1% -2.0% Commonwealth of Independent -12% -1.4% -3.0% -1.5% -3.4% States Average Developed Countries -27% -1.0% -1.0% -0.6% -1.5% Source: JRC, IPTS, GEM-E3 Table 7: Impact on growth over the period Growth in GDP over period In Baseline In Target case EU % 37.2% USA 51.8% 50.6% Japan 37.5% 36.6% Canada 55.1% 52.0% Australia & New Zealand 61.8% 58.5% Other OECD Europe 38.1% 36.7% Commonwealth of Independent States 99.7% 93.7% Source: JRC, IPTS, GEM-E Impact of different options for LULUCF accounting rules on the 30% reduction target of developed countries A quantitative analysis of the impact of the different options was carried out by JRC. It was assessed how large a sink or source the LULUCF sector would be if reporting data for the years would be used as proxies for future emissions in the LULUCF sectors over a five year commitment period.

56 This assessment was made on the basis of the publicly available LULUCF data submitted by Parties under the UNFCCC or the Kyoto Protocol by These submissions contain only historical information (from 1990 to 2006) and the level of completeness of the information available differs from country to country and for specific LULUCF activities, which had to be complemented with further assumptions. All 4 options were assessed as presented in 5.2 with the exception of option 3. Analysing the impact of option 3 would require the elaboration of provisions on how a Party is to establish a forward-looking baseline for forest management to assess emissions and removals, how anthropogenic emissions and removals from forest management during the subsequent commitment period will be assessed against the baseline, and how the baseline will be revised in response to natural disturbances. Given that few modelled projections on forest management are available at moment (to be used as hypothetical baselines), and given that very different approaches could be elaborated (i) to assess anthropogenic emissions and removals against the baseline, and (ii) to revise the baseline in response to natural disturbances, JRC concluded that at present an assessment of option 3 is not possible. Therefore finally only options 1, 2 and 4 were assessed (see table below). Table 8 Accounting options assessed Option Art. 3.3 Art (KP rules) Mandatory, gross-net Voluntary. FM gross-net with fixed CAP. Other 3.4: net-net 1 Mandatory, gross-net FM gross-net with discount factor. Other 3.4: net-net 2 Mandatory, gross-net FM net-net with no discount factor. Other 3.4: net-net 4 Convention reporting (FL, CL, GL, WL, S, OL), net-net KP activities: Art 3.3: afforestation/reforestation (AR) and deforestation (D). Art. 3.4: forest management (FM), cropland management (CM), grassland management (GM), revegetation (RV). Convention categories: Forest land (FL), Cropland (CL), Grassland (GL), Wetlands (WL), Settlements (S), Other land (OL) Source: JRC/IES Table 9 shows the impact of different options of future accounting rules of LULUCF on the amount of emissions or absorptions accounted for, compared to the 1990 as a base year (excluding LULUCF). Negative values represent a carbon uptake while positive values represent a release of carbon into the atmosphere. For options that use the net-net accounting methodology two different base periods are assessed, i.e. the year 1990 only and the period 1990 to In option 1 forest management is accounted for using the gross-net accounting method but different discount factors are applied, i.e. 100% (not accounting for forest management at all), 85% and 0% (no discounting of forest management). In all options the so called optional article 3.4 activities become mandatory to account for. Furthermore the forest management cap for the US is set to zero given that they are not a Party under the Kyoto Protocol and that therefore a cap for forest management was never defined for the US. In analysing the results put forward in Table 9 it is important to keep in mind that the data set supporting this assessment is historical. Hence, this analysis does not allow assessing the effect of planned policies in the LULUCF sector. Further studies have been launched on projections for the LULUCF sector until 2020 but results will not be available soon enough to be taken into account in this assessment. Table 9 Impact of different LULUCF accounting options on developed countries targets

57 Net emissions: % compared to 1990 GHG without LULUCF (accounting period: ) when relevant, net -net activities with 1990 base year base period Options 0 (KP rules) 1 1 2, , Discount for FM(%) Austria -0,8-0,5-3,7-22,1-7,5-5,3-0,6-3,8-22,2-2,7-0,8 Belgium 0,0 0,0-0,4-2,4-0,2-0,2 0,0-0,3-2,3-0,2-0,2 Bulgaria 0,0 6,5 5,5 0,0 5,0 5,2 1,0 0,0-5,5 0,3 0,3 Czech Republic -0,6-0,3-0,8-3,6-1,1-1,4-0,1-0,6-3,3 0,7 0,6 Denmark -2,1-1,9-2,5-6,4-2,3-2,6 0,2-0,5-4,3 0,1 0,0 Estonia 0,0 0,0-0,7-4,6 8,0 8,2 0,0-0,7-4,6 4,6 4,7 Finland -0,8 7,1 0,1-39,9-7,5-11,7 6,6-0,5-40,5-2,0-6,0 France -0,7-0,5-2,2-11,5-2,6-4,0-0,4-2,0-11,3-1,9-2,7 Germany -0,6-0,5-1,4-6,5-0,5-0,6-0,4-1,3-6,4-0,4-0,4 Greece -0,7-0,3-0,9-3,9-2,1-2,1-0,4-0,9-4,0-1,7-1,6 Hungary -1,1 0,9 0,4-2,5 0,9 0,8 0,7 0,2-2,7 1,6 1,8 Ireland -0,2-0,1-0,3-1,2 0,7-0,7 0,1-0,1-1,0 0,1-0,7 Italy -4,8-3,7-5,9-18,4-9,5-6,9-3,9-6,1-18,7-6,3-3,5 Latvia -8,7-4,4-11,7-53,0 18,4 23,9-4,4-11,7-53,0 11,0 16,6 Lithuania -4,4-2,3-4,5-17,0 1,8 4,6-2,3-4,5-17,0-0,4 1,9 Luxembourg 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Netherlands 0,1 0,1 0,0-0,9 0,2 0,0 0,1 0,0-0,9 0,2 0,0 Poland -0,9-0,6-1,7-8,0-1,6-1,7-0,5-1,6-8,0-1,6-1,5 Portugal -1,3 0,9 0,1-4,5-5,6-6,7 0,9 0,1-4,5 2,2 1,3 Romania -1,6 0,0-2,2-14,5-0,5-0,5 0,0-2,2-14,5 0,6 0,6 Slovakia -0,2-5,6-6,4-11,1-5,0-2,3-4,3-5,1-9,8-3,7-1,8 Slovenia -6,5 0,0-4,0-26,7-11,0-12,1 0,0-4,0-26,7-5,2-5,7 Spain -2,8-2,0-3,4-11,3-2,0-2,0-2,0-3,4-11,3-2,0-1,5 Sweden -4,0-1,8-5,2-24,7-14,0-18,7-2,2-5,6-25,1 8,0 4,6 UK -0,3-0,1-0,4-1,8-0,3-0,6-0,1-0,4-1,9-0,2-0,3 EU -1,2-0,6-1,8-8,7-1,9-1,9-0,7-1,9-8,8-1,0-0,8 Australia 8,4 8,4 7,8 4,6 10,2-18,6 8,4 7,8 4,6 10,0-5,3 Belarus 0,0-0,3-3,4-20,9-1,2-2,4-0,1-3,2-20,7 0,4 0,0 Canada 2,0 2,0 1,8 0,6 22,9 18,2 2,4 2,2 1,0 9,9 6,0 Croatia 0,0 0,0-3,6-24,3-11,0-10,7 0,0-3,6-24,3 1,3 1,3 Iceland -2,6-2,9-3,0-3,5-3,1-7,7-2,8-2,9-3,4-2,9-5,6 Japan -4,0 0,0-1,1-7,0-1,0-0,6-0,1-1,2-7,1-0,9-0,6 Liechtenstein -2,6-2,6-3,9-11,0-2,9 1,1-2,6-3,9-11,0-2,7 0,7 Monaco 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 New Zealand 4,7 4,7-1,3-35,5-1,0-2,2 4,7-1,3-35,5-3,8-6,4 Norway -9,9-7,5-16,5-67,6-37,0-34,5-7,3-16,3-67,4-38,6-35,6 Russian Federation -3,6-0,4-2,0-11,5-7,3-7,5 2,7 1,0-8,5-0,8-0,9 Switzerland -3,5 0,7 0,2-2,5 4,4 3,7 0,7 0,2-2,5 4,8 4,2 Turkey -0,3-0,3-4,8-30,5-4,7-13,8-0,3-4,8-30,5-2,9-4,8 Ukraine -2,4 6,2 4,4-5,6 7,5 3,0 4,0 2,2-7,8 5,2 2,5 USA 0,0 0,0-1,4-9,7-1,8-1,5 0,0-1,5-9,7-1,3-1,1 Other AI -1,0 0,6-0,9-9,4-1,3-2,6 1,3-0,2-8,7 0,0-0,7 TOTAL AI -1,1 0,2-1,2-9,2-1,5-2,4 0,7-0,7-8,7-0,3-0,8 1 Only the 3.4 activities already selected by Parties for the 1st commitment period were included. 2 All 3.4 activities were selected, not to prejudge which activities Parties will elect. 3 For illustrative purposes, the full range (0-100%) of discount factors is shown. The eventual use of a discount factor will be subject to negotiations. Source: JRC, IES The different accounting options produce significantly different results for individual Parties with large impacts on the amount of emission credits that they would be allowed to issue for their total LULUCF sectors, without even taking additional mitigation actions into account. The overall capacity of LULUCF to deliver credits appears to be rather limited for those options with a highly constrained contribution of forest management, i.e. option 0 (current rules) or option 1 with a discount factor of 85% that reduces total removals in this sector to a level equal to the current cap. For the EU this would mean that accounting for LULUCF would result in a net credit equal to -1.8% of 1990 emissions instead of the -1.2% under the current rules. For the group of other developed countries the impact is even less, although

58 some substantial differences exist. For instance New Zealand would be allowed to account for much larger removals under option 1 with 85% discounting (-1.3 %) than with the present cap (+4.8%) whereas Japan would be able to account for substantially less (-1.1% compared to - 4%). Also the other options, options 2 and 4 would result in a modest impact on the overall total targets (all developed countries) as well on the overall EU. For the EU the impact would be anywhere between -0.8% and -1.9% of 1990 emissions depending on the option and the base period used. Similarly for the group of developed countries the impact would be anywhere between 0% and -2.4% of 1990 emissions. While the impact of such levels of removals is large in comparison with most countries targets under the Kyoto Protocol for the period , the impact is modest on the -30% reduction target as proposed by the EU for the period up to However, it should be noted again that these figures reflect simulated actual emissions/removals without additional mitigation action. Unconstrained accounting for forest management applied together with the current rules of gross-net accounting would lead to very large credits from the LULUCF sector in the order of -8.7% of 1990 emissions for the EU and -9.2% for the whole group of developed countries. This is equivalent to almost one third of the suggested target of -30% by 2020 compared to 1990 that the EU proposes for the whole group of developed countries. In addition, the method of gross-net accounting without applying a cap or a discount factor does not provide an accurate account of the real net carbon fluxes due to human-induced activities. This analysis should reassure the legitimate concern regarding the risk of large LULUCF credits coming into the system solely because of partial accounting methods, potentially overwhelming the reductions needed in the other sectors. This should allow the debate to focus on other criteria, such as the promotion of environmental integrity, the stimulation of real additional action, the ability to deal with extreme natural disturbances and the practical implementation and not simply reward business as usual trends. In designing and negotiating future accounting rules for the LULUCF sector, the EU should be guided by the quality and integrity of the accounting methods in accordance with the following criteria: Mandatory rules that cover all sources of emissions under LULUCF management practices and that increase the environmental integrity of the overall LULUCF accounting system. Increase the effectiveness of the LULUCF sector by realistic accounting for marginal management effects on emissions and removals (net-net accounting). This would stimulate meaningful improvements in the land-use sectors (without inflating the results) rather than rewarding business as usual. It would be particularly necessary in the context of a rapidly increasing use of biomass as fuel in order to properly reflect changes in land use. To the extent possible, accounting rules should also provide incentives for the management of the forest products pool, including incentives for the production and

59 use of long-lived products as well as increased recycling rates. Accounting rules for wood products need to be linked to accounting rules for emissions and removals from forests. Have a long term view for a sector that typically has a long term planning horizons and high inter-annual fluctuations. Simplify current rules and improve the quality and cost effectiveness of the reporting. Ensure the highest level of harmonisation in the rules in order to facilitate consistent LULUCF accounting at Community level. The option that delivers on most of these qualitative criteria listed above is Option 4, i.e. mandatory land based accounting. It would ensure that emissions and removals for all land categories are reported. This would also put an end to the selective cherry picking of certain activities as is currently allowed for. It would imply a much broader coverage as all managed land would be covered on a mandatory basis. Accounting for all land would remove any perverse incentives arising from partial and inconsistent accounting rules. It would be a net-net approach with a base year or base period. An advantage of netnet accounting for forest management is that no arbitrarily negotiated cap or discount factor needs to be applied providing a clear incentive for countries to take mitigation action in the LULUCF sector. The same accounting rules would apply to all managed land, which would be a simplification. While reporting methods already exist under the UNFCCC that could be used for land based accounting, significant further effort will be necessary to improve the reporting practices and methods, particularly for agricultural lans. This is likely to increase uncertainties, at least in a first stage. Given that all land would need to be accounted for and the potentially important inter-annual fluctuations of the biological carbon sequestration which limited degree of human control, the compliance risk for Parties is likely to substantially increase.. Uncertainties and difficulties could however pragmatically be dealt with by using a conservative approach, which would reduce the risk of overestimation of removals or underestimation of emissions and thus also the risk of ex-post adjustment and compliance issues. Furthermore, applying net-net accounting would reduce the effect of systematic uncertainties making it easier to implement a conservative treatment of uncertainties. Difficulties that would remain for this option are the effects of natural disturbances, age structure and harvesting cycles. To support the acceptability of Option 4 its implementation needs to be accompanied by a regime allowing countries to deal with emissions due to extreme natural disturbances. Several proposals are currently on the table in relation to the treatment of natural disturbances that should be further assessed during the negotiations. Accounting for harvested wood products would also need to be considered in the context of Option 4. The effect of age structure, if significant and substantiated, could be taken into account through target setting.

60 Conclusion The risk of large sinks credits coming into the system, potentially overwhelming the reductions needed in the other sectors is limited for some of the options and can be contained for the others through appropriate capping or discounting. Therefore, almost all assessed accounting options would guarantee the minimal required environmental integrity of the overall targets. From a quantitative and quality point of view option 4 (mandatory land-based accounting on a net-net approach) has the advantage that it delivers on most of the environmental integrity and quality criteria required for the accounting of LULUCF. This will need to be accompanied with rules dealing with the compliance risk due to extreme natural disturbances. Implementation of option 4 will also requires further improvement of LULUCF inventory data Accounting rules for a surplus off Assigned Amount Units In order to assess the impact of any surplus of Assigned Amount Units over the period on the environmental integrity of the reduction targets for the period after 2012, the following is assumed: average emission levels are assumed to remain at the level of 2006 emissions Countries with a deficit (i.e. emission levels above the reduction target under the Kyoto Protocol for the period ) acquire AAUs from countries with a surplus in order to be in compliance No credits generated through CDM are used for compliance 37, neither any emission rights generated through a net sink in the LULUCF sectors. Table 10 gives an overview of the potential surplus or deficit per country on the basis of the above assumptions. For the group of countries that have ratified the Kyoto Protocol, the potential surplus on an annual basis over the period amounts to 1.47 Gt CO 2, i.e million AAUs or 7.4 billion AAUs over the period Given that any potential inflow of credits from CDM is not taken into account, the total surplus is likely to be substantially larger. If the USA is taken into account as a potential buyer of AAUs for compliance, the surplus would reduce substantially to 162 million AAUs per year or 811 million AAUs over the period. Table 10 Potential annual surplus or deficit of AAUs over the period Note that emission rights generated through the Joint Implementation Mechanism are actually converted AAUs and as such do not change the total amount of available emission rights.

61 Target Base year average annual emissions Average annual target in absolute emissions Average annual Surplus (+), deficit (-) EU 15-8% EU 10-7% Russia 0% Ukraine 0% Iceland 10% Norway 1% Switzerland -8% New Zealand 0% Australia a 8% Japan -6% Canada -6% USA -7% Surplus (+) or Deficit (-) Excluding the USA Including the USA Source: UNFCCC GHG inventory data a For Australia, the base year data includes emissions from LULUCF according to Art. 3.7 of the Kyoto Protocol 38 The impact of this amount of surplus AAUs on the achievement of a -30% reduction target for developed countries by 2020 is significant. 39 If it is assumed that the surplus AAUs under the Kyoto Protocol are consumed for compliance purposes at a constant rate over the period by the group of all developed countries (including the USA), then a total of 737 million AAUs ( = 1474 x 5 / 10) would be available each year up to This would represent 4% of 1990 emissions of this group, including the USA. As such the surplus amount This figure for Australia needs to be adjusted once their AAU report is approved by the UNFCCC. For the purposes of this calculation, it is assumed that the 2020 target level is the average of a five year period from 2018 to 2022, following a five year period from 2013 to 2017.

62 of AAUs could potentially reduce the real environmental impact of the -30% target for the whole group of developed countries, including the USA, by 4% 40. The impact might even be higher if less surplus AAUs are used for compliance early in the period and more at the end, compared to the flat rate of 737 million AAUs. Similarly the use of CDM credits and removal units generated through the LULUCF sectors is expected to further increase the amount of surplus AAUs over the period and thus the potential negative impact on the environmental effectiveness of a given reduction target in If the USA had participated in the Kyoto Protocol, as foreseen when negotiation the Kyoto Protocol's reduction targets, the surplus AAUs would have had a significantly lower impact on the post-2012 reduction target, i.e. only 0.4% or on average 128 million AAUs over the period (= 162 x 5 / 10). Conclusion Surplus AAUs from the period constitute a significant risk for the environmental effectiveness of the reduction targets for the period after If this is not taken into account when setting the overall ambition level, the -30% reduction target compared to 1990 by 2020 might result in real emission reduction of only -26% or even less compared to 1990 by Actions/technologies to achieve the reduction targets for developed countries and a substantial deviation from baseline in developing countries by 2020 and the development of the global carbon market to stimulate these actions Actions to achieve the reduction targets for developed countries and a substantial deviation from baseline in developing countries by 2020 The POLES model was used to analyse the type of actions/technologies necessary in the energy and transport sector to ensure that GHG emissions are limited to be in line with the objectives proposed by the EU following the policy assumptions as presented in the policy option definition in chapter 5.4. The results are referred to as the "appropriate global action scenario". GHG emissions in developed countries decrease by 22% in 2020 compared to Also in the EU, domestic GHG emissions decrease by 20%. The remaining 10% is achieved through offsetting mechanisms that generate credits for reductions in developing countries. GHG emissions of developing countries continue to grow up to 2020, but reach a peak between 2020 and In 2020, emissions from energy and industry in developing countries are 19% below baseline projections. See Annex 12 of this Staff Working Document (Part 2) for more details for the major economies. Figure 5 Developed/developing countries GHG emissions in POLES baseline & appropriate global action scenario Note that if the USA is not taken into account, the annual amount of 737 million AAUs used for compliance over the period , would represent 6% of 1990 emissions. See in Annex 12 of this Staff Working Document (Part 2) for more details on impacts of the Appropriate global action scenario on selected MEM participants.

63 WORD GHG emissions EU27 GHG emissions Mt CO2eq Mt CO2eq Base-WRD Reduction-WRD Base-EU27 Reduction-EU27 DEVELOPING GHG emissions DEVELOPED GHG emissions Mt CO2eq Mt CO2eq Base-NAN Reduction-NAN Base-AN Reduction-AN Source: JRC, IPTS, POLES Action on energy efficiency, crucial contribution to the appropriate global action scenario Until 2020, energy efficiency measures represent the bulk of the reduction potential, both technically and economically. It is the single most important opportunity in the coming decade. A large variety of low-cost measures can be exploited, most of which are already available and have negative or low costs even though upfront investments might be considerable. All sectors have options to improve energy efficiency (both supply and demand sectors). The POLES model simulates the realisation of this reduction potential through improving the global energy intensity through such policies at no or low cost. Moreover, the gradual introduction of a carbon price at higher levels than the one assumed in the baseline stimulates further carbon price-induced energy efficiency improvements. The figure below shows the crucial importance of such induced energy efficiency improvements for the overall emission reductions, delivering up to 50% of total global effort compared to baseline in 2020 at no or very low cost. In 2030 it would still a little less than half the global effort. For developing countries this share is even higher at 2/3 rd of the total action.

64 Figure 6 Contribution of different technologies to reduce CO2 emissions 42 Contribution of different measures to CO2 emission reductions between baseline and reduction scenarios* - WORLD Contribution of different measures to CO2 emission reductions between baseline and reduction scenarios* - EU avoided emissions avoided emissions Energy savings in transport Energy savings in other sectors Fossil fuel switch Carbon sequestration Nuclear energy Renewable energies GHG reduction scenario Energy savings in transport Energy savings in other sectors Fossil fuel switch Carbon sequestration Nuclear energy Renewable energies GHG reduction scenario Contribution of different measures to CO2 emission reductions between baseline and reduction scenarios* - DEVELOPING Contribution of different measures to CO2 emission reductions between baseline and reduction scenarios* - DEVELOPED avoided emissions avoided emissions Energy savings in transport Energy savings in other sectors Fossil fuel switch Carbon sequestration Nuclear energy Renewable energies GHG reduction scenario Energy savings in transport Energy savings in other sectors Fossil fuel switch Carbon sequestration Nuclear energy Renewable energies GHG reduction scenario Source: JRC, IPTS, POLES Annex 11 of this Staff Working Document (Part 2) gives more detailed background to exactly what types of energy efficiency actions can be taken in what regions and in what sectors. Renewable energy Renewable energies are not only carbon free, but also improve the security of supply within energy balances. Most of them are particularly relevant for power production (hydropower, on- and off-shore wind power, solar PV, high temperature solar, geothermal, different types of biomass-fed power plants, and in perspective geothermal, tidal and wave power). They present often zero or very low GHG emissions. They are available at a wide range of development levels, from commercially mature to those that are only at the conceptual stage. Particularly innovative are some technologies to improve the performance of photovoltaic cells, but also biotechnologies for biofuels or hydrogen production. These still need important R&D efforts. Other technologies, close to commercial stage, are struggling to compete and need support schemes but they would do well in a world with a price of carbon. The baseline scenario foresees that electricity output from renewables would grow worldwide by 148% by 2020 and by 246.8% by 2030 with respect to 1990, whereas renewables would increase by 185.4% by 2020 and by 322.4% by 2030 in the Appropriate Global Action scenario for the same period. The potential growth of each technology, however, depends on the remaining potential. Hydropower, for instance, offers limited expansion capacity in many developed 42 See Annex 12 of this Staff Working Document (Part 2) for more details on impacts of the Appropriate global action scenario on selected MEM participants.

65 regions, and by 2030 the hydropower output differences between the two scenarios are small, around 5% with respect to the reference year (that is, an 85.3% increase in the Appropriate global action scenario versus an 80.3% increase in the Baseline). 'New' renewables (mainly wind and to a lesser extent solar), are expected to grow by % above 1990 levels in the Baseline and by % in the Appropriate global action scenario by These changes look impressive but in fact they represent in the baseline scenario a yearly growth rate of 8.8% until 2020 and of 8.3% until 2030, and in the Appropriate global action scenario slightly higher yearly growth rates (10.0% until 2020 and 9.2% until 2030). The real acceleration takes place in the period , when production increase more than sevenfold in the baseline more than tenfold in the Appropriate global action scenario. For the EU renewables growth in power generation would be 272,2% in 2020 and 331.1% in 2030 with respect to 1990 in the Appropriate scenario (against 221% and 310.4% in the baseline for the same period). The growth in "new" renewables, excluding hydropower, would be much faster, with rates close to 13.4%/yr to 2020 and 10.6%/yr to 2030 in the Appropriate scenario. Total growth in renewables allows to reach a share of 17% over total primary energy by 2020 and 18,3% by They represent respectively 17% in 2020 of total final energy consumption 43 Renewables have also an important market niche in non-electric applications. In domestic and industrial sectors, low temperature solar thermal devices and biomass-fuelled boilers can be used. In the transportation sector, bio-ethanol, bio-diesel or other forms of sustainable biofuels are also already extensively used in several countries, and in some of them have gained a significant market share. Their worldwide potential is significant. This assessment addresses the increased demand for sustainable biomass and biofuels and its potential impact on deforestation and agricultural production in chapter 6.6. Nuclear power Another carbon free energy source is nuclear power. In the baseline, worldwide nuclear power sees a 40.6% capacity increase and a 40.1% output increase over the period This is higher than in the 2007 IA 44 due to higher overall fossil fuel prices. In the Appropriate global action scenario more nuclear power capacity is added, with an 80.9% increase of installed capacity and an 80.5% increase in output by 2020 compared to Over half of total additional capacity would be installed in developing countries. In the EU, capacity is roughly maintained in 2020 at 2005 levels in both scenarios in line with current phase-out plans in Member States. Fuel switch This translates into a 17% renewables share of final energy demand. The figure does not include the contribution of heat-pumps in Residential and Services surface heating, geothermal, tidal and wave energy. Heat production for local CHP plants based on biomass is not considered in the model. If these sources would be incorporated in the calculation, the renewables share would increase towards the 20% target. See also the results of the Green-X model used for the staff working document accompanying the Renewable Road Map Communication on the estimations of the excluded sources (COM 2006/1719). Impact assessment accompanying the Communication "Limiting Global Climate Change to 2 degrees Celsius The way ahead for 2020 and beyond"

66 Fuel switch very often entails not only changing to a less carbon-intensive fuel but also additional gains in efficiency because the fuel change implies a substantial change in technology (e.g. replacing oil-fired boilers with advanced high-efficient gas turbines). However, this is not always the case, since some standard combustion plants can accommodate a range of fuels from highly carbon intensive coal to virtually zero-carbon biomass. The power generation sector is the one, at global scale, that would experience most of the fuel switch in the projected period due to its relatively high technological flexibility. It is interesting to note that the upward trend in the demand for electricity is much higher compared to the projected increase in overall final energy demand, i.e. the share of electricity will increase. Electricity will continue to be the most valued and demanded final energy carrier, and even in the Appropriate global action scenario total electricity demand grows by 160% by 2030 with respect to the 1990 level. However, the technological portfolio is expected to radically change, carbon-free primary electricity is supposed to account for around 55-56% of total electricity produced by 2030 (both worldwide and in EU-27) in the Appropriate global action scenario, whereas in the baseline this share is expected to reach a mere 33.6% worldwide and 47,7% in the EU. It should be noted that since 1990 the share of carbon free electricity produced globally has dropped significantly. This is due to the huge growth in fossil fuel power generation capacity (particularly coal-fired), and to the slowdown or outright halt of nuclear programmes worldwide over the last two decades. The Appropriate global action scenario will take the world back in terms of share of carbon free electricity almost exactly to the share as it stood in The scale, of course, will be 3.5 times bigger than in Figure 7 Power Generation by fuel type See in Annex 12 of this Staff Working Document (Part 2) for more details on impacts of the Appropriate global action scenario on selected MEM participants.

67 WORLD Power Generation by Fuel EU27 Power Generation by Fuel TWh TWh Base 2010 Red Base 2020 Red Base 2030 Red Base 2010 Red Base 2020 Red Base 2030 Red. Natural gas (TWh) Oil (TWh) Coal (TWh) Nuclear (TWh) Renewables(TWh) Natural gas (TWh) Oil (TWh) Coal (TWh) Nuclear (TWh) Renewables(TWh) DEVELOPING Power Generation by Fuel DEVELOPED Power Generation by Fuel TWh TWh Base 2010 Red Base 2020 Red Base 2030 Red Base 2010 Red Base 2020 Red Base 2030 Red. Natural gas (TWh) Oil (TWh) Coal (TWh) Nuclear (TWh) Renewables(TWh) Natural gas (TWh) Oil (TWh) Coal (TWh) Nuclear (TWh) Renewables(TWh) Source: JRC, IPTS, POLES It should be noted that since 1990 the share of carbon free electricity produced globally has dropped significantly. This is due to the huge growth in fossil fuel power generation capacity (particularly coal-fired), and to the slowdown or outright halt of nuclear programmes worldwide over the last two decades. The Appropriate global action scenario will take the world back in terms of share of carbon free electricity almost exactly to the share as it stood in The scale, of course, will be 3.5 times bigger than in Carbon Capture and Storage From the point of view of new technologies, a significant contribution to emissions reductions is expected from CCS. In fact a very fast deployment of this technology would be necessary from the very low current levels to those projected for 2030 in the Appropriate global action scenario. This technology is already being used especially in the context of enhanced oil recovery and natural gas production but the marginal costs for retrofit applications is still significantly higher than prevailing carbon prices. Furthermore, the environmental impact of large scale deployment of this technology in the power sector over very long periods is largely unknown. The environmentally sound and safe deployment of this technology requires a sound legal framework like the one that has been adopted by the European Union. Unsurprisingly, at global level, in the Baseline, the penetration of CCS with respect to fossilfuelled power plants by 2030 is virtually zero, whereas the Appropriate global action scenario results in a significant share of fossil fuel power generation with CCS (18%). This underlines how crucial this technology will be in the future to achieve a sustainable carbon emission path at global level, and that large scale demonstration has to commence without delay. The greatest potential for expansion of this technology is anticipated to take place in the US and in

68 China, while it would be relatively smaller in the EU. Most new fossil fuel power plants built after 2020 would be with CCS. Figure 8 Share of power sector emissions captured through Carbon Capture and Storage Share of power sector emissions captured % Developed countries Developing countries EU 27 Source: JRC, IPTS, POLES Investment needs in the power sector The Appropriate global action scenario implies an accelerated decommissioning of carbonintensive technologies and its replacement by low-carbon, climate-friendly ones. The latter typically exhibit higher investment costs, therefore higher investment flows are required. However, while the costs of single investments are higher, a carbon constrained world also entails more efficient end-use of energy and therefore a lower total final energy demand requiring less power plants overall. This affects all final energy carriers, but most especially the power generation sector, which is the one expected to contribute a significant share to the overall decarbonisation of the energy sector. The annual investment in newly installed capacities for the power sector (26 power generation technologies are considered) is shown hereafter for both scenarios until For CCS installations, this investment cost includes the costs to capture CO2 but not to transport and store it. As such total investments including CCS might be higher in 2030 due to a large penetration of CCS by then. Figure 9 Annual Power Generation Investments See in Annex 12 of this Staff Working Document (Part 2) for more details on impacts of the Appropriate global action scenario on selected MEM participants.

69 WORLD Annual Power Generation Investment (annual average over the period) EU27 Annual Power Generation Investment (annual average over the period) Billion /yr 300 BASELINE REDUCTION Billion /yr BASELINE REDUCTION DEVELOPING Annual Power Generation Investment (annual average over the period) DEVELOPED Annual Power Generation Investment (annual average over the period) Billion /yr BASELINE REDUCTION Billion /yr BASELINE REDUCTION Source: JRC, IPTS, POLES The results indicate that the differences in costs within the power generation sector are not very high because efficiency gains are projected to offset higher specific capital investment costs. Figure 10 Changes in the mix of power generation See in Annex 12 of this Staff Working Document (Part 2) for more details on impacts of the Appropriate global action scenario on selected MEM participants.

70 Power Generation Capacities- WORLD Power Generation Capacities- EU MW Other Renew Hydro NUC Bio ff capture fossil fuel MW Other Renew Hydro NUC Bio ff capture fossil fuel Base _ Base Red _ Base Red Base _ Base Red _ Base Red Power Generation Capacities - DEVELOPING Power Generation Capacities - DEVELOPED MW Other Renew Hydro NUC Bio ff capture fossil fuel MW Other Renew Hydro NUC Bio ff capture fossil fuel Base _ Base Red _ Base Red Base _ Base Red _ Base Red Source: JRC, IPTS, POLES The main changes in generation capacity between the Appropriate global action scenario and the baseline would concern the thermal-electric power from fossil fuels. Worldwide it would decrease by around 41% in the Appropriate global action scenario by 2030, but the impact until 2020 would be much smaller. This trend is particularly obvious in China, India and the US. But the losses of fossil fuelled generation capacity would be to a large extent substituted by increases in renewables and nuclear capacity. Additional capacity in developed countries would be provided mainly by new renewables and hydro. Nuclear would also grow in all regions. Figure 11 Additional, new capacity in Power generation compared to See in Annex 12 of this Staff Working Document (Part 2) for more details on impacts of the Appropriate global action scenario on selected MEM participants.

71 New Capacity Addition in Power Generation - WORLD New Capacity Addition in Power Generation - EU MW Other Renew Hydro NUC Bio ff capture fossil fuel MW Other Renew Hydro NUC Bio ff capture fossil fuel Base _ Base Red _ Base Red Base _ Base Red _ Base Red New Capacity Addition in Power Generation - DEVELOPING New Capacity Addition in Power Generation - DEVELOPED MW Other Renew Hydro NUC Bio ff capture fossil fuel MW Other Renew Hydro NUC Bio ff capture fossil fuel Base _ Base Red _ Base Red Base _ Base Red _ Base Red Source: JRC, IPTS, POLES Sectoral contributions to the appropriate global action scenario The structure of energy-based and industrial GHG emissions provides an insight on the different opportunities of emission cuts by sectors. More than half of the potential emission cuts are to be found within the power generation sector. This reflects the great potential of this sector to shift to less carbon intensive technology portfolio combined with the possible reductions on the demand side. The industrial sector follows, where significant opportunities can also be found. This emission reduction potential is particularly important in developing countries, so that the power generation and industrial sectors in these economies appear to be the key sectors for GHG abatement actions in the future international agreement. Sectors like residential and transport exhibit lower rates of technological change as private persons might lack sufficient cash to purchase energy efficient goods at optimal levels due to sometimes high upfront investments (e.g. energy efficient household equipments or better thermal insulation of houses). Figure 12 GHG reductions per sector, World Regions See Annex 12 of this Staff Working Document (Part 2) for more details on impacts of the Appropriate global action scenario on selected MEM participants.

72 WORLD sectoral GHG reductions EU27 sectoral GHG reductions MtCO2eq GHG em. reduction from residential services GHG em. reduction from transport GHG em. reduction from industry GHG em. Reduction from other conversion GHG em. reduction from Power Sector Reduction Scenario MtCO2eq GHG em. reduction from residential services GHG em. reduction from transport GHG em. reduction from industry GHG em. Reduction from other conversion GHG em. reduction from Power Sector Reduction Scenario DEVELOPING sectoral GHG reductions DEVELOPED sectoral GHG reductions MtCO2eq GHG em. reduction from residential services GHG em. reduction from transport GHG em. reduction from NANustry GHG em. Reduction from other conversion GHG em. reduction from Power Sector Reduction Scenario MtCO2eq GHG em. reduction from residential services GHG em. reduction from transport GHG em. reduction from industry GHG em. Reduction from other conversion GHG em. reduction from Power Sector Reduction Scenario Source: JRC, IPTS, POLES Costs associated with the resulting actions necessary in the energy system and the industrial sectors The real incremental mitigation costs that are experienced within an economy induced through carbon prices and the upfront investments necessary to achieve energy efficiency measures are estimated by the POLES model and can be found in Table 11. They do not include the financial flows generated by the trade in emission reduction credits, even though developed countries only reduce by around -22% by 2020 compared to 1990 so around 8% further reductions would have to be achieved through acquisition of credits through the use of offsetting mechanisms. The annual global reduction costs in the year 2020 amount to 152 billion by Over the whole period cumulative global costs are equal to 666 billion. Costs in developed countries are equal to 81 billion in 2020 or 374 billion cumulated over the period Costs in developing countries are equal to 71 billion in 2020 or 292 billion over the period Table 11 Costs in developed and developing countries Cost of reductions in CO2 from energy and Non CO2 emissions from industry Costs in the year 2020 Total costs in Billion (2005 prices) Total costs over the period Total costs in Billion (2005 prices)

73 World Developed countries Developing countries EU USA Japan Russia China Brazil India Source: JRC, IPTS, POLES (a) (c) Annex 13 of this Staff Working Document (Part 2) discusses in more detail the type of policies and institutional architecture within the international agreement on climate change could deliver the type of actions in developing countries as indicated in this chapter. Annex 14 of this Staff Working Document (Part 2) gives further information on the issue of sectoral approaches and how they relate to type of actions in developing countries as indicated in this chapter. Annex 15 of this Staff Working Document (Part 2) gives further information on the issues related to technical cooperation and how they can assist with actions in developing countries as indicated in this chapter. Conclusions Actions in the energy system and industrial sector on a truly global scale are crucial to ensure that the 2 C limit can still be met. Little more than half of the reduction potential compared to baseline in the energy system and in the industrial sectors comes from measures that have no or low cost on the short and mid term. In developing countries this is even 2/3 rd of the total. They still have substantial upfront investment cost. This can be a hurdle for those who do not have the financial capacity. Energy efficiency has by far the single largest potential to reduce emissions. But there is no single silver bullet technology. Next to energy efficiency improvements, there is need to also use more low carbon energy sources (renewables & nuclear), to switch to lower carbon content fossil fuels, and gradually after 2020 implement CCS for all large remaining point sources, certainly those newly build The role of the carbon market The three options as presented in chapter 5.4 are analysed using the POLES and GEM E3 model.

74 Option 1: Gradual global carbon market For the gradual global carbon market we take the same scenario as the "Appropriate global action scenario" presented in chapter with the policy assumptions already presented in chapter 5.4 With these assumptions GHG emissions in developed countries decrease by 20% in 2020 compared to 1990 by This of course means that the remaining 10% of their - 30% target needs to be achieved through offsetting mechanisms in the global carbon market. Option 2: No global carbon market For this option it is assumed that the developed countries need to reach the -30% target domestically. The carbon prices in the POLES model are increased step by step until the group of countries meets the -30% target in 2020 compared to This results in the cost effective outcome to reduce -30% within the group of developed countries. At the same time, carbon prices in the developing countries are decreased to such an extent that total global emissions remain the same as in the case of the option gradual global carbon market and in line with the 2ºC objective. Option 3: Perfect global carbon market This option ensures that global emissions stay the same as in the case of the option gradual global carbon market but this time all carbon prices (in all sectors and all countries) are equalised assuming no transaction costs 50. Assessment of the costs of the different options of the global carbon market using the POLES model The table underneath gives an overview of the real mitigation costs incurred, i.e. not representing any financial transfers due to trade flows in emission rights. They also give costs for some of the key countries. The figure underneath represents the carbon prices as experienced in the different scenarios for the ETS-type of sectors in the different regions. Columns (a) to (c) in the table give the projected internal reduction cost experienced in 2020 while columns (e) to (g) give the cumulative costs over the period 2013 to Costs on a global scale are lowest for the option of the perfect carbon market. But also in the gradual carbon market scenario, costs are substantially lower compared to the case where developed countries achieve the -30% domestically. In the perfect market case costs increase for developing countries. Also the costs expressed as a % of GDP are highest for developing countries in the perfect market case while for developed countries they are highest in the case of no global market. Carbon prices in developed countries range from 72 per ton of CO2 in case of the need to achieve the 30% internally to 22 per ton of CO2 in the case of a perfect global carbon market, with 44.5 per ton of CO2 as a price level in case of the gradual carbon market. 50 Note that in the baseline already a carbon price is included in the EU and other developed countries. It is assumed that this carbon price is not lowered, even if in a optimal global perfect carbon market prices would go below these carbon prices assumed already in baseline. See chapter 6.1 for a detailed description of the baseline.

75 Table 12 Impact of gradual development of the carbon market, POLES Carbon price per ton CO2 in developed countries ETS, 2020 Total costs 2020 (Billion, 2005 prices) No Gradual Perfect global global global carbon carbon carbon market market market 72,2 43, Total costs period (Billion, 2005 prices) No global carbon market Gradual global carbon market Perfect global carbon market Relative % costs per GDP, compared to world average No Gradual Perfect global global global carbon carbon carbon market market market (a) (b) (c) (d) (e) (f) (g) (h) (i) World % 100% 100% Developed % 119% 76% countries Developing % 85% 120% countries EU % 94% 66% USA % 129% 83% Japan % 93% 54% Russia % 159% 97% China % 92% 124% Brazil % 87% 119% India % 36% 84% Source: JRC, IPTS, POLES The above table clearly confirms that a gradually developing carbon market reduces global reduction costs substantially. But in order to estimate overall costs per region, both mitigation costs of reducing emissions from energy and non CO2 in industry (see table above) and potential costs and revenues related to trade flows in the carbon market need to be taken into account. For the assessment of potential trade flows, economy-wide mid-term targets (QELROs) were allocated to developed countries that create the demand for emission reduction credits from developing countries and were applied on the gradual carbon market scenario, or also called the "Appropriate global action scenario" as presented in chapter For this assessment it is assumed that developed countries have a reduction target as indicated in chapter 6.2 based on the option using a composite of four indicators (see Table 5 for target setting approach). The table below shows the result of the domestic emissions reductions in some key developed and developing countries for this scenario and compares this for the developed countries with the targets as suggested in Table 5. Table 13 Reductions in developed and developing countries and trade in emissions rights

76 2020 target vs1990 emissions Achieved domestic reduction in 2020 vs 1990 emissions Amount bought (+) or sold (-) in 2020 via the carbon market as a % of 1990 emissions Reduction in 2020 vs baseline emissions Amount sold via carbon market as % of baseline emissions Developed countries -31% -22% 9% EU -30% -20% 10% USA -24% -9% 15% Japan -24% -6% 18% Russia -38% -46% -8% Developing countries -19% -6% China -20% -6% Brazil -20% -6% India -13% -4% Source: JRC, IPTS, POLES In the appropriate global action scenario, developed countries would decrease their domestic emissions by around 22% compared to 1990 and thus need to acquire an amount of emission credits which is equal to 8% of their 1990 emissions. Developing countries reduce their emissions compared to baseline by around 19%, of which 6% can be sold through the carbon market (6% of 2020 baseline emissions of developing countries is equal to 8% of 1990 emissions in developed countries). This means that still 13% of reductions in developing countries would need to come from autonomous actions that are not directly supported by the carbon market. Around two third of this 13% can be achieved through measures at low carbon value or even negative costs ('win-win') in the short to mid term. The table underneath gives an overview of the costs incurred by different key countries. Columns (a) and (b) represent the domestic reduction costs, while columns (c) and (d) take into account any additional costs from acquiring emissions credits on the carbon market or revenues from selling emission credits on the carbon market. The transfers on the carbon market represent in total 51 billion, including trade between developed countries. Trade between developed and developing represents 38 billion. Developed countries benefit substantially from this trade with developing countries. Even though the acquisition of the credits costs them 38 billion, they reduce their mitigation costs by 85 billion from 166 billion in case of no trade at all (see Table 12) to 81 billion in case of trade. This represents a net gain of 47 billion. Table 14 Costs in developed and developing countries and trade in emissions rights Average annual cost of reductions in CO2 from energy and Non CO2 emissions from industry in 2020 Not taking into account revenues or expenditure for carbon trade in 2020 Taking into account revenues or expenditure for carbon trade in 2020 Total costs in Billion (2005 Cost per GDP compared to world Total costs in Billion (2005 Cost per GDP compared to world

77 prices) average prices) average (a) (b) (c) (d) World % % Developed countries % % Developing countries 71 86% 33 40% EU 23 94% % USA % % Japan 7 93% % Russia 7 159% -3-75% China 30 92% 12 38% Brazil 3 87% 2 51% India 5 36% 4 30% Source: JRC, IPTS, POLES In the scenario with no global market at all, it was assumed that developed countries reach their -30% target and developing countries would also undertake appropriate own actions that would see global emissions in line with a 2 C scenario 51. The cost of this appropriate action is equal to 48 billion in developing countries (see Table 12). The gradual introduction of a carbon market in developing countries is assumed to pay only for offsetting for those credits that are generated for emissions beyond the appropriate action. The price paid is assumed to be equal to the highest experienced marginal abatement cost within the developing country's region that is selling credits, which is still below the carbon price in developed countries. These offsetting mechanisms lead to further emission reductions in developing countries, consequently increasing the costs in developing countries from 48 billion to 71 billion. But for this cost increase of 23 billion, developing countries receive revenues worth 38 billion. In this way, emissions trading creates a significant rent of 15 billion over and above the emission reduction costs. This rent can be used to pay also partly for the costs of the appropriate own action which is estimated to amount to 48 billion. Subtracting the rent only around 33 billion will have to be paid for by developing countries themselves or through other additional support mechanisms. This is a very important positive consequence of a well designed gradual carbon market. Future offsetting mechanisms should ensure that it only compensates for those reductions that are not 'low or negative' cost. In addition, it needs to go well beyond mere crediting of offsets compared to baseline, ensuring that the mechanism recycles rents from the trade in order to compensate for those emission reductions that do not generate credits. Assessment of the macro-economic costs of the different options of the global carbon market using the GEM E3 model 51 Assuming that action on REDD and agriculture is also undertaken as described in chapters 6.6 that lead to a deviation from baseline in total between 15 and 30%.

78 The macro-economic impacts of the same carbon market options as before will be assessed. No global carbon market For this option it is assumed that the developed countries reach the -30% target internally. The target used for developed countries are those developed in chapter 6.2 using a set of 4 indicators (see Table 5). For the developing countries it was assumed that they would also introduce internal actions to ensure global emissions are on a pathway stay within the 2ºC objective, i.e. that emission growth would be limited to a level of around 20% above 1990 levels. In order to determine the level of appropriate action by developing countries in this scenario, similar indicators were used as in chapter 6.2 GDP per capita, addressing the capacity to pay for emission reduction within a country GHG per GDP, addressing the opportunities to reduce GHG emissions Projected Population trends over the period , recognising different pressures on the projected emission evolution. The higher a country's GDP per capita, the more national actions it would need to undertake to limit emissions growth compared to baseline. The higher a country's GHG emissions per GDP, the more it would need to undertake action to limit emission growth compared to baseline. And finally, the higher a county's projected population growth rate up to 2020, the less mitigation action it would need to undertake. It actually would be allowed to increase emissions compared to baseline. Summing up the three factors up will result in the necessary emission limitations below the baseline. The table underneath gives an overview of the implication of each indicator on the total amount or reduction needed compared to baseline in this internal action scenario for China, Brazil and India. Brazil being the richest of these three countries would need to limit emissions most according to its GDP/Capita. But for Brazil the reverse is true for GHG intensity of its economy, where it is one of the better performers. Finally, India has a high population growth rate while that of China is very low resulting in a different amount of allowed increase compared to baseline. In total, China is expected to reduce more than the other two compared to baseline. Table 15 Resulting allocation of mitigation efforts compared to baseline for key developing countries (in % compared to baseline) Share according to GDP/cap Share according to GHG/GDP Share according to Population Target relative to Baseline Brazil -13.2% 0.0% 3.9% -9% China -4.2% -13.0% 1.0% -16% India -0.5% -12.2% 4.9% -8% A gradual developing carbon market

79 This scenario is identical to the scenario presented in chapter 6.2, with a gradually developing carbon market and targets for developed countries as presented in the chapter based on the 4 indicators and with an amount of appropriate action by developing countries as presented just above. A prefect carbon market This scenario is identical to the scenario presented just above with the only difference that the carbon market does not develop gradually but equalises immediately on a global scale across sectors and countries The table underneath represents the results for the 3 scenarios. Table 16 Impact of gradual development of the carbon market, GEM E3 Welfare compared to baseline GDP compared to baseline 2020 Perfect market Gradual market No market Perfect market Gradual market No market EU27-0.7% -1.4% -1.4% -0.4% -1.2% -1.5% USA -0.5% -0.7% -0.7% -0.4% -0.8% -1.0% Japan -0.3% -0.6% -0.6% -0.3% -0.6% -0.7% CIS -1.3% -1.4% -1.7% -2.7% -3.0% -2.1% China 0.5% 0.3% -0.2% -1.4% -0.8% -0.5% Brazil 0.0% -0.1% -0.2% -0.5% -0.4% -0.2% India 0.1% -0.2% -0.4% -1.4% -0.5% -0.5% World 0.2% -0.7% -0.8% -1.1% -0.9% -1.0% GHG Emissions compared to baseline GHG Emissions compared to Perfect market Gradual market No market Perfect market Gradual market No market EU27-6.3% -20.9% -25.3% -8.5% -22.8% -27.1% USA -20.9% -31.6% -37.7% -1.0% -14.3% -22.0% Japan -14.8% -23.9% -31.0% -7.4% -17.3% -25.0% CIS -24.9% -26.1% -20.4% -46.7% -47.5% -43.5% China -32.9% -20.8% -16.2% 70.3% 100.9% 112.6% Brazil -18.8% -12.3% -9.3% 80.7% 95.2% 102.0% India -23.5% -10.7% -7.8% 143.1% 183.6% 192.9% World -21.4% -21.4% -21.4% 18.3% 18.3% 18.3% Source: JRC, IPTS, GEM-E3 This modelling run confirms that a perfect global carbon market would minimise welfare impact for all key regions. Also the gradual carbon market performs better than no carbon market. What is interesting to note is that the perfect carbon market does not improve GDP for the developing countries. The reason for that is that due to the transfer of credits, consumers in developing countries receive a higher income which they decide to spend rather on more consumption and leisure, as such maximising welfare but therefore not GDP growth. Taking into account the gradual emissions trading flow results in affordable impacts on GDP for all key countries. Conclusion

80 Global carbon markets decrease costs significantly to achieve a certain environmental target cost efficiently, even if targets are 'fairly' allocated. Offsetting mechanisms should only compensate for reductions over and above low cost options. Otherwise windfall profits are created for those selling the credits. Offsetting mechanisms, if well designed, can compensate also for reductions that do no lead to credits. These types of offsetting mechanisms go beyond mere crediting of reductions below a baseline that does not include own appropriate action. Costs in the energy system are estimated at 152 billion in 2020 (2005 prices) of which 81 billion comes from mitigation costs in developed countries and 71 billion comes from mitigation costs in developing countries but 38 billion of these costs are compensated through trade in the carbon market. In practice this means significant shifts in investment flows, with some sectors/technologies receiving much higher investments compared to baseline (e.g. energy efficiency) and some much lower (e.g. primary energy production) See Annex 17 of this Staff Working Document (Part 2) for more information on the institutional architecture needed to ensure that the global carbon market will develop in the coming decade Actions necessary in the forestry sector and agriculture sector to reduce emissions and associated costs Actions for REDD, estimating costs The emissions from deforestation are assessed using the G4M and GLOBIOM models. Modelling the full forest sector poses significant difficulties because of the complex interactions involved and lack of coherent data sources. This analysis gives an indication of the magnitude of impacts and the efforts needed to achieve emission reductions from deforestation and afforestation. Important to note is that the GLOBIOM model's baseline projects agricultural services including bio-energy production and thus takes the bio-energy requirements needed in the POLES baseline fully into account. These models project in the baseline, emissions from gross deforestation (without afforestation) to amount around 4.3 Gigatons CO 2 on average for the period and they decrease to around 3.5 Gigatons CO 2 by In 2020, this reflects an annual loss of 11 million hectares of forest, decreasing from a higher average annual level of around 14 million hectares in This is similar to the historical data of FAO that report that the gross deforestation rate in tropical regions was between million ha per year in the period FAO reported that forest expansion was on average 5.8 million hectares a year over the period In the baseline, afforestation is increasing up to 2020 to roughly 7 million hectares or more than half the loss in millions of hectares from gross deforestation. A key driver for afforestation in the projected baseline is the demand for biomass for energy (as 52 JRC estimate based on FAO data (FAO, 2006)

81 projected in the POLES baseline). But the impact of afforestation on overall net emissions from deforestation (emission net deforestation = emissions gross deforestation sinks from afforestation) is substantially less pronounced. By 2020, emissions from net deforestation are only 10% lower than those from gross deforestation. This clearly underlines that reducing deforestation is a more effective and necessary policy in the short run to reduce net GHG emissions per hectare of land use than afforestation 53. Table 17 GHG emissions/removals from land-use change involving forests in baseline 54 Baseline emissions (million ton CO 2 ) Deforestation Afforestation Net deforestation Source: G4M and GLOBIOM, IIASA Table 18 Deforestation and afforestation in baseline Annual change in land use (million of hectares) Gross deforestation Afforestation Net deforestation Source: G4M and GLOBIOM, IIASA The GLOBIOM and G4M models were then used to assess the impacts of the objective of the Communication Commission "Addressing the challenges of deforestation and forest degradation to tackle climate change and biodiversity loss" 55, i.e. to halt global forest cover loss by 2030 at the latest and to reduce gross tropical deforestation by at least 50 % by 2020 compared to current levels. Two policy scenarios were modelled that could deliver these changes in forestry sector: 1. Increased demand for sustainable biomass for energy in order to reduce GHG emissions in the energy sector. Increased demand was projected with the POLES model for the global emission reduction scenario as presented in chapter This will increase land use for sustainably managed forest plantations. 2. Specific policies introduced to reduce the amount of gross deforestation Reducing emissions from deforestation offers significant results in the short-term, as large amounts of carbon dioxide around tonnes of CO2 per hectare are not released into the atmosphere. With afforestation and reforestation this takes many years to accumulate and depending on the type of afforestation and reforestation might well not reach this level of carbon content since natural tropical forests store much more carbon than new planted forests. Afforestation represents afforestation in the G4M model and GLOBIOM model. The GLOBIOM model ensures that sufficient biomass is produced to fulfil the biomass requirements in the POLES baselines. COM(2008) 645 final

82 The G4M model is used to project impact on deforestation of specific policies to reduce deforestation. Two policy options were assessed: (i) carbon tax and (ii) compensation of foregone rents. In the case of the carbon tax, land users need to pay a tax per ton of CO 2 emitted from deforestation. In case of a rent, land users are compensated for the foregone rent by not cutting the forests on their plot of land. The Globiom model is used to assess the implications on land use stemming from increased demand for biomass for energy production. Both models are run simultaneously to assess if sufficient land is available for agricultural production and to assess what the impact could be on agricultural production, food prices and food supply. Table 19 and Table 20 present the impacts of a tax on deforestation. At a tax level of US$ 2.3 per ton CO2 gross deforestation is halved by 2020 compared to The projected results would be increasing demand for bio-energy that will lead to increased afforestation in 2020, typically through short rotation plantations. These plantations increase the amount of afforestation to a level that is more than twice the amount of afforestation in the baseline. In 2020, total forested surface would increase substantially but in total net emissions from deforestation would still be substantial, i.e. around 1.6 Gigatons CO2 per year. By 2030, with a tax of US$ 27 per ton CO2, net deforestation emissions would go down. Gross deforestation would decrease to one tenth of the levels of the period by 2030 and afforestation increase substantially leading overall to a net positive sink 56. Table 19 GHG emissions/removals from land-use change involving forests in baseline Appropriate global action scenario (million ton CO 2 ) Deforestation Afforestation Net deforestation Tax (US$ tax per ton CO2 from deforestation) / Source: G4M and GLOBIOM, IIASA Table 20 Deforestation and afforestation in baseline Change in land use (million ha) Gross deforestation 13,1 7,8 3,0 56 The emission profile in Figure 14 and the projections used to estimate the impact on temperature levels, used the results from GLOBIOM+G4M for the policy scenario described in this chapter up to 2030 but for 2030 and onwards towards 2050 it was assumed that emissions go down to zero and do not revert into a sink as presented in Table 20.

83 Afforestation -7,0-18,4-20,8 Net deforestation 6,1-10,5-17,8 Source: G4M and GLOBIOM, IIASA In the appropriate global action scenario, a tax level of $ 2.3 per ton CO 2 is required to bring down gross deforestation by 50% compared to 2005 by The G4M land use model was also used to analyse the necessary funds needed if one would like to apply a rent-based approach to decrease deforestation. As such the model compares the net present value from forests or other uses of land and it assesses what needs to be paid to land owners to compensate the foregone rent from deforesting for 5 years whereby the value is determined by the value of the total carbon stock of the land for which rent is paid per ton CO 2. The projections find that the amount of rent in 2020 is US$ 1.4 per ton of CO 2 stock on forest land to be preserved for five years. A similar study by IIASA (Kindermann et al. 2006) finds that the amount to reduce emissions by half compared to baseline 57 is US$ 1.6 per ton of CO 2. However, total costs will greatly depend on the assumed amount of leakage 58 : If no leakage occurs, it can be assumed that only forest area targeted for conversion ("frontier forests") is to be included in the scheme; it is estimated that a global target of reducing deforestation by half could be reached with a payment of US$1 billion at 2000 price levels or around 0.9 billion in 2005 prices 59 in Assuming that there would only be leakage on a regional scale, payments over a larger area will increase to US$ 20.6 billion (some 18 billion in 2005 prices) per year. Leakage on a global scale, translating into the need to compensate for the continued conservation of all standing carbon stocks globally, would cost in the order of US$209 billion (some 184 billion in 2005 prices). But these cost estimates could be too low. For instance the Globiom model, which is used to assess the requirement on land use from increased demands for biomass for energy production. In order to provide an incentive to increase the productivity of bio-energy plantations, a carbon tax of $ 2.3 per ton CO 2 is applied. This results in a lower number of hectares needed for bio-energy related afforestation and thus lessens the pressure on deforestation. It is at present not possible to project the translation of such a tax in Globiom into a rent based approach. Neither does the projection with the G4M quantify additional costs arising from monitoring and leakage that would further increase the costs. In Annex 16 of this Staff Working Document (Part 2) more background is given to the Commission's point of view on action on REDD, as also presented in its Communication Please note that this study is a bit more ambitious given that baseline is already decreasing compared to Leakage occurs when the activity causing deforestation in one project area is shifted to a different location outside the boundaries of the project area. The GDP deflator has been used to convert 2000 in 2005 prices.

84 "Addressing the challenges of deforestation and forest degradation to tackle climate change and biodiversity loss" of 17/10/ Actions for REDD and their relationship with emission reductions from the energy and industrial sectors Emissions in baseline from deforestation are projected in Table 17 to be equal to 3.5 Gt CO 2 equivalent. Action on REDD sees these emissions reduce to 2.2 Gt CO 2 equivalent (see Table 19). This is a net reduction in 2020 equal to 1.3 Gt CO 2. It is sometimes advocated that these reductions should generate credits that can be used to offset emissions in developed countries. If this option was chosen, then targets in the other sectors in developed countries would need to be tightened in order to ensure that total emissions on a global scale do not increase. As an example, if REDD would be allowed to be fully credited and if REDD would achieve indeed a 1.3 Gt CO 2 reduction, then the target for developed countries 61 needs to be increase from -30% compared to 1990 to -38% to ensure that the global emission target can be achieved. If the emission reductions due to REDD would not be achieved, than emission reductions in the energy system and industries need to be significantly larger to ensure that the 2 C target can be met. A sensitivity analysis with the POLES model was made that sees emission reduction action increase up to the level needed to compensate for no REDD action at all 62. The table below shows that estimated global reduction costs in those sectors would go up by more than 65 billion in This is around three times the estimated cost of REDD action provided that leakage could be limited to the regional scale. Table 21 Costs to the energy system and industry if there is no action on REDD Cost of reductions in CO2 from energy and Non CO2 emissions from industry Total costs in Billion (2005 prices) If deforestation remains like in If REDD objectives are met baseline projections (a) (b) World Developed countries Developing countries EU USA Japan 7 10 Russia 7 12 China Brazil 3 4 India 5 5 Source: JRC, IPTS, POLES COM(2008) 645 final Assumed in this example to be a -30% target for the emissions from the energy system and the industrial sectors. The action is undertaken according to similar assumptions as used for chapter

85 Impact REDD on agriculture In the REDD scenario as described in chapter 6.6 total land area forested increases in 2020 by 10 million hectares instead of decreasing by 4 million. Furthermore, land that is available for agriculture will in part be used for increased bio-energy production. This has a significant impact on the available land for agricultural crops other than bio-energy. In order to satisfy increasing demand for food and other agricultural commodities because of global population growth, this would require a significant shift towards more productive agricultural practices with higher output per hectare. The land use models G4M and Globiom were used to assess the feasibility of such a scenario and its impact on agricultural prices. It should be noted that substantial uncertainties remain in the biophysical data and the potential costs of the conversion of agricultural practices, so these results have to be treated carefully. The necessary improvements in agricultural practices need to take place in particular on several fronts, i.e. timely shifts from 1. traditional grassland based livestock production systems to more intensive ones requiring less land area, which would need important changes in the diet of the cattle, and free up land for forest-based biomass production. 2. low input and rain-fed agricultural practices towards high input and irrigated crop production systems. However, the feasibility of this option needs to be assessed in specific site-conditions according to the projected evolution of water availability. In addition to these options, it can be recommended to improve soil management practices to increase soil fertility and to recover degraded farmland soils. This could contribute to substantially increase agricultural productivity The results indicate that achieving the sustainable bio-energy and deforestation targets set by POLES for 2020 would only see modest price increases for agricultural products assuming that improved agricultural management were feasible and timely. Price increases for crops are projected to be potentially around 6 to 7% compared to baseline in It should be noted that such improvements and innovations in agricultural practices would create additional benefits, not only from the point of view of climate change. They would increase productivity in this sector. They could lead to reductions of GHG emissions from livestock production but care should be taken not to offset these by increased emissions from changes in land-use (e.g. changes from pasture to arable land) and fertilisation. In order to achieve these important changes, support for increasing agricultural productivity and rural development would have to be an essential element of a comprehensive global climate change policy, for instance through intensified research and capacity building in improved agricultural practices, investment in agricultural and rural infrastructure and sometimes institutional changes, all requiring strong domestic land use policies Mitigation action to reduce Non-CO2 greenhouse gases in agriculture: nitrous oxide and methane An assessment was also made separately with the IMAGE model what type of policies could be implemented in the agriculture sector to reduce non-co 2 GHG emissions and to what extent this is in line with the need to increase agricultural productivity if deforestation has to be reduced and bio-energy supply increased.

86 Under baseline assumption, the IMAGE model projects the development of non-co2 greenhouse gases from agriculture as a function of a corresponding activity indicator (e.g. the number of cows) and assumed development in the technology and type of activity (emission factor). The activity indicators for the purpose of this paper are based on the baseline image projected for the ADAM project 63. Assumptions for agricultural activities are based on the so-called Adaptive Mosaic scenario of the Millennium Ecosystem Assessment (MEA, 2005). Emission factors for the non-co2 greenhouse gases are mostly held constant as no climate policy is introduced. In the global action scenario, climate change policies are implemented cost efficiently, i.e. equalising marginal abatement costs for all non-co2 greenhouse gases and all sectors in all regions. The marginal abatement costs are based on estimates published by US EPA and further work by Lucas et al. (2007). In the baseline, total CH4 and N2O emissions increase up to 2050 and slowly stabilize after this time period. The contribution in total greenhouse gases drops since their growth rate is slower than that of GHG emissions of energy and industry. By 2020 emissions from agriculture are projected to increase in the baseline to around 6 Gt CO 2-eq., an increase of 30% compared to Growth is higher in developing countries with an increase of 51% compared to 1990 by 2020 while emissions in developed countries actually decrease over this period even though they are rather stable in the period 2005 to The reason why non-co2 emissions from agriculture increase less than energy-related (CO2) emissions over the coming years is caused by the fact that most land-use related drivers of these emissions have strong saturation tendencies. For CH4, only emissions from animal husbandry are likely to increase rapidly in the absence of climate policies. Wetland rice emissions remain more or less constant, as not much expansion is assumed to occur and yields per hectare improve. Emissions from fertiliser use and animal waste are expected to lead to increasing N2O emissions. Figure 13 Global Non-CO2 GHG emission from agriculture 63 Adaptation and Mitigation Strategies: Supporting European climate policy, Preliminary ADAM scenarios, Project no GOCE,

87 Non-CO2 emission from agriculture global Gt CO2eq/yr baseline appropriate action Agriculture Non-CO2 emission in developed countries Agriculture Non-CO2 emission in developing countries Gt CO2eq/yr Gt CO2eq/yr baseline appropriate action baseline appropriate action Source: IMAGE model of PBL, ADAM project By 2020, in the global appropriate action scenario emissions from agriculture reduce on a global scale by 0.73 Gigatons CO 2-eq. to 14% above 1990 levels compared to baseline. The total mitigation cost to deliver these reductions is estimated at US $ 8.1 billion or 6.5 billion 64. There are substantial cost differences between developed and developing countries. Costs in developed countries by 2020 will be around 1.48 billion while the developing countries experience mitigation costs in the order of 5.0 billion. This large share for developing countries is partly due to the fact that this study looked at cost efficient option, as such leading to a relatively higher share of reductions in developing countries. The key reduction options at hand in the agriculture sector as identified in Lucas et al. (2007) and implemented in IMAGE include changing animal diets, optimising manure management and limiting grazing, reducing methane emission from rice production through water management, improving fertiliser use efficiency, restricting use of fertiliser in time and replacing current fertiliser with new types of fertiliser producing less emissions. Some of these mitigation options are actually win-win increasing agriculture productivity and decreasing greenhouse gas emissions for a similar amount of agricultural production. As such they are the type of measures that also need to be implemented to reduce emissions from US $ per Euro is assumed as average exchange rate 2005.

88 deforestation, while simultaneously allowing afforestation (for bio-energy purposes) to increase (see chapter 6.6). The existing barriers, often linked to uncertainties of impacts on productivity, costs and/or lack of knowledge needs to acknowledged. These implementation barriers are larger in developing countries, noting particularly Africa where in most areas such productivity increases have not happened yet. This confirms again that in order to achieve them many changes would have to take place that will require support for research and capacity building in improved agricultural practices, investment in agricultural infrastructure and sometimes institutional change, all requiring strong sustainable development policies. Conclusions REDD & Agriculture It is feasible and affordable, as well as essential to reduce gross tropical deforestation by at least 50 % by 2020 compared to current levels. Increased demand for bio-energy will also be an important driver for afforestation and reforestation. But reducing emissions from deforestation is more important in the short term than increased afforestation or reforestation. Thus, the deforestation of areas for the purposes of biomass extraction for bio-energy production needs to be prevented. The recently adopted revised Fuel Quality Directive and Directive on Renewable Energy require the Commission to explore the issue of land use changes caused by an increased use of biofuels. In addition, the Commission will prepare a report and make proposals on sustainability criteria for biomass. If crediting of REDD actions would be allowed for offsetting purposes, then targets for developed countries need to be made much more stringent. In the above assessment they would need to be cut further to -38% compared to 1990 by Leakage is an important cost factor for the efficiency of REDD policies that will need to be addressed if emissions from REDD need to be reduced cost efficiently. Agriculture itself also offers a substantial mitigation potential in developing countries, often through intensification of the agricultural production. Such practices will need to respect local ecosystem characteristics and water, soils, biodiversity, all of which are under increasing pressure including from climate change, and all of which require protection. They could include marginal shifting from traditional grassland based livestock production systems to landless ones and limited switch from low input and rain-fed agricultural practices towards higher input and sustainable irrigation systems as well as improving soil management practices in croplands and grazing lands areas. This will also be crucial to compensate for pressures on food production coming from REDD and increased demand for bio-energy. Higher demand for agricultural land and switching to more intensified agricultural practices will see a slight increase in agricultural produce prices. Increasing agricultural productivity in a sustainable manner will require support for capacity building and rural development in developing countries. To achieve the REDD objectives through a rent based approach, an estimated 18 billion in 2020 (2005 prices) will be necessary, if leakage can be limited to a regional scale. Not taking this action on REDD would lead to a cost increase in the energy and industry sectors of around three times the costs of action on REDD, because of additional action to be taken in these sectors. To reduce emissions from agriculture, 6.5 billion of mitigation costs would occur in 2020, of which developing countries represent 5.0 billion.

89 6.7. Sources of financing complementing the carbon market The analysis in chapters 6.5 and 6.6 showed that there still remains a considerable financing gap for mitigation action in developing countries that will have to be closed to a certain extent by additional financial flows. In addition, adaptation will have to be funded as well, especially in the least developed countries. International public financial support will have to be scaled up and mobilised. In this context, a number of key questions will have to be answered, e.g. level of funding, sources of funding, purpose of public funds, governance issues, and distribution keys. Apart from a politically acceptable governance structure, a distribution key will have to be identified. In this respect, Table 22 analyses different options in order to determine the relative shares for the financial contribution of different countries based on: Actual contributions of Official Development Assistance Actual scale of assessment for the UN budget polluters pays principle, i.e. emitted GHG emissions, which could be applied only on developed countries or on a global scale Share of total GDP Depending on the distribution key, the EU's contribution could range between % of total funding. Again, building a composite index that reflects responsibility and capability might be the most suitable and political acceptable way forward. Furthermore, there is no doubt, that the larger the number of contributors, the higher the amounts that will be able to be mobilised, especially in view of the current economic recession. Table 22 Possible distribution keys for countries' contributions to finance UN budget Poll. Pays GDP 2005 Poll. Pays ODA Principle (Market Principle global (2005) 67 Exch. Rate) Annex-I (2005) EU27 60% 37% 15% 31% 28% 65 Note: The data for 2007 are preliminary pending detailed final data to be published in December ODA (every one has commitment to 0.7% of their GNI) in practice for 2007 where the total was around 104 billion USD the figures are very roughly broken down like this. 66 The Fifth Committee of the UN General Assembly decides on the scale of assessments for contributions to the Regular Budget every third year. The scale of assessments reflects a country s capacity to pay (measured by factors such as a country s national income and size of population). The figures in the table are 'assessed percentage for the year 2006' and does not necessarily reflect actual payments. and ments.shtml 67 Estimates from IEA 2007 C02 from fossil fuel combustion data. 68 Estimates from IEA 2007 C02 from fossil fuel combustion data. 69

90 70 United States 21% 22% 21% 28% 41% Japan 7% 19% 4% 10% 9% Canada 4% 3% 2% 3% 4% Australia 2% 2% 1% 2% 3% China 2% 19% 5% Mexico 2% 1% 2% Brazil 2% 1% 2% Russia 1% 6% 2% 11% India 4% 2% Korea 0.6% 2% 2% 2% Note, PPP refers to the polluter-pays principle, according to which the share of a country is calculated on the basis of its share in global emissions calculated from C02 from fossil fuel combustion data (PPP Global) or its share in emissions of Annex-I parties only (PPP Annex I). In this respect, the carbon market also offers new opportunities in terms of raising public revenues for such contributions in Europe. As agreed in the Directive of the European Parliament and of the Council amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the Community foresees that at least 50% of the revenues generated from the auctioning of allowances should be used for climate actions 71. As part of a financial package for Copenhagen, one option could be that Member States earmark/pledge concrete contributions for climate actions in developing countries Impact of the financial crisis The financial crisis is perceived to have a real impact on the dynamics of the international climate change negotiations and on the perceptions by parties on how their baseline GHG emissions will develop and how much additional action they are willing and able to take to reduce emissions. The analysis in this assessment has included the impact of the financial crisis in its baseline, to the extent possible. Chapter 6.1 describes the baseline, and includes an explanation on how the financial crisis was taken into account. This chapter will briefly assess A nation can only contribute a maximum of 22 percent to the regular budget. (The ceiling rate was lowered by the Fifth Committee in December 2000 from 25 percent to the current 22 percent and only affects the US as it is the UN's largest contributor.) This concerns actions in developed and developing countries and includes for instance contributions to the Global Energy Efficiency and Renewable Energy Fund and to the Adaptation Fund,, measures to avoid deforestation and increase afforestation and reforestation in developing countries that have ratified the future international agreement, to transfer technologies and to facilitate adaptation to the adverse effects of climate change in developing these countries, and for the environmentally safe CCS, including in third countries. Under Directive 2008/101/EC, all auction revenues from aviation should be used for these purposes;

91 what the impact of the economic crisis could be on the total cost to reach an ambitious GHG emissions target in line with the 2 C objective. The POLES model was used to run the "Appropriate global action scenario" as presented in chapter 6.5.1, both in case with an economic growth equal to the one assumed in baseline, which was lowered to take into account the effect of the financial crisis and in the case where this impact was not taken into account. See Annex 7 of this Staff Working Document (Part 2) for differences in assumed growth rate. The overall result shows a decrease in costs to achieve the mitigation target by around 20 billion. This cost reduction is by far the largest for the developed countries due to the larger impact of the financial crisis on these economies. Table 23 Average annual cost of reductions in CO2 from energy and Non CO2 emissions from industry in 2020, for the case with and without financial crisis Average annual cost of reductions in CO2 from energy and Non CO2 emissions from industry in 2020, Billion (2005 prices) Not taking into account the potential impact of the financial crisis Taking into account the potential impact of the financial crisis World Developed countries Developing countries EU USA Japan 8 7 Russia 9 7 China Brazil 3 3 India 5 5 The results of the POLES model confirm the logic that lower levels GDP growth will reduce increases of energy consumption and thus greenhouse gas emissions and thus lower the costs to reduce a certain amount of emissions compared to a fixed base year. But one should also note that a slowdown in GDP might also slow the rate at which the energy intensity of output is reduced, in particular by slowing investment in the renewal of the economy s capital stock or leading to reduced investment in innovation. These counter balancing forces can increase costs again to reduce GHG emissions and underline the need for government policies that ensure that sufficient capital is leveraged for continued investments in low carbon technologies, also in case of an economic slowdown Assessment of co-benefits of climate change policies Air pollution Policies to reduce the most important GHG, i.e. CO 2, through shifting to carbon free energy sources or decreasing overall energy consumption, also tend to reduce emissions of other local air pollutants such as sulphur dioxide (SO 2 ) particulate matter (PM) and nitrogen oxides

92 (NO x ). In addition, measures to reduce methane (CH 4 ) and nitrous oxide (N 2 O) emissions from agriculture may also have an indirect benefit for air quality. Reductions in CH 4 can reduce the formation of ground level ozone. More efficient fertilizer use can reduce both NO x as well as N 2 O emissions. The co-benefits of reduced local air pollution due to climate change mitigation measures consist of two parts. Firstly, a positive impact on human health, materials, crops and natural ecosystems, foremost through reduced concentrations of particulate matter and ground level ozone. Secondly, a reduction of costs associated with controlling these 'local air pollutants' because lower emissions levels through climate change mitigation decrease the overall costs to reduce these local air pollutants by specific measures. JRC has analysed the global impact of climate change mitigation measures on local air pollution. They analysed the impact of a GHG mitigation scenario. They did so by implementing it on two different options with respect to local air pollution policies: Option 1: Little progress is made in traditional air pollution control up to Option 2: Air pollution controls are tightened in the baseline on a global scale. For the EU, for instance, it is assumes that current legislation on local air pollutants up to 2020 is fully implemented. The rest of the world would follow EU legislation with one decade delay. These two options present two extremes for future policies concerning local air pollution. For both options JRC estimated what the impact would be if the Appropriate global action scenario would be implemented. For this assessment the global atmospheric model TM5 from JRC was used. JRC applied dose-response functions for the health impact of PM and ozone 72. The PM impacts were capped at 100 micrograms/m3 taking into account natural emissions (e.g. sea salt and dust). The capping underestimates the full benefit i.e. in countries like China where current concentrations exceed 100 microgram in 20% of the cities. The methodology reflects the predicted age structure per country although population numbers are based on the year The results confirm that a global GHG mitigation effort will lead to significant additional reductions in PM as well as ozone concentrations: Policy option 1 (stagnating air pollution policies): PM10 concentrations diminish significantly compared to baseline and life expectancy increases by around 1.7 months per person in 2030 compared to business-as-usual. Ground level ozone concentrations are reduced and life expectancy increases by an average of 0.01 months per person in 2030 compared to baseline. Under this scenario, climate mitigation measures could reduce the number of life years lost by nearly 18 million worldwide in 2030 compared to baseline. Large shares of this benefit would accrue to South Asia (including India), East Asia (including China) and the USA. Using the average value of life year lost under European 72 Pope, C. A. et al Lung cancer, cardiopulmonary mortality, and long-term exposure to fine particulate air pollution. Journal of the American Medical Association 287(9): and Worldbank/State Environmental Protection Administration P.R China (2007) Costs of pollution in China: economic estimates of physical damages, The Worldbank, Washington. D.C.

93 circumstances 73 suggests that the monetary benefits might range from close to 920 billion to nearly 2,120 billion in On top of these reductions in mortality there are positive impacts in reducing morbidity, avoiding crop damages (several billions), and ecosystems. Policy option 2 (improved air pollution policies): Understandably, the gains in life year lost because of additional climate change policies are lower and close to 17 million in A large share of local air pollution is already abated through specific air pollution policies in this scenario. Again significant benefits are expected in South Asia, East Asia and the USA. Total monetary benefits for this decrease in mortality range from some 860 to around 1,990 billion per year. Table 24 Benefits in terms of reduction in life years lost compared to baseline in 2030 without additional air pollution policies in place (scenario 1) Scenario 1 Scenario 2 life years lost (x 1000) Valuation ( billion/yr) life years lost (x 1000) Valuation ( billion/yr) High case Low High Low case Low High CANADA USA CTRAL SOUTH AMERICA NORTHERN WESTERN AFRICA EASTERN AFRICA SOUTHERN OECD EUROPE EASTERN EUROPE FORMER USSR MIDDLE EAST SOUTH ASIA EAST ASIA SOUTH EAST ASIA OCEANIA JAPAN World Source: JRC (IES) DG V based on the CARB and CAP scenarios 73 The values of life year lost ( and ) were used that are typically applied for impacts assessments in the EU. There are insufficient studies in developing countries that address the 'value of life year lost' but the Worldbank /SEPA China (200 7 ) suggest values of statistical life lost for China of 1 million RMB a factor 10 to 20 lower than typical EU values of 1-2 million.

94 IIASA has developed a tool that allows assessing the inter-linkages between climate change and local air pollution policies for the EU27, i.e. the GAINS model. This model was extended for specific cases under the GAINS-ASIA project 74 focussing on China and India. They have developed for the EU, China and India a baseline scenario including existing local air pollution policies but interpreted in the least-strict way. IIASA assessed what the impact of the Global appropriate action scenario, would be on local air pollution on top of this baseline. The results indicate a reduction of emissions of local air pollutants by several percentage points in 2020 in India, China and the EU compared to baseline (see Table 25). In the EU the reduction is more significant. In 2030, higher reductions of greenhouse gases by India and China compared to baseline result in significant reductions in the emissions of local air pollutants. The impact is more pronounced in China than in India since the CO 2 emission reduction compared to baseline is smaller for India than for China. Reductions in emission of local air pollutants are around 20 to 50 % for China and 15 to 45 % for India in These emission reductions also imply that fewer resources are needed to control traditional air pollution. The GAINS model was used to estimate the cost, in the baseline case, to comply with existing air pollution legislation and subsequently to estimate how much this cost would be reduced if GHG mitigation policies were put in place. In 2020, local air pollution control costs are reduced by nearly 14 billion (2000 prices) in the EU27, 12 billion in China and 1 billion in India. In 2030, the cost reductions are higher: 20 billion in the EU27, 34 billion in China and around 3 billion in India (see Table 25). The results take account of the fact that costs of air pollution control can differ between India, China and Europe due to different prices in equipment, materials and labour. Table 25. Reduction in emissions and in air pollution control costs in India, China and the EU27 due to climate mitigation measures EMISSIONS (change over BAU) Reduction Air pollution control costs 2020 CO 2 SO 2 PM2.5 NO X Billion /year EU27-20% -29% -10% -16% 13.7 China -19% -19% -9% -18% 12.4 India -15% -11% -6% -14% EU27-34% -44% -8% -25% 20.0 China -43% -46% -22% -43% 34.5 India -42% -43% -14% -35% 3.3 Source: IIASA Energy supply security Risks to security of energy supply can be regarded as the exposure to interruption of imports or strong fluctuations in energy prices due to the fact that supply is concentrated in a few 74 GAINS-ASIA and GAINS-EUROPE. See:

95 countries with high geopolitical risk. For the EU and many other developed and emerging countries as well, it concerns mainly their reliance on oil and gas. Compared to business-as-usual, a GHG mitigation scenario reduces final energy consumption and increases the shares of renewable and other non-fossil fuels. Consequently, the consumption of oil, gas and coal decline in the policy case compared to baseline scenario. As a result the dependence on in particular oil and gas imports declines. Table 26 gives the projections for oil and gas expenditure by the EU, China, India and the US in case of the baseline and the Global appropriate action scenario. In 2020, expenditures on consumption of oil are reduced by between 16 % (China) to 27% (EU27) compared to baseline. In 2020, the changes in gas consumption expenditures are more modest and range from +1% (China) to minus 27% (EU27). It should be noted that this takes into account that reductions in consumption will in turn reduce prices of oil and gas compared to baseline. Both the USA and the EU27 would consume less oil in 2020 and 2030 than in the year 2005 and would decrease their dependence on oil. In China and India oil consumption would still be higher than in 2005 but the increase would be significantly smaller in the GHG mitigation scenario. Table 26 Oil and gas consumption expenditures Baseline GHG % Baseline GHG % Appropriate global action scenario Appropriate global action scenario billion US$ billion US$ % billion US$ billion US$ % China Oil % % Gas % % EU27 Oil % % Gas % % India Oil % % Gas % % USA Oil % % Gas % % Source: POLES ($ 2005 prices) Can the specific and operational objectives set by the EU meet the requirement to limit temperature increase to 2 C GHG emissions need to have peaked globally by 2020 to have a 50% chance to limit temperature increase to 2 C 75. By 2030, emissions (excluding reduced deforestation emissions) need to further reduce to around 10% above 1990 levels and continue to decrease rapidly up to 50%, or more to have a chance beyond 50% to meet the 2 C limit. Figure 14 represents the global emission pathway if actions are undertaken as described in chapter in the energy system and industries, 6.6 on REDD and in the agricultural sector. 75 Corresponding to an emission pathways of 450 CO 2 -eq ppmv. Michel den Elzen et al. 2008

96 Emissions including those from deforestation peak before Emissions, excluding deforestation, level off around 2020 at around 32% above 1990 levels. In developed countries, emissions from energy, industry and agriculture reduce by 23% in 2020 compared to To achieve the 30% target for developed countries, an equivalent of 7% of 1990 emissions would need to be acquired through offsetting mechanisms. Emissions in developing countries from energy, industry and agriculture decrease with 18% compared to baseline in Taking into account the fact that developed countries need to offset 7% of their 1990 emissions, developing countries will need to limit the growth of their emissions to 14% below baseline by their own appropriate actions and the remainder of the reductions (up to 18% reduction compared to baseline) can be credited and transferred to developed countries. Taking into account also the reduction from deforestation, emission growth will be limited to 20% below baseline in developing countries in Taking into account the reductions through offsetting mechanisms used by developed countries, the own appropriate actions by developing countries, including on REDD, is equal to a reduction of 16% compared to baseline by Figure 14 Emissions for all sectors in the appropriate global action scenario LULUCF Agriculture Source: POLES (JRC, IPTS), G4M (IIASA), Image (PBL) Energy & industry CO2 Energy & industry other GHG The MAGICC model was used to estimate the temperature increase up to 2050 with an emission profile as presented in the figure above. The best estimate temperature increase by 2050 stays limited to 1.5 C compared to pre-industrial levels instead of 2 C for the baseline scenario 76. Global average temperature increases further after 2050 but with continued 76 The best estimate temperature projection was done using the MAGICC model, version 5.3

97 emission abatement it will be able to be contained within the limit of 2 C above pre-industrial levels. Figure 15 Global temperature increase for different emission profiles up to ,5 Temperature increase 2 1,5 1 0,5 Temperature Baseline Temperature Appropriate global action Temperature EQW450* Temperature IMAGE B *Equivalence peaking & stabilization pathways (EQW) by Malte Meinshausen, January 2005 Source: Best estimate temperature increase MAGICC model

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104 COMMISSION OF THE EUROPEAN COMMUNITIES Brussels, SEC(2009) 101 COMMISSION STAFF WORKING DOCUMT accompanying the COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Towards a comprehensive climate change agreement in Copenhagen - Extensive background information and analysis -PART 2- {COM(2009) 39 final} {SEC(2009) 102}

105 Table of content 1. Annex 1: A brief description of models used in this staff working document Annex 2: Results of the Stakeholder conference Annex 3: The science of climate change, update Recent scientific findings on Climate Change Observed climate change Impacts of Climate Change Adaptation to Climate Change Annex 4: Some key statistics for the G8 and key MEM participants Annex 5:Views of the 3rd parties concerning climate change policies The role of the G8 and the Major Economies meeting Developed countries Asia Argentina, Mexico, Brazil and other Latin America Africa Middle East & OPEC Candidate countries and potential candidate countries Annex 6: Comparison baseline (excluding LULUCF) with the other baselines Annex 7: GDP growth in baseline in the POLES model Annex 8: Mitigation action by developed countries - Quantified emission limitation or reduction objective Annex 9: Target calculation for the developed countries on the basis of 4 indicators Annex 10: Specific accounting rules for LULUCF sectors up to 2012 under the Kyoto Protocol Which LULUCF activities can one account for under the present rules? Which LULUCF activities does one have to account for? How does one account for a sector? What is the problem with the forest management sector? What are the options under debate at present in the international negotiations? Annex 11:Actions and technologies for Energy efficiency

106 12. Annex 12: Impacts of the Appropriate global action scenario on selected MEM participants Annex 13:Appropriate Mitigation action by Developing Countries Annex 14: Sectoral approaches Annex 15: Technology cooperation Annex 16: Addressing the challenges of deforestation and forest degradation to tackle climate change and biodiversity loss Annex 17: The gradual development of a global carbon market Domestic cap and trade systems the core of the emerging global carbon market Complementary (UN-based) offsetting mechanisms the first step for developing countries to participate in the global carbon market Annex 18: Sectors and sources Annex 19: Emissions from international aviation and maritime transport International aviation emissions International maritime emissions Emissions from international aviation and maritime transport: institutional architecture to address these sectors Annex 20: F-gases Annex 21: Monitoring, reporting, verification Annex 22: Institutional architecture to ensure appropriate action on adaptation Mainstreaming Addressing vulnerability Facilitating assistance to tackle barriers to implementation Incentive mechanisms Technology for adaptation Scaling-up of predictable financial flows Conclusions Catalytic role of the UNFCCC Monitoring and review effectiveness of measures Annex 23: Option for meeting urgent and immediate climate-related needs: the Global Climate Financing Mechanism Annex 24: Compliance and enforcement List of tables: 103

107 Table 1 Key statistics Annex I parties Table 2 Key statistics MEM participants other than G Table 3 Key statistics OPEC (excl. MEM members) Table 4 GHG Baseline emissions staff working document compared to other baseline projections (excluding LULUCF) Table 5 Objectives and policies set unilaterally by developed countries Table 6 Target for developed countries, using 4 indicators Table 7 Overview of policy tools for developing countries Table 8 Policies undertaken and objectives set by selected developing countries Table 9 Annual costs related to the GCFM List of figures: Figure 1 Observed change in global mean temperature (left) and 2007 surface temperature anomaly Figure 2 Change in melting area of the Greenland ice sheet Figure 3 Area of Minimum Arctic sea ice Figure 4 Selected global impacts from warming associated with various reductions in global greenhouse gas emissions Figure 5 Comparison of legislative climate change targets under discussion in the US congress Figure 6 South Africa s vision on climate change: GHG emission reductions and limits Figure 7 Distribution according to each of the four criteria Figure 8 Total target according to the combination of the four criteria Figure 9 Final Energy Consumption, World Figure 10 Sectoral Final Energy Savings compared to Baseline Figure 11 Emissions, excluding agriculture and LULUCF, in baseline and the Appropriate global action scenario for selected MEM participants Figure 12 Emissions reductions per sector compared to baseline in the Appropriate global action scenario for selected MEM participants Figure 13 Power Generation by Fuel type in the Appropriate global action scenario for selected MEM participants

108 Figure 14 Sectoral Final Energy Savings compared to Baseline in the Appropriate global action scenario for selected MEM participants Figure 15 Contribution of different technologies to reduce CO2 emissions in the Appropriate global action scenario for selected MEM participants Figure 16 Annual Power Generation Investments in the baseline and in the Appropriate global action scenario for selected MEM participants Figure 17 Changes in Power generation mix in the baseline and in the Appropriate global action scenario for selected MEM participants Figure 18 Additional, new capacity in Power generation compared to 2000 in the baseline and in the Appropriate global action scenario for selected MEM participants Figure 19 Diversity in CO2 Intensity and Per Capita Income in selected developing countries (MEM) Figure 20 Diversity in Emission and Population trajectories 1990 to 2005 in selected developing countries (MEM) Figure 21 Major developing GHG emitters in key sectors and GDP per capita Figure 22 Abatement cost and potential for different mitigation technologies Figure 23 Energy R&D Investment Patterns in IEA Countries

109 8. ANNEX 1: A BRIEF DESCRIPTION OF MODELS USED IN THIS STAFF WORKING DOCUMT POLES: POLES is a long-term energy model for the world that represents 47 regions. It models demand and supply in the energy sector as well as greenhouse gas emissions in industrial sectors. The model used in this staff working document is an improved version of the POLES model used for the 2007 impact assessment accompanying the Communication "Limiting Global Climate Change to 2 degrees Celsius The way ahead for 2020 and beyond". The main novelties regard: a) the adoption of a detailed energy balance structure for the 47 countries/zones in the model, and no longer only for the most relevant ones. b) the introduction of a capital vintage approach in some energy transformation sectors, capturing more adequately technological improvements. c) the broadening of the technological portfolio in electricity generation to cover 26 technologies. d) the introduction of a detailed model for biomass and biofuels (1st and 2nd generation), including international trade of raw biomass and biofuels.. e) the coupling with IIASA LULUCF model. f) the reviewed emission coefficients according to the latest UNFCCC values. g) the treatment of non-co2 GHG gases according to the EDGAR reference. h) the GDP growth rates are also revised for Europe based on the basis of the latest available long term ECFIN forecast. i) the update of population growth data according to the latest UN forecast (version 6, medium variant) GEM-E3: The world version of the GEM-E3 model is an applied general equilibrium model, covering the interactions between economy, energy system and environment for 18 World Regions. The GEM-E3 model integrates micro-economic behaviour into a macro-economic framework and allows the assessment of medium to long-term implications for policies. The output of GEM-E3 includes projections of input-output tables, employment, capital flows, government revenues, household consumption, energy use, and atmospheric emissions. The model allows for the evaluation of the welfare and distributional effects of various environmental policy scenarios, including different burden sharing scenarios, environmental instruments and revenue recycling scenarios. Although the model is global, the output is sectorally and geographically disaggregated. 106

110 The model distinguishes between eight categories of government revenues, including indirect taxes, environmental taxes, direct taxes, value added taxes, production subsidies, social security contributions, import duties, and foreign transfers. The model evaluates the emissions of carbon dioxide (CO2), other GHG (e.g. CH4), and there is a possible extension for a number of other air pollutants (NOx, SO2, VOC, NH3, and PM10). There are three mechanisms for emission reductions: (i) substitution between fuels and between energetic and non-energetic inputs, (ii) emission reduction due to less production and consumption, and (iii) purchasing abatement equipment. The direct emissions and the potential for mitigation from agriculture were estimated using the land use change model from the integrated assessment model IMAGE of the Netherlands Environmental Assessment Agency. IMAGE: The Integrated Model to Assess the Global Environment (IMAGE version 2.4) is an integrated assessment model framework that explores the long term dynamics of global change as a function of drivers such as demographic and economic development, and developments in the energy and agricultural system (Bouwman et al. 2006). Within IMAGE, energy scenarios are developed using the energy model TIMER (Van Vuuren et al. 2006b). The climate policy model FAIR (den Elzen & Lucas 2005) is used to calculate global emission pathways that lead to a stabilization of the atmospheric greenhouse gas concentration. The developments in the energy system and in agricultural demand and production are described on the scale of 24 or 26 world regions, respectively. Environmental parameters are simulated at a 0.5 by 0.5 degree resolution by the ecosystem, crop and landuse models of IMAGE. Greenhouse gas emissions from energy and industry, land use, landuse change, crop and livestock production systems and natural ecosystems are computed largely on the basis of guidelines of the Intergovernmental Panel on Climate Change (IPCC 2006). IMAGE also describes the biosphere-atmosphere exchange of carbon dioxide (CO2), and feedbacks of climate and atmospheric CO2. Global mean temperature change is first calculated by the simple Atmosphere-Ocean model MAGICC model (Wigley & Raper 1992, Hulme et al. 2000), and subsequently downscaled via a pattern-scaling method (Schlesinger et al. 2000) to project climate change at the 0.5 by 0.5 degree resolution. G4M: The model is based mainly on a global afforestation model and calculates the net present value of forestry compared to the net present value of agriculture with equation. The main drivers for the net present value of forestry are income from carbon sequestration, wood increments (timber sales), rotation period length, discount rates, planting costs and wood prices. Main drivers for the net present value of agriculture on current forest land are population density, agricultural suitability and risk adjusted discount rates. These two values are compared against each other and deforestation is subsequently predicted to occur when the agricultural value exceeds the forest value by a certain margin. If deforestation occurs the speed of deforestation is constrained. The speed of deforestation is a function of sub-grid (0.5 x 0.5 ) forest share, agricultural suitability, population density and economic wealth of the country. GLOBIOM: 107

111 GLOBIOM (Global Biomass Optimization Model) is a global partial equilibrium static model integrating the agricultural, forestry, and bio-energy sectors. Within the agricultural sector about 20 major crops and the pertinent management alternatives are represented. The livestock sector is so far represented through an aggregate commodity animal calories. Within the forestry sector, it is distinguished mainly between traditional forests and fast growing forest plantations. Both crop yields and mean annual forest increments are estimated for the different management strategies by means of biophysical models, like EPIC, or through downscaling of country level information, on the level of simulation units. The latter are defined as intersection of different soil, slope and altitude classes, with a 0.5 grid, and with the country boundaries. Finally, three bio-energy production pathways are taken into account: (1) biofuels based on conventional feedstocks (sugar cane, maize, soybeans and rapeseed), (2) biofuels based on woody feedstock, and (3) heat and power generated by direct combustion of woody biomass. The equilibrium solution is found in the model through maximization of the market surplus under technological and resource constraints. Prices and international trade flows are endogenously computed for 27 world regions. TM5: The TM5 model is an off-line global transport chemistry model (Krol et al. 2005) that uses meteorological fields, including large-scale and convective precipitation and cloud data, from the European Centre for Medium Range Weather Forecast (ECMWF). The standard version of TM5 employs 25 vertical layers which are derived from the 60 layers of the operational ECMWF model. The model resolution can be chosen flexibly. For this work high resolution 1ºx1º zoom regions are utilized over the main centres of pollution North America, Europe, India and China. The spatial resolution for most of the remaining Northern Hemisphere is 3ºx2º, where as a resolution of 6ºx4º in the remaining less polluted regions such as the Southern Hemisphere is used. Natural emissions of gases and aerosol (precursors) are taken from recommendations by GEIA, and AEROCOM. Anthropogenic emissions were taken from the EDGAR/POLES emissions. Concentrations of ozone and PM were than translated into physical damage using population data and dose-response functions from the literature. GAINS Europe - GAINS Asia: GAINS is an extension of IIASA s RAINS (Regional Air Pollution Information and Simulation) model. It explores synergies and trade-offs between the control of local and regional air pollution and the mitigation of global greenhouse gas emissions. The GAINS (Greenhouse Gas and Air Pollution Interactions and Synergies) model assists in the search for pollution control strategies that maximize benefits across all scales. The European implementation of the GAINS model has been released in December It covers 43 countries in Europe (including the European part of Russia. The new GAINS model incorporates the latest version of the RAINS-Europe model as it has been prepared for the 2007 revision of the National Emissions Ceiling directive. GAINS combines it with estimates of emissions, mitigation potentials and costs for the six greenhouse gases included in the Kyoto protocol, fully compatible with the methodology applied for the conventional air pollutants. 108

112 The GAINS-Asia project integrates policy-relevant information from several models 77. It includes a reduced-form representations of these models and allows to combine functional relationships at the meta-level for the newly developed GAINS-Asia policy assessment framework. The GAINS-Asia tool allows the interactive assessment of the cost-effectiveness and benefits for a wide range of technical and market-based policy options. It can assess combinations of policies aimed at reducing long-range and hemispheric air pollution alongside greenhouse gas emissions in order to optimize overall benefits in the medium- and long-term. 77 BernCC carbon cycle model, MESSAGE global energy scenario model, RAINS air pollution integrated assessment model, GAINS Model, TM5 hemispheric atmospheric chemistry and transport model, MARKAL and IPAC energy models for India and China respectively 109

113 9. ANNEX 2: RESULTS OF THE STAKEHOLDER CONFERCE Overview of specific issues raised during the stakeholder conference on 15 October 2008: There is a need for a clear vision for tomorrow's low carbon world. This work should be based on latest scientific findings. Domestic cap-and-trade systems for greenhouse gas emissions are important tool to deliver emission reductions in developed countries. Complementary measures such as standards, regulations and taxes could be used in sectors that cannot be covered by cap-and-trade schemes. Comparability of emission reduction efforts by developed countries is an important element of the post-2012 agreement. There are various ways to measure it, however, the criteria of assessing comparability should be forward looking (historic responsibility should not be the only factor). For scaling up and sharing financial support to developing countries both public and private financing is needed. Institution building in developing countries is the first priority. In order to ensure the most effective use of financing, conditions for developing country access to financing in terms of governance would need to be elaborated. While developed countries should continue to take the lead in committing to ambitious emission reduction targets, developing countries have to be part of the solution according to the principle of common but differentiated responsibilities and capacities. One of the central issues to support general engagement in mitigation is to find the appropriate way to provide sufficient incentives for developing countries to act ambitiously. The great diversity of situations, vulnerabilities and mitigation potentials among non- Annex I countries has to be recognized and taken into account in international response. Further differentiation among non-annex I countries for emission reduction actions should be explored. Mitigation actions by developing countries depend largely on support by developed countries. In general, developing countries should focus on actions and policies that provide co-benefits. For instance, sustainable development and climate change policies like energy efficiency have positive impact on health (reduced urban air pollution). Moreover, they enable to reduce energy costs and increase energy independence like energy efficiency and developing renewable energies. Sectoral approaches in non-annex 1 countries were considered a possible promising track to be explored. However, a number of critical issues must be addressed such as benchmarks and possible perverse effects (that may reduce mitigation potential). Also, more reflection is needed on whether sectoral approaches could provide any solution to carbon leakage. However, it was recognized that sectoral approaches is not a substitute for cap and trade systems. Technology cooperation should address primarily sectors with greatest emission reduction potential, support joint ventures among highly competitive sectors and best practices. There is a need to reflect if some technologies could be considered as a public good, however it mentioned that importance of IPR in technology transfer might be overstated. The idea of guaranteed support for some technologies (technological leapfrog) and demonstration projects was underlined. 110

114 Regarding financial support, it was noted that relying on CDM is largely insufficient. The uneven distribution of CDM projects is quite revealing the limits of this mechanism. An efficient financial architecture will require a combination of public and private financing. Adaptation is already a reality for an increasing number of countries, especially for developing countries which will bear the brunt of climate impacts. Even with a global temperature rise limited to 2 degrees, adaptation will be a huge burden. Adaptation and mitigation are of equal importance in the convention and adaptation can be a deal maker or breaker for the negotiations on a post 2012 regime. In addition, adaptation and mitigation are closely interlinked Considering free standing adaptation activities versus mainstreaming adaptation in national planning and strategies, participants recognised a need to be pragmatic as adaptation is very context-specific issue. Free standing activities have a direct appeal to the population, but mainstreaming will be required to achieve the scale of adaptation action needed, integrated approach and to prevent short term solutions. Mainstreaming actions will need to be monitored, verified and reported. The additional cost of mainstreaming adaptation needs to be evaluated and taken into account. Regarding technological cooperation and capacity building, learning by doing and building on the National Adaptation Programmes of Action (NAPAs) and their implementation is the first step in right direction. There is important role of private sector in sharing knowhow in risk sharing, management and transfer. 111

115 10. ANNEX 3: THE SCICE OF CLIMATE CHANGE, UPDATE Recent scientific findings on Climate Change The most recent comprehensive assessments by the Intergovernmental Panel on Climate Change, the IPCC 4 th Assessment report 78 published during 2007 presents the most complete and authoritative assessment of the status of climate science to date. It thus provides an authoritative scientific basis for the EU and the international climate policy and highlights the urgency to act. The IPCC AR4 Synthesis report ( summarises the findings from the three IPCC Working groups. The IPCC highlighted inter-alia the following as robust findings: The warming of the climate system is unequivocal, as is now evident from observations As a result of anthropogenic emissions, atmospheric concentrations of CO2 now far exceed the natural range over the last 650,000 years. Many natural systems, on all continents and in some oceans, are being affected by regional climate changes. Anticipated increases in the frequency and intensity of some extreme weather events are expected to lead to larger impacts than previously estimated. Impacts are very likely to increase due to increased frequencies and intensities of some extreme weather events. More extensive adaptation is required to reduce vulnerability to climate change. Making development more sustainable by changing development paths can make a major contribution to climate change mitigation and adaptation and to reducing vulnerability. Unmitigated climate change would, in the long term, be likely to exceed the capacity of natural, managed and human systems to adapt. A wide range of mitigation options is currently available or projected to be available by 2030 in all sectors. Many impacts can be reduced, delayed or avoided by mitigation. Mitigation efforts and investments over the next two to three decades will have a large impact on opportunities to achieve lower stabilisation levels. 78 IPCC AR4 WG1: IPCC AR4 WG2: IPCC AR4 WG3: wg3.htm ; 112

116 Science on climate change has made further progress since finalization of the IPCC WG1 AR4 79. As a result, a number of risks could be larger than assessed in the AR4, in particular the risk of large sea-level rise already in the current century and the risks from increases in extreme weather events. This chapter highlights a selection of findings published since the finalisation of the IPCC AR4 80.Improved data and analyses techniques have improved understanding of observed climate change. These findings add to the already extensive evidence of the anthropogenic signal on all aspects of current climate Observed climate change The IPCC AR4 published in 2007 stated that 11 out of the 12 warmest years on record (i.e., since 1850) had occurred during the last 12 years. According to the NASA Goddard Institute for Space Studies (GISS), 2007 was another exceptionally warm year that tied with 1998 for Earth's second warmest year on record. The eight warmest years have all occurred since [GISS, 2008] Figure 16 Observed change in global mean temperature (left) and 2007 surface temperature anomaly Source: NASA GISS, 2008 Comparison of the most recent observed climate trends for carbon dioxide concentration, global-mean surface temperature and sea level with the projections in the IPCC Third Assessment Report (TAR) indicate that previous projections are relatively conservative. The observed increase in global mean surface temperature since 1990 is 0.33 C; this is in the upper part of the range given by the IPCC projections. Sea level data from tide gauges and satellite data show a linear trend of 3.3 mm/yr, which is faster than the best-estimate projections in the TAR of 2 mm/yr. [Rahmstorf et al., 2007] Sea surface temperatures in the North Sea and the Baltic Sea show an unprecedented warming trend since the mid-1980s. Temperatures in summer since 1985 have increased at nearly triple the global warming rate and summer temperatures have risen two to five times faster than those in other seasons. Therefore, globally averaged warming is likely to underestimate the This chapter on recent findings does by no means aim to supplant the body of knowledge presented in the IPCC AR4. It only provides a selection of publications with updates of scientific developments in these areas occurred since the IPCC AR4 publication. Due to it's thorough and comprehensive review procedures the IPCC AR4 could assess only scientific literature (for physical climate science, impacts and adaptation) published by mid of 2006 to early 2007, depending on the working group; for details see: 113

117 magnitude of climate change in the North and Baltic Sea and the resulting impacts. [Mackenzie & Schiedek, 2007] A new study analysing satellite observations suggests that precipitation and total atmospheric water have increased at about the same rate over the past two decades, while climate models suggest that precipitation would increase much more slowly. If this observed trend continues, climate change will result in substantially more rain than currently predicted by climate models. [Wentz et al., 2007] Scientists from the UK Met Office found that greenhouse gas emissions have led to a rapidly increasing risk of extremely hot summers in the Northern hemisphere, such as those experienced in large parts of Europe in 2003 and Hot summers which were infrequent years ago are now much more common and the current sharp rise in incidence of hot summers is likely to continue. [Jones et al., 2008] The human influence on climate has for the first time been detected in precipitation at global and regional scales. A recent study finds that anthropogenic forcing contributed significantly to observed increases in precipitation in the Northern Hemisphere mid-latitudes, drying in the Northern Hemisphere subtropics and tropics, and moistening in the Southern Hemisphere subtropics and deep tropics. These changes cannot be explained by internal climate variability or natural forcing. [Zhang et al., 2007] New analyses combining climate model simulations with satellite data and surface measurements have also shown that the atmospheric moisture content over land and over oceans has increased substantially in recent decades, and that the increase is primarily due to greenhouse gas emissions. [Santer et al., 2007, Willett et al., 2007] Some previously unclear findings could be solved recently as a team of British and US scientists was able to explain an abrupt drop of in the temperature record (summer 1945). This climate large shift in the 20th century that climate models were unable to explain is actually a mirage and was a result of uncorrected instruments. [Thompson et al., 2008] A new analysis of data for the upper troposphere the first time shows a warming trend, which agrees well with predictions from global climate models. The consistency between model simulations and inferred data increases confidence in model-based climate projections. [Allen & Sherwood, 2008]. 1. Detection and attribution of recent climate change Improved data and analyses techniques have improved understanding of observed climate change. These findings add to the already extensive evidence of the anthropogenic signal on all aspects of current climate. Scientists from the UK Met Office found that anthropogenic greenhouse gas emissions have led to a rapidly increasing risk of extremely hot summers in the Northern hemisphere, such as those experienced in large parts of Europe in 2003 and Hot summers which were infrequent years ago are now much more common and the current sharp rise in incidence of hot summers is likely to continue. [Jones et al., 2008] Another study was able to detect and separate the effect of greenhouse gases from that of sulfate aerosols on the observed warming trend since 1950 in nine world regions, including southern Europe. [Zhang et al., 2006] 114

118 The human influence on climate has for the first time been detected in precipitation at global and regional scales. A recent study finds that anthropogenic forcing contributed significantly to observed increases in precipitation in the Northern Hemisphere mid-latitudes, drying in the Northern Hemisphere subtropics and tropics, and moistening in the Southern Hemisphere subtropics and deep tropics. These changes cannot be explained by internal climate variability or natural forcing. [Zhang et al., 2007] New analyses combining climate model simulations with satellite data and surface measurements have also shown that the atmospheric moisture content over land and over oceans has increased substantially in recent decades, and that the increase is primarily due to anthropogenic greenhouse gas emissions. [Santer et al., 2007, Willett et al., 2007]. Some previously unclear findings could be solved recently. A team of British and US scientists was able to explain an abrupt drop in the temperature record in summer This largest shift in the 20th century record that climate models were unable to explain is actually a mirage and was a result of uncorrected measurements of sea-surface temperature. [Thompson et al., 2008] A new analysis of data for the upper troposphere the first time shows a warming trend, which agrees well with predictions from global climate models. The consistency between model simulations and inferred data increases confidence in model-based climate projections. [Allen & Sherwood, 2008] 2. Changes in ice sheets, glaciers and sea level Many new studies have investigated prehistorical and recent changes in glaciers, large ice sheets and sea level in order to improve projections of future sea-level rise. The average annual melting rate of mountain glaciers has doubled after 2000, in comparison with the already accelerated melting rates observed in the two decades before. [UNEP/WGMS, 2008] Figure 17 Change in melting area of the Greenland ice sheet Source: [Mote, 2007] Melting of the Greenland ice sheet in summer 2007 established a new record, which was 60% above the previous high in The most recent 11 summers have all experienced melting greater than the average of the available time series (1973 to 2007). [Mote, 2007]The current and future contribution to sea level rise from Antarctica has been subject to large uncertainties. A recent study used extensive satellite observations to estimate the total Antarctic ice flux into the ocean from 1992 to The Antarctic ice sheet as a whole was 115

119 found to be losing mass, mostly in West Antarctica, and the mass loss increased by 75% in 10 years. [Rignot et al., 2008] Other studies have also found that changes in the Greenland and the West Antarctic ice sheets are accelerating. [Shepherd & Wingham, 2007, Velicogna & Wahr, 2006] A team of US and Canadian scientists found that between 9000 and 8500 years ago, melting of the ice sheet on Greenland contributed around 6.6 m of sea level rise at about 1.3 m per century. Other scientists have found that the average rate of sea-level rise during the last interglacial period, around 120,000 years ago, was about 1.6 m per century. The two groups suggest that climatic conditions (in terms of the increase in summer surface air temperatures and global mean temperature, respectively) in these periods were comparable to those projected for the 21st century under business-as-usual emission scenarios. [Carlson et al., 2008, Rohling et al., 2008] A team of US scientists has combined climate modelling and paleoclimatic data to assess the potential for large increases in sea level by the end of the 21st century. Their maximum and best estimates of total sea-level rise by 2100 are 2 m and 0.8 m, respectively. [Pfeffer et al., 2008] Also the German institute PIK [Rahmstorf, 2007, Horton et al., 2008] has developed a model of sea-level rise, which suggests figures that are substantially higher than the estimates in the IPCC AR4, which did not include ice-sheet dynamics. Thus, the risk of large sea-level rise in the 21st century is now estimated to be much greater than in the AR4. According to data from the United States National Snow and Ice Data Center, Arctic sea ice area reached a new all-time minimum on 14 September 2007 at 3.6 Mio km2, which is 27% lower than the previous record low reached in The decline in ice cover has accelerated substantially. [Comiso et al., 2008] The observed sea ice decline is about three times faster than the model mean, which suggests that melting of Arctic sea ice is likely to happen much faster than projected by current climate models. [Stroeve et al., 2007, Arzel et al., 2006]. Figure 18 Area of Minimum Arctic sea ice 116

120 Source: Spreen, G., L. Kaleschke, and G. Heygster (2008), Sea ice remote sensing using AMSR-E 89-GHz channels, J. Geophys. Res., 113, C02S03, doi: /2005jc " 3. Carbon cycle feedbacks Inclusion of geological and ecosystem feedbacks in warming projections could increase global warming over the next century due to human emissions of greenhouse gases by an additional 15-78%. [Scheffer et al., 2006, Torn & Harte, 2006] New measurements of methane emissions from Siberian thaw lakes revealed that these emissions are already five times greater than previous estimates. Hence, future methane releases from decaying Arctic permafrost may create a new positive climate feedback that has not yet been fully analysed. [Walter et al., 2006] 4. Changes in extreme events Knowledge on recent and future changes in extreme events has improved significantly, due to better models and improved analysis techniques. New research reveals that since 1950 extremely warm temperatures have increased by between 1 and 3 C, which is much larger than the change in average temperature. [Brown et al., 2008] A recent study by German scientists projects that indices of extreme precipitation will also increase significantly in most regions, especially those that are presently experiencing significant precipitation. Conversely those regions which are presently dry are projected to become drier because of longer dry 117

121 spells. In conclusion, the difference between humid and arid regions in terms of extreme events is projected to become even greater under a changing climate. [Sillmann & Roeckner, 2008] The European PRUDCE project has investigated changes in climate extremes during the 21st century. The scientists found that the frequency, intensity and duration of heat waves will substantially increase over Europe due to increases in average temperature as well as temperature variability. Heavy winter precipitation will increase in central and northern Europe and decrease in the south; heavy summer precipitation increases in north-eastern Europe and decreases in the south. Mediterranean droughts start earlier in the year and last longer. The models show stronger winter storms over the North Sea, which cause an increased risk of storm surges along coastal regions of Holland, Germany and Denmark, in particular. [Beniston et al., 2007] 5. Risk of abrupt climate change New findings based palaeoclimate records underpin the concept of risks of abrupt climate change. [Dakos et al., 2008] and [Brauer et al., 2008] Sensitive mechanisms have been identified with Arctic summer ice and the Greenland ice sheet, where the thresholds for an abrupt change of the earth system was estimated in a range from 1 C to 2.5 C above preindustrial level Impacts of Climate Change Also the projections of climate impacts and understanding of adaptation have improved significantly since finalization of the IPCC WG2 AR4 in Many recent studies conclude that the consideration of current climate variability and its potential changes in climate impact assessments increases the estimated adverse impacts of climate change on agriculture, natural ecosystems, coastal regions, and human health. Furthermore, evidence increases that ocean acidification presents a very substantial risk from anthropogenic greenhouse gas emissions for marine ecosystems, which is independent of climatic changes. Leading scientists [Parry et al., 2008] have compiled information from the IPCC AR4 on climate impacts for different mitigation levels. They project (see figure below) major global impacts even for a 50% reduction of global emissions by 2050 compared to 1990 and that the extent of impacts increases significantly for less stringent emission cuts. These results confirm that both adaptation and mitigation are essential. Figure 19 Selected global impacts from warming associated with various reductions in global greenhouse gas emissions. 118

122 Vertical lines indicate likely impacts of the median warming expected to result from indicated emissions scenarios (percentage cuts are from 1990 levels); shaded columns show 5 to 95% uncertainty ranges for impacts of a 50% cut. Source: [Parry et al., 2008], adapted from the IPCC WG2 AR4 Technical Summary 1. Climate impacts on key ecosystems Coral reefs are most important biodiversity hotspots, and they provide significant services to society, including for coastal protection and coastal tourism. A recent review study shows the crucial role of ocean acidification in the destruction of coral reefs during previous mass extinction events. The study suggests that ocean acidification has the potential to trigger a further mass extinction. [Veron, 2008] Another study finds that atmospheric carbon dioxide concentration exceeding 500 ppm and a global temperature rise of more than 2 C significantly exceeds conditions of at least the past 420,000 years during which most extant marine organisms evolved. [Hoegh-Guldberg et al., 2007] Many corals rely on their symbiotic algae for survival. Without stringent mitigation measures coral reefs will undergo a substantial reduction in biodiversity during the 21st century because most coral species are unable to adapt. [Goulet, 2006] 119

123 Recent research has underlined the risks to the Amazon rainforest from climate change. One study projects a 70% reduction in the extent of the Amazon rain forest by the end of the 21st century for a high emissions scenario. Rain forest vegetation are projected to disappear entirely from Bolivia, Paraguay and Argentina and most of Brazil and Peru. While these dramatic results are dependent on the global climate model applied, they add to the previous evidence that most of the Amazon rainforest may be at risk from climate change. [Cook & Vizy, 2008] Another study suggests that aerosol forcing has delayed greenhouse gas-induced reductions in Amazonian rainfall but is unlikely to do so for much longer. Model simulations suggest a substantial increase in droughts in western Amazonia, such as the one that occurred in 2005, under conditions of increased greenhouse gas concentrations and reduced aerosol loading in the Northern Hemisphere. A 2005-like year is an approximately 1-in-20-yr event currently but is projected to become a 1-in-2-yr event by 2025 (at about 450 ppm CO2) and a 9-in-10-yr event by 2060 (at around 610 ppm CO2). [Cox et al., 2008] The impact of climate change on terrestrial organisms is often predicted to increase with latitude, in parallel with the rate of warming. Recent research suggests that also warming in the tropics, although relatively small in magnitude, may have most deleterious consequences because most tropical animals are relatively sensitive to temperature change and are currently living very close to their optimal temperature. The study suggests high extinction risks from global warming also in the tropics, where biological diversity is also greatest. [Deutsch et al., 2008] A detailed analysis of all 400 large wildfires in the western USA over a 34 year period has found that large wildfire activity increased suddenly and markedly in the mid-1980s, with higher large-wildfire frequency, longer wildfire durations, and longer wildfire seasons. Earlier snowmelt and higher summer temperatures are critical factors in this increase; years with early snowmelt had five times as many wildfires as years with late snowmelt. The marked increase in wildfire activity happened in spite of increased expenditure in fire suppression, pointing to the limited success in adaptation. Projected temperature increases until the 2050s alone are projected to increase wildfire activity further threefold. [Westerling et al., 2006] In a comprehensive study of climate-induced changes in key ecosystem processes across the globe during the 21st century, a global vegetation model was used with multiple scenarios from 16 climate models. The model results suggest that with >3 C of warming, the estimated land sink of carbon may convert to a source, suggesting a positive climate feedback. [Scholze et al., 2006]. 2. Climate impacts on coastal regions Sea-level rise is expected to effect coastal properties in two-ways: inundation of low-lying property and episodic flooding of properties at an elevation. A recent detailed study estimated the cost from episodic storm events to be much greater (up to 250 times) than the costs from inundation alone. While the specific numbers represent the particular circumstances of the study area, the results strongly suggest the total cost of sea-level rise could be underestimated if the costs of episodic flooding are not accounted for. [Michael, 2007]. 3. Climate impacts on human health Recent research has shown that the death toll of the unprecedented 2003 European summer heat wave was much larger than previously estimated. Based on an analysis of daily mortality numbers at the regional level from 16 European countries this study finds that more than 120

124 70,000 additional deaths occurred in Europe during the record heat wave in summer [Robine et al., 2008] The new results show that even wealthy countries can be vulnerable to climate change, in particular when it involves extreme climatic conditions never experienced before in a region. The initial results of the FP6 research project ED, (Emerging diseases in a changing European environment - involving 24 countries from Europe, the Middle East and Africa are suggesting that climate change, among other factors, could alter the distribution of tick-borne and rodent-borne diseases. ) Adaptation to Climate Change Several recent studies have highlighted challenges for future adaptation. They highlight that adaptation to climate change requires being a cross-cutting issue to which all relevant government departments must sign up. Adaptation to climate change will be particularly difficult in countries where institutional networks between governments departments and relevant non-governmental adaptation actors are weak. [Koch et al., 2007] and [Patt & Schröter, 2008] 1. Built Environment Recent studies highlight the cost of adaptation in the built environment. The additional costs of making new infrastructure and buildings resilient to climatic changes, in OECD countries, could range from $15 - $150 billion per year (depending on temperature change). One of the main components of this cost can be attributed to protecting key infrastructure from storm surge and flood damage [Stern 2007]. Land use planning, construction codes and performance standards could provide mechanisms where the private markets and simple measures can yield significant benefits or cost avoidances [Stern 2007]. The potential of the green infrastructure to moderate climate change impacts in towns and cities has been shown to be significant. Green infrastructure can moderate summer temperatures and reduce surface runoff at the local level, if coupled with storage to take account of expected increase in winter precipitation [Gill et al, 2007] and [Gill et al, 2008]. There is a case for adopting the precautionary principle within the construction industry, together with wider adoption of market mechanisms, and stronger application of regulatory safety nets where market mechanisms are ineffectual. [Shipworth 2007]. 2. Energy Infrastructure Climate changes will have significant impacts on the power sector (in particular where depending on water for hydropower and cooling). Where regions are dependent on hydropower as a source of electricity, recent findings suggest that a different portfolio of generating sources would be preferable to protect the electricity system from the effects of climate change [Markoff et al 2007]. Also the temporal and spatial distribution of electricity consumption is forecasted to change, depending on the region in question; this change is likely to have significant effects on the peak load capacity of the electricity systems. Energy infrastructure, especially for electrical distribution, is likely to need upgrading sooner than expected; adaptation measures should be taken in sectors which are highly dependent on the electricity supply [Jollands et al, 2006]. A study projects climate change could add 10 20% to costs to Alaska s public infrastructure, including the energy infrastructure, by Additional costs are projected to be relatively higher in the short run (2030 vs 2080), because of less time to adapt infrastructure to changing conditions [Larsen et al 2008]. For the US, a study suggests climate impacts on the energy 121

125 balance. Increased cooling will require more energy than what is saved on avoided heating, resulting in a net increase in energy consumption as temperatures rise (assuming no passive ventilation or cooling). If the US warms by 2.5 C (compared to the baseline) energy expenditures are predicted to increase by $26 billion annually, while a 5C temperature increase by 2100 would cause an increase of $57 billion [Mansur et al 2007]. 3. Risk management One of the barriers to effective adaptation is uncertainty; insurance markets need high quality information in order to send out the right signals to support adaptation, especially with regards to costs, benefits and uncertainty. Insurance markets can send out appropriate price signals, corresponding to concise risks and encourage adaptation, especially to reduce flood risk. However, if the impacts of climate change increase in frequency and extent, insurance mechanisms may not be able to cope with the additional risk. When the risks reach very high levels, costs may become too large for the industry to bear and these mechanisms might fail. Governments should put in place guidelines and frameworks for private stakeholders to stimulate adaptation [Stern 2007]. Measures that mitigate and adapt are doubly beneficial. Insurers can serve as proactive risk managers and promote practices that simultaneously contribute to loss-prevention and enhance sustainability. [Evan Mills 2007]. At the global level, the economic cost of weather damage could exceed 1 trillion USD in a single year by A new study is calling for approaches that integrate adaptation, disaster management and sustainable economic development [Dlugolecki, 2008]. The insurance industry can promote efforts to adapt to the impacts of weather hazards through the promotion of three measures: disseminating information about reducing the vulnerability of properties; offering financial incentives to invest in reducing the impacts of extreme weather; and establishing partnerships with policy-makers. [Ward et al, 2008, Botzen et al, 2008]. 122

126 11. ANNEX 4: SOME KEY STATISTICS FOR THE G8 AND KEY MEM PARTICIPANTS Table 27 Key statistics Annex I parties Total GHG excl. LULUCF and Bunker Fuels Ratified Kyoto GDP/cap 2005 a Ton CO 2 / Cap 2005 b CO 2 intensity energy mix 2005 c CO 2 intensity GDP 2005 d Change e Kyoto Target Distance from target 2005 EU27 31/05/ % - EU15 31/05/ % -8% -6% Australia 12/12/ % 8% -19% Canada 17/12/ % -6% -31% Iceland 23/05/ % 10% -1% Japan 04/06/ % -6% -13% N. Zealand 19/12/ % 0% -25% Norway 30/05/ % 1% -8% Russia 18/11/ % 0% 29% Switzerland 16/03/ % -8% -10% Turkey % - - Ukraine 12/04/ % 0% 55% USA % -7% -23% a 1000 per capita, Data for 2005, 1000 per capita, Adapted from World Bank and Eurostat b Data from IEA2007 c ton CO 2 /terajoule, Data from IEA2007 d kg CO 2 /US$ using 2000 prices and exchange, Data from IEA2007 e Data database UNFCCC website 123

127 Table 28 Key statistics MEM participants other than G8 Total CO 2 excl. LULUCF and Bunker Fuels GDP/cap 2005 a Ton CO2/ Cap 2005 b CO2 intensity energy mix 2005 c CO2 intensity GDP 2005 d CO e CO e Change CO e Brazil % China % India % Indonesia % Mexico, % South Africa % South Korea % a. Data for 2005, per capita, Adapted from World Bank and Eurostat b.data from IEA2007 c ton CO 2 /terajoule, Data from IEA2007 d kg CO 2 /US$ using 2000 prices and exchange, Data from IEA2007 e Date from IEA

128 12. ANNEX 5:VIEWS OF THE 3RD PARTIES CONCERNING CLIMATE CHANGE POLICIES The role of the G8 and the Major Economies meeting In order to facilitate the negotiations under the UNFCCC, several other negotiating platforms have contributed to the climate change negotiations. Most notably the G8 and the Major Economies Meetings 81 (MEM) have discussed climate change in 2007/08. These meetings have proven useful to exchange views and improve understanding among major economies; this should contribute to reaching a global and comprehensive agreement in 2009 under the UNFCCC. This resulted for instance in a clear recognition that global action is necessary. Most notably the G8 Summit in Hokkaido, in July 2008, endorsed a clear reference to the need for a global long term reduction target and invited, inter alia, to consider and adopt in the UNFCCC negotiations, the goal of achieving at least 50% reduction of global emissions by 2050, without mentioning the base year against which this reduction needs to be measured. Also the MEM, who met back to back with the G8 recognised the need for a long term emission reduction goal but without a specific figure. In accordance with the principle of common but differentiated responsibilities and respective capabilities, it was affirmed that developed major economies would take on mid-term economy-wide quantitative targets (e.g. for 2020) while developing major economies would pursue national action on their emissions, supported and enabled by technology, financing and capacity-building, with a view to achieving a deviation from business as usual emissions. For a more detailed overview of some of the differences in key statistics between some of the parties that participate in the international negotiations, see 11. (see Table 27 Key statistics Annex I parties and Table 28 Key statistics MEM participants other than G8) Developed countries United States of America The US is part of Annex I under the UNFCCC and has an emission reduction target under Annex B of the Kyoto Protocol. The US has not ratified the Kyoto Protocol, following its rejection by the Bush Administration in March US GHG emissions from sources 82 have increased above 1990 levels to around 16% in Since 2001 US policies to tackle climate change have focussed on promoting research and technologies and on an overall intensity objective (reducing emissions per unit of GDP) to be achieved through voluntary policies. In promoting technology, the US administration has also pursued bilateral or multilateral frameworks such as the Asian Pacific Partnership on climate change. The US has not accepted binding emission reduction targets but has agreed to the Bali Action Plan under the UNFCCC in December 2007 that includes a reference to comparability of 81 The MEM was started by the US administration. The MEM brings together representatives of major economies that are responsible for around 80% of global CO2 emissions. It includes the members of the G8 plus China, India, Brazil, South Africa, Indonesia, Mexico, South Korea and Australia as well as the Presidency of the EU. The EU supports a successor to the MEM to be set up by the new US administration in early This refers to GHG emissions from sources but not emissions or absorption by Land Use, Land Use Change and Forestry. 125

129 mitigation commitments or actions by developed countries including quantified emission limitation and reduction objectives. President Bush s new policy announcement in April 2008 included an acknowledgement that the MEM should negotiate a long term goal for emission reduction but he set 2025 as the stabilisation date for US GHG emissions, thereby falling short of expectations. The US also signed up to the conclusions of the Hokkaido G8 summit that state that developed countries will implement ambitious economy-wide mid-term goals in order to achieve absolute emissions reductions In the US congress several bills are debated that would lead to a cap and trade system for US companies indicating that the US might be willing to accept some type of binding commitment. Most bills include a large set of emissions sources, including emissions from transport and heating of housing via and upstream trading system. One of the prominent bills under debate is the Boxer-Lieberman-Warner bill that would see emissions in 2020 be reduced to around 1990 levels. Figure 20 Comparison of legislative climate change targets under discussion in the US congress Source: Adapted from World Resources Institute, Although the new US administration is likely to engage much more constructively in the international negotiations, participation by all major emitters in a post-2012 agreement will remain key to enable the US to sign up. Both presidential candidates supported the establishment of federal cap and trade system. On 18 November 2008, President Elect Barack Obama, during a taped speech for the Bi-Partisan Governors Climate Summit, declared that he had the intention to establish strong annual targets that set us on a course to reduce emissions to their 1990 levels by 2020 and reduce them an additional 80% by EU-US bilateral cooperation on climate change is happening in the framework of the High Level Dialogue (HLD) on Climate Change, Energy Efficiency and Sustainable Development, which has been held twice since established by the 2006 EU-US Summit in Vienna. 126

130 Canada Canada is a Party to both the UNFCCC and its Kyoto Protocol. Although it has a 6% reduction target under the Protocol, its GHG emissions from sources were in % higher than in With frequent government changes and the absence of ambitious GHG reduction policies or large-scale investment in the CDM, it appears increasingly unlikely that Canada will be able to meet its Kyoto target. There have been attempts to introduce emission trading scheme based on intensity targets 83. Currently several Canadian states (British Columbia, Manitoba, Ontario, Qubec) are part of Western Climate Initiative, that created to identify, evaluate and implement collective and cooperative ways to reduce greenhouse gases in the region, focusing on a market-based cap-and-trade system. Canada is actively engaged in the post-2012 negotiations, sharing the EU s view that we need to reach an agreement on a comprehensive, global post-2012 agreement in 2009 but does not show the leadership expected from developed countries in reducing GHG emissions. Like the US, Canada is of the view that such agreement must ensure the participation of all major emitters. Australia The Australian government only recently ratified the Kyoto Protocol at the end of 2007, following the Labor Party s victory in the November 2007 elections. Australia s Kyoto target allows it to increase its emissions by 8%. Although Australia s greenhouse gas emissions from sources have increased by 27% in 2005 compared to 1990, it is expected to meet its target using its considerable potential for carbon sinks under the Protocol. Australia has announced a long-term goal of reducing Australia s greenhouse emissions by 60% by 2050 and is currently preparing to announce a mid-term goal. Garnaut Climate Change Review 84 recommends Australia to reduce its emissions by 10% until 2020 and 80% by 2050 from 2000 levels, provided that a binding international agreement designed to stabilise concentrations at the 550ppm CO2 equivalent. In case more ambitious international agreement is concluded aiming to reach 450ppm overshoot scenario, Australia's emission reduction share would be 25 % by 2020 and 90 % by 2050 compared to 2020 levels. In the absence of comprehensive global agreement at Copenhagen in 2009, the review recommends Australia to reduce emissions by 5% from 2000 levels by 2020, which is consistent with current government policy of a linear track to achieving 60% by The Australian Carbon Pollution Reduction Scheme has been released at the end of The Scheme will commence on 1 July 2010, has a broad coverage, and plans for the majority of permits to be auctioned, with free allowances for trade exposed industries based on yearly historical average emissions in the sector, and will have a price cap. Australia s mid term goal is to reduce emissions by 2020 to between 85% and 95% of 2000 levels: a target range for Australia-wide emissions reductions of between 5% and 15%. The 5% target is unconditional, whereas the 15% target represents the extent to which Australia will accept tighter targets in the context of a global agreement under which all major economies commit to substantially restrain emissions and advanced economies take on reductions comparable to Australia. While this notes a fairly modest level of ambition, Australia deems a 450 ppmv emissions path as in their genuine interest. New Zealand Regulatory Framework for Air Emissions (RFAE). Final Report, 30 September 2008,

131 Under the Kyoto Protocol, New Zealand is required to stabilise its greenhouse gas emissions at 1990 levels. In 2005 its emissions from sources were up by 25% compared to It recently adopted an almost economy-wide greenhouse gas emissions trading system that together with action in the forestry sector represent its two main avenues to meet its Kyoto target. The New Zealand ETS operates within the cap on emissions established by the Kyoto Protocol during its first commitment period ( ). There is no cap on the emissions that occur within New Zealand. However, domestic emissions that exceed New Zealand s allocation under the Kyoto Protocol must be matched by emission units bought internationally from within the Kyoto cap on emissions. The New Zealand ETS foresees to include gradually until 2013 all major sectors (stationary energy, transport, industrial processes, forestry, agriculture, and waste) and all greenhouse gases specified in the Kyoto Protocol. The forestry sector is planned as the first to enter the scheme, where overall 21 million NZUs 86 will be allocated during the first commitment period ( ). No free allocation is foreseen for transport, stationary energy and waste. New Zealand and the EU share the overall objective of a comprehensive, global climate agreement and the development of the global carbon market. New Zealand has however not defined its level of ambition for a post 2012 framework. Like Canada, Australia and the US, New Zealand is concerned about engaging large emitters in more immediate action to mitigate global greenhouse gas emissions. The new government has announced an upcoming reform of New Zealand's cap and trade system. Japan Under the Kyoto Protocol, Japan has a quantified reduction target of 6%. Japanese total GHG emissions had increased in 2005 by 6,9% compared to their level in 1990, thus requiring a reduction of 12,9% from 2005 levels to meet its Kyoto target. Japan intends to make use of sinks (LULUCF), and industry would also contribute through voluntary action. A voluntary emission trading system already exists and could be extended next year on a trial basis. But with no mandatory domestic emissions trading scheme or a carbon tax so far, Japan will recourse extensively to the Kyoto flexible mechanisms to meet its target. Japan's main objective in the context of the post-2012 climate negotiations is to ensure that China and India take adequate action to reduce their emissions, not only for environmental purposes but also because of competitiveness concerns. On May 24, 2007, Prime Minister Abe launched Cool Earth 2050 initiative in preparation of Japan's G8 presidency in It sets a global common goal of achieving a global reduction of GHG by half by Unlike the EU, the current levels of emissions would be taken as a basis, not 1990 levels as called for by the EU. Japan proposes to reach this long-term target through a mix of developing innovative technologies (including increased use of nuclear energy) and creating a societal change towards a "low carbon society". The Speech of Prime Minister Fukuda in Davos on 25 th January 2008 confirmed the focus of Japan for bottom-up reductions stemming from improvements in energy efficiency and development of new technologies, instead of the top- 86 New Zealand Unit (NZU) equals to 1 metric ton of CO2 equivalent. 128

132 down approach of fixing an overall ambition level for absolute emission reductions. PM Fukuda however indicated his preference for a nation-wide cap, i.e. one single numerical target for Japan. But a mid-term (2020) GHG emission reduction target is still unknown. The Japanese are the biggest proponents of sectoral approaches (SA). They propose two distinctive kinds of SA, one that would be used for target setting for developed economies, and the other ( cooperative SA") to enhance technology cooperation with developing countries. Japan suggests using a bottom-up sectoral approach to determine medium targets for individual countries. On a sector by sector basis, the emission reduction potential would be calculated by identifying the gap between current practice and best available technology. This means considering mainly the technical potential and not the cost of bridging the gap between current and best technology; other important factors to be taken into account, such as the capacity to finance the transition to a low-carbon economy. Due to important pressure from developing countries (especially China) and the EU, Japan acknowledges that the bottom up approach cannot replace national caps for developed countries (but should be considered within their numerical emission reduction target) and that intensity targets should be differentiated according to the situation of countries and sectors. On other issues under negotiation for the post-1012 climate regime, Japan advocates for further differentiation between UNFCCC countries along three categories. Included among developed countries would be: current Annex I Parties; OECD Members or countries with equivalent economic development; or countries that want to be treated as Annex I. Developing countries would also be classified into three different groups, according to their level of economic development. Actions undertaken by developing countries would range from setting binding intensity targets per sector for the most advanced Developing Countries, to submission of voluntary national action plans for the others. Japan also supports an automatic graduation between the categories pursuant to e.g. economic and GHG criteria. Cooperation between the EU and Japan, founded on the 2001 Action Plan, takes place at all levels culminating in the EU-Japan annual summit meetings. In addition, EU and Japan are engage in regular sectoral dialogues with the dialogue on Environment having Climate Change as one of its key points of discussion. G8. Contacts between the peoples, academics and business communities of the EU and Japan are being promoted through the activities of EU Centres in Japan and cooperation in the field of education, as well as through business dialogue and a number of programmes offering training in Japan to European executives. Russia The Kyoto protocol entered into force on 16 February 2005 thanks to Russia's ratification of the Kyoto Protocol in November Russia's Kyoto target is the same as its emission level in 1990, i.e., 100% of 1990 emissions in Its greenhouse gas emissions (GHG) fell by 29% between 1990 and Russia's GDP/capita was relatively low at 4300 USD in 2005 but its CO2 intensity is very high, up to 10 times the EU average. In the UN climate negotiations Russia has so far not been a vocal participant in the discussions under the Bali Action Plan and it has not been open to discuss more concrete future emission reduction targets. Russian negotiators have indicated that Russia might accept to limit its emissions in 2020 at the 1990 level, the same level as the current target for Russia for the period 2008 to This would mean an actual substantial increase compared to current emission levels, which are around 30 % lower than 1990 levels. One reason for Russia's cautious position appears to be that it lacks sufficient analysis of its own long-term 129

133 mitigation potential and policies for realising these reductions.. Earlier analysis shows that there are significant emission reduction potentials in the Russian energy sector, for example by reducing gas flaring, and also by improving energy efficiency in industry and in residential buildings. Russia s position in the climate change negotiations will depend on the new government's decisions on domestic energy efficiency and how they impact on long-term emission projections. In June 2008 President Medvedev signed a decree that requests the government to elaborate policies and measures to reduce the energy intensity of the Russian economy by at least 40% by 2020 compared with 2007 in order to guarantee the rational and environmentally responsible use of energy and energy resources. The new President has highlighted environmental concerns, which he describes as a crucial challenge for Russia's socioeconomic development. It remains to be seen what effect this policy shift will have on Russia's position in the international climate negotiations. Expert level co-operation on climate change is well established between the EU and Russia thanks to a tradition of regular informal bilateral meetings and workshops since An Expert Group on Climate Change was established under the EU-Russia Environment Working Group in October 2006 and has met regularly since then. It has also organised joint seminars on topics such as adaptation, the EU's emissions trading system and post-2012 negotiations. Ukraine Ukraine is a Party to UNFCCC since May 1997 and ratified the Kyoto Protocol in April Ukraine s Kyoto target requires it to stabilise its GHGs emissions at the level of its base year. Ukraine supported the EU's objective of reaching a global and comprehensive post-2012 agreement to fight climate change by 2009 in the joint statement of the EU-Ukraine summit of 2007 and Between 1990 and 2005, Ukrainian GHGs emission decreased by 55%, as a result of the major industrial and economic restructuring following its transition to a marketbased economy. A law on monitoring GHG emissions and promoting the efficient use of natural resources was adopted in 2007 covers all aspects of Kyoto implementation and the use of Kyoto mechanisms. Ukraine has several Joint Implementation (JI) projects under the Kyoto Protocol. Ukraine has stated its aspiration to become a member of the EU while underlining that, at present, it remains within the Umbrella group (which includes the US, Russia, Japan, Iceland, Norway, Canada, New Zealand and Australia) under the UNFCCC negotiations in order not to be excluded from the negotiating groups. Ukraine has expressed its willingness to accept a 20% reduction target, however without referring to the base year for such a commitment. A EU-Ukraine Joint Working Group on Climate Change (WGCC) was established that organised a seminar on post-2012 action in Kiev in 2007, which was the first joint EU- Ukraine event on climate change in Ukraine. At the meeting of the WGCC in Brussels 14 November 2007, Ukraine stressed its strong interest in EU mitigation policies and proposed closer co-operation with the EU on long-term measures, including modelling of emissions and mitigation scenarios. The next WGCC meeting and seminar on post-2012 action against climate change was foreseen in October Asia China 130

134 China ratified the UNFCCC in 1993 and the Kyoto Protocol in As a non-annex I country, it does not have binding emissions reduction targets. Reflecting the rapid economic growth of the country, Chinese emissions have been increasing rapidly. Between 1990 and 2005, they increased by 127%. At present China is at least the 2 nd largest global emitter of GHGs, although recent studies 87 suggest that China has already overtaken the US at the top spot for emissions from CO 2 from energy. CO 2 intensity of both the energy mix and GDP is particularly high in China. Per capita emissions still remain below those in developed countries, but are already around 4 tons CO 2 per capita, roughly half those of the EU, and continue to grow rapidly. China s position on climate change has changed, realising that unfettered emission growth is not in line with a sustainable climate but also realising the links between climate change, energy security and air pollution policies. China has put in place some domestic policies and measures (e.g. energy efficiency targets in the 11th Five Year Plan and the 2007 National Climate Change Programme) that, if implemented, will reduce emissions from baseline. The programme identifies a list of measures to control GHG emissions over the period and estimates that these will amount to 1500 Mt CO2-eq emissions avoided 88 The programme outlines several objectives for 2010: to reduce energy consumption per unit GDP by 20%, to raise the proportion of renewable energy (including large-scale hydropower) in primary energy supply up to 10%, to stabilise nitrous oxide emissions from industrial processes at 2005 levels, to control the growth rate of methane emissions, and to increasing the forest coverage rate to 20% and to increase carbon sink by 50 Mt over the level of China is in a potentially pivotal position to contribute realistic ideas as to how emerging economies can tackle their greenhouse gas emissions and serve as a role model to others. This is a key strategic objective of the EU-China Partnership on Climate Change. The Partnership was established at the 2005 EU-China Summit and the aims are to improve practical capacity to tackle climate change and mutual understanding of each other's positions and policies. Agreed joint activities are set out in a Rolling Work Plan, and include a commitment to work together on demonstration of near zero emissions coal with carbon capture and storage technology; capacity building at national and provincial levels on mitigation and adaption, and the EC's largest capacity building project for the Clean Development Mechanism (CDM). 89 China has indicated readiness to include its domestic emission reduction policies in an international agreement, provided that developed countries commit to mid-term reduction targets for 2020 and that an effective financial mechanism is put in place to promote technology transfer. 90 Over the course of the last year, China has increasingly focused its arguments on the need for technology transfer from Annex I countries in order for it to fulfil its own adaptation needs and our mitigation expectations. China is a major player in the Kyoto Protocol's Clean Development Mechanism (CDM), with the largest flow of Certified Emissions Reductions (CERs) of any host country, and often argues that it should have delivered more technology transfer. It is difficult to estimate transfers between the EU and China in this regard, but up 87 International energy agency, World Energy Outlook 2008 (check with final version WEO 2008) China s National Climate Change Programme, June More information at: Barroso joint press conference with PM Wen Jiabao in Beijing, April

135 until 2012, they run to billions of, the EU being the main purchaser by far.. The UNFCCC estimates that China could generate with its CDM projects that are already registered, annually on average 116 million CDM credits 91 which represent a value of around 2 billion annually at current prices for CDM credits 92.Interest is also growing in China in implementing emissions trading as a domestic policy tool (the focus is currently on emissions of local environmental pollutants rather than CO 2 ) and there is increasing interest in gaining domestic experience of carbon trading. The Ministry of Science and Technology is preparing an "adaptation plan", which will set out options for China to deal with climate change. The EC is assisting with the development of similar plans at provincial level. India India ratified the UNFCCC in 1993 and the Kyoto Protocol in As a non-annex I country, it does not have binding emissions reduction targets. Reflecting the rapid economic growth of the country, Indian emissions have been increasing rapidly. Between 1990 and 2005, they increased by 96%. India is the 5th largest global emitter of CO2 93. CO2 intensity of GDP is relatively high but its per capita emissions are very low, also compared to China, reflecting the fact that almost half the Indian population survive on less than a dollar a day 94 and several hundred million people do not have access to basic energy supplies 95. India s stance on climate change and reluctance to submit to targets is driven by its overriding desire to secure development and alleviate poverty through economic growth (preferably by maintaining current 8% growth rates). India demands the right economic development and sees the increasing wealth of the population as the best means to adapt to climate change. India has on several occasions stated that its per capita GHG emissions will not exceed the per capita GHG emissions of the developed industrialised countries, however not specifying which developed country US per capita emissions are more than twice those of the EU. India has a number of policies (e.g. on renewables, energy efficiency and urban transport) which, although not driven by climate change concerns, contribute to mitigate measures. The publication of the first Indian Climate Change Action Plan 96 complements these policies, but continues in the same vein (i.e. mainly a focus on adaption plus energy and research policies and activities) and does not set out clear objectives. The Plan seeks to promote sustainable development through the use of clean technologies and focuses on domestic actions under eight "missions", i.e. in the areas of solar energy, energy efficiency, sustainable habitat, water, Himalayan eco-system, forestry, sustainable agriculture and research. However, the Plan does not set out clear objectives for any of those actions. Comprehensive documents for each of those areas with objectives targets and measures are under development and will be institutionalised via several ministries and through intersectoral groups. These should be ready by December ( ) Point Carbon, CDM & JI Monitor, Vol 6 - Issue September 2008, Secondary CER assessment USA, China, EU and Japan had more CO2 emissions from energy in According to the 2001 census, nearly 700 million people in India were without access to modern energy sources India's National Action Plan on Climate Change, June

136 Given its per capita low emissions, India advocates that the objective of a post-2012 agreement should be to ensure that emissions per capita become equal for all countries, still allowing growth in per capita emissions for poorer countries. Prime Minister Singh stated that India's per capita emissions would never exceed those of the Western Developed countries. In a recent report, Greenpeace accused India of hiding behind the poor through their reiteration of their current low per capita emissions (which hide a large disparity between social groups and an ever-increasing middle class which looks to the West for its lifestyle inspiration). The CDM has been very successful for India, which is the host country with the most projects (358 projects out of a total of 1,170 registered projects 31% - on 29 September 2008). India is the second largest (after China) in terms of Certified Emissions Reduction (CERs) generated, with 14% of the market. Like China, India places great emphasis on the need for technology transfer from the developed world to the developing countries in order for them to fight climate change (mitigation and adaptation). The Indian government is developing a venture capital fund to facilitate this, e.g. by buying down IPR on key technologies, and frequently pushes this idea in the UNFCCC negotiations. However, Indian industry has been very active in acquiring and investing in low carbon technologies. For instance in the sector of wind energy it acquired two of the EU's leading companies, i.e. gearbox producer Hansen Transmissions and wind turbine manufacturer REpower. At the India-EU Summit of 2005, an EU-India Initiative on Clean Development and Climate Change was established, although it has been difficult to establish as many concrete cooperation projects under this banner as the EU would have like. However, at the 2008 Summit in Marseille on 29 September, a Joint Work Programme for EU-India co-operation on Energy, Clean Development and Climate Change was agreed, which we anticipate will enable us to have regular and constructive dialogue with the Indians to build political will and practical capacity to tackle climate change. South Korea The Republic of Korea (South Korea) signed the UNFCCC in 1993 and ratified its Kyoto Protocol in South Korea is not among the Annex I countries to the UNFCC. Membership to Annex I in 1992 was determined on the basis of OECD Membership plus countries with economies in transition, including the Russian Federation, the Baltic States, and several Central and Eastern European States. Since then, despite increasing pressure on South Korea to become an Annex I group, it still argues that it is still a developing country with regard to the UNFCCC. Together with Mexico and Turkey it are the only OECD members that have no reduction commitments under Annex B of the Kyoto Protocol. The Government is considering announcing a mid-term target in the course of 2009, which will be likely use as reference year the 2009 emissions 97. In addition, it is also planning to introduce a trial voluntary emission trading scheme at local level. In September 2008, a national action plan on climate was released. It focuses on fostering green industries 97 Cf. presentation by the Korean Environmental Management Corporation and on 29 September 2008 in Seoul during the "Korea-EU Workshop on Climate Change Policies and Business Contributions". 133

137 (improving energy efficiency in the industrial sector; increasing the share of renewable energy (obj. to go from current 2% to 11% in 2020 and 20% in 2050) and R&D (share of climate R&D in total government R&D investment: from 6.4% in 2008 to 8.5% in 2012; improving quality of life (e.g. developing green transport) and contributing to global efforts (e.g. national mid-term target in 2009; development and cooperation assistance towards developing countries, including an East-Asia Climate Partnership with 200 million USD for 5 years). As regard the EU Korea bilateral relation a Framework Agreement (FA) on Trade & Cooperation with the Republic of Korea (ROK), in recognition of South Korea s increasing role in the world economy and in Asia, were signed in October 1996, and entered into force on 1 April The FA is currently in the process of being updated, and the EU wishes that meaningful provisions on climate change are included in the upgraded agreement. The third summit meeting between the EU and the Republic of Korea was held in Helsinki on 9 September 2006 (fourth Summit is due to take place on October 25, 2008). The Leaders agreed to foster EU-ROK cooperation on climate change. In addition, the Commission has been invited to participate in several conferences and seminars focusing on climate change in Korea in recent years, and is interested in continuing such cooperation. Indonesia Indonesia ratified the UNFCCC in 1994 and the Kyoto Protocol in As a non-annex I country, it does not have binding emissions reduction targets. Indonesian emissions have been increasing rapidly. Between 1990 and 2005, they increased by 140%. Excluding land use change, Indonesia is in the top 20 of largest global emitters. However, when land use change is included, Indonesia's contribution to global greenhouse gas emissions rises considerably and is estimated to make it one of the top 5 emitters globally through emissions from deforestation, land use change, peat land degradation and forest fires 98. CO2 intensity of GDP is slightly less that of India (see Table 28) but per capita emissions are slightly higher. The Indonesian Government is aware of the challenge that climate change poses globally and the country's vulnerability to the phenomenon. Deforestation alone makes up over 80% of Indonesia's total GHG emissions and is an issue of key concern to Indonesia in the context of the UNFCCC. As host of the UNFCCC Bali conference in December 2007, Indonesia positioned itself as a supporter of a successful post-2012 outcome. Indonesia is showing interest in projects under the Clean Development Mechanism 99 (CDM) of the Kyoto Protocol, from which it has not benefited to the extent possible. For instance, according to a 2001/02 study there is a reduction potential of million tonnes of CO 2 equivalent per year in Indonesia's energy and forestry sectors alone. Indonesia believes that procedures for approving CDM projects should be simplified with a view to increasing the WRI, 2005 In august 2008, 16 CDM projects were registered in Indonesia 134

138 participation of developing countries in such projects. In October 2008, Indonesia had registered 16 CDM projects. 100 At the UNFCCC COP-11 in Montreal in December 2005, Indonesia was among a group of 15 rainforest-rich countries that proposed to allow carbon credits for "avoided deforestation" (i.e. compensation for preventing deforestation that would otherwise occur) under the Kyoto Protocol's Clean Development Mechanism.. Reducing emissions from deforestation requires effective forest management policies at the international and domestic levels, alongside economic incentives. While Indonesia has adequate forestry policy and legislation, implementation and enforcement are weak. Moreover, preserving remaining forests and high carbon stock land is jeopardised by the Government's policy to expand biofuel production. This policy is driven by the need to reduce dependency on fossil fuels and by export market potentials. Negotiations began almost 2 years ago on the adoption of a Voluntary Partnership Agreement between the EU and Indonesia under the EU's Forest Law Enforcement, Governance and Trade (FLEGT) Action Plan, which the EU side is keen to conclude. Closely related to climate change is the issue of air pollution, and particularly the problem of trans-boundary haze pollution resulting from the burning of peat land in Indonesia was the worst year since 1997, with haze covering parts of the region as far away as Micronesia. This also contributes substantially to Indonesia's CO 2 emissions. Other Asian Countries The other countries in Asia are a very heterogeneous group. The range spans the Asian LDCs (such as Myanmar with a GDP per capita of 177 in 2005, Bangladesh, Laos and Cambodia, with a GDP/capita of 577) which have concerns mainly related to poverty eradication, economic development and adaptation to climate change through the emerging economies of Thailand and Malaysia who have attained high economic growth rates over the last decades, to the non-annex I anomaly of Singapore, which as a small island developing state does not currently have an emissions reduction target, but has a GDP higher than some EU Member States. There are two notable regional groupings in Asia, namely the Association of Southeast Asian Nations (ASEAN all of whom have ratified the Kyoto Protocol except Brunei), which exemplifies the range of economic development and political systems of Asia 101 and the South Asian Association for Regional Cooperation" 102 "(SAARC).Climate change interests in the SAARC countries, grouped around issues related to water (floods and scarcity as well as glacial melting), sea level rise (much of Bangladesh is at or near sea level) and the impact of changing weather patterns on agriculture that are more homogenous than in ASEAN. Neither grouping has managed to develop a common position on climate change, although ASEAN has expressed the desire to politically integrate more closely at the regional level, including on climate change. For Indonesia and Malaysia in particular, forestry and land use and the related issue of biofuels are very important. The EC has a climate change dialogue with ASEAN, which met for the second time in Bangkok in July 2008, back-to-back with an EU-ASEAN UNFCCC, 7 October ASEAN members include Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. SAARC members include Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. 135

139 CDM workshop, where ASEAN countries present expressed their interest in greater participation in the CDM and in improving its functioning for the future Argentina, Mexico, Brazil and other Latin America Mexico is the world s ninth largest economy and is a member of the OECD. As a large oil producer and exporter, it is the 12th largest emitter of greenhouse gases, accounting for about 1.54% of global emissions. Mexico s National Strategy on Climate Change" 103 "has identified specific mitigation measures for energy sector (improved energy efficiency and saving, increased use of renewables, increase rail coverage for freight transportation) and forestry and land use (sustainable forest development, conservation of forest ecosystems in protected areas, reforestation and recovery of lands apt for forestry, soil restoration with reforestation). Their estimated emission reduction potential is ~106,8 Mt CO2-eq by 2014 for energy sector and Mt CO2-eq by 2012 for carbon conservation in forestry and 30,2-54,2 Mt CO2-eq by 2012 for forestry and land use. Mexico recognises that current division between AI and non-ai countries has to move towards a more realistic differentiation and explicitly mentions group of advanced developing countries including themselves in this group. Considers no-lose targets appropriate for this group Africa South Africa South Africa ratified the United Nations Framework Convention on Climate Change (UNFCCC) in August 1997 and acceded to the Kyoto Protocol in The South African government has outlined a vision for the road ahead on climate change 104, where they foresee to demonstrate leadership in the multi-lateral system by committing to a substantial deviation from baseline, enabled by international funding and technology. This vision states that South Africa s GHG emissions must peak around , stabilise around 100 Mt above current levels for up to ten years and then decline in absolute terms. South Africa has estimated what the gap would be between a baseline scenario which they name growth without constraints and an emissions reduction scenario that would see sufficient reductions as proposed by sound science, i.e. leading to a 30 to 40% reduction by 2050 compared to 2003 GHG levels 105. Figure 21 South Africa s vision on climate change: GHG emission reductions and limits Mexico s National Strategy on Climate Change, Long Term Mitigation Scenarios: Strategic Options for South Africa, October

140 Source: Long Term Mitigation Scenarios: Strategic Options for South Africa, October 2007 South Africa outlines several options how to fill the gap between the baseline scenario and the ambitious reduction scenario. Start now option covers about 44% of the gap in 2050 and contains net negative cost measures and other sustainable development co-benefits, like increasing energy efficiency in industry and transport, as well as use of more renewable and nuclear sources for electricity production. Scale up option covers two thirds of the gap between two scenarios by 2050 and foresees actions going beyond negative costs, such as further increasing energy efficiency for industry and transition to zero-carbon electricity generation by mid-century, where nuclear and renewable sources have equal share of electricity production. Use the market option closes the gap by three fourths between the two scenarios and foresees escalating CO2 tax and incentives for technology acceleration, renewables for electricity generation, biofuels and solar water heaters. The fourth option Reaching for the goal is needed to close the gap between two scenarios and reach emission reductions required by science. For this new technology development and behavioural change will be needed. Other African Countries Africa contributes little to global climate change, with low carbon dioxide emissions from fossil fuel use and industrial production in both absolute and per capita terms. Africa accounts for 2 3% of the world s carbon dioxide emissions from energy and industrial sources, and 7% if emissions from land use (forests) are taken into account. 106 At the same time, Africa will be particularly affected by climate change in terms of food security, sustainable water supply and extreme weather phenomena such as floods, droughts and threats of desertification. Economies and livelihoods of an increasing number of communities, countries and sub-regions in Africa continue to decline due to desert encroachment partly emanating from climate change and locally generated land degradation processes. African countries engage in UNFCCC negotiations as members of different groups, mainly the G77 & China, and the African Union. Africa expects substantial commitments by 106 Harnessing Technologies for Sustainable Development, Economic Commission for Africa,

141 Annex I parties for capacity building, climate change adaptation measures and, to a lesser extent, mitigation measures. On many occasions, South Africa has been expressing these views on behalf of the African nations Middle East & OPEC The Middle East and OPEC members are key countries in the international energy system and also in the fight against climate change. As the main fossil fuel producers they have in the past often delayed international negotiations, fearing the impact of climate change measures on the future demand for fossil fuels.. Membership of OPEC is very diverse. All, except Iraq, have ratified both the UNFCCC and the Kyoto Protocol. OPEC includes developing countries with a low GDP per capita but also some countries which have higher GDP per capita than the EU average. Moreover, 5 OPEC members have higher GDP per capita emissions than the EU average while some of them have very low ones. CO 2 emissions per capita and energy intensity in some OPEC Members is quite high. Table 29 Key statistics OPEC (excl. MEM members) Total CO 2 excl. LULUCF and Bunker Fuels GDP/cap 2005 a Ton CO 2 / Cap 2005 b CO 2 intensity energy mix 2005 c CO 2 intensity GDP 2005 d CO e CO e Change CO e Algeria % Angola % Ecuador % Indonesia % Iran % Iraq % Kuwait % Libya % Nigeria % Qatar % Saudi Arabia % UAE % Venezuela % a Data for 2005, per capita, Adapted from World Bank and Eurostat b Data from IEA

142 c ton CO 2 /terajoule, Data from IEA2007 d kg CO2/US$ using 2000 prices and exchange, Data from IEA2007 e Date from IEA2007 Over the past few years, the EU has stepped up its cooperation with this group of countries to foster their shift towards a low carbon economy based on low carbon emitting uses of fossil fuel and on the potential of the Middle East region to develop and deploy new technologies like carbon capture and storage (CCS) and new energy sources like solar energy The EU is engaged in supporting R&D efforts in the Middle East and in the OPEC countries. A new Inco-Net (European International Cooperation Network for R&D) platform was launched this year by the Commission targeted at Gulf Cooperation Council (GCC) countries. Some countries, like the United Arab Emirates, are already undertaking major renewable energy projects. Under the EU-GCC Joint Cooperation Council it was decided to organise a regular dialogue between the EU and the GCC on environment and especially climate change. Two meetings were already organised in 2007 and In these meetings some issues of common interest were identified like adaptation, technology development and deployment including CCS and solar, and CDM Candidate countries and potential candidate countries Candidate countries and potential candidates regularly align themselves with EU positions, supported EU statements and submissions to the UNFCCC. Candidate countries Turkey Turkey only became a Party to the UNFCCC in May 2004 and are in the process of ratifying the Kyoto Protocol. Between 1990 and 2005 GHGs emission of Turkey increased by 73%, currently CO2 emission/capita are at level of 3.04 ton and GHG is relatively high, comparable to that of Australia. Although Turkey is classified under the UNFCCC as a developed country, its late ratification of the Convention meant that it does not have a target under the Kyoto Protocol. As a result of this Turkey is neither allowed to participate in the CDM, nor allowed to participate in international emissions trading or JI. Turkey s recent ratification of the Kyoto Protocol demonstrates its wish to be proactively engaged in the international negotiations on a post-2012 agreement. At recent meetings Turkey has been regularly aligning itself with EU positions, supporting EU statements and submissions to the UNFCCC. In view of its low per capita emissions and GDP, Turkey has however continuously stressed its discomfort with being classified among developed countries under the Convention and its Protocol. Turkey will want to ensure that its participation in a future regime recognizes its actual level of greenhouse gas emissions and economic development. Turkey s first national communication to the UNFCCC was submitted in January During the preparations of the national communication, Turkey also compiled the first inventory of greenhouse gases emissions and removals in the country as of

143 In February 2007, the Turkish Grand National Assembly adopted a decision to establish a Research Commission on Global Warming, which will also focus on the position of Turkey with respect to the international process including the Kyoto Protocol. The EU funded SYNERGY Project has build up capacity in relation to the flexible mechanisms under the Kyoto Protocol. During an International Workshop in Istanbul in February 2005 Turkey showed an interesting in CDM project but this could not be taken forward given that it is an Annex I party under the UNFCCC. Under EU program TAIEX a workshop regarding greenhouse gas emission mitigation policy in EU was foreseen in October 2008 in Ankara. Croatia The Republic of Croatia is a Party to the United Nations Framework Convention on Climate Change (UNFCCC) from April 1996 and ratified the Kyoto Protocol in May 2007 committing to a 5% reduction of GHG compared to base year. Between 1990 and 2005 Croatia's CO2 emissions from energy decreased by 4%. CO2 emissions/capita are at 5 ton and CO 2 intensity of GDP is around the double of that of the EU. GDP/capita in 2005 amounted to around Croatia drafted its National Strategy with an Action Plan for the Implementation of the UNFCCC and the Kyoto Protocol in The latter was incorporated in May 2008 in Croatia s National Air Quality Protection and Improvement Plan for the period Croatia s position on a post-2012 agreement has been closely aligned with that of the EU and it frequently supports the EU s statements and submissions. The Air Protection Act partially transposes the provisions of Directive 2003/87/EC. It inter alia, prescribes the contents of the National Allocation Plan for Greenhouse Gas Emission Allowances thereby preparing for eventual greenhouse gas emission trading under the EU ETS if Croatia would join the EU. It also foresees the implementation of the Kyoto Protocol mechanisms, prevention and abatement of emissions and the establishment of the Greenhouse Gas Emissions Register managed by the Croatian Environment Agency (CEA). The Regulation on the monitoring of greenhouse gas emissions in the Republic of Croatia (OG 1/07) sets out the requirements for the implementation of Commission Decision 280/2004/EC on the monitoring of greenhouse gases and Commission Regulation 2216/2004/EC for a standardised and secure system of emission registers amended by Commission Regulation 916/2007/EC. The Former Yugoslav Republic of Macedonia (FYRoM) FYRoM became a Party to UNFCCC in January 1998 and ratified the Kyoto Protocol in November FYRoM is considered a developing country under the Convention and its Protocol. As such it can participate in the CDM, for which it adopted a national strategy in 2007 identifying potential projects. Between 1990 and 2004 FYROM's GHGs emission decreased by around 10%, currently CO2 emission/capita are at level of 4.1 ton and CO2 intensity of GDP is high at 2.15 kg CO2/US$. GDP/capita amounts to 2300 in FYRoM adopted the National Strategy for the Clean Development Mechanism in February 2007, giving the Ministry of Environment the responsibility to continue the coordination of all activities related to the implementation of CDM projects. 140

144 FYRoM prepared a Draft Inventory of Greenhouse Gas Emissions taking 2000 as base year. A Final Action Plan on adaptation to climate change and a Draft Report on climate change reduction by sectors were also prepared. Potential candidate countries Albania became a party to the UNFCCC in January 1995 and acceded to the Kyoto Protocol in April Albania is considered a developing country under the Convention and its Protocol and as such it can participate in the CDM. Bosnia and Herzegovina became a party to the UNFCCC in December 2000 and acceded to the Kyoto Protocol in April It is considered a developing country under the Convention and its Protocol and as such can participate in the CDM. Montenegro became a party to the UNFCCC in January 2007 and acceded to the Kyoto Protocol in June The Ministry of Tourism and the Environment has been designated as the national authority for projects related to the CDM. Serbia became a party to the UNFCCC in June 2001 and acceded to the Kyoto Protocol in October Serbia can participate in the CDM. 141

145 13. ANNEX 6: COMPARISON BASELINE (EXCLUDING LULUCF) WITH THE OTHER BASELINES Compared to the SRES scenarios the assessment in this staff working document has conservative estimates for the emission growth in developed countries. For the developing countries the baseline projections of GHG emissions, excluding LULUCF, is similar to the outcome of the original SRES B2 scenario and higher than the recently updated B2 scenario. But emission growth in developing countries is substantially lower than the A1 scenario from the SRES and the baseline in the study by Sheenan which has high projections for GHG emissions growth in the baseline 107. Table 30 GHG Baseline emissions staff working document compared to other baseline projections (excluding LULUCF) Increase of emission levels compared to 1990 in 2020 in %* 2020 Developed countries vs 1990 Developing countries vs 1990 World vs 1990 IPCC A % 170% 84% IPCC A % 132% 67% IPCC B % 121% 50% IPCC B % 143% 63% IPCC A1f % 173% 87% IPCC A1t % 160% 78% Baseline staff working document -2% 166% 63% Common Poles Image Baseline % 147% 66% Update IPCC B2 21% 114% 57% Sheenan % 204% 92% *: Adapted from den Elzen and Höhne, Sheenan,

146 14. ANNEX 7: GDP GROWTH IN BASELINE IN THE POLES MODEL Baseline (incorporating impact financial crisis) Yearly growth Total growth over period World 3,4% 4,1% 3,7% 3,9% 76,6% Developed 2,1% 2,1% 2,6% 2,4% 43,3% countries EU 1,9% 1,8% 2,2% 2,1% 36,1% USA 3,1% 2,0% 2,8% 2,5% 45,5% Japan 1,5% 1,5% 2,0% 1,8% 31,2% Russia -0,7% 6,0% 4,3% 4,8% 103,0% Developing 5,4% 6,4% 4,8% 5,3% 117,8% countries Brazil 2,5% 3,1% 3,2% 3,2% 59,6% China 9,8% 9,1% 5,7% 6,8% 169,9% India 5,9% 7,3% 5,5% 6,1% 142,5% Baseline before financial crisis Yearly growth Total growth over period World 3,4% 4,8% 3,7% 4,1% 81,8% Developed countries 2,1% 3,1% 2,6% 2,7% 50,0% EU 1,9% 2,7% 2,2% 2,4% 42,3% USA 3,1% 3,0% 2,8% 2,9% 53,0% Japan 1,5% 2,5% 2,0% 2,1% 37,3% Russia -0,7% 6,5% 4,3% 5,0% 108,4% Developing countries 5,4% 6,7% 4,8% 5,4% 121,2% Brazil 2,5% 3,5% 3,2% 3,3% 62,1% China 9,8% 9,4% 5,7% 6,9% 173,5% India 5,9% 7,7% 5,5% 6,2% 147,5% 143

147 15. ANNEX 8: MITIGATION ACTION BY DEVELOPED COUNTRIES - QUANTIFIED EMISSION LIMITATION OR REDUCTION OBJECTIVE The global mitigation challenge can only be met if all countries contribute according to their common but differentiated responsibilities and respective capabilities. Due to their large historic contribution to GHG emissions and their currently higher per capita emissions and more advanced economic development, developed countries need to take the lead in reducing emissions. With the exception of the United States, all developed countries have not ratified the Kyoto Protocol and thus did not accept a quantitative emission limitation or reduction commitments for the first commitment period of the Kyoto Protocol ( ). The approach of quantitative emission limitation or reduction commitments for developed countries should be continued beyond Quantitative targets provide environmental effectiveness by determining the maximum permissible emission levels of countries covered by those targets. A single economy-wide target gives countries maximum flexibility as regards the policy approach it wants to pursue, e.g. the sectors in which reductions need to be made as well as the choice of policy instruments (e.g. standards, market based instruments taxation). The domestic policy mix can be defined bottom-up taking into account national circumstances. Quantitative targets also provide a reliable basis for cap and trade-based emission trading systems at private entity level. In fact, an increasing number of developed countries have introduced or are preparing emission trading systems based on an absolute ceiling for GHG emissions. Intensity-based targets, one of the main alternatives for quantitative caps, do not provide this environmental effectiveness and significantly complicate the implementation of cap and trade based emissions trading systems at private entity level such as the EU ETS. In theory, intensity-based targets could provide for an adjustment of mitigation efforts in case of unexpected economic development in individual countries. For developed countries, however, the main trend of GDP is relatively robust and comparable across countries, so that absolute emission reduction targets can be applied without unnecessary economic risks. In addition, the global carbon market provides for significant flexibility in achieving absolute emission reduction targets in a cost-effective manner, thus allowing countries with higher than expected GDP to fulfil part of their mitigation commitment by purchasing emission credits on the international market. The EU has set itself a unilateral target or QELRO of -20% compared to 1990 by 2020 and expressed its willingness to increase this to 30% given a sufficiently ambitious global agreement. Other developed countries have expressed targets for the long term up to 2050, but there is much less clarity on their willingness to what an acceptable QELRO could be for them in the mid term, i.e See the table below on the positions and policies of other developed countries. One of the main challenges in continuing a quantitative target-based approach will be the inclusion of the US into a post-2012 agreement. The United States have not ratified the Kyoto Protocol and are not bound by an economy-wide quantitative emission limit or reduction 144

148 target. In 2005, the US represented about 40% of the developed countries 108. Including the US emissions into the future reduction commitments is therefore indispensable to ensure the environmental effectiveness of the global regime. Table 31 Objectives and policies set unilaterally by developed countries Country USA Target and assessment President Bush s announced in April 2008 a US goal for stabilising US emissions, but only in In the US congress several bills are debated that would lead to a cap and trade system for US companies indicating that the US might be willing to accept some type of binding commitment. Most bills include a large set of emissions sources, including emissions from transport and heating of housing via and upstream trading system. One of the prominent bills under debate is the Boxer-Lieberman-Warner bill that would see emissions in 2020 be reduced to around 1990 levels. Presidential elect, Barack Obama supports emission reductions of 80% below 1990 levels by He also supports the establishment of federal cap and trade system. In addition, Obama proposes to reduce energy intensity of economy by 50% by 2030 and to reduce oil consumption overall by at least 35% by Canada The Government of Canada has committed to reducing emissions by 60-70% by 2050 and by 20% by 2020 compared to 2006 levels 110. As in 2005 Canada was 25% above 1990 levels, mid-term target would mean that Canada's emissions will be around 2% above 1990 levels by 2020, thus reaching its Kyoto target of reducing emissions by 6% relative to 1990 levels only around However, several Canadian provinces have come up with more ambitious targets, but they all use different base and target years: 111 Several provinces have also set their own targets: Alberta: stabilize emissions by 2020, 14% below 2005 by Ontario: 6% below 1990 by 2014, 15% below 1990 by 2020, 80% below 1990 by Quebec: 6% below 1990 by 2012 Saskatchewan: Stabilize emissions by 2010, 32% below 2004 by 2020, 80% below 2004 by According to data reported to the UNFCCC, excl. LULUCF emissions. A Climate Change Plan for the Purposes of the Kyoto Protocol Implementation Act Climate Change-Energy report from the European Heads of Missions in Canada, 145

149 British Columbia: 33% below 2007 by 2020, 80% below 2007 by 2050 Manitoba: 18% below 1990 by 2010 and 23% below 1990 by 2012 Australia The Garnaut review recommended: 25% by 2020 and 90% by 2050 compared to 2000 for 450ppm scenario 10% by 2020 and 80% by 2050 compared to 2000 for 550ppm scenario 5% by 2020 compared to 2000 in absence of comprehensive international agreement, which is consistent with current government policy of a linear track to achieving 60% by The Australian Carbon Pollution Reduction Scheme has been released at the end of Australia s mid term goal is to reduce emissions by 2020 to between 85% and 95% of 2000 levels. The 5% target is unconditional, whereas the 15% target represents the extent to which Australia will accept tighter targets in the context of a global agreement under which all major economies commit to substantially restrain emissions and advanced economies take on reductions comparable to Australia. Japan Russia Reduce emissions by 60-80% by No firm mid-term target is set yet but announced for Russia set itself the objective to reduce the nation's energy intensiveness by 40% from 2007 levels by Between 2000 and 2005 actual energy intensity fell by 21 % in Russia partly due to structural shifts in the economy and mostly to higher revenues from oil and gas exports which pushed up the GDP. There were no efficiency gains in the residential and transport sectors, focus in Medvedev's decree. High energy savings potential that could easily be realised in industry and manufacturing but will demand more targeted measures and support in residential sectors (especially heating). Russian negotiators have indicated that Russia might accept to limit its emissions in 2020 at the 1990 level, the same level as the current target for Russia for the period 2008 to This would mean an actual substantial increase compared to current emission levels, which are around 30 % lower than 1990 levels Decree signed by President Dmitry Medvedev, June

150 16. ANNEX 9: TARGET CALCULATION FOR THE DEVELOPED COUNTRIES ON THE BASIS OF 4 INDICATORS An example of how a combination of four indicators can be combined to give the total target per country in The target is set as follows: (1) For the indicator GDP per capita the country with the highest level gets minus a -20% (i.e. Norway) target by 2020 compared to 2005 attributed while country with the lowest level gets a target equal to 0% (i.e. Ukraine). A country that is around the average gets around -11.5% attributed for this indicator. (2) For the indicator GHG intensity of GDP the country with the highest level gets minus -20% by 2020 compared to 2005 attributed as target while country with the lowest level gets -4% (i.e. Switzerland). A country that is around the average gets around -11.5% attributed for this indicator. The maximum level of the indicator is topped, to avoid allocation of extreme targets for Russia and Ukraine. Both Russia and Ukraine get a -20% attributed for this indicator. (3) For the indicator Early action the country with the lowest level of early action (i.e. Australia) gets minus -20% by 2020 compared to 2005 attributed as target while country with the highest level of early action is allowed to increase its emissions with 8%. A country that is around the average early action gets around -8.5% attributed for this indicator. The minimum level of the indicator is topped, to avoid allocation of extreme targets for Russia and Ukraine. Both Russia and Ukraine get a +8% attributed for this indicator (4) For the indicator Population trend the country with the highest decreasing population trend gets 0% by 2020 compared to 2005 attributed as target (i.e. Ukraine) while country with the highest increasing population highest level is allowed to increase its emissions with 10% (i.e. Australia. A country that is around the average of population trend gets around 2% attributed for this indicator. (5) The total target by 2020 compared to 2005 is simply the sum of the 4 targets attributed for each of the indicators. Table 32 Target for developed countries, using 4 indicators Share according to GDP/cap Share according to GHG/GDP Share according to GHG Share according to Population Target relative to 2005 Target relative to 1990 (a) (b) (c) (d) (e) = (a+b+c+d) EU % -10.1% -5.2% 1.7% -24% -30% Australia -12.6% -16.7% -20.0% 10.0% -39% -24% Figures in this table were calculated using GHG emissions excluding emissions from land use, land-use change and forestry (LULUCF). In accordance with Article 3.7 of the Kyoto Protocol, the base year for Australia will include a significant net volume of emissions from LULUCF. If this is taken into account 147

151 Canada -12.6% -14.6% -19.3% 7.8% -39% -23% Iceland -17.3% -4.9% -14.0% 7.6% -29% -21% Japan -12.8% -5.6% -12.5% 1.7% -29% -24% New Zealand -9.6% -12.8% -19.3% 9.8% -32% -15% Norway -20.0% -4.7% -13.3% 3.9% -34% -28% Russia -1.4% -20.0% 8.0% 0.8% -13% -38% Switzerland -16.5% -4.0% -10.7% 3.4% -28% -27% Ukraine 0.0% -20.0% 8.0% 0.0% -12% -60% USA -14.3% -12.3% -15.9% 8.2% -34% -24% The figures below give a graphical representation of this approach. Figure 22 gives the target as set for each individual indicator (x-axis gives the indicator, y-axis the resulting target). Figure 23 gives an overview of what this would mean if targets compared to 2005 emission levels are summed up and also gives what this would mean in comparison with Figure 22 Distribution according to each of the four criteria Target vs 2005 due to GDP/cap indicator Distribution according to GDP per capita 0% Ukraine % Russia -4% -6% -8% -10% -12% -14% -16% -18% -20% New Zealand EU Australia, Canada, Japan USA Switzerland Iceland Norway GDP/Capita 2005, 1000 / Cap, at market exchange rates* * Source: Adapted from World Bank and Eurostat Distribution according to change GHG Target vs 2005 due to change GHG emissions 10% 5% 0% -5% -10% Russia, Ukraine EU Switzerland Japan Norway Iceland -15% USA New Zealand, Canada Australia -20% -30% -20% -10% 0% 10% 20% 30% % Change GHG *** *** Source: Data database UNFCCC website Target vs 2005 due to GHG/GDP indicator Distribution according to GHG per GDP 0% % -4% Switzerland Iceland, Norway -6% Japan -8% -10% -12% -14% -16% -18% -20% EU USA New Zealand Canada Australia Russia, CO2 intensity energy mix 2005, ton CO2 /terajoule** Ukraine ** Source: Data from IEA Statistics, 2007, CO2 Emissions from Fuel Combustion Distribution according to population growth Australia 10% New Zealand 9% Target vs 2005 due to change population USA 8% Canada 7% Iceland 6% 5% 4% 3% 2% Norway Switzerland EU Japan 1% Ukraine Russia 0% -10% -5% 0% 5% 10% 15% 20% % Population **** **** Source: UN population data for both base year and emission trends since 1990, the target figure for Australia would be in the order of 27% below the Kyoto base year levels (incl. LULUCF). 148

152 Figure 23 Total target according to the combination of the four criteria Reduction targets Developed Countries 0.0% AUS CAN USA NOR NZ JPN ICE SWI EU27 RUS UKR -10.0% -20.0% Reduction (%) -30.0% -40.0% -50.0% Target vs 2005 Target vs % -70.0% 149

153 17. ANNEX 10: SPECIFIC ACCOUNTING RULES FOR LULUCF SECTORS UP TO 2012 UNDER THE KYOTO PROTOCOL Which LULUCF activities can one account for under the present rules? Following activities are recognised under the Kyoto Protocol as LULUCF activities for the period : Afforestation (Article 3.3 of the Kyoto Protocol) Deforestation (Article 3.3 of the Kyoto Protocol) Reforestation (Article 3.3 of the Kyoto Protocol) Forest management (Article 3.4 of the Kyoto Protocol) Cropland management (Article 3.4 of the Kyoto Protocol) Grassland management (Article 3.4 of the Kyoto Protocol) Revegetation (Article 3.4 of the Kyoto Protocol) Note that these are all specific activities that in principle require human/anthropogenic actions Which LULUCF activities does one have to account for? A developed country has to report for any emissions or sinks that come from Afforestation, Reforestation or deforestation. For the other activities it can choose if it wants to account for but if it does, it is obliged to continue to do so also in the future How does one account for a sector? Net-net accounting methodology: In this methodology one compares the net total flow in one LULUCF sector for a year during the compliance period, with the net total flow of that sector in some base year. The difference between those two defines the net emissions or sink for that sector. The sectors where net-net accounting is applied are Cropland management, Grassland management and revegetation. An example: In the base year the cropland management sector emits the equivalent of 1 million ton CO2. But in 2010 this has changed and it removes the equivalent of 2 million ton CO2. This means that the net flow for this LULUCF sector that has to be accounted for in 2010 is equal to a removal of 3 million ton CO2. 150

154 Gross-net accounting methodology: In this methodology one does not compare flows for a year during the compliance period with the flows in some base year, but one simply accounts for the net flow of that year in that LULUCF sector. The sectors where gross-net accounting is applied are Afforestation, Reforestation, Deforestation and Forest management. If a country chooses forest management, it needs to account for all its forests on its territory. For Afforestation, Reforestation, Deforestation a country (for which accounting is obligatory) only needs to account for those areas of land where the 'use' has changed between the period 1990 and Changes of use are those where land have been converted from forests into other uses (deforestation) or has been planted with forests for the first time (afforestation) or replanted after having been deforested before 1990 (reforestation). An example: In the 1998 the country has converted long-time pasture land into new forest to create a national park. The trees are still growing in 2010 and are good for a net absorption (in that year and only over the area that was afforested in 2008) of ton CO2. This means that the net flow for this LULUCF 'area' that has to be accounted for in 2010 is equal to a removal of ton CO What is the problem with the forest management sector? The emission removals that can be accounted for under forest management, are capped, as agreed in the Marrakech Accords in One can never account in this sector for more than this cap. This limits the use of removals from forest management. This was done for two reasons: The proportion of the net removals that are human-induced in relation to total (natural) removals is still unknown and is relatively small. If no cap was put on the amount that can be accounted for, then the amount of human induced removals would have been overestimated. By applying the gross-net methodology (that does not require the comparison with a base year) the total removals can be very large. In many cases they can be larger than the reductions targets agreed under Kyoto Protocol for the period If this cap was not put in place, some countries simply would have had the option to issue an amount of additional emissions rights which often would have been larger than the net target they received under the Kyoto Protocol compared to base year. The definition of the Cap was also a political solution that was part of the agreement on the first commitment period of the Kyoto Protocol by allowing some developed countries relatively more access than others to make use of part of the removals achieved by their managed forests for compliance purposes. 151

155 The Marrakech also explicitly foresaw that the forest management cap needed to be reviewed for the period after What are the options under debate at present in the international negotiations? The international technical discussions carried out since the Bali conference have led to the identification of four main groupings of options that are considered as the future accounting framework for LULUCF after 2012 in developed countries. The first 3 groupings of options are based on activity based reporting: i.e. related to specific land use activities as already known under the Kyoto Protocol (see annex 17.1). The fourth one (land based accounting) is based on the accounting under the UNFCCC which is different from the accounting under the Kyoto Protocol. Under the UNFCCC, countries do not account for specific activities but they monitor all GHG emissions fluxes occurring on their land and report them, whatever activity has led to such a net flux of GHGs. Option 1: This is the options that would require least changes. It would simple keep the existing accounting framework but would require an evolution to mandatory accounting for all activities and thus no optional choices anymore. For the forest management sector some propose to go away from the present cap which was to some extent determined on a political basis, and simply apply a discount factor for the whole sector which is equal for all countries. Option 2: Under this option everything would be kept as in the existing accounting framework with the exception of the forest management sector. For this sector countries could not anymore account for by the gross-net methodology but have to account for through a net-net accounting methodology comparing annual net flows with those of a base year or base period. Additionally under this option some propose to evolve towards mandatory accounting for all LULUCF activities. Option 3: This option was introduced by Canada as a way to tackle both historical management effects and the effect of natural disturbances. It would maintain for all sectors the same approach as present except for the forest management sector. For the forest management sector the idea is to produce a baseline for all or part of the foreseen GHG fluxes on the basis of the knowledge of past and planned land use policies and the statistical occurrence and quantified effects of natural disturbances. This is the so-called "forward looking baseline". But after the end of the commitment period, this "forward looking baseline" is further adapted to take into account the real effect of natural disturbances which was larger or smaller than those assumed ex ante before the commitment period. This is the so-called "natural disturbances corrected forward looking baseline". The amount of credits or debits accounted for by the country for the forest management sector would be the difference between the "natural disturbances corrected forward looking baseline" and the real monitored and reported emission flux in this sector. As such this rewards actions in the forest management sector that were more ambitious than assumed when the baseline was constructed and punishing behaviour and actions in the forest management sector that were less ambitious than assumed when the baseline was constructed and it could factor out at the same time any natural disturbances. 152

156 Option 4: This option would be the most drastic change compared to the present framework (even though countries do report already on it under the UNFCCC). It would require to account for all GHG emissions fluxes occurring on a country's land and would compare this net flow with an historic base year (as such a net-net approach) It is innovative in the sense that it would lead to a complete and harmonised coverage of GHG fluxes in the LULUCF sector, which is far from being achieved by the current LULUCF accounting rules. 153

157 18. ANNEX 11:ACTIONS AND TECHNOLOGIES FOR ERGY EFFICICY Part of the induced energy efficiency improvements is driven through the fact that energy price differentiation becomes smaller across developed and developing countries, and all economies become fully exposed to the same energy price increases and the same price volatility. Developing countries have as such stronger incentives for the early adoption of innovative energy saving technological solutions. Examples of these are shifting to secondary iron, steel and non-ferrous metal production or substituting materials that are the most energy intensive in the production processes (e.g. reducing clinker content in cement, application of inert carbon anodes in aluminium production, or simply applying higher recycling rates in paper and glass making, shifting to more sustainable building materials and insulation). A large potential also remains to be exploited in power generation, with the continuous cost efficient improvement of certain power plant types (from combined cycle gas turbines to supercritical coal plants). This potential is very large in both developed and developing countries, but particularly interesting in developing countries such as China and India. Among developed countries, the United States have ample room for efficiency improvement. But in developing countries, if coupled with use of air pollution abatement technologies, the efficiency improvements would also bring immense health benefits. See chapter in Part 1 of this Staff Working Document for an analysis of the co-benefits of climate change policies in relation to air pollution policies. Important efficiency gains can be reaped by improving the overall architecture of the power generation system and of the transmission and distribution grid, with effective integration of intermittent power sources like renewables or distributed generation like CHP. Smart grids, superconducting electric lines, power storage devices ranging from pumping hydro to new generation batteries are the crucial technologies to realise these efficiency gains. Energy efficiency improvements in the industrial sector are the second most important. They are potentially very large in emerging economies, especially in those where economic growth is accompanied by a fast development of energy intensive industries (typically the case of China and other East Asian economies). Faster economic growth also fosters rapid capital equipment turnover, opening possibilities for adopting best available technologies (BAT) from the international technology market. Their benefits are reinforced by the fact that very often BAT deliver not only the most energy efficient performance but also considerable cobenefits in terms of reducing air and water pollutants. Comparing the Baseline and the Appropriate global action scenarios in terms of final energy consumption, the latter suggests a balanced effort between sectors, bearing in mind the different technological possibilities. At global level, the Appropriate global action scenario anticipates by 2030 a lower global final energy consumption of 20.4% compared to the Baseline scenario. Figure 24 Final Energy Consumption, World 154

158 World Final Energy Consumption Mtoe In du st ry Resid. & Services T ransport Total Base-WORLD Reduction-WORLD Source: JRC, IPTS, POLES This large potential for efficiency gains in final energy demand, can be either driven by policy interventions (e.g. setting standards, targeted loan programmes, increasing final energy prices) which lead to technology improvement. The potential for improvement in the residential and transport sector are proportionally more important in the EU-27 and in other developed countries (at least in the short term), as larger shares of energy consumption in these two sectors are typical of wealthy economies. Within the residential and tertiary sector, several emerging electric and heating appliances can play a significant role. Compact light bulbs offers already a large saving potential (80%) at virtually zero cost, to occupy a market niche of about 20% of the electricity consumed in dwellings. LEDs are likely to offer even larger savings and is a technology that is rapidly becoming available. Intelligent management of stand-by electronic appliances also offers substantial savings potential. More efficient electric motors and compressors can further improve the performances of washing machines and refrigerators. Heat consumption can also be lowered with appropriate building standards and the generalised introduction of low temperature solar thermal producing domestic hot water and other uses. These technologies will be particularly crucial in those emerging countries with a relatively lower energy intensity growth path (India, Brazil, etc) but where income growth is expected to push up domestic energy consumption. Out of the final consumption sectors, the transportation sector provides the best opportunities, via (a) improvement in power trains engine efficiency (b) lowering the weight of engines and cars, (c) shifting to less carbon-intensive fuels (i.e. biofuels), and (d) shifting from private to public transport or from road to rail. Tertiary sectors are expected to deliver less, especially in developing countries: this will be due to counterbalancing income effects as per capita incomes are expected to rise but also due to changing social patterns and population dynamics. The figures for the residential and services sector are 14.2% and 13.9%, for the world and EU-27, respectively. 155

159 Figure 25 Sectoral Final Energy Savings compared to Baseline 115 WORLD Sectoral Final Energy Savings over Baseline EU27 Sectoral Final Energy Savings over Baseline Total Total Transport Transport Resid. & Services Resid. & Services Industry Industry 0,0% 5,0% 10,0% 15,0% 20,0% 25,0% 30,0% Sectoral % Reduction over Baseline 2030 Sectoral % Reduction over Baseline ,0% 5,0% 10,0% 15,0% 20,0% 25,0% 30,0% 35,0% Sectoral % Reduction over Baseline 2030 Sectoral % Reduction over Baseline 2020 DEVELOPING Sectoral Final Energy Savings over Baseline DEVELOPED Sectoral Final Energy Savings over Baseline Total Total Transport Transport Resid. & Services Resid. & Services Industry Industry 0,0% 5,0% 10,0% 15,0% 20,0% 25,0% 30,0% 35,0% Sectoral % Reduction over Baseline 2030 Sectoral % Reduction over Baseline ,0% 5,0% 10,0% 15,0% 20,0% 25,0% 30,0% Sectoral % Reduction over Baseline 2030 Sectoral % Reduction over Baseline 2020 Source: JRC, IPTS, POLES The transport sector, even if technologically rigid, can achieve substantial reductions of final energy demand between the two scenarios thanks to energy efficiency improvements, a modal shift towards more performing electric transportation schemes, and an increased use of public transport. In 2030, energy savings from the transport sector are expected to amount in the Appropriate global action scenario to around 20% and 30% compared to the baseline for the world and the EU-27, respectively. 115 See in annex 19 for more details on impacts of the Appropriate global action scenario on selected MEM participants. 156

160 19. ANNEX 12: IMPACTS OF THE APPROPRIATE GLOBAL ACTION SCARIO ON SELECTED MEM PARTICIPANTS Figure 26 Emissions, excluding agriculture and LULUCF, in baseline and the Appropriate global action scenario for selected MEM participants USA GHG emissions CHINA GHG emissions Mt CO2eq Mt CO2eq Base-USA Reduction-USA Base-CHN Reduction-CHN INDIA GHG emissions BRAZIL GHG emissions Mt CO2eq Mt CO2eq Base-IND Reduction-IND Base-BRA Reduction-BRA RUSSIA GHG emissions JAPAN GHG emissions Mt CO2eq Mt CO2eq Base-RUS Reduction-RUS Base-JPN Reduction-JPN Source: JRC, IPTS, POLES 157

161 Figure 27 Emissions reductions per sector compared to baseline in the Appropriate global action scenario for selected MEM participants USA sectoral GHG reductions CHINA sectoral GHG reductions MtCO2eq GHG em. reduction from residential services GHG em. reduction from transport GHG em. reduction from industry GHG em. Reduction from other conversion GHG em. reduction from Power Sector Reduction Scenario MtCO2eq GHG em. reduction from residential services GHG em. reduction from transport GHG em. reduction from industry GHG em. Reduction from other conversion GHG em. reduction from Power Sector Reduction Scenario INDIA sectoral GHG reductions BRAZIL sectoral GHG reductions MtCO2eq GHG em. reduction from residential services GHG em. reduction from transport GHG em. reduction from industry GHG em. Reduction from other conversion GHG em. reduction from Power Sector Reduction Scenario MtCO2eq GHG em. reduction from residential services GHG em. reduction from transport GHG em. reduction from industry GHG em. Reduction from other conversion GHG em. reduction from Power Sector Reduction Scenario RUSSIA sectoral GHG reductions JAPAN sectoral GHG reductions MtCO2eq GHG em. reduction from residential services GHG em. reduction from transport GHG em. reduction from industry GHG em. Reduction from other conversion GHG em. reduction from Power Sector Reduction Scenario MtCO2eq GHG em. reduction from residential services GHG em. reduction from transport GHG em. reduction from industry GHG em. Reduction from other conversion GHG em. reduction from Power Sector Reduction Scenario Source: JRC, IPTS, POLES 158

162 Figure 28 Power Generation by Fuel type in the Appropriate global action scenario for selected MEM participants USA Power Generation by Fuel CHINA Power Generation by Fuel TWh TWh Base 2010 Red Base 2020 Red Base 2030 Red Base 2010 Red Base 2020 Red Base 2030 Red. Natural gas (TWh) Oil (TWh) Coal (TWh) Nuclear (TWh) Renewables(TWh) Natural gas (TWh) Oil (TWh) Coal (TWh) Nuclear (TWh) Renewables(TWh) INDIA Power Generation by Fuel BRAZIL Power Generation by Fuel TWh TWh Base 2010 Red Base 2020 Red Base 2030 Red Base 2010 Red Base 2020 Red Base 2030 Red. Natural gas (TWh) Oil (TWh) Coal (TWh) Nuclear (TWh) Renewables(TWh) Natural gas (TWh) Oil (TWh) Coal (TWh) Nuclear (TWh) Renewables(TWh) RUSSIA Power Generation by Fuel JAPAN Power Generation by Fuel TWh TWh Base 2010 Red Base 2020 Red Base 2030 Red Base 2010 Red Base 2020 Red Base 2030 Red. Natural gas (TWh) Oil (TWh) Coal (TWh) Nuclear (TWh) Renewables(TWh) Natural gas (TWh) Oil (TWh) Coal (TWh) Nuclear (TWh) Renewables(TWh) Source: JRC, IPTS, POLES 159

163 Figure 29 Sectoral Final Energy Savings compared to Baseline in the Appropriate global action scenario for selected MEM participants USA Sectoral Final Energy Savings over Baseline CHINA Sectoral Final Energy Savings over Baseline Total Total Transport Transport Resid. & Services Resid. & Services Industry Industry 0,0% 5,0% 10,0% 15,0% 20,0% 25,0% Sectoral % Reduction over Baseline 2030 Sectoral % Reduction over Baseline ,0% 5,0% 10,0% 15,0% 20,0% 25,0% 30,0% 35,0% 40,0% Sectoral % Reduction over Baseline 2030 Sectoral % Reduction over Baseline 2020 INDIA Sectoral Final Energy Savings over Baseline BRAZIL Sectoral Final Energy Savings over Baseline Total Total Transport Transport Resid. & Services Resid. & Services Industry Industry 0,0% 5,0% 10,0% 15,0% 20,0% 25,0% Sectoral % Reduction over Baseline 2030 Sectoral % Reduction over Baseline ,0% 5,0% 10,0% 15,0% 20,0% 25,0% Sectoral % Reduction over Baseline 2030 Sectoral % Reduction over Baseline 2020 RUSSIA Sectoral Final Energy Savings over Baseline JAPAN Sectoral Final Energy Savings over Baseline Total Total Transport Transport Resid. & Services Resid. & Services Industry Industry 0,0% 2,0% 4,0% 6,0% 8,0% 10,0% 12,0% 14,0% 16,0% 18,0% 20,0% Sectoral % Reduction over Baseline 2030 Sectoral % Reduction over Baseline ,0% 2,0% 4,0% 6,0% 8,0% 10,0% 12,0% 14,0% 16,0% 18,0% 20,0% Sectoral % Reduction over Baseline 2030 Sectoral % Reduction over Baseline 2020 Source: JRC, IPTS, POLES Figure 30 Contribution of different technologies to reduce CO2 emissions in the Appropriate global action scenario for selected MEM participants 160

164 Contribution of different measures to CO2 emission reductions between baseline and reduction scenarios* - USA Contribution of different measures to CO2 emission reductions between baseline and reduction scenarios* - CHINA Energy savings in transport Energy savings in other sectors Fossil fuel switch Carbon sequestration Nuclear energy Renewable energies GHG reduction scenario avoided emissions Energy savings in transport Energy savings in other sectors Fossil fuel switch Carbon sequestration Nuclear energy Renewable energies GHG reduction scenario avoided emissions Contribution of different measures to CO2 emission reductions between baseline and reduction scenarios* - INDIA Contribution of different measures to CO2 emission reductions between baseline and reduction scenarios* - BRAZIL Energy savings in transport Energy savings in other sectors Fossil fuel switch Carbon sequestration Nuclear energy Renewable energies GHG reduction scenario avoided emiss ions avoided emissions Energy savings in transport Energy savings in other sectors Fossil fuel switch Carbon sequestration Nuclear energy Renewable energies GHG reduction scenario Contribution of different measures to CO2 emission reductions between baseline and reduction scenarios* - RUSSIA Contribution of different measures to CO2 emission reductions between baseline and reduction scenarios* - JAPAN avoided emissions avoided emissions Energy savings in transport Energy savings in other sectors Fossil fuel switch Carbon sequestration Nuclear energy Renewable energies GHG reduction scenario Energy savings in transport Energy savings in other sectors Fossil fuel switch Carbon sequestration Nuclear energy Renewable energies GHG reduction scenario Source: JRC, IPTS, POLES 161

165 Figure 31 Annual Power Generation Investments in the baseline and in the Appropriate global action scenario for selected MEM participants USA Annual Power Generation Investment (annual average over the period) CHINA Annual Power Generation Investment (annual average over the period) Billion /yr BASELINE REDUCTION Billion /yr BASELINE REDUCTION INDIA Annual Power Generation Investment (annual average over the period) BRAZIL Annual Power Generation Investment (annual average over the period) Billion /yr 30 BASELINE REDUCTION Billion /yr 10 8 BASELINE REDUCTION RUSSIA Annual Power Generation Investment (annual average over the period) JAPAN Annual Power Generation Investment (annual average over the period) Billion /yr BASELINE REDUCTION Billion /yr BASELINE REDUCTION Source: JRC, IPTS, POLES 162

166 Figure 32 Changes in Power generation mix in the baseline and in the Appropriate global action scenario for selected MEM participants New Capacity Addition in Power Generation - USA New Capacity Addition in Power Generation - CHINA MW Other Renew Hydro NUC Bio ff capture fossil fuel MW Other Renew Hydro NUC Bio ff capture fossil fuel Base _ Base Red _ Base Red Base _ Base Red _ Base Red New Capacity Addition in Power Generation - INDIA New Capacity Addition in Power Generation - BRAZIL MW Other Renew Hydro NUC Bio ff capture fossil fuel MW Other Renew Hydro NUC Bio ff capture fossil fuel Base _ Base Red _ Base Red Base _ Base Red _ Base Red New Capacity Addition in Power Generation - RUSSIA New Capacity Addition in Power Generation - JAPAN MW Other Renew Hydro NUC Bio ff capture fossil fuel MW Other Renew Hydro NUC Bio ff capture fossil fuel Base _ Base Red _ Base Red Base _ Base Red _ Base Red Source: JRC, IPTS, POLES 163

167 Figure 33 Additional, new capacity in Power generation compared to 2000 in the baseline and in the Appropriate global action scenario for selected MEM participants New Capacity Addition in Power Generation - USA New Capacity Addition in Power Generation - CHINA MW Other Renew Hydro NUC Bio ff capture fossil fuel MW Other Renew Hydro NUC Bio ff capture fossil fuel Base _ Base Red _ Base Red Base _ Base Red _ Base Red New Capacity Addition in Power Generation - INDIA New Capacity Addition in Power Generation - BRAZIL MW Other Renew Hydro NUC Bio ff capture fossil fuel MW Other Renew Hydro NUC Bio ff capture fossil fuel Base _ Base Red _ Base Red Base _ Base Red _ Base Red New Capacity Addition in Power Generation - RUSSIA New Capacity Addition in Power Generation - JAPAN MW Other Renew Hydro NUC Bio ff capture fossil fuel MW Other Renew Hydro NUC Bio ff capture fossil fuel Base _ Base Red _ Base Red Base _ Base Red _ Base Red Source: JRC, IPTS, POLES 164

168 20. ANNEX 13:APPROPRIATE MITIGATION ACTION BY DEVELOPING COUNTRIES The Bali Roadmap recognizes the need for developing countries mitigation actions to be nationally appropriate and to be defined in the context of sustainable development. In order to meet the lowest stabilisation scenarios assessed by the IPCC, substantial deviations from business as usual are needed in advanced developing regions in addition to significant reductions in developed countries. The deviations have been further quantified in recent studies as a reduction of emissions below business as usual of around 15 to 30% by 2020 for developing countries as a group. 116 As set out above, nationally appropriate mitigation action by developing countries as included in the Bali Action Plan will have a different meaning for different countries according to their very different responsibilities and respective capabilities. Key questions to be discussed with regard to developing countries participation are: In which sectors can and should a country take what type of action? -What overall deviation from BAU should result from those actions and what level and type of support is required to achieve that ambition? What institutions or processes are required to monitor implementation of action and review results in terms of emission reductions achieved? As a general rule, the level of financial and technical support for possible mitigation actions identified in different sectors in developing countries should be differentiated according to countries respective capabilities. Moreover, mitigation action should at least cover those sectors in each developing country with regard to which this country is among the most relevant global emitters. For more advanced developing countries, action should be more comprehensive and cover a broad set of sectors. Indicators, such as per capita GDP and the Human Development Index as published by UNDP could provide a useful reference in this respect. There is significant diversity in socio-economic circumstances even among those developing countries that have been participating in the major economies meetings (MEM). Those differences will need to be reflected in the stringency of different countries' contributions to mitigation as part of the Copenhagen agreement. The following graphs illustrates differences among developing MEM countries according to a number of relevant indicators. Figure 34 Diversity in CO2 Intensity and Per Capita Income in selected developing countries (MEM) 116 den Elzen and Höhne,

169 3 2.5 China CO2 intensity kg/us$' India Indonesia South Africa Brazil Mexico South Korea GDP per capita ( ) Figure 35 Diversity in Emission and Population trajectories 1990 to 2005 in selected developing countries (MEM) 35.0% 30.0% South Africa India Population % 20.0% 15.0% 10.0% Mexico Brazil South Korea China Indonesia 5.0% 0.0% 0% 20% 40% 60% 80% 100% 120% 140% 160% CO2 Trend In order to allow for a comprehensive assessment of mitigation actions by developing countries and to identify needs and options for supporting those actions, developing countries should devise National Low Carbon Development Plans. These plans should set out the low carbon development pathway for each country up to 2050 formulating specific milestones for For each of the key emitting sectors of the economy specific actions should be identified, estimating expected emission reductions below business as usual. The development of such plans would be optional for LDCs. The sectoral coverage of these national plans 166

170 should be more comprehensive the higher the respective income level of a developing country. Moreover, those countries that are among the top emitters in a particular sector should be required to include this sector in their national low carbon development plan. Figure 36 Major developing GHG emitters in key sectors and GDP per capita GDP per capita Coverage Korea (South) Saudi Arabia Argentina South Africa Mexico Malaysia Thailand Brazil Iran China Venezuela Indonesia India Myanmar Nigeria Congo, Dem. Republic 0 Note: 7 key sectors are looked at: Electricity, Iron & Steel, Chemical & Petrochemical, Aluminium, Cement & Limestone, Paper, Pulp & Printing and LULUCF. The value on the right vertical axis reflects for each country for how many of those seven sectors it is among the top 10 developing countries emitters. The left hand side vertical axis shows countries per capita income in US$ per person. Values are shown for those developing countries that are among the global top 30 GHG emitters in absolute terms. (Data source: Schmidt et al and WRI CAIT There are a number of options of which actions could be included in a country's national low carbon development plan to address emissions of different sectors. These could include, inter alia, such options as sustainable development policies and measures (SDPAMs), technology cooperation, sector-based technology standards, transnational sectoral efforts (e.g. related to emissions from aviation or maritime transport), project based CDM, sectoral crediting (e.g. no-lose targets), binding sectoral targets (with appropriate financial and technical support) as well as other domestic policies such as carbon taxes, subsidy removal or quantitative policy targets e.g. related to renewable energy production or energy intensity. Each of these options will need to be assessed in light of developing countries respective capabilities for policy implementation and with regard to the specific situation in different sectors. Table 33 Overview of policy tools for developing countries SD-Pams Technology cooperation Technology standards Transnation al emission Project based CDM No-lose targets Binding sectoral 117 Schmidt et al. Sector-based approach to the post-2012 climate change policy architecture, Table 1, Climate Policy 8 (2008)

171 targets targets Legal status Non-binding Binding/nonbinding Binding/nonbinding Binding Non-binding Non-binding Binding Responsible entity Government Government and industry Government Business associations Companies Government Government Scope Sectoral/econ omy-wide Sectoral Sectoral Sectoral Project-based Sectoral/econ omy-wide Sectoral Target Type Policy implementati on Technology/ R&D Standard implementati on Absolute/inte nsity Absolute/inte nsity Absolute/inte nsity Absolute/inte nsity Stringency Defined by government n.a. Uniform base, with some regional differentiatio n Determined multilaterally Reductions below BAU Reductions below negotiated crediting baseline Negotiated or government defined reduction target Relation to Carbon market None None None None / within / separate market Within Within Within Financing Private sector / international funds / ODA Public and private sector Private sector / international funds /ODA Private sector / carbon market / international funds / ODA Carbon market Carbon market / international funds Carbon market / international funds Examples South Africa: Promotion of energy efficient low cost housing Steel: APP steel sectoral task force SOACT steelmaking handbook Automotive: Top-Runner- Approach Japan; Canadian automobile industry commitment for total reduction by 2010 Aviation: Emission trading system for international aviation linked to Kyoto Protocol carbon market Steel: Introduction of heat recovery for blast furnaces Cement: National baseline expressed in tco2 per ton cement Cement: National target expressed in tco2 per ton cement Source: Adapted from ECOFYS 2008 To prepare international negotiations on how to support the implementation of these plans in the most effective manner, those plans should identify: win-win measures that could be implemented autonomously and which measures would require implementation assistance in form of capacity building, policy assistance and/or awareness raising; further measures that could be taken if targeted support would be provided, indicating the type and extent of necessary support (both financial and technical); expected emission reductions resulting from actions identified above. Each of these plans will be submitted for review to an expert panel that will assess: 168

172 the feasibility and level of ambition of win-win measures and required assistance for those measures and the proposals for further measures and in particular the required support for implementation. On the basis of this analysis, the panel may invite a country to strengthen its autonomous actions and propose support measures for doing so, including concrete recommendations for further mitigation actions and support mechanisms for implementation. Those plans would need to be regularly updated and re-assessed. An interval of up to 5 years seems appropriate. A number of developing countries have recently put forward national climate change action plans or strategies that identify concrete actions these countries plan to take that will reduce the projected growth of their greenhouse gas emissions (see table below). All of these plans identify win-win measures and measures that those countries intend to implement for non climate related reasons. Some of these plans also identify more ambitious measures that would require external technical or financial support to ensure their implementation. Table 34 Policies undertaken and objectives set by selected developing countries Country South Korea Target and assessment South Korea has put forward a National action plan on climate 118 focusing on fostering green industries with the following aims: improving energy efficiency in the industrial sector; increasing the share of renewable energy from current 2% to 11% in 2020 and 20% in 2050 increase climate R&D share in total government R&D investment from 6.4% in 2008 to 8.5% in 2012 improve quality of life (e.g. developing green transport) contribute to global efforts (e.g. national mid-term target in 2009; development and cooperation assistance towards developing countries, including an East-Asia Climate Partnership with 200 million USD for 5 years). China China has a National Climate Change programme 119 that identifies a list of measures to control GHG emissions by 2010 and estimates that these will amount to 1500 Mt CO2-eq emissions avoided. The programme outlines several objectives for 2010: reduce energy consumption per unit GDP by 20%, raise the proportion of renewable energy (including large-scale Released September 2008 China s National Climate Change Programme, June

173 hydropower) in primary energy supply up to 10% to stabilise nitrous oxide emissions from industrial processes at 2005 levels control the growth rate of methane emissions increase forest coverage rate to 20% and increase carbon sink by 50 Mt over the level of India The Indian Climate Change Action Plan 120 seeks to promote sustainable development through the use of clean technologies and mainly focuses on domestic actions under eight "missions", i.e. in the areas of solar energy, energy efficiency, sustainable habitat, water, Himalayan eco-system, forestry, sustainable agriculture and research. However, the Plan does not set out clear objectives for any of those actions. More detail on the 8 'missions' is expected in early Mexico Brazil Mexico s National Strategy on Climate Change 121 has identified specific mitigation measures for energy sector and forestry and land use. Their estimated emission reduction potential is ~106,8 Mt CO2-eq by 2014 for energy sector and Mt CO2-eq by 2012 for carbon conservation in forestry and 30,2-54,2 Mt CO2-eq by 2012 for forestry and land use. Mexico recognises that current division between AI and non-ai countries has to move towards a more realistic differentiation and explicitly mentions group of advanced developing countries including themselves in this group. Considers no-lose targets appropriate for this group. Brazil has seta long-term goal of a 15% renewable energy share of the primary energy supply until 2020.However in 2003, hydropower provided 13.8% and biomass 26.3% of primary energy supply. Other measures include 122 : Guaranteed sales contracts for electricity from renewable energy sources (PROINFA) Financial incentives for reducing supply side losses (PROCEL) Direct investment support for energy efficiency measures National electricity saving programme (PROCEL) National programme for the rational use of fuel (CONPET) India's National Action Plan on Climate Change, June Mexico s National Strategy on Climate Change, 2007 Ecofys, Wuppertal Institute, Proposals for contributions of emerging economies to the climate regime under the UNFCCC post 2012, July

174 National alcohol programme (PROALCOOL) Tax incentives for less powerful vehicles Programme for air pollution from automotive vehicles (PROCONVE) South Africa The South African government has outlined a vision for the road ahead on climate change 123., where they foresee to demonstrate leadership in the multi-lateral system by committing to a substantial deviation from baseline, enabled by international funding and technology. This vision states that South Africa s GHG emissions must peak around , stabilise around 100 Mt above current levels for up to ten years and then decline in absolute terms leading to a 30 to 40% reduction by 2050 compared to 2003 GHG levels 124. South Africa outlines several options how this could be achieved Start now option covers about 44% of the gap in 2050 and contains net negative cost measures and other sustainable development co-benefits, like increasing energy efficiency in industry and transport, as well as use of more renewable and nuclear sources for electricity production. Scale up option covers two thirds of the gap between two scenarios by 2050 and foresees actions going beyond negative costs, such as further increasing energy efficiency for industry and transition to zero-carbon electricity generation by mid-century, where nuclear and renewable sources have equal share of electricity production. Use the market option closes the gap by three fourths between the two scenarios and foresees escalating CO2 tax and incentives for technology acceleration, renewables for electricity generation, biofuels and solar water heaters. Reaching for the goal option is needed to close the gap between two scenarios and reach emission reductions required by science. For this new technology development and behavioural change will be needed. A significant part of these reductions can be achieved at low or even negative cost. All developing countries should strive to harvest low hanging fruits by way of domestic action, e.g., to improve energy efficiency in key sectors such as buildings, transport and power generation. Many other policy options exist at slightly higher cost but with a whole range of economic and social co-benefits such as reduced air pollution, increased access to energy and reduced energy bills. As demonstrated in chapter 6.9 in Part 1 of this Staff Working, the value of these co-benefits can be high, as such reducing the real additional cost of taking action against climate change Long Term Mitigation Scenarios: Strategic Options for South Africa, October

175 21. ANNEX 14: SECTORAL APPROACHES Sectoral approaches could become a possible element of a post 2012 agreement. They address the emissions of a specific sector by a particular policy instrument. The sectors can cover, e.g., steel production, transport or the power generation sector. Three major options of sectoral approaches are currently mainly under discussion: 1. The first option includes sectoral crediting approaches which are a type of offsetting mechanism (see annex 24 on the global carbon market). A baseline that includes own appropriate action or an intensity target would be defined or negotiated for one specific sector. Emission credits are then generated for reductions below the negotiated baseline. Under this approach, international financing would be limited to carbon financing. Reductions up to the negotiated baseline would count as own appropriate action by developing countries. Reductions that go beyond the baseline and generate credits, do not count for own action. 2. The second option is the cooperative type where national governments as part of their national action plan define certain domestic policy measures, e.g. intensity targets, technology deployment plans for specific economic sectors. Within an international framework such approaches could be formally recognised and supported. In this way, action of developing countries could focus on key emitting sectors. For these sectors some measurable, reportable and verifiable policy objectives could be defined. The type and scale of external support (e.g. capacity building, technology transfer) could be tailored to the respective capabilities of the developing country. If several Governments would voluntarily subscribe to the same approach within the same sector, this could become a co-ordinated sectoral approach. This could be a particularly useful instrument if a single agreement among a few countries could cover the major part of emissions of a specific industrial sector. In this case, the risk of carbon leakage could be reduced. Reductions within such an approach, which does not generate credits, would count as own appropriate action by developing countries. 3. The third option is the bottom up approach for target setting, for instance in the context of the Kyoto Protocol) proposed by the Japanese government. 4. This option is based on determining the technical potential of GHG emission reductions in each sector on the basis of high performance benchmarks or best available technologies. This is a useful analytical instrument to define the mitigation potential in different sectors in order to inform policy decision making. As such it could become an essential element when drawing up national action plans. If used for the setting of targets, as proposed, the mitigation potential would have to be complemented with additional information, e.g. the mitigation costs and the financial capability of the country to finance the implementation of concrete emission abatement options. Otherwise this approach would not lead to an equitable result. In all these approaches, the principle of common but differentiated responsibilities and respective capabilities can be applied. 172

176 22. ANNEX 15: TECHNOLOGY COOPERATION Technology will be an essential part of a post 2012 climate agreement. Most of the options to implement mitigation and adaptation actions will require the deployment of clean and safe low carbon technologies. Many recent studies explore the role of different technologies for different GHG emission reduction scenarios (IEA Energy Technology Perspectives; IPCC; UNEP) 125. One of the essential messages is that for ambitious mitigation scenarios a broad portfolio of technologies will be needed. While some technologies are already contributing to mitigation today and will increasingly do, others will contribute significantly over the medium to long-term. For global emissions to be stabilised at 2000 levels, the UNFCCC estimated the overall annual additional financial needs mitigation investments in developed and developing countries to be roughly between US$ 200 and 210 billion by Until 2030, US$ 25 trillion alone needs to be invested in energy infrastructures 127. To make sure that the additional funds will be invested in low GHG emitting technologies, Governments will have to design and implement supportive policies. Obstacles to technology development and deployment exist at various stages of the technology cycle. Those obstacles can include unfavourable enabling environment (e.g. missing regulation, investment risks), lack of economic incentives (e.g. fossil fuel subsidies, higher costs of low GHG emitting technologies, cash-flow problems for high upfront investments) and in some cases in relation to intellectual property rights (IPR). The graph below illustrates the spectrum of technologies that will be needed to address climate change in the next decades. Figure 37 Abatement cost and potential for different mitigation technologies IEA Energy Technology Perspectives 2008; IPCC TAR WG III on mitigation; IPCC report on Methodological and Technological Issues in Technology Transfer; IPCC report on Carbon Dioxide Capture and Storage; UNEP-SEFI Global Trends in Sustainable Energy Investment 2008 Report UNFCCC Investment and financial flows to address climate change, 2007 IEA Energy Outlook,

177 According to the IPCC, even low stabilisation levels "can be achieved by deployment of a portfolio of technologies that are either currently available or expected to be commercialised in coming decades, assuming appropriate and effective incentives are in place for their development, acquisition, deployment and diffusion and addressing related barriers". 128 This essentially implies that the post-2012 agreement should include incentives to drive technologies at three different stages: a) Accelerate diffusion of existing low carbon technologies; b) Accelerate development and large scale demonstration of near-commercia technologies, such as Carbon Capture and Storage (CCS), second generation biofuels, solar energy and advanced transmission and grid technologies; c) Increased spending on research and development of new technologies. Different approaches to supporting technology deployment will be needed with regard to different parts of this spectrum. Domestic policies and the carbon market will be the main driver behind faster diffusion of existing technologies. For near-commercial and new technologies, however, current public expenditure on energy related research, development and demonstration is far from sufficient to achieve the technological advances and cost reductions that are needed in the medium to long term. Over the last two decades, public energy R&D spending in developed countries has dropped dramatically, on average to below half of 1984 levels in 2004 (see figure below). 128 Intergovernmental Panel on Climate Change, IPCC 2007, Synthesis Report, p

178 Figure 38 Energy R&D Investment Patterns in IEA Countries Source: Pacific Northwest National Laboratory/Joint Global Change Research Institute Technical Paper PNWD Energy R&D Investment Patterns in IEA Countries: An Update, Paul Runci, October 6, 2005 Initial assessments in the literature suggest that an increase of about 10bnUS$ is needed over the next two decades to create the conditions for new technologies to become commercially available. 129 In fact, this would imply a doubling of current expenditures. Also the IEA estimated the R&D investment needs in its recent "2008 Energy Technology Perspectives". It listed several studies that recommend a multiplication of the current spending levels. For instance it list the Stern report that recommends a doubling of the public investment in energy RD&D (Stern et al., 2006) while several other studies even make the case that overall RD&D investments need to be increased from two to ten times the current spending levels (PCAST, 1997, 1999; Schock, et al., 1999; Davis and Owens, 2003; Nemet and Kammen, 2007). The IEA also concludes that RD&D can be considered an inexpensive insurance policy to hedge against the future risks of climate change. Current levels of investment are very unlikely to achieve the sort of step change in technology that is needed to deliver the sought outcomes. Even a doubling of current levels of investment may not be enough. It concludes in its executive summary of the "2008 Energy Technology Perspectives" that 'While details are difficult to establish, independent studies have suggested that publicsector RD&D needs to increase by between two and ten times its current level.' As such a doubling public-sector energy-related RD&D by 2012 and increase it to four times its current level by 2020 seems a sensible and minimum strategy. 129 UNFCCC 2007: Investment and Financial Flows, p