Finance, Trade Policy, and the Implementation of the Paris Agreement

Part of Chapter 10 | Climate Change and Energy

By Zhang Zhongxiang
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This essay will focus on three key issues in the context of the Paris Agreement (PA): finance, trade and climate, and PA implementation. To the extent possible, discussion of each issue will cover four aspects: description of the problem, existing efforts to address the problem, policy solutions, and suggestions for Sino-U.S. cooperation (or ways of managing differences).

Finance

Financial support from developed countries has been one key issue of greatest concern to developing countries. At the Paris climate change conference, China proposed and insisted on “a concrete roadmap” to scale up the level of pre-2020 financial support by developed countries to achieve the goal of jointly providing $100 billion annually by 2020 for mitigation and adaptation. China also insisted on “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.”

However, developing countries consider the finance section of the PA to be too weak, which does not contain any compulsory language to scale up climate finance, and demand that it be strengthened in subsequent negotiations. On behalf of developed countries, Australia and the United Kingdom delivered in October 2016 a roadmap for meeting the collective target of $100 billion per year by 2020. This roadmap report suggests that public support will increase to $66.8 billion in 2020 from $43.5 billion in 2014 and would be leveraged to mobilize private finance to reach the full collective pledge.1 It enhances transparency on how developed countries plan to reach the collective target. The increase in climate funds and the relatively high share of public finance are encouraging signals.

However, this report, as well as the widely debated climate finance report produced by the Organization for Economic Cooperation and Development (OECD), overestimates the net climate support provided to developing countries.2 Both reports also reveal the persistent neglect of adaptation needs in the poorest countries, with less than 20 percent of international climate finance going to adaptation. The PA specifies a balance between climate mitigation and adaptation. While balance could be interpreted differently, by any standard 80 percent versus 20 percent of international climate finance would not be considered a balance between climate mitigation and adaptation.

Negotiators need to agree on what should be included in climate finance, how best to account for climate financing, and what the next steps are to both increase funding for measures to build resilience to climate impacts and how to balance climate mitigation and adaptation.

The Paris Committee on Capacity Building (PCCB) aims to support developing countries in their climate action efforts. PCCB is now up and running. Negotiators agreed that in 2017 it will focus on supporting implementation of countries’ national climate plans.

The U.S. finance contribution in the PA context depends on the U.S. stance on the PA, given that on the campaign trail Trump promised to cancel U.S. involvement in the PA and cut U.S. international obligations to provide climate-related funding. President Trump has already proposed to cut climate-related funding in his first budget proposal. This includes proposed budget cuts for the Global Climate Change Initiative, which, as a presidential development initiative, integrates climate change considerations into U.S. foreign assistance. This would also affect entities such as the Green Climate Fund and the Climate Investment Funds, supported by George W. Bush’s administration with $2 billion partly to boost renewables abroad.3

To what extent the United States will retreat remains to be seen. In this context, however, there is one area offering a promise of Sino-U.S. cooperation. That is to control public investment flows to projects with high pollution and carbon emissions both domestically and internationally.

There is concern around the environmental impact of China’s overseas energy finance. Between 2007 and 2014, 66 percent of overseas power-generation projects financed by Chinese policy banks went to coal-fired power projects, with 28 percent going to renewable power plants. By contrast, during the same period the World Bank had not financed any coal-fired power generation project, and 88 percent of the overseas power generation projects financed by multilateral development banks (MDBs) go to renewable power plants.4

Hervé-Mignucci and Wang found that for overseas coal-fired power projects, while Chinese banks offer Chinese companies relatively easy access to low-cost finance, they do not seem to be offering more favorable rates than other multilateral development banks and export credit agencies (e.g., the KfW Development Bank, Japan Bank for International Cooperation, Japan International Cooperation Agency, and Asian Development Bank).5 Moreover, China’s support for exports is technology blind. There is no clear differentiation between financing for power versus nonpower projects, or for coal power versus noncoal power projects.

U.S. has led efforts toward ending overseas coal financing. The Obama administration set new guidelines to end most overseas coal financing through the U.S. Export-Import Bank and the Overseas Private Investment Corporation. Since then, the United States had pushed the issue with dozens of countries and brought the issue before the OECD. The UK, France, the Netherlands, and several Nordic countries as well as the World Bank have since enacted similar restrictions, most of which allow coal financing only for the world’s poorest nations.

In September 2015, the United States and China committed to “controlling public investment flowing in projects with high pollution and carbon emissions both domestically and internationally.” In November 2015, the OECD countries committed to common standards for coal subsidies, also potentially significantly restricting international finance for coal power.

The ambition of China’s commitments to control public investment depends on the definition of public finance, the scope of the commitment (for example: Which projects will no longer receive public support? Will only coal power generation projects meeting specific criteria be eligible to funding? Are there any exceptions for some projects depending on who is receiving public money?), and whether they are implemented strictly no matter what China’s level of commitments is.

Trade and Climate

The Paris Agreement is built on a bottom-up approach. The decentralized nature of the climate agreement means that countries have considerable flexibility in determining their own climate targets and instruments incorporated in their nationally determined contributions (NDCs). Moreover, under the PA, countries will be mandated to submit an updated NDC every five years, with parties expected to progress in the level of ambition in each round in line with their national circumstances.

In the context of trade, one issue is the potential introduction of border carbon adjustments (BCAs). BCAs are a policy tool intended to respond to carbon pricing that differs across jurisdictions. BCAs could come in the form of import duties or the forced surrender of emissions allowances from domestic emissions trading schemes. While BCAs are legally and politically controversial, they are unarguably considered a potential policy option to address carbon leakage and competitiveness concerns.6 BCAs in the form of emissions allowance requirements under the U.S. proposed cap-and-trade regime were the most concrete unilateral trade measure put forward to level the carbon playing field.7 In the U.S. Senate, the Boxer Substitute of the Lieberman-Warner Climate Security Act (S. 3036) mandates that starting from 2014 importers of products covered by the cap-and-trade scheme would have to purchase emissions allowances from an International Reserve Allowance Program if no comparable climate action were taken in the exporting country.8 In the U.S. House of Representatives, the American Clean Energy and Security Act of 2009 (H.R. 2998), the so-called Waxman-Markey bill, sets up an “International Reserve Allowance Program” whereby U.S. importers of primary emission-intensive products from countries having not taken “greenhouse gas compliance obligations commensurate with those that would apply in the United States” would be required to acquire and surrender carbon emissions allowances.9

In the PA context to date, Mexico is the only country to explicitly refer to the possibility of border carbon adjustments in its NDC. The Mexican NDC states that its 25 percent emissions-reduction commitment could be increased to 40 percent, subject to a number of conditions, including border carbon adjustments. While only one NDC includes an explicit reference to border carbon adjustments, this does not mean that others may not consider it.10

Depending on the extent to which the United States retreats from the PA, the United States could be confronted with potential carbon tariffs imposed by other parties, on the same grounds that the United States used to threaten other counties for not taking actions comparable with its own. In this regard, it would be beneficial if the United States would remain a party to the PA, but would water down some initiatives and efforts undertaken under the Obama administration. The United States seems to be going in this direction. President Trump already proposed to cut climate-related funding in the first budget, and signed an executive order instructing the U.S. Environmental Protection Agency (EPA) to begin rewriting the 2015 Clean Power Plan regulation that limits greenhouse gas emissions from existing power plants. Given that the rule on Clean Power Plan is tied up in litigation on the U.S. Court of Appeals for the DC Circuit and that the agency will have to justify reversing the regulation and reaching the opposite conclusion of the EPA under the Obama administration—which argued it was technically feasible and legally warranted to reduce carbon pollution by about one-third by 2030, compared with 2005 levels—to revisit the matter and rewrite the regulation will trigger a laborious rule-making process and a possible legal fight.11

Implementing the Paris Agreement

The Paris Agreement aims to strengthen the global response to the threat of climate change by keeping a global temperature rise this century well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius. Under the Paris Agreement, all parties have outlined their climate action plans known as NDCs, to be implemented from 2020 and expected to be scaled up over time.

While the PA establishes legally binding obligations of conduct, it does not establish a legally binding obligation for countries to actually achieve their contributions. Negotiators need to work on details of the PA and put in place a process to design the rules and processes that will guide countries in fulfilling their existing climate commitments and scaling up their commitments over time. Countries agreed to start in 2018 a facilitative dialogue to take stock. Negotiators need to decide how the 2018 process will proceed. Any rules and processes, once agreed, help to assess where countries stand both individually and collectively in terms of meeting their own pledges and the collective target, and lay out updated national climate plans to accelerate climate action and close the emissions gap.

Transparency in the implementation of countries’ contributions is the backbone of the PA. The PA for the first time establishes a universal transparency system. This new system substantially increases the transparency requirements for mitigation actions by developing countries, and at the same time, meets the developing countries’ demand for including adaptation and increasing transparency for developed countries’ provision of support.

In designing an enhanced transparency framework, negotiators in subsequent conferences need to strike a balance between common guidelines and flexibility. On the one hand, common guidelines are applied for all countries regarding what information should be included and how countries can improve the quality of their reported information over time. On the other hand, flexibility allows different responsibilities for developing countries based on their national circumstances and capacity constraints.

On the campaign trail, Trump promised to cancel U.S. involvement in the PA and cut U.S. international obligations to provide climate-related funding. While President Trump continues to attack climate change policy, he has not indicated whether the United States would remain. U.S. Energy Secretary Rick Perry said that he believes that the United States should remain part of the deal, but renegotiate it. White House spokesman Sean Spicer said that the administration expected to make a decision on whether to remain a party to the deal by the time leaders of the Group of Seven wealthy nations meet in late May.

According to Article 28 of the PA, any country leaving this UN deal will take four years. Even if the United States decides to withdraw from the PA, it gets what it wants in four years. As discussed earlier, by doing that the United States will pay high political and diplomatic costs.

To what extent the United States will retreat remains to be seen. On the one hand, in a bid to make the United States fully energy independent, Trump does support renewable energy, along with sources such as fossil fuels. On the other hand, Trump lost the popular vote, and a large number of states, cities, and counties across the United States have been taking great actions and efforts toward climate mitigation and wide use of renewables, even in those states where Trump won. Sixteen Fortune 500 big businesses across the U.S. economy (Apple, BHP Billiton, BP, DuPont, General Mills, Google, Intel, Microsoft, National Grid, Novartis Corporation, PG&E, Rio Tinto, Schneider Electric, Shell, Unilever, and Walmart) signed a petition on April 26, 2017, urging President Trump to keep the United States in the PA on climate change.12 A poll released in April 2017 shows that President Trump’s stance and policies on climate change are opposed by a majority of Americans.13 All these may restrict the space of the Trump retreat.

In the meantime, the European Union and China are leading the global community in keeping collective pressure on the United States, restricting its potential damage to a minimum. In Paris, China had shown itself both a great collaborator and leader in global governance. With a potential vacuum left from the U.S. retreat, China should take this opportunity and strengthen its role in the global governance of climate change. Meanwhile, it should avoid taking too many responsibilities that go beyond its capabilities and capacity.

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[1] Department of Foreign Affairs and Trade of Australia, Roadmap to US$100 billion, October 2016, http://dfat.gov.au/international-relations/themes/climate-change/Documents/climate-finance-roadmap-to-us100-billion.pdf.

[2] Ibid.; Organization for Economic Co-operation and Development, Climate Finance in 2013–14 and the USD 100 billion goal: A report by the OECD in collaboration with Climate Policy Initiative, 2015, http://www.oecd-ilibrary.org/docserver/download/9715381e.pdf?expires=1497888253&id=id&accname=guest&checksum=8A0BDB16696F8B2C0F6DBAB13FD077B0.

[3] “Lean, not green: America’s proposed budget cuts will be bad for the environment,” Economist, March 23, 2017, http://www.economist.com/news/international/21719466-and-signal-they-send-even-worse-americas-proposed-budget-cuts-will-be-bad.

[4] Kevin P. Gallagher, Rohini Kamal, Yongzhong Wang, “Fueling Growth and Financing Risk: Benefits and Risks of China’s Development Finance in the Global Energy Sector,” Boston University Global Economic Governance Initiative, May 2011, https://www.bu.edu/pardeeschool/files/2016/05/Fueling-Growth.FINAL_.version.pdf.

[5] Morgan Hervé-Mignucci and Xueying Wang, “Slowing the Growth of Coal Power Outside China: The Role of Chinese Finance,” Climate Policy Initiative, November 2015, https://climatepolicyinitiative.org/wp-content/uploads/2015/11/Slowing-the-Growth-of-Coal-Power-Outside-China.pdf.

[6] Zhongxiang Zhang, “Competitiveness and Leakage Concerns and Border Carbon Adjustments,” International Review of Environmental and Resource Economics, Vol. 6, No. 3 (2012): 225–87, http://dx.doi.org/10.1561/101.00000052; Samuel Kortum and David A. Weisbach, Border Adjustments for Carbon Emissions: Basic Concepts and Design, Resources for the Future, March 11, 2016, http://www.rff.org/files/document/file/RFF-DP-16-09.pdf.

[7] Zhongxiang Zhang, “The U.S. Proposed Carbon Tariffs, WTO Scrutiny and China’s Responses,” International Economics and Economic Policy, Vol. 7, Nos. 2/3 (2010): 203–25, https://ssrn.com/abstract=1594743; Zhongxiang Zhang, “Competitiveness and Leakage Concerns and Border Carbon Adjustments.”

[8] United States Senate Democrats. “The Boxer Substitute Amendment to S. 3036, the Lieberman-Warner Climate Security Act of 2008,” https://democrats.senate.gov/2008/05/29/the-boxer-substitute-amendment-to-s-3036-the-lieberman-warner-climate-security-act-of-2008/#.WUgNdO3yvcs.

[9] United States Library of Congress. “H.R.2998—American Clean Energy and Security Act of 2009,” https://www.congress.gov/bill/111th-congress/house-bill/2998/text.

[10] Clara Brandi, Trade Elements in Countries’ Climate Contributions under the Paris Agreement, International Centre for Trade and Sustainable Development, 2017, http://www.ictsd.org/sites/default/files/research/trade_elements_in_countries_climate_contributions.pdf.

[11] Juliet Eilperin and Brady Dennis,Donald Trump moves to erase Barack Obama’s legacy on fighting climate change,” Washington Post, March 29, 2017, http://www.smh.com.au/world/donald-trump-moves-to-erase-barack-obamas-legacy-on-fighting-climate-change-20170328-gv8kru.html.

[12] “Letter to White House re Paris Agreement,” April 26, 2017, https://www.c2es.org/docUploads/business-letter-white-house-paris-agreement-final-04-26-2017.pdf.

[13] Jason Le Miere, “ Trump’s Climate Change Policy Is Strongly Opposed by Americans, Poll Shows,” Newsweek, April 6, 2017, http://www.newsweek.com/trump-climate-change-policies-poll-580049.