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Wednesday, October 29, 2008

China's $300bn request

According to the FT, China has just "raised the price of its cooperation in the world's climate change talks" by demanding that developed countries spend 1% of GDP on transfer funds to poorer nations to help them reduce emissions. For the EU, this would equate to $160bn, and for the US, $130bn. The Chinese conceded that even such large funds "might not be enough".

China has done more than just raise the price for its cooperation - unless this is some kind of ruse, it has thrown a spanner in the works of climate change diplomacy. It is supremely unlikely that the US or Europe would be at all in the mood right now to pledge such enormous sums.

Some transfers will occur through the continuation of the Clean Development Mechanism (CDM) - which allows western governemnts and companies to offset their emissions by buying in permits for apparently 'green' projects in developing countries. But leaving aside the fact that these projects are usually useless or harmful, CDM transfers won't put much of a dent in the amount the Chinese are asking for. If we go with the Commission's estimate that between 2013 and 2020 EU industries in the Emissions Trading Scheme will be allowed to offset around a third of their reduction commmitments through the CDM, this would mean 100-150 million tonnes worth of 'reductions' could be 'imported' in this manner.

Even assuming a relatively high CDM price of $25 per tonne, this would only equate to transfers of just under $4bn. Even if ALL of the reduction commitment under the ETS was to be met through offset credits (which will probably actually happen in the current trading phase), this would imply transfers of about $10bn. There'll be some demand from the non-ETS sectors and national governments, but that won't raise the transfers by more than a few billion dollars worth of permits. It's a long way off $160bn.

In short, what the Chinese are asking for goes way, way beyond the existing mechanisms for transferring (pretty substantial) funds to developing countries to fight climate change. The amount of money being requested is ludicrous and unrealistic and will probably be scaled down, but the principle of asking for large financial transfers is likely to be maintained during negotiations. India has been less brazen, but will probably row in behind the Chinese on this.

As Prof. Dieter Helm (who advises the UK government on energy matters) has pointed out, the rest of the world doesn't regard the EU 20-20 by 2020 targets as realistic or credible (and neither it seems do many EU member states). The EU position is mere “political rhetoric” he says. Bearing in mind this lack of seriousness/ realism on the part of the EU, it's not hard to see why the Chinese want to secure huge sums of cash as a kind of insurance policy before making any binding pledge on carbon reductions.

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