28Smith School of Enterprise and the EnvironmentSmith Concerns have been raised that trading in CO2 may create or reinforce power monopolies and constitutes 'carbon colonialism' . These objections indicate strong advantages of moving to auctioning of permits or to other forms of permit distribution, such as on a per capita basis, as discussed in the following section.Funding for Mitigation and Adaptation in Developing CountriesOne of the big issues of climate change is that those who have not caused the problem will be those that suffer the effects most. The costs of climate change for the less developed countries are estimated to be high. Furthermore, the less developed countries, such as many of the African nations, cannot afford the high costs of mitigation and adaptation. The least developed nations are often neglected in climate change deals. In 2008, investment in sustainable energy in developing countries reached US$36.6 billion . Of this amount Africa received less than 1 per cent. There is a trend for investment from developed countries to be concentrated in the countries with emerging economies within developing regions (see figure 5). For example, in 2008, of the investment in Asia and Oceania, China and India together CO2 trading schemes have become the dominant form of pricing since the Kyoto Protocol introduced market mechanisms as a way of reducing emissions. The markets have grown considerably since the formation of the EU ETS and look set to grow further both geographically and in volume. In 2008, the CO2 trading markets were worth around US$120 billion and it is estimated that within a decade trading volumes could reach US$1 trillion. This would be similar to trading in commodities like oil, gas and gold .CO2 trading has been adopted instead of carbon taxes largely due to its appealing political characteristics. Current trading schemes start by distributing allocations free of charge and move to auctions over time. This appeals to industry as it allows for a less dramatic adjustment than a tax. However, free allocations based on historical emissions have significant drawbacks. First, given the considerable market value of permits, free allocations imply giving high emitters significant 'windfall profits'. This effectively rewards those that are responsible for (unknowingly) causing the problem. It can also incentivise increases in emissions in order to gain more permits. Such 'grandfathering' could act to give competitive advantages to incumbent firms if they get large allocations; thereby reducing competition . Figure 5 - Registered CDM projects by host party, total number 3195. (Source: http://cdm.unfccc.int)Chapter 5Chapter
EnvironmentSmith School of Enterprise and the Environment29accounted for 80 per cent. In South America, Brazil accounted for 88 per cent . To date, Africa hosts fewer than 2 per cent of all registered CDM projects.There are several reasons for this. First, African and other least developed countries make up a very small percentage of the world's GHG emissions. Therefore investors have focused on the 'low-hanging fruit' of high emission nations. In addition, the majority of emissions savings opportunities in the least developed countries come from smaller projects, as demonstrated by figure 6. The costs of establishing a CDM project are high due to the strict requirements and administration processes. For smaller projects these requirements and costs make up a much larger fraction of the project costs in comparison with larger projects. There are two strategies that have been developed to overcome these issues in the form of the Bundling Approach and the more recent Programmatic Approach introduced in 2007. The latter was introduced in order to overcome issues with Bundling Approach which required very high levels of planning due to its inflexibility. The strict requirements when implementing a CDM project represent another reason the majority of projects have been implemented in emerging nations; there is relatively more safety involved in investing in an emerging nation with the proven experience and technical skills to carry out the project. The current international approach to climate mitigation and adaptation financing is insufficient as it lacks a functioning and permanent system for resource transfer to developing countries. It largely depends upon arbitrary contributions of grant resources from governments' treasuries. In addition, the private financial flows as mentioned above do not meet the climate needs of developing countries. Long-term and stable flows of climate financing that are sufficient to meet the requirements of developing countries are unlikely to materialize in view of the dire fiscal prospect of most developed nations.The Cancun Agreements sets out funding for developing nations approaching US$30 billion for 2010-12 and moving to US$100 billion by 2020. This latter figure is in the range of that estimated to be 5Chapter 5Chapter 5: Next StepsFigure 6 -The long-tailed emissions reductios curve for CDM projects. The majority of the emissions reductions opportunities in the least developed countries lie within the tail. Adapted from UNEP 2008 .