EnvironmentSmith School of Enterprise and the Environment33discovery and production. What is now required from governments is a major stimulus to this cash-rich sector to encourage a significant proportion of turnover into fossil-free energy technologies and alternatives, such as carbon capture and storage (CCS). From his position in the UK Government, in 2001 Sir David King initiated an analysis of the level of energy research, public and private, in the UK. The result was stark. With the privatisation of the energy sector in the 1980s, Europe's largest gas and electricity RD&D centres, based in the UK, were broken up and shared out between the emerging utility companies, and then closed down. The level of funding in energy RD&D in the UK had therefore collapsed to a very low level [59]. A subsequent IEA analysis [27] showed that this was an international trend, with the largest decrease in the area of nuclear power RD&D. Faced with the obvious need to rejuvenate research effort into low carbon energy sources meetings were held with the CEOs of the major UK utilities, and the outcome was the establishment of a new Energy Technologies Institute (ETI) in the UK as a public-private partnership. The ETI is a £1 billion investment over 10 years, half the funds being raised from the private sector. The idea is to stimulate a much bigger and more realistic investment by the private sector into low carbon energy RD&D within each of their own organisations. Energy companies, whether in the oil, coal or gas production sectors or as utilities, will need to reconfigure and transform their operations in order to remain competitive over the coming few decades. This applies equally to oil and gas producing countries, where economic diversification will be the key to future development. The formation of the ETI embodies recognition of a way that a government can maximise funding for RD&D, by stimulating investment from the private sector. The private sector has a larger capital pool available for investment than the public sector; the energy sector is worth globally around 3 trillion US dollars pa. The private sector has to be incentivised to invest optimally in RD&D given "knowledge spillovers" that imply they cannot capture all of the returns; and governments have to demonstrate that they will benefit from increased funding for RD&D. The economic pay-off for increases in RD&D can be very high. A recent study of energy RD&D programs found that a very large proportion of them produced positive net economic gains as well as both environmental and security benefits [60]. There is, however, a tendency for companies to make short-sighted investments in order to maximise profit immediately. Government policy should act to encourage long-term planning in private sector investment decisions. Public funds should be strategically invested so as to increase spending from the private sector.There are some areas of RD&D that would be important to focus on. Globally, coal reserves are abundant and low cost; one area with a large potential for emissions reductions will therefore be in CCS for coal. A competitive source of electric power generation with lower emissions levels is also an important area for further research; options here include direct solar, hydrogen power and storage, nuclear power, solar photovoltaics and wave and tidal power. A focus of RD&D on energy efficiency gains will act to counter any increases in the cost of energy production, and so stimulate growth. This will in turn lead to more opportunities for innovation. Forestry Carbon Sequestration Recent estimates suggest that forestry could contribute an average 6.7 billion tons of emissions reductions annually, with over two-thirds of this potential coming from tropical nations. Making full use of the forest carbon sink is appealing to both the developed and the developing world. Developed nations see forest carbon sequestration as a low-cost option for mitigating climate change and meeting commitments for reduced net emissions. For the developing world, forest carbon payments could provide a sustainable source of much-needed income. At the most recent climate negotiation talks in Cancun the parties agreed on a framework on forest carbon. The lack of political opposition to an agreement on forest carbon, along with its large potential for reducing emissions, meant that it was a key area in 5Chapter 5Chapter 5: Next Steps

34Smith School of Enterprise and the EnvironmentSmith which progress could be made.The Kyoto Protocol established two separate programs for forest carbon. Annex I nations may generate carbon removal credits from certain land use, land use change and forestry (LULUCF) activities. In the developing world, the CDM rewards certain afforestation and reforestation projects by allowing them to generate emissions credits that can be sold to Annex I nations. These programs are inadequate, however, to effectively and comprehensively address the role of forests in the carbon cycle. Significant sources of forest emissions and forest sinks remain outside the scope of either program. Neither program, for example, addresses the massive amounts of carbon lost to tropical deforestation in the developing world. To increase the scope of coverage, some countries have encouraged adoption of an international program for reductions in emissions from deforestation and degradation (REDD) from developing countries. Others have suggested expanding that to include not just avoided emissions, but increases in carbon sequestration via forest planting and management (REDD+). Recent work at the Smith School for Enterprise and the Environment proposes a still more comprehensive approach, the Forest Program for Inventories in National Carbon (PINC) that applies to all forest carbon sequestration activities in Annex 1 and non-Annex 1 countries alike [35]. The Agreement developed at Cancun is based around a REDD+ scheme. Although there is much to do before it is truly operational, the Agreements do provide guidance for countries preparing to be REDD+ ready.Previous proposals differ with respect to the funding mechanism for forest carbon sequestration. Some proposals suggest a dedicated fund with resources provided by Annex 1 countries. Others have suggested that an international forest carbon program should be linked to the international emissions allowance trading program; i.e., reductions in deforestation and gains in sequestration would be rewarded with payments in the form of marketable GHG emissions allowances. The magnitude of finances required indicates the need for the involvement of the private sector. The CO2 market could provide an incentive that would motivate the private sector to contribute to scale. The establishment of these new market mechanisms will be a point of discussion next year at COP17 in South Africa.There is a general trend in the discussions towards a focus on national accomplishments rather than on project-by-project assessments. This has two important implications. First, it will be up to individual nations to develop domestic forest carbon policies and programs in response to the international forestry agreement. Second, the rewards for accomplishments will accrue to national governments. The challenge for national governments, then, in promoting forest carbon sequestration is designing a program that reliably induces landowners to protect and expand their forest carbon inventories - whether through regulations, subsidies, information campaigns, tax policy, or other mechanisms - and to take steps that will conserve and expand forest carbon stocks. In nations with large holdings of public land it may also be possible to use direct management by the government to increase carbon sequestration. Careful design of domestic programs for both private and public lands will be key to the success of the international forest carbon sequestration initiatives. It will also determine the extent to which individual countries benefit in terms of environment quality, resource management and economic development. Chapter 5