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A dual carbon pricing system to save rainforests in Indonesia offers great hope.
THE official communique from the Cancun climate-change conference cannot disguise the fact that there will be no successor to the Kyoto Protocol at the end of 2012. Japan, among others, has withdrawn its support for extending the treaty.
This sounds like bad news, as it means there will be no international price on carbon, and, without a market price, it is difficult to see how the reduction of carbon emissions can be efficiently organised. But appearances can be deceiving.
Even as the top-down approach to tackling climate change is breaking down, a new bottom-up approach is emerging. It holds out better prospects for success than the cumbersome United Nations negotiations.
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Instead of a single price for carbon, this bottom-up approach is likely to produce a multiplicity of prices for carbon emissions. This is more appropriate in reducing carbon emissions than a single price, because there is a multiplicity of sectors and methods, each producing a different cost curve.
The market price of anything is always equal to the marginal cost. When there is a single price, all the various cost curves are merged into one and low-cost projects enjoy large rents. This makes the cost of reducing carbon emissions much larger than it needs to be.
This was amply demonstrated by the working of the Kyoto Protocol in practice. The carbon-trading scheme that it established gave rise to many abuses. For example, former communist countries earned emission credits at zero cost on heavy industries that they had to shut down and reaped windfall profits selling them. So the Kyoto Protocol’s will be no great loss.
The same applies to the protracted negotiations between developed and developing nations. The developed nations promised to pay reparations for their past sins at the Rio de Janeiro summit in 1992 but kept deferring their obligations by negotiating. Meanwhile, conditions changed over time: China, following decades of booming growth, replaced the US as the largest emitter.
The negotiations have taken on an increasingly unreal air. At present the dispute revolves around how governments will deliver $100 billion annually by 2020 to help developing countries confront climate change, given that even the $10 billion Fast Track Fund cannot be cobbled together without using smoke and mirrors. By failing to make any progress beyond keeping the talks alive, the Cancun summit has given the impression that nothing is happening, and that the situation is hopeless.
That is not the case. Countries such as Germany are making binding unilateral commitments that are not conditional on what other countries do, and ”coalitions of the willing” are being formed to tackle particular sectors. The REDD+ partnership (Reducing Emissions from Deforestation and Forest Degradation), an effort to create financial value for the carbon stored in forests, is the prime example. Indeed, the greatest progress is being made where the problem is most urgent: it is much easier to preserve forests than restore them.
The case of Indonesia deserves special attention. Indonesia has become the third-largest polluter in the world, after China and the US, because much of its forest grows on peatlands. When the trees are cut and peatlands drained, the carbon accumulated over millennia is exposed and oxidised – often in the form of fires that envelop neighbouring Singapore and Malaysia in smoke. Today, half of Indonesia’s peatlands remain intact; if they were exposed, emissions would double. President Susilo Bambang Yudhoyono is determined to prevent this, and he has received financial support for his efforts from Norway. Their partnership has already been joined by Australia, and others will soon follow.
The partnership is path-breaking in several ways. Yudhoyono is introducing a moratorium on the exploitation of peatlands and virgin forests. A REDD+ agency will be charged with treating rainforests as a natural resource that is to be preserved and restored. This will also transform governance and the delivery of official development assistance (ODA).
The REDD+ agency will have a domestic governing board that will co-ordinate the activities of all the governmental units concerned with rainforests, and an international board that will authorise and monitor the spending of ODA funds, which will support home-grown institutions instead of administering projects introduced from outside.
Eventually, it should lead to the establishment of a global fund for rainforests and agricultural adaptation. The global fund would introduce two prices: one for carbon saving by restoring forests and one for avoiding carbon emissions by preserving them.
This in turn sets an example for other sectors. In this way, carbon pricing will be introduced and international co-operation established from the bottom up, on a sectoral basis rooted in demonstrated results.
Written by George Soros
Sceptre Group Limited is a specialist investment firm focused in low carbon financial investments such as sustainable biofuel plantations, agricultural farmland and green technologies. For more information on Biofuel Investments, please visit Sceptre Group’s website at www.sceptreinternational.com.
Source: PROJECT SYNDICATE – George Soros is chairman of Soros Fund Management and of the Open Society Institute.