Yvo de Boer: Bring private sector into UN climate talks

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Yvo de Boer, the former UN climate chief, has called for the private sector to be enabled to participate in international negotiations and contribute around $100 billion per year to a Green Climate Fund, through a new consultative mechanism.

Between 2006 and 2010, Yvo de Boer was executive secretary of the United Nations Framework Convention on Climate Change (UNFCCC). A former head of the Netherlands Climate Change department, he is currently working as a climate change advisor to KPMG, an international advisory firm.

He was speaking to EURACTIV's Arthur Neslen.

To read a shortened version of this interview, please click here.

How will the private sector be able to fill the coffers of the Green Climate Fund, when national governments can't?

There's a broad sentiment, certainly on the part of industrialised countries, that private sector finance needs to be a significant part of the solution, and I think that that's absolutely correct. We will need both public and private sector finance to address this huge challenge. That financing will need to be partly through grants and loans, but also through market-based mechanisms.

It is a little odd that the private sector and financial institutions have no place at the table designing the Green Fund. That is exclusively being designed through an interim committee composed of government representatives. My sense is that if private sector finance is a significant part of the solution, then it should also have a significant say in how that solution is designed.

Rather than one single institution, we should be working towards a network of different public and private financial institutions that pool their collective skills in order to deliver on this. Now I well appreciate that the UN negotiations are an intergovernmental process, having been on the inside for four years.

But we're in need of some kind of consultative mechanism to help bring private sector perspectives into this debate, and ensure that we mobilise the €100 billion a year effectively for adaptation and mitigation through a mixture of public and private channels.

Why do you think the private sector is excluded from the negotiating table? Is it just over-fixation on intergovernmental mechanisms or is there a more general suspicion of corporate 'green profit-taking' among developing countries?

The Copenhagen Accord talks about the €100 billion being delivered by both public and private sources. I think many developing countries feel that a very significant portion of that €100 billion should be grants-based public finance. They are afraid that if the private sector is involved – and pointed to as a major part of the solution – then industrialised countries will not meet their public finance obligations.

That's a significant part of the underlying hesitancy about bringing the private sector into the discussion.

And of course the UNFCCC is an intergovernmental process and the role of observer organisations is relatively limited within it.

But since climate finance is absolutely critical to the ultimate solution and everyone recognises that the bulk of relevant investments actually come from the private sector, to then design the solutions without their involvement doesn't make any sense to me.

What percentages would you like to see the Green Climate Fund being composed of?

That's very hard to say at this stage. I think that the key challenge is intelligent financial engineering and lending of financial resources, grants, concessional finance and commercial loans. We're not just talking about public capital from industrialised countries, but also public finance in developing countries.

Part of the challenge relates to improving investment conditions in developing countries through better regulation, tax systems and governance. We really are at the beginning of an exploratory journey.

What principles of ownership, management, purpose and accountability for this new consultative mechanism do you have in mind?

An interim committee was established to design the Green Climate Change Fund that resulted from the Copenhagen Accord. It is composed of government representatives, and will meet a number of times this year.

But the private sector only has an observer role in the committee and I think it would be beneficial to have a consultative mechanism that allows members of that committee to seek more direct input and advice from the financial community – from international development banks, commercial banks, pension funds and other energy and climate change investors – that want to be part of that Green Fund.

Wouldn't it institutionalise market-based solutions within the UN's decision-making process?

This idea does not relate to the negotiating process itself. It relates only to the design of the Green Fund which is happening outside the formal negotiations. There's already a decision from the parties to the Climate Change Convention that existing market based mechanisms will continue, that they need to be part of the solution. What I'm suggesting is that in designing this new financial mechanism, it's important to seek advice and input from the private sector.

But why should the private sector be represented when it is not a government, and is only accountable to its shareholders?

It's not a matter of being represented, or giving the private sector a voice in the intergovernmental process. It is a matter of tapping into the knowledge of the financial community when designing a financial mechanism.

Could the idea win widespread support?

You potentially could see some resistance from developing countries – that this would be potentially a way of shifting public sector financial obligations to the private sector. I think that is a real concern.

But at the same time, to cut off your nose to spite your face and say we have to keep the private sector out of the discussion would at the end of the day be to the detriment of developing counties.

How would the 'network of different public and private financial institutions' you envisage be different to the current notion of a single Green Climate Fund?

Well, the Green Fund that's being proposed at the moment is only a name. My suggestion is that in designing it we should not be thinking about a single financial institution, but about a family of financial institutions that combine their different expertise and financial roles to achieve climate change goals more effectively.

Isn't it an attempt to rewrite the Copenhagen and Cancún Accords?

No, because the Copenhagen Accord talks about the $100 billion coming from all channels – including the private sector – so the notion of private finance is already included. There was a decision immediately after Bali that there should be a continuation of the current market-based mechanisms. The role of future market-based mechanisms is in fact one of the action items that emerged from Cancún.

So this is in no way rewriting the Cancún Accord or Copenhagen decisions, but it could be a way of involving financial private sector expertise in the design of a truly effective solution.

I see a lot of enthusiasm in the private sector to engage with and be part of the solution. That applies to commercial banks, private equity companies, sovereign wealth funds and pension funds, as well as companies which feel they can be part of the solution.

Wind and solar energy companies are keen to find ways in which they can play a more significant role in new developing countries' markets. An intelligently designed financial mechanism can help to make that possible.

Do you think the developed world's historic responsibility for climate change should be shared between the public and private sectors or should governments, as representatives of the nations which put the CO2 into the atmosphere, bear first responsibility?

Well, there is a historic responsibility on the part of industrialised countries. And the emissions generated in those countries largely come from the private sector. But I think it is also important to remember that even the public finances that contribute to the solution, ultimately come out of the tax pockets of individuals and corporations. So at the end of the day, even with public finance, it is taxpayers and companies that foot the bill.

But how reliable is such funding? Critics say that the carbon market is barely secure enough for Western investors. It has proven itself massively vulnerable to fraud. If you were a developing world government, would you bet the future of the planet on it?

Actually, a growing number of developing countries are interested in participating in market-based mechanisms because they see them as a significant way of attracting capital to drive innovation in their own countries. The World Bank recently launched a carbon market readiness initiative to help developing countries get ready for market-based approaches. My understanding is that there is a very keen interest in that programme.

A broader concern for me is that we end up having a supply of cost-effective credits into the market because so many developing countries are taking action but there is not enough demand in that market. That is because industrialised countries are not showing enough ambition with their emissions reductions.

At the moment, the only meaningful emissions buyers in the international market are Japan and the EU. If we see market-based mechanisms as a significant part of the solution then we also need adequate demand, which is created by ambitious industrialised country reduction targets.

I fully appreciate the developing countries' point that they want stability and predictability in terms of how finance is provided. That should be a major focus of attention in this new Green Fund, as well as in the negotiating process. That clarity needs to be there and I absolutely subscribe to the historic responsibility of industrialised nations to provide public sector financial support to developing countries, especially for adaptation. But if you look at energy sector investments, over 80% of those investments are currently private and not public.

I don't realistically see public finance performing 100% of the role in relation to the €100 billion. In that sense I share the European Commission's view.

An alternate view might be that the private sector is motivated by profit, while the developing world's needs to mitigate and avoid climate change cannot always be addressed that way. And is there not an ethical obligation to use any profits generated to make more mitigation and more avoidance of climate change?

First of all, I think that we are fortunately seeing a gradual redefinition of the term 'shareholder value' to mean more than profit alone.

Secondly, the international money to buy emissions reduction credits will come out of the pockets of companies in the [global] north. So the private sector's financial contribution is already significant.

Thirdly, if this whole exercise is about driving sustainable green economic growth around the world, then there has to be the potential to make a profit in doing that, otherwise it won't happen. So I think that private sector investment in developing countries to drive green growth there is nothing dirty.

But is the reality investment or profit-taking? In 2005, the Clean Development Mechanism (CDM) paid factory owners $4.7 billion to close down fluorinated gas factories – 47 times more than was needed – because it was most profitable.

In 2008-9, 84% of all ETS carbon offsets – worth 1.2 billion – were paid to China and India to close HFC-23 plants when the real cost of doing so was €13.8 million annually. Critics would say that there is a pattern where the private sector is involved which is: 'Profit first. Environment whenever.'

No, I don't subscribe to the notion of 'Profit first, Environment whenever.' I think there are a growing number of companies around the world which recognise that sustainability needs to be part of their business agenda. Their business environment is evolving and changing as well.

Having said that, it is of course a government responsibility to ensure that international market-based mechanisms and systems are environmentally responsible in the way they function.

If there is an obligation for a country to destroy a certain environmentally harmful substance, you can then do one of two things. You can either put in place legislation that forces a country to destroy it or you can put in place a market mechanism that rewards it for destroying that substance.

What about the tendency of the carbon market to create windfall profits for polluters? Power companies are estimated to have accrued windfall profits of some €19 billion in the EU Emissions Trading Scheme (ETS)'s Phase l, and look set to make up to €71 billion in Phase ll. Subsidies to energy-intensive industry through the two phases could amount to another €20 billion. How does funding polluters like this helping the planet?

By reducing the quantity of free emissions rights available on the market, you are reducing emissions of greenhouse gases so that is good. But the question that you're pointing to is: how do power companies use the extra revenue that they receive as a result of that policy process? I believe that the primary purpose of revenue generated in this way should be to further reduce emissions.

Is that happening?

At the moment it is undeniably true that power companies in Europe have made windfall profits as a result of the way in which the ETS is designed. I think part of the challenge in moving forward is to make sure that financial resources are used in a way that contributes to the solution.

I think that there is no direct linkage between the extra revenue that power companies receive as a result of the ETS and how financial resources are mobilised for developing countries.

What about carry-overs? A surplus of around 970 million allowances from the second phase of the ETS (2008-2012) can be used in the third phase, which means that some polluters won't need take to take action domestically until 2017.

Part of responsible government is to stick to what you've agreed and not change the rules of the game half-way through. If there is an agreement that emissions rights can be carried over then I think it needs to be honoured.

One of the merits of the ETS over some more extreme approaches is that Europe has tried to gently ease industry into emissions trading as the central approach for dealing with climate change.

Over time, I would expect conditions to become more stringent and free allocations more limited.

Do you think that the 'rules of the game' were correctly set?

Compared to the situations in Europe and Australia, in Europe we started with generous emissions ceilings and free allocations of emissions rights. As a result of what I see as a sensible approach, European industry had the opportunity to get used to emissions trading as a central policy pillar.

In Australia, they tried to start off with a much more limited free allocation of emission rights and as a result, they ran into considerably more resistance.

I think that while yes, there is a sense of urgency, while we are not delivering the emissions reductions goals we need to, there is a very clear benefit to taking the phased approach.

But isn't that the heart of it? Wasn't the resistance in Australia mounted by the private sector to measures which would have eaten into their shareholders' profits?

There is naturally going to be a discussion between the public and private sectors about the price of emissions rights and how that is going to affect the profitability of companies. I think that is only healthy.

Part of that is taking place in a broader international context: What's happening in the rest of the world? Are other countries moving at the same pace? Are competitors being confronted with the same stringency in terms of climate legislation?

I don't think it will benefit the climate change issue if we close down the European economy and replace it in other parts of the world.

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