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To achieve the ambitious aim of the initiative, we promote a new approach to global climate cooperation: one that is based on creating a short-term incentive for countries and governments to take action.

The Framework

  • A new international agreement is created between participating countries. Participation is voluntary, but the agreement is binding for participating countries

  • The agreement determines a future net greenhouse gas emission profile for each country, the country’s emission benchmark. The benchmark would not serve as a commitment or as a cap

  • The agreement also determines a price per unit of net emission saving. An example for the price for carbon saving could be $50/t CO2e

  • Under the agreement, countries emitting less than their emission benchmark in any year receive an annual cash payment based on their carbon saving compared to their benchmark and the above price.

  • In order to make these payments, the agreement establishes an international fund (the Climate Opportunity Fund or Fund). The Climate Opportunity Fund finances the annual payments to  countries by borrowing from private investors through issuing long-term bonds similar to multilateral development banks. The bonds offer a financial return to investors in addition to representing a sustainable investment

  • The credit of the Fund is backed by the international agreement and the participating countries. The liabilities of the Fund are repaid in the future through the payments of participating countries. The allocation of future payments among countries is based on a pre-determined percentage or formula. The important point is that while the payments countries receive from the fund depend on their emission performance, countries’ share of future liabilities is independent of these payments received

Flow of funds during the two stages of the proposed model:

Phase 1

Phase 2

Improved prospects of reaching an effective climate agreement

Implementation requires reaching an international agreement on some key components of the scheme: the emission benchmarks of individual countries; the allocation of long-term liabilities; the price for carbon saving; and the financial sustainability of the scheme. While agreeing these points certainly poses a challenge, the prospect of reaching an effective agreement under this framework has a better prospect than under the currently pursued approach of allocating costly short-term actions for the following reasons:

  • The emission benchmarks are not legally binding caps, there are no potential penalties attached or direct transfers among countries. This makes an agreement on benchmarks politically more attractive.

  • The sum of individual benchmarks can exceed the targeted global emissions without risking the success of the scheme. The incentive for countries to emit less than their benchmark means that total emissions will be lower than the sum of the benchmarks. Agreeing to higher benchmarks is more acceptable for many reasons, not least because a higher benchmark creates the potential for receiving higher short-term payments from the Fund

  • Intended Nationally Determined Contributions countries submitted under the Paris Agreement could serve as a starting point for determining emission benchmarks. As these pledges were established by countries themselves, the implied emission levels should be acceptable for governments. Total emissions under these pledges exceed the remaining carbon budget to achieve the shared climate goal. However, as discussed above, this does not necessarily lead to actual emissions surpassing this level.

  • Agreeing the sharing of the burden in the future costs as opposed to in the short-term should be considerable more acceptable from a political perspective. As long as the priorities of decision-makers are dominated by the short-term, pushing the financial costs into the future makes an allocation of costs more attractive

  • Cooperation based on a future cost sharing agreement offers lower risk for countries, as they will only have to pay for their share of emission reductions actually delivered in the past. This contrasts with an agreement that relies on commitments for short-term action, which exposes them to the risk of no reciprocal action and the free-ridership by other countries

  • The agreement on future cost allocation can be explicitly or implicitly linked to the issue of agreeing on countries’ emission benchmarks. This represents an opportunity to create a trade- off especially for larger emitters between higher benchmarks and higher future cost allocations, which could contribute to reaching a compromise

  • The prospect of receiving short-term payments from the Fund creates a strong incentive for governments to find an agreement and to join. In a world dominated by short-term oriented priorities and heavily discounted long-term consequences, the short-term benefit of joining and making a profit on emission abatement will be attractive and an important motivation

  • Governments have a strong incentive to set the price for carbon saving at a sufficiently high level under this framework, which is the primary driver of emission reductions. The higher this price, the higher the potential short-term payments received by governments from the Fund.

  • The scheme could be launched with only a sub-set of countries and other could join in subsequent stages. As a result, an agreement by all countries would not need to be secured simultaneously, reducing the risk of delays

  • An agreement that promises to be more effective has a better chance of generating an agreement. Even though countries are likely to have different views on emission benchmarks and the future cost allocation among countries, the shared goal to effectively mitigate climate change will contribute to reaching a compromise

Advantages of this climate framework

Once in place, this proposed model offers a number of further advantages:

  • It aligns climate action with the interests of decision-makers. Decoupling financials costs from taking action, transforms incentives from free riding to maximising gains from the Fund through reducing carbon emissions. Today, mitigation efforts are characterised by individual costs and shared benefits. This is turned on its head and becomes the combination of individual benefits and shared costs

  • It aligns climate action with the time horizon of decision-makers. Borrowing by the Fund pushes the financial burden into the future, meaning that both the benefits and costs of mitigation materialize in the future. The prospects of action improve, as short-term costs are replaced by short-term benefits from the perspective of decision-makers. This, of course, implies leaving a financial debt to the future. However, this is preferable to leaving future generations a more costly and potentially insurmountable environmental burden. There is broad consensus that the sooner we act, the smaller the costs and the smaller risks of climate change

  • It creates much stronger political commitment and government action. Governments are more likely to take climate action thanks to the short-term financial incentives. Successful cooperation requires trust among countries that mitigation efforts will be reciprocal. The framework facilitates building mutual trust by changing countries’ incentives so that emission reduction becomes their best course of action even from a perspective of self-interest

  • It raises capital from private investors and helps finance the necessary transition. The capital raised by the Fund is distributed to individual governments, who can use it to finance the transition to a decarbonized economy as well as to secure the necessary political and public support for this. In addition, for many countries, especially developing ones, the cost of financing they could access would be much higher than the Fund’s cost of financing

  • It offers full domestic political and policy flexibility for countries. This will be politically attractive and it recognises that the preferred policy tools might differ across countries due to different social, political, economic and environmental circumstances and preferences. In addition to being politically attractive, this will also facilitate policy innovation

  • It does not require any international enforcement mechanism. The framework relies on an incentive as opposed to an obligation and compliance with it – countries reducing emissions receive a payment, others do not. Sidestepping the challenges of enforcement in the case of sovereign states is an advantage for any international agreement

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