Only on Friday, a new UN report said the current projected financial costs for adapting to climate change might be a gross underestimate. Only on Friday, a new UN report said the current projected financial costs for adapting to climate change might be a gross underestimate.
Written by Amitabh Sinha | Lima | Posted: December 7, 2014 2:03 am
Climate change talks, one would assume, would be driven mainly by environmental concerns. But going by the buzz in Lima, money seems to be an equally big, if not bigger, driver of the way the climate agreement will be shaped. Some, of course, argue that money is the limiting factor and not the driver.
With huge sums of money involved in the kind of actions necessary to effectively deal with climate change, finance has always been an integral part of climate discussions. The order of financial commitments talked about is in tens and hundreds of billions of US dollars per year, sometime even trillions of US dollars.
Only on Friday, a new UN report said the current projected financial costs for adapting to climate change might be a gross underestimate.
The Adaptation Gap report by the UN Environment Programme said the adaptation costs can be at least two to three times higher than the current estimates of about $70-100 billion per year by 2050 even in the best case scenario. It could even reach $500 billion per year by 2050 if adequate steps on cutting greenhouse gas emissions are not taken.
The costs of reducing emissions can be even higher as it has economy-wide impacts. Estimates put that figure in the range of 1 to 2 per cent of global GDP per year under different scenarios. And there are costs associated to a variety of other climate actions as well.
Any talk of climate action, it is evident, is meaningless without huge amounts of money being apportioned for it.
The reason why finance has been dominating discussions at Lima is that for the first time, big money has actually started flowing in climate channels. There is a maze of financial mechanisms through which climate money flows, making exact computations difficult, but some encouraging assessments have come over this week. The most clear is the $10 billion added to the Green Climate Fund, established only recently, in a matter of a few months. It has got everyone excited, even though this money is only a pledge right now and is still to be delivered.
The Secretariat of UN Framework Convention on Climate Change (UNFCCC), the umbrella agreement under which the climate talks take place, put forward a first of its kind assessment which found that hundreds of billions of dollars in climate finance had already started flowing across the globe. Annual average flows were of the order of $340-650 billion, “possibly higher”, in 2011 and 2012. This included between $40-175 billion in climate support to developing countries from the developed world.
“The good news is that money is not an issue. There is plenty of money out there,” Aliz Mazounie of Climate Action Network, a group of climate non-government organisations, said. She said there was a need to further convert “bad” money, like money being used on subsidies for fossil fuels, into “good” money.
At the 2009 Copenhagen climate meet, developed countries had pledged to mobilise $ 100 billion every year by 2020, through public and private sources, and make it available for poorer nations to use it for their climate actions. These countries still swear by that commitment.
However, the scale, and consistency, of the requirement is such that even all this money might not be enough. Christiana Figueres, the topmost official of the UNFCCC, called the $100 billion pledge as “frankly a very, very small sum”.
“We are talking here about trillions of dollars that need to flow into the transformation at a global level,” she said.
Stefan Schwager, co-chair of the standing committee on finance which put out the assessment on climate finance flows, said it was good to know that the money flows were real and not imagined. “Climate finance flows have always been a little bit of sore spot at the negotiations over the last few years because nobody had a clear figure,” he said.
The sudden availability of money, and the prospect of more money being made available in future, has led countries like India to start making preparations to access this money to fund their climate programmes. The Indian government has already begun an exercise to complete all the necessary formalities early so that when the money does start coming in the Green Climate Fund, for example, it can move fast to access it.
“Why not? If money is being made available and we are entitled to tap into it, we should claim it. There would be requirement of thousands of billions of dollars for our climate action programmes and most of it would have to be raised through domestic resources. If we are able to access some money from other resources we would welcome it,” said Susheel Kumar, the head of the Indian delegation at Lima.
# $9.7 billion in Green Climate Fund till now. Contributors include US ($3 billion), Japan, Canda, Spain, Norway, Germany, Australia and some others.
# $100 billion to be raised per year from 2020 by developed countries
# About $650 billion in climate flows annually in 2011-12
# Up to $175 billion in annual support to developing to developed nations
# Climate money flows through a variety of other bilateral, regional and multi-lateral channels as well like the Global Environment Facility of the World Bank or in the form of Overseas Development Assistance
# As much as $500 billion per year might be required just for adaptation by 2050
# About 80% of the funds used for climate action in developed countries is raised at home. In developing countries this figure is 70%
# About 95% of global climate finance is spent on mitigation, or efforts to reduce emissions. Only 5% is utilised for adaptation.
# Subsidies for oil and gas, and investments in fossil fuels are almost double the total global climate finance
Source: Indian Express
America's Most Obvious Tax Reform Idea: Kill the Oil and Gas Subsidies
In a world where $100-a-barrel oil is here to stay, there's no need to pad the industry's bottom line.
(Reuters)When Saudi Arabia's longtime oil minister, Ali Al-Naimi, opens his mouth, the world listens. Yesterday, during a speech in Hong Kong, he delivered a message that U.S. policy makers in particular would do well to take note of. The days of $100-a-barrel crude, he told the crowd, are here "for the foreseeable future."
If he's right, one thing that shouldn't be around for the foreseeable future are the outdated tax credits that protect oil and gas companies, which will be plenty profitable in a world of $100-a-barrel oil. If Democrats and Republicans are looking for safe ground to set up camp for the budget negotiations, let's start with these $7 billion-a-year subsidies.
Why Big Oil Doesn't Need Uncle Sam's Help
The oil industry's lobbyists like to argue that its array of tax write-offs (which allow companies to deduct everything from drilling costs to the declining value of their wells) aren't any different than other deductions for less publicly reviled companies. Cutting them will discourage new exploration and put jobs at risk, they claim.
Yet, some of the breaks are anachronisms that date back almost to the days of John D. Rockefeller. And in a world of permanently high crude prices, there's very little rationale for subsidizing the bottom lines of companies like ExxonMobil and BP.
Make no mistake, either: Those profits are perfectly healthy. Between drilling and refining, Exxon's U.S. operations alone earned $7.5 billion after taxes in 2012. California-based Occidental Petroleum Corporation, one of the so-called "independent" oil companies and the top oil driller in Texas, raked in $7.1 billion via its oil and gas division.
There are plenty of reasons, far beyond the word of a single middle-eastern oil man, to expect that those profits will stay high. Oil prices have continued to hover around the $100 mark in part because of instability in the Middle East, but also because, even in our sluggish global economy, demand is still relatively tight. As things improve, demand -- and prices -- will only increase. So if you think China's best days are still ahead of it, and that Europe will eventually pull out of its funk, you should expect prices to keep floating skyward. The Energy Information Administration, for one, believes the cost of a barrel will most likely increase to around $162 by 2040 (as shown on the blue line below).
The oil-filled shale formations in states like North Dakota and Texas that have powered the U.S. energy boom are notoriously expensive to drill. But if predictions like the EIA's come even close to true, then they should remain profitable plays for the industry for years to come. One might argue that without subsidies, they won't be quite profitable enough -- that by nixing the tax breaks that support domestic drilling and refining, we might encourage companies to put their money to do something else with their money. But as Harvard's Joseph Aldy has noted, independent analysts forecast that cutting the subsidy cord would have at most a minimal effect on U.S. drilling activity, possibly reducing it by as little as 26,000 barrels-a-day. Since 2009, he notes, production has been growing each month by 30,000 barrels a day.*
If there's money to be made sucking oil out of the ground, in the end, somebody is likely to do it.
The Worst of the Worst
Some of the biggest subsidies are, well, a bit goofy. In its FY 2013 budget request, Obama administration singled out eight oil and gas tax breaks for the ax, worth about $38.5 billion over the next decade. Those are laid out in the table below from a Congressional Research Service report earlier this month. Let's take the three big ones highlighted in the table below.
- Expensing Intangible Drilling Costs ($13.9 billion): Since 1913, this tax break has let oil companies write off some costs of exploring for oil and creating new wells. When it was created, drilling meant taking a gamble on what was below the earth without high-tech geological tools. But software-led advances in seismic analysis and drilling techniques have cut that risk down.
- Deducting percentage depletion for oil and natural gas wells ($11.5 billion): Since 1926, this has given oil companies a tax breaks based on the amount of oil extracted from its wells. The logic is, if manufacturers get a break for the cost of aging machinery, drillers can deduct the cost of their aging resources. (You decide for yourself whether that makes any sense.) Since 1975, it's only available to "independent oil producers," not the big oil companies, like Exxon and BP. But many of these smaller companies aren't actually small. According to Oil Change International, independents made up 86 of the top 100 oil companies by reserves. Those 86 had a median market cap of more than $2 billion. So essentially, this is a tax break that subsidizes the Very Big oil companies at the expense of the Very Biggest.*
- The domestic manufacturing deduction for oil and natural gas companies ($11.6 billion): In 2004, as American manufacturing was being ravaged by China's entrance on the global scene, Congress passed legislation designed to encourage companies to keep factories operating in the U.S. Thanks to some intensive lobbying, the oil industry ended up as one of the beneficiaries. But while the refining process does involve high-tech manufacturing, there was never any danger that either drilling or refining was going to migrate overseas.
No matter how badly John Boehner and House Republicans might wish otherwise, any long-term deficit reduction deal is probably going to have to raise some taxes, probably by nixing deductions. At least, it will if it has any hope of making it past Senate Democrats and the White House. Just $40 billion to $70 billion won't be enough. But the oil and gas subsidies are breaks that, by all rights, have outlived their usefulness. It's time for them to go.
*CORRECTION: An earlier version of this article stated that American production has "been growing by 30,000 barrels a day."
*CORRECTION: An earlier version of this article stated that the median market cap of all independent oil producers was $2 billion.