COP15 - Business impacts

01 Dec 2009Archived News Climate Change Matters

Following 2 years of intense negotiations, as outlined in the 2007 Bali, the 192 parties to the UN Framework Convention on Climate Change (UNFCCC) are meeting in Copenhagen, Denmark, from 7- 18 December 2009. The intent of this 15th Conference of the Parties (COP15) is to agree on a replacement to the Kyoto Protocol which is due to expire in 2012. Given current uncertainty surrounding Australia domestic policy response to climate change, this meeting, the signals it sends and outcomes it achieves, assumes an even greater significance for business.

Energetics would like to provide you with an overview on COP15: its intent, desired outcomes, who's involved and what it means for Australian business. We intend to provide a further update, either during or after COP15, with absolute outcomes and suggested actions for business beyond COP15.

What are the outcomes we are hoping for?

Expectations are that Copenhagen will result in substantive agreement, with details to be worked out over the following 6-12 months.

Opinions on how success will be measured diverge in the particulars, although agreement on 5 key political outcomes was reached at the Climate Change Summit in NY in September.Source: United Nations New York Summit

These include:

  1. Enhanced action to assist the most vulnerable and the poorest to adapt to the impacts of climate change;
  2. Ambitious emission reduction targets for industrialized countries;
  3. Nationally-appropriate mitigation actions by developing countries with the necessary support;
  4. Significantly scaled-up financial and technological resources; and
  5. An equitable governance structure.

Business is united in its call for certainty in the regulatory regimes that define the financial instruments and intellectual property rights backing global climate policy. Delay in certainty is proving a barrier to the significant investments in research, development and implementation required of business, if the emission reductions called for by the International Panel on Climate Change (IPCC) are to be achieved. In voicing these concerns, 200 global business and civil society leaders similarly achieved a consensus Declaration at the UN Leadership Forum. Source: UN Leadership Forum on Climate Change Declaration by Business, Investors, Civil Society and Governments

Key points of the Declaration include recognition of:

  • The need for a global agreement and carbon price sufficient to ensure continuation of a global marketplace and to diffuse climate solutions;
  • The enormous value-creation opportunities presented by transitioning to a low-carbon economy;
  • The importance of regulatory certainty to drive innovation, and spur global investments to the extent that efficiencies enable climate mitigation and adaptation approaches to reach full scale;
  • The danger that a lack of global agreement and clear carbon pricing could lead to trade tensions and competitive distortions that threaten future advances in sustainable economic and social development; and undermine existing investments and projects, leading to higher costs for business.

Who are the key players?

It is generally accepted that the above outcomes are highly dependent on four key players – the United States, the European Union and the two advanced developing economies of China and India. Debate between these and other parties is centred on a number of core issues including:

  • The extent to which elements of the Kyoto protocol may be maintained or modified;
  • The level of developed country emission reduction targets;
  • Whether or not developing nations, and in particular those advanced developing nations of China, India, Brazil and Mexico, should also be bound by emission reduction targets; and
  • The level of financing provided to developing nations to assist in adaptation and mitigation.

Individual targets announced by these parties are as follows:

  • European Union: 20% by 2020 (1990 baseline); 30% if international agreement.
  • USA: 17% by 2020 (2005 baseline – equivalent to 3-4% against 1990 baseline); and 83% by 2050.
  • China: 45% reduction in energy intensity/unit of GDP by 2020 (2005 baseline).
  • India: rejects binding targets, but has said will not allow its per capita emissions to rise above those of the developed country average.

What are the impacts for business?

The need to reduce emissions below an emissions trading cap

Regardless of Australia’s domestic policy (CPRS) outcomes, our current government is a signatory to Kyoto and committed to negotiations for a subsequent agreement. One of the trading mechanisms under the Kyoto Protocol is international emissions trading. Developed nations with binding emission reduction targets under the Protocol may, if they satisfy certain conditions, trade in Assigned Amount Units with other developed nations to assist in meeting their targets. Source: Decision 13, CMP.1, 'Modalities for the accounting of assigned amounts under Article 7, paragraph 4, of the Kyoto Protocol' (FCCC/KP/CMP/2005/8/Add.2). Because of this, businesses in Australia are in effect now operating in a market that is, and will most likely continue to be, constrained by an emissions reduction target or cap. As this target tightens over time, so too will the demands for business to reduce its emissions.

Development of emission reduction projects and trade in Kyoto units

With the establishment of the Australian National Registry of Emissions Units and the Australian National Authority for the Clean Development Mechanism (CDM) and Joint Implementation (JI), business is now able to acquire and trade in Kyoto units and develop CDM and JI projects. Source: Department of Climate Change. Under current CPRS rules and the National Carbon Offset Standard, eligible Kyoto Units may be traded to meet both compliance and voluntary targets.

Given the time and effort involved in the accreditation process for CDM and JI projects, there is little incentive for the development of new projects prior to 2012. Clarity is sought from Copenhagen as to the continuation, and the nature of any reforms of the CDM and JI mechanism, post-2012. Until that clarity is achieved, the credibility of the schemes post-2012 is undermined. As a consequence, the incentive for Australian businesses to trade in or develop such projects, given a lack of experience in the area, is low.

Climate change impacts and increasing energy costs

Even without solid agreements in Copenhagen, increasing scarcity of resources arising from climate change, in particular energy and water, will mean that preparation for a low resource constrained future should be increasingly factored into business decision making processes.

The energy costs of production even without CPRS are likely to increase. This is due to factors such as the Renewable Energy Target, escalating natural gas prices on the east coast of Australia, infrastructure upgrades in gas and electricity networks and peak oil. These factors strengthen the need for business to both reduce the energy intensity of its production process and its exposure to up and downstream energy price shock risks.

Climate change strategy

Given the likelihood of increasingly stringent targets and IPCC estimates of emission reductions required to maintain atmospheric warming below 2°C, compliance with existing or voluntary targets is unlikely to be adequate. Business strategies that result in the implementation of accelerated emission reduction programs are essential to mitigate exposure to risk.

Disclosure of risks and climate change impacts

Already organisations such as the Carbon Disclosure Project and the Investor Network on Climate Risk are placing increasing pressure on business to disclose risks and impacts associated with climate change, ands the strategies implemented to manage these. It is likely that these disclosure requirements will increase, with some speculating that these may even become regulated over time. Businesses seeking investor confidence should be in a position to properly document, review and adjust to these risks and impacts will be best placed.

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