COP15: the search for certainty

23 Feb 2010Archived News Climate Change Matters

Participants and observers of Copenhagen agree that the process was at best difficult and at worst, a failure. As a result, a growing number of commentators are questioning the ability of the multi-lateral process to generate real outcomes for such complex issues as climate change.

 

In search of certainty and answers, Australia’s business and investment community is increasingly limiting its strategic outlook to domestic arrangements. As a long-term strategy however, this approach is short sighted.

A brief analysis of Copenhagen outcomes, key players’ targets, and the policies intended to achieve those targets, demonstrates the growing relevance of international processes and policies to Australian business.

The Copenhagen Accord

The fifteenth Conference of the Parties (COP15) to the United National Framework Convention on Climate Change (UNFCCC) held in Copenhagen last December, resulted in the Copenhagen Accord (the Accord) - a small document of 3 pages (6 with title page and annexes).(1)

A key outcome of the Accord, is a mandate for all Annex 1 (developed country) parties to pledge emission reduction targets. In addition, all major non-Annex 1 (developing country) emitters pledged voluntary targets.

Some view this outcome as disappointing: the combined pledges are less than those required to keep emissions below the agreed 2 degrees rise, and no greater than had been indicated prior to COP15.

Others view the outcomes optimistically: the Accord was in itself designed and agreed to by all of the world’s largest emitters, leaving room open for further negotiation of those issues that remain undecided.

The key items agreed to or omitted from the Accord are summarized below.

Copenhagen Accord – Items agreed

Temperature increase

  • Temperature increases should be limited to below 2 degrees Celsius.

Targets

  • Annex 1 parties should commit to 2020 targets; accounting and reporting subject to international verification.
  • Non-Annex 1 parties to undertake mitigation actions; accounting and reporting subject to domestic verification, unless seeking international financing.

Financing

  • Developed nations to provide financing to the most vulnerable developing nations.
  • Financing is intended to assist in mitigation, including Reducing Emissions from Deforestation and Forest Degradation (REDD- plus) and will involve an initial injection of US$30 billion over 2010-12 and a further US$100 billion/year to 2020.

Markets

  • Reference is made to the use of market mechanisms, but no detail is provided.

Copenhagen Accord - Items omitted

Significantly, no agreement was reached on the continuation of the Kyoto Protocol and the two-track approach, or some alternative arrangement.

Key players’ targets and policies

Targets submitted to the UNFCCC by major emitters for inclusion in the Accord are presented here in Table 1 (Australia has been included for reference).(2) To provide some context, the emissions last reported to the UNFCCC are also provided.(3)

To achieve the above targets a raft of climate mitigation policies have been, or are in the process of being, developed. Examples of some of the key domestic policies aimed at achieving the above targets are presented here in Tables 2a-e.

 
 

Implications for Australia

In assessing carbon risks and opportunities, most businesses in Australia, as in other countries, will tend to limit their assessment to national targets and policy and to actions that enable compliance. Given the weaker outcomes of Copenhagen, and limitations associated with the multi-lateral process, it is likely that this view will be amplified. In taking a longer-term position, it can however be shown that such a strategy is a risky one.

1. International agreements

Any agreement to arise out of the Accord is likely to impact Australia in at least one of the following ways.

Target

Irrespective of whether Australia’s Carbon Pollution Reduction Scheme (CPRS) eventually passes through the senate, Australia’s international obligations will impact the level of mitigation action the government seeks domestically. This in turn will determine a price on carbon, either directly through a market mechanism or tax, or indirectly through efforts such as regulated minimum efficiency standards.

Soil sequestration, forestry and other emission sources

The inclusion, and manner of inclusion, of such emission reduction activities within final negotiations and accounting rules will determine the nature of offsets that can be created under the CPRS or alternative policies.

Credit supply

At present, the CPRS allows unlimited import of credits into the scheme. Any limitations placed on credit supply through an international regime will increase the carbon price and any existing forecasts.

2. Domestic policies

A number of the above domestic policies can be seen to have both direct and indirect impacts on Australian business. Any strategic review of carbon by the business or investment community should however undertake a detailed analysis of such interactions.

Carbon Capture and Storage (CCS)

Domestic action in both the US and China and through regional partnerships such as the Asia-Pacific Partnership on Clean Development and Climate, will increase the investment, research and development undertaken in the area of CCS. This will decrease the likely timeframe in which such projects become available. Given Australia’s prominence as a coal supplier, this opens both new technology markets and reduces the potential risks associated with coal as an export market.

Cap-and-trade

Improvements in the European Union Emissions Trading Scheme, and demonstration of the viability of cap-and-trade for the purpose of greenhouse gas mitigation, will improve the credibility of such schemes. This will (eventually) increase the likelihood of such schemes being adopted elsewhere, including Australia.

Development and implementation of further cap-and-trade schemes, such as in the US, increases the potential for linkages of regional/domestic schemes and liquidity in the global market.

Renewables (solar)

The increased investment, research and development and demand for solar in particular, in China and India, creates both opportunities and risks: opportunities in the expansion of new markets and improvements in economies of scale; and risks through technology transfer and loss of demand for Australian products.

Forestation

There is an emphasis within the Accord, and in domestic policies from countries such as Brazil and Indonesia (not discussed here), for policies that reduce emissions from deforestation and forest degradation (REDD-plus). Such action serves as an opportunity for Australian companies operating in these countries, but also for the potential volume of credits available.

Should a cap-and-trade scheme be introduced in the US, the current volume of Certified Emission Reduction Units (credits generated under the Kyoto Protocol’s Clean Development Mechanism) will not satisfy a US market. Because of this, US negotiators will seek inclusion of REDD-plus in international accounting rules; such credits will be needed as a cost containment measure.

3. Voluntary action

Numerous NGOs, business and investor groups such as the World Business Council for Sustainable Development and the Carbon Disclosure Project, already demand transparent reporting of emissions, reduction efforts, risks and opportunities. These go beyond most compliance requirements, but serve as an indicator for the possible direction of future compliance requirements.

Further, the science is unlikely to change – if anything, it is likely to require more action, sooner. This means that targets are unlikely to decrease. Instead they are more likely to grow and the timeframe in which they are to be achieved will decrease. Businesses and investors that fail to take on actions that go beyond compliance will be at a competitive disadvantage to those that are taking greater action now. 

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