Friday, 26 November 2010

CoP16: the lack of the political will and the complexity of the international economic dynamics

Realism is at the heart of the media’s and politicians’ predictions for the next Climate Summit this December in Cancún. The 16th Conference of Parties (CoP16) is going to be held there as part of the UNFCCC efforts to reach an international post-Kyoto agreement. Unfortunately, this realism is not about the problem itself (climate change), it is rather about the political and economic challenges facing this one of a kind agreement. It is about the unwillingness to compromise a nation’s short term economic interests in the sake of the global long term social and economic benefits.

Last year, CoP15 in Copenhagen was overhyped with the possibility of reaching legally binding agreement. This was due to the fact that negotiators have agreed in CoP13 Bali 2007 to reach a decisive agreement in CoP15. Well, this was not the case. The conference ended up with a backroom meeting between the US and BASIC nations (Brazil, South Africa, India, and China) to issue the so called Copenhagen Accord (CA). Some argue: this was a face-saving document. To big extent, yes it is. But to certain extent it is a step forward. This accord has theoretically addressed the setbacks in Kyoto Protocol (KP).

First and foremost, CA includes the developing nations with those who are going to take actions to reduce their emissions. In KP, there was a distinction between the developed and developing countries, Annex I and non-Annex I respectively. Annex I have to take immediate actions to reduce their emissions by 5% within the protocol period 2008-2012. While non-Annex I have to take actions in a period stretched over 2-5 decades subject to financial and technical support from Annex I.

Second, signatories agreed on a scientific “politically-accepted” target of maintaining the emissions’ concentrations to the level that keeps temperature growth below 2°C by 2050. Unarguably, this target is going to cause climatic damages, such as sea level rise, floods, deforestation, etc... A less destructive target would be 1.5°C. AOSIS (Alliance of Small Islands Nations) backed by most African countries are in favour of a target less than 1.5°C, and actions to be taken universally by 2013. They, by far, will face the most devastating damages. In a recent report, the UNEP suggested that reaching such target (1.5°C) requires steep reduction in emissions from 2020 to 2050, and negative emissions in the 2nd half of 21st century. In other words, new technologies are needed to absorb the emissions from the atmosphere. Suggesting such thing in the conference hall would literally end up with the negotiators fleeing the conference.

The third and last achievement in CA is setting up and agreeing on the Climate Change Finance. These funds are to support the Least Developed Countries, and vulnerable Developing Countries in their low-carbon economic growth and adaptation to the inevitable climatic damages. It has been agreed to raise $30bn between 2010 and 2012, and then up to $100bn by 2020, which will be the annual funds then after. In return, the receiving nations have to construct National Adaptation Plan of Actions (NAPAs) to define their financial needs for both mitigation and adaptation projects. Developed countries, the US in particular, have asked for setting Measurement, Reporting, and Validation standards (MRV) as an insurance policy that these funds are spent in the proposed NAPAs. MRV standards concept was strongly refused by China, and in a recent announcement their position will not change in CoP16. The US president needed this MRV article to be resolved in order to convince the Senate to pass the climate bill. Truth to be said, China has the right to rise its point of the illegitimacy of being asked for MRV standards by a country, the US, which has not yet ratified its obligations under KP.

The accord required the nations to submit reductions' pledges by January 2010. Around 35 nations did. However, earlier this week the UNEP has issued a document called “Emission Gap Report”, which confirmed that the current pledges offered on the table will fall short with a 5 gigaton gap of the required reductions. Under these pledges we will reach an increase of 2.5°C to 5°C by the end of the century. Also, estimates show that KP will result in 12 gigaton gap. This indeed, reflects the inefficiency of KP. The report added that failing to reach the 2020 targets of 44 gigaton reductions will make it economically impossible to achieve the 2°C goal. Estimating these figures using various rang of models, scientists said that reaching the 2°C target is economically and technically feasible. Moreover, Copenhagen Accord was not signed by the ALBA block (Venezuela, Cuba, Bolivia, and Nicaragua) as they are advocating tighter targets (despite their dirty emissions’ history), and refusing the notion of having backroom agreements. Originally, such practices breach the UNFCCC policies. 

In the course of 2010, several countries have started planning to take real actions. On the top of the list is China. It has announced, a week before CoP16, its 5-year plan to establish a domestic Emission Trading Scheme (ETS). Also it has announced to voluntarily reduce its emissions up to 50% by 2020 based on 2005 levels. However, one cannot ignore that China is triggered to take actions by the fact of being one of the most vulnerable countries to climatic damages. Japan announced its reduction targets of 25% by 2020, proposed initial tax on fossil fuels activities, and designed new climate bill to be processed next year.  New Zealand, and South Korea set plans for domestic ETS for next year as well. UK is establishing its Green Investment Bank, although details are blurry to big extent, especially under the coalition's cuts program. The EU is planning to raise its targets to 30% during or after the summit based on the other countries positions. India will introduce ETS for Tradable White Certificates (TWC) as an economic instrument for fostering energy efficiency in the market. Despite the failure of TWC markets in UK and France caused by the market response, it is unfair and unrealistic to ask India for any real cuts while almost half of its citizens are still with no access to electricity. In its case, a small action is better than no action. The other side of the coin is that these actions are part of the race toward the leadership in the emerging global low carbon economy. These actions are to set out the frameworks of the emerging global energy markets, which will define winners and losers. Winners are those mostly dependent on their domestic resources and on a low-carbon efficient portfolio of energy measures, both renewables and fossil fuels.

Certainly these actions will impose new costs that will be disruptive to the current business models. It will affect their balance sheets. Well, in economic terms, these actions will represent the real costs of current business models. Since the industrial revolution, business practices are based on abusing the atmosphere absorptive capacity of the Greenhouse Gas (GHG); bumping carbon emissions with no regards to the environmental implications what so ever. These emissions are global public good. Setting the right price on them will give real representation of the production costs. It will signal the market with the need to produce more efficiently in order to maintain its competitiveness and growth. A gradual price introduction will facilitate a smooth transition towards low carbon economy, a transition that will ensure future economic prosperity with the least market disruptions. Economists have introduced various instruments to set this price.

2010 cannot be labelled as a year that witnessed positive domestic climate actions worldwide. A week before the summit, the Canadian governing Conservative Party has killed the climate bill. The US, the most important player to join the regime, is unlucky enough to have this new “Sceptic Congress” elected in November midterm elections. The debate was always between two different bills’ architectures (Waxman-Markey bill vs. Kerry-Lieberman bill). Also, during this debate there was a “Plan B” proposed, which includes a set of weak regulations that won’t achieve the 17% target. Well now, the debate is: Plan B or no action at all. Analyst said that it is unlikely to have any climate bill or regulations passed through the Congress before the next elections in 2012, and this largely depends on the newly elected regime. Without the US on board, there is no way to convince China or any of the BASIC countries to sign the agreement. One solution proposed few days ago by Sir Nicholas Stern is to impose restrictions on the carbon-dirty American products in the international trade, a step which requires intervention form the World Trade Organization. This is meant to maintain the competitiveness of the European and world businesses against the American ones.

Having reached this part of the article, none would possibly suggest that there will be a binding agreement this year. Officials and negotiators across the world confirmed that. Furthermore, since CoP15 the formal negotiation rounds under the Ad Hoc Working Group on Long-term Cooperative Action (AWG-LCA) gave indicators of what is possible to be agreed upon during CoP16. The conference is going to come up with a set of focused agreements (on both mitigation and adaptation sides), which are:

1.    Reducing Emission from Deforestation and Forest Degradation (REDD+): this scheme aims at providing countries that have forestry endowments with financial incentives to conserve these forestry’s while maintaining their economic growth. A REDD+ ministerial meeting was held in Japan 26th of October, which emphasized the need to define financial pledges especially design to REDD+ scheme. Also they launched a new website to measure the financial proceedings and the actions taken. These negotiations are to take place in CoP16 under the Ad Hoc Working Group on Further Commitments for Annex I Parties under Kyoto Protocol (AWG-KP).

2.    Climate Change Finance: The High-level Advisory Group on Climate Change Finance (AGF) published a document on November the 5th that defines the mechanisms and governance issues using which the proposed funds in CA will be processed. AGF stated that raising these funds is achievable but challenging task. It requires a composition of financial instruments that includes public, private, bilateral, and multilateral sources, through creating suitable market incentives. These mechanisms have to be agreed upon in CoP16. Another important issue need to be clarified that there is a firm distinction between the Climate Fund and the Foreign Development Aid. Several countries, among which is the UK, have repackaged both funds together in their annual budgets, which mean no real additional funds were created.

3.    Fossil Fuels’ Subsidies Reform: Word Leader in the G20 meeting in Seoul this year agreed on phasing out on the medium term the fossil fuels subsidies by 2020. Experts said that this will reduce the emissions up to 6% by 2020. CoP16 must set the required mechanisms and plans to put this in practice. Furthermore, the International Energy Agency IEA said in a recent report that abolishing these subsidies will boost the world economy, send a clear signal to foster the markets’ transitions toward low carbon technologies, and thus reduce the emissions. In 2009 total subsidies to fossil fuels were $312bn while those to renewable were $57bn. The estimated subsidies in 2015 are $600bn and $100bn respectively. Economists emphasized on the need to start penalizing the fossil fuels activities instead of subsidising them. China, in its turn, will set plans to shift the subsidies toward the renewables and reduce their costs up to 20% by 2035.

4.    Measurement, Reporting, and Validation standards (MRV): The heart of the struggle between the US and China. The negotiation over setting these standards blocked any possible advancement last year and potentially this year. The standards were bundled with the Climate Finance to make it as a conditional offer. UNFCCC along with the AGF have to find a middle ground between the developed and developing nations in setting a complete mechanism for financing and validation. Also, both sides need to compromise on their political stances.

5.    Technological Support: The Expert Group on Technology Transfer (EGTT), set by the UNFCCC, proposed various mechanisms for technical cooperation and transfer.  It has issued a document on the needed collective technological R&D to enhance actions on mitigation and adaptation. Also, it proposed certain mechanism for the Intellectual Property Rights.

6.    Clean Development Mechanism Reform (CDM): This is one of the celebrated mechanisms in KP.  It aims at incentivising the Foreign Direct Investment of low-carbon projects in developing countries as a form of offsetting emissions. However, it hands the power to the host nation of the project, and gives a room for the investors to manipulate their real reductions. The executive board expressed the need to reform the CDM regulations to prevent further fraud and lack of effectiveness.

7.    Land Use, Land Use Change, and Forestry (LULUCF): So far Land Use Change is the biggest contributor to emissions on the sectoral level. It is important to set new regulations (penalties and taxes) on land use change.

8.    Levy and taxes on the International Aviation and Shipping Industry: Given the high emissions generated from this industry’s activities, it is important to have a certain levy or tax in place that will form a major contribution to the Climate Finance.

9.    Raising the current mitigation pledges: as discussed earlier, these pledges need to be raised to reach the target of 44 gigtone emission reductions by 2020.

10. Strategic Alliances and Agreements: perhaps these are not officially conducted within the UNFCCC processes, but equally they are triggered by this annual “event”. Some of the recent announced or planned actions are: Strategic alliances between the EU and China for cooperation on setting the Chinese ETS, and several agreements to reduce the emissions on the regional and local level such as: the US Regional Greenhouse Gas Initiative (RGGI), R20 initiative by the Californian governor, Climate Change Pact, and EU Roadmap 2050 project.

11. Achieving progress toward defining the legal form of the International Agreement: By all means this is the most important factor in defining a fair, effective, and efficient climate agreement. There are various sets of market and economic instruments designed by economists and policy-makers for this agreement. Some of the possibilities are:
             I.        Kyoto-2 Protocol (KP2): similar to KP. It is based on Cap and Trade instruments for another commitment period with the same signatories and no action by the developing countries.
           II.        Copenhagen Accord: Cap and Trade for all the nations under the 2°C limit.
          III.        Kyoto-2 Protocol with Parallel Protocol for the developed nations including the US: A suggestion by the EU, which stated that KP2 is feasible but subject to the establishment of a parallel agreement for the developing nations, under which they are entitled to reduction targets. Also it has to address certain setbacks in KP such as the “hot air” problem in Russia and other former Soviet Union countries.
          IV.        Carbon Tax: (Economists’ most preferred instrument) universal and long-term agreement using different method of carbon pricing instrument, namely Harmonized Carbon Tax with Domestic Recycling.
            V.        No action: a gap period to reach an agreement.

This agreement is struggling in the face of the geopolitical dynamics. It involves multidisciplinary factors that require radical reforms in the current political and economic systems. New forms of creative coalitions are going to be witnessed. The focused agreements, if reached in CoP16, are certainly sound foundations for the long term agreement. Not reaching any of these will raise questions over the effectiveness of UNFCCC processes. Despite reaching these agreement, we are again in the situation that all the hopes are built on the next conference CoP17 in Durban, South Africa. But the question is: Will CoP16 create the shared vision to reach a decisive agreement in CoP17? Is CoP17 agreement going to be the magic bullet that sets up all the details and mechanisms before Kyoto Protocol expires? Or will reaching an agreement be postponed again, possibly to the Earth Summit in Rio 2012?

2010 marked the highest record in GHG concentrations. It is the warmest year since the 19th century. Climate Change is happening. It is not going to wait for the agreement to take place. Every single year of delay marks the birth of future irreversible climatic damages. Every single year of delay increases the cost of adapting to and mitigating the climatic damages. Various studies showed that the costs of inaction are much higher than the costs of preventive actions. The endless efforts in reaching a politically pragmatic agreement are clear representation of trading-off the short term business interest with the long term environmental and economic benefits. It is a total ignorance of our obligations toward the future generations in cleaning the mess we created. 

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