If Copenhagen proved anything, it's that climate and trade/economic policies are inextricably intertwined

Paul Krugman opens this NYT Op-Ed piece with the following statement:

Op-Ed Columnist - Chinese New Year - NYTimes.com


"It’s the season when pundits traditionally make predictions about the year ahead. Mine concerns international economics: I predict that 2010 will be the year of China. And not in a good way."

In my post below, "China: Copenhagen Spoiler or Keen Strategist?", China is investing aggressively toward a Low Carbon Economy.


Question: Should the West be willing to cede economic/trade leadership to China if it's "profits" were to continue to be directed toward environmental protection and climate change mitigation?

Comments welcomed...

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China: Copenhagen Spoiler or Keen Strategist?

On the 8th day after Copenhagen, the obvious whacked me upside the head...

In recent weeks, I've observed several events that support the theory that China wants to be economically and geopolitically dominant in the coming Low Carbon Economy.

First, China does not want Copenhagen to establish a flat playing field in the low carbon economy and got everything it wanted at the summit; no binding agreement, no targets, no timetable and contention and disarray within the global community.

Second, while spot prices for coal in China have risen steadily during 2009 due to increasing demand, the government has curtailed coal production and now sits on a historically low 12-day supply. It has mandated over 1500 coal mines under 300,000 tons/year output will be closed by the end of 2010. This constrained supply will drive coal and coke prices up further raising the cost of fossil fuel-based energy across their entire manufacturing sector.

Third, on December 28^th, the Chinese government revised its renewable energy laws to mandate that utilities buy 100% of the renewable energy produced and established severe financial penalties for non-compliance. This action will dramatically raise the cost of coal-based energy and incentivize investment in renewables by guaranteeing a market for renewable energy at any/all future production levels.
Further investigation reveals other actions taken by China in 2009:

• 54 Gigawatts of China’s smallest, most inefficient coal-fired electrical plants were taken offline in 2009. Replaced with new plants, such as the 1 GW Huaneng Power International coal plant in Yuhuan that can generate a kWh with just 283 grams of coal, a 25% improvement on the their industry average efficiency.
• The central Asian gas pipeline began operations in December. The pipeline will bring 40 billion-cubic-meters/year of natural gas from Turkmenistan, (through Uzbekistan and Kazakhstan) to northwest region of Xinjiang Uyghur Autonomous Region and from there to Shanghai, Guangzhou and Hong Kong.
• In a move to augment its controversial hydro projects, China’s National Energy Administration (NEA) announced it would bring its total wind power capacity to 100 GW by 2020 from the current 12 GW and has planned six 10GW-level wind power bases Inner Mongolia, Gansu, Xinjiang, Hebei and Jiangsu. The first o be built in the Jiuquan will be completed by 2010.
• Construction started in September on three third-generation, pressurized water reactor, nuclear power projects in Sanmen (Zhejiang), Haiyang (Shandong) and Taishan (Guangdong). The fleet will employ AP1000 technology from Westinghouse. The combined capacity will be almost 4GW with the first plant being on-line in 2012. At the same time, the government also revised its plans for nuclear power production capacity in 2020 from 40GW to 70GW.
• Effective January 1, 2010, China will move to a market price-based scheme for oil pricing. In addition, taxes on gasoline will be raised 500% while taxes on diesel fuels will be raised 800%. These incrwases will accelerate the move to electrification of the automobile fleet.

Was China a climate spoiler in Copenhagen or a keen strategist? Are these actions the coordinated effort of a nation that is serious about climate change? Or, does it believe the low carbon economy is coming and an opportuntity to establish itself as the economic and geopolitical leader in the coming era?

Learning to love multinationals

On the 7th day after Copenhagen a conclusion came to me...

It’s all about leverage.  Who has it?  How do you apply it?

In the fight against climate change, multinational corporations (MNCs) are on the front lines, bringing both scale and scope to the battle.   Wal-Mart is the often-cited example.  With over 2.1 million employees in the U.S.  alone and a global supply chain of  over 60,000 suppliers in 70 countries, the company’s reach is massive and the impact of its strategic decisions rapidly crosses national borders.  The company has discovered sustainability makes strategic and economic sense and it reinventing itself to take advantage of the opportunity. Most of the major consulting firms (AT Kearney and Cap Gemini efforts highlighted below) have brisk business in the supply chain area helping clients implement these high leverage strategies.  Perhaps more importantly there is also a secondary effect, for as Wal-Mart goes, so goes the world.   All of this has been accomplished without the involvement of multilateral institutions, legislative procedure or regulatory mandate.

While historically the daemon in past, MNCs with the right kind of leadership these companies can serve society while also serving their shareholders.    Educating and influencing the strategy of the world largest MNCs may be both more expedient and more effective than the rhetoric of political process.
Gci Capgemini Future Supply Chain 2016 Report

Sustainable Supply Chain Aug 09

Is the U.S. too big to fail?

On the 6th day after Copenhagen a conclusion came to me...

The “failure” to reach a comprehensive and binding agreement on climate charge in Copenhagen was due in some part to two related issues, the scale of nation states and their representative forms of government.

Large nation states are among the largest emitters and play a leading role at the environmental bargaining table. At the same time, they are made up of many entities with conflicting needs across geographic, industries, cultural, demographic and sociological strata. Imagine the difference one finds across a country such as the United States, Australia, China, India, Russia or Brazil and it is easy to see the many conflicts that can arise when discussing what country’s optimum position on various aspects of climate change, environmental protection, trade or economic development. Small nation state’s, particularly island state, issues are more bounded and more easily focused, i.e. Mohamed Nasheed, President of the Maldives is dealing with externally driven sea level rise and salt water infiltration of their ground water without the need to consider issues related to a domestic coal industry or loss of jobs in a major domestic industrial group, such as automotive sector.

At the same time, leaders of large nations with representative forms of government are torn between the conflicting needs of their many constituents, leaving them without a clear mandate. In essence, this leaves them powerless to demonstrate the leadership demanded by many or to take strong positions on issues that may, in the short term, negatively impact significant elements of their constituency. As an example, Australia and Prime Minister Kevin Rudd had been leading voices for bold legislative change, Emissions Trading Schemes (ETS) and aggressive GHG emission targets in the run up to COP15 and was planning to attend COP15 with signed legislation in hand. That is until Tony Abbott, a stanch climate skeptic ascend to the leadership of the leadership opposition (Liberal) party immediately prior to the summit. In preparing to attend COP15, Rudd is quoted in the "Now that Tony Abbot and the extreme right have taken over the opposition it's difficult to see legislation passing the Australian parliament." In contrast, China with its centralized form of government had significant advantages at the bargaining table in Copenhagen as a result.

Are we treating the large, industrialized nation states as we have the large global financial institutions of the recent financial crisis, i.e. too big to fail? Will climate change reforms require a new approach governance and implementation, in essence a break from Kyoto? I think yes. As we are seeing in the case of California in climate/environmental legislation and the broader global trade regime, regionalization and cross-border coalitions with tighter alignment around political, strategic resource and economic factors will evolve to fill the governance gap. It has been said political boundaries that historically have been arbitrarily set for a variety of reasons, would be better aligned according to the ecosystems boundaries and subdivisions of the natural watersheds. This is a unique point of view that triggers interesting thinking around the issues of climate change and governance.

Map Description

This map shows the location of 106 major watersheds of the world. It includes the world’s  largest transboundary watersheds and other small basins that are representative of a particular geographic area. Omitted regions, shown in white, are primarily smaller coastal drainage basins or regions with no permanent rivers.

Source: Earth Trends Institute

Sustainable Thinking - Smarter, Cleaner, Cheaper

On the fifth day after Copenhagen (Christmas Day), a new mantra came to me...

Design thinking is all the rage these days in executive suites and product planning sessions these days. The 1.4 million Google hits for the phrase and in over 1,000 scholarly publications in 2009 are a testament to the attention being given this creative process that attempts to apply empathy and “out of the box” thinking to meet user needs better and drive business success. This emphasis makes sense in markets where commoditization combined with years of focus on six sigma, supply chain management, lean manufacturing, outsourcing and low cost production have both raised quality and squeezed the margins out of many product categories. This design thinking philosophy feels like an improvement while being regressive at the same time. I recall the Volkswagen ad from the 1960’s, where the jingle “longer... lower... wider... the ’49 Hudson is the car for yoooOOOoooOOOuuuu” has stuck in my head all these years. In this ad, VW contrasts “marketing thinking” of Hudson, Studebaker and Packard with its own more sustainable (in the micro-economic theory of the firm sense) “value thinking”. In the 1980s with the microelectronics, quality and globalization revolutions, the pendulum swung to “better, faster, cheaper”, a value-based philosophy that has led to too many bland, look-alike products. I see design thinking trying to bring these two opposing forces, “marketing thinking” and “value thinking” together to drive business success (revenues), as well as benefit of users. The challenge is related to the classic Porter-ian question of profits, “Does the uniqueness of the product or service create enough value such that the firm can charge a premium and that the higher price covers the incurred in offering the unique features?”. In many cases, perhaps not.

At the same time, the emerging sustainability trend will impact this balance moving forward. Macro-level environmental and sustainability demands are shifting the value proposition from product/service features of “better, faster, cheaper” to those of “smarter, cleaner, cheaper”; smarter use of scarce natural resources, cleaner (less wasteful) products/processes and lower costs that will accelerate adoption and allow penetration of Bottom of Pyramid (BOP) markets. William McDonough among other has been a proponent the life-cycle based design for many years which has seen growing adoption a number of corporations and industries. Now with the advent of the Low Carbon Economy, sustainability thinking, i.e. smarter, cleaner, cheaper has reached a tipping point and will be the mantra the permeates every element of every product, service and industry form here forward.

Would we act differently if GHG emissions were as threatening to civilization as nuclear weapons?

On the forth day after Copenhagen a conclusion came to me…

There is discussion of the successes of Copenhagen, the important first step, getting all the major emitters to the table, the rain forest agreements, the financing mechanisms, the importance in reporting and validation (transparency). But, there is has been much more talk of what failed in Copenhagen. The UN let us down. Our leaders let us down. So much has slipped through our fingers, been left undone. Others suggest, as written in this week’s Time Magazine, “The very struggle to reach agreement at Copenhagen (…) that 113 heads of state attended (…) is a sign that global climate talks have moved beyond symbolic rhetoric.” Looking ahead, it will only get tougher at COP16 in Mexico City in 2010, as the stakes get higher.

It was neither the science nor the leadership that failed at Copenhagen. It was the process that failed. The process used by the UNFCC calls to mind the two familiar stories about herding both and allowing the 800-pound gorilla (China) sleep anywhere it wants to. It is the direct result of the open and democratic process being used, where one country gets one vote and the vote must be unanimous. One hundred ninety two countries involved in the negotiation process, each with veto power. This approach treats climate as a common good and thus we are at risk of suffering Garrett Hardin’s tragedy of the commons.

Rather than treat climate as a common good, what if we treated climate change as a threat to international security (which it is on many level) where the proliferation of Green House Gas (GHG) emissions need to be collectively controlled as is done with that other major threats to international security, nuclear weapons. This shift in the paradigm gives one great freedom to think differently about the process of GHG emissions proliferation while remaining within the auspices and consistent with the purposes of the United Nations.

The purposes of the United Nations laid down in Article 1 of the present Charter, shall be:

1. to further international peace and security;
2. to promote the political, economic, social, and educational advancement of the inhabitants of the trust territories, and their progressive development towards self-government or independence as may be appropriate to the particular circumstances of each territory and its peoples and the freely expressed wishes of the peoples concerned, and as may be provided by the terms of each trusteeship agreement;
3. to encourage respect for human rights and for fundamental freedoms for all without distinction as to race, sex, language, or religion, and to encourage recognition of the interdependence of the peoples of the world; and
4. to ensure equal treatment in social, economic, and commercial matters for all Members of the United Nations and their nationals, and also equal treatment for the latter in the administration of justice, without prejudice to the attainment of the foregoing objectives and subject to the provisions of Article 80.

One model to follow in moving forward beyond Copenhagen is that of the UN Security Council, whose primary responsibility is the maintenance of international peace and security. The Council is composed of five permanent members — China, France, Russian Federation, the United Kingdom and the United States — and ten non-permanent rotating members. The Presidency of the Security Council is held in turn by the members of the Security with each President holds office for one calendar month. Ten non-permanent members, elected by the General Assembly for two-year terms and not eligible for immediate re-election.

Each Council member has one vote. Decisions on procedural matters are made by an affirmative vote of at least nine of the 15 members. Decisions on substantive matters require nine votes, including the concurring votes of all five permanent members. This is the rule of "great Power unanimity", often referred to as the "veto" power.

Under the Charter, all Members of the United Nations agree to accept and carry out the decisions of the Security Council. While other organizations of the United Nations make recommendations to Governments, the Council alone has the power to take decisions that Member States are obligated under the Charter to carry out.

A climate Council could mirror this structure and purpose. This would build on the actions of the Copenhagen “Basic Five”, the US, China, India, Brazil and South Africa, who structured the Copenhagen Accord, This smaller group of this design would be more nimble, action-oriented and while being consistent with the overall UN charter.

This “Climate Council” could have functions and powers similar to that of the Security Council:

• to maintain international “climate equity” in accordance with the principles and purposes of the United Nations;
• to investigate any dispute or situation which might threaten the climate security of member nations and lead to international friction;
• to recommend methods of adjusting such disputes or the terms of settlement;
• to formulate plans for the establishment of a system of emissions targets and measurement, monitoring and validation of regulate emissions;
• to determine the existence of a threat to the global climate action should be taken;
• to call on Members to apply economic sanctions and other measures not involving the use of force to prevent or stop emissions violations;
• to take collective military action against an aggressor;
• to recommend the admission of new Members;
• to exercise the trusteeship functions of the United Nations in "strategic areas";
• to recommend to the General Assembly the appointment of the Secretary-General and, together with the Assembly, to elect the Judges of the International Court of Climate Justice.

Indeed, a conclusion after a dew days of reflection and undoubtedly an oversimplification of what needs to be done. This approach does address many of the areas seen as flaws in the current process and provides a path moving forward: leadership by a smaller groups, representative and faster decision making and majority rule, clearly defined goals, targets, measurement and independent validation, as well as the ability to impose economic sanctions and other actions on violators. Without a movement toward a more effective process, we are destined to have a repeat experience in Mexico City in 2010 and another year lost.

The Curious Incident of the Dog in the Night-Time

On the third day after Copenhagen I became aware of a deafening silence…

Battling climate change is a global challenge where technology will play a central role, in many ways analogous to that of vaccines and pharmaceuticals in fight for global health. Most fundamental research and technology development will occur in the developed world with a need to be transferred and deployed, whether in its original or locally modified form, in many third world countries. As with the intellectual property issues of pharmaceuticals in global trade environments, I expected to learn about IP issues being central to the discussion in Copenhagen. What I heard related to IP issues over the five days I spent at COP15 was…..nothing.

As with the curious incident of the dog in the night-time in the Sherlock Holmes classic “Silver Blaze”, this silence piqued my interest and warranted further investigation. Are issues of IP a non-issue in the fight against global warming? Have they already been resolved? Or perhaps is it the purview of another forum, such as the World Trade Organization (WTO).

My subsequent investigation uncovered IP issues are in fact central to the work of the UNFCC with much emphasis placed on the topic in the preparatory meetings leading up to COP15. This work was captured in a paper interestingly called “Non-Paper 47,” which was developed in the Barcelona meeting of November 2009 under the Ad Hoc Working Group On Long-Term Cooperative Action (AGWG-LTC), with some follow-on work performed during week one of COP15.

Non-Paper 47 contains a number of IP-solution suggestions ranging from developed countries having no patent protection on green technology, to setting up a patent pools for green technology, to ensuring that developing countries can make full use of the flexibilities found in the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) - including compulsory licensing - and cooperation on future research and development of green technology.

As with pharmaceuticals, the Parties are far apart of the issue of IP protection of green technologies. Developed nations are adamant that a strong IP protection framework is essential to innovation, while the G77 group of developing countries and others take the position IP is a barrier adoption and must be removed. Much of the debate focuses on trade rules, and what has been learned from TRIPS. For example, patents on some green technology could be removed for developing countries and compulsory licensing could also be considered. Today compulsory licensing of pharmaceuticals is allowed under TRIPS, but each technology has a lot of patents and the developing countries have to go to each country and company and apply for a license, which does not make sense when technologies must be deployed are rapidly as possible.

New technologies will be at the core of new solutions that address climate change. It is important that the right IP framework is put in place the to foster innovation without creating barriers to timely and successful deployments.

Economics 1, Climate-Change 0

On the second day after Copenhagen, a conclusion came to me…

COP15 may have been titled the United Nations Climate Conference, but the agenda was economics under the guise of global warming; developed countries protecting jobs and avoiding taxation, emerging economies protecting sovereign rights to unconstrained growth and poor countries seeking to protect prior commitments of financial support for development with no strings attached. Yes, there were impassioned pleas for action against climate change and global warming. Citizens of low lying island nations such as Tuvalu, Kiribati and the Maldives are especially vulnerable to sea-level rise and spoke eloquently of the immediacy of this threat and near-term loss of their homelands and extinction of their cultures. While others voiced acknowledgment of challenges to be faced, the future consequences to be endured ny all and the need to act collectively, but without a true sense of a clear and present danger, this was a case of language of climate debate being used to frame the economic discussion.

The Copenhagen Accord, akin to a non-binding letter-of-intent, recognizes the need to keep global temperature rise below 2 degrees centigrade by 2050, provides a means for protecting current rain forests and establishes a $100B fund to support poor countries in the future but does not establish emissions targets for individual countries, does not specify what developing countries will do, nor defines how the financing is to be raised and distributed to poor countries; an important first step, but much less than many hoped for.

Could the outcome have been much different? Could the world leaders really achieve what was hoped for going into COP15? In a word, no. As powerful as they are, the majority of world leaders, had neither the autonomy nor the mandate to act in a way that would give climate change priority over the economy?

Meanwhile the scientists remind us the clock is still ticking toward that environmental tipping point that will ultimately define that clear and present danger that will eventually drive us to consensus and coordinated action.

If you are one to keep score, at the end of the first inning, it is Economics 1 and Climate-Change 0.

We have it backwards – Managing Symptoms versus Investing in Cures

I’ve returned from Copenhagen, had some time to reflect on what transpired, how it has affected my thinking and begun to draw some conclusions about what’s next. All this will be fodder for a series of 12 essays that will take us from today to the end of the year and serve as the basis of discussion of what now lies beyond Copenhagen.

On the First Day After Copenhagen

On the first day after Copenhagen, a conclusion came to me…

We are going about this climate change thing all wrong for three reasons. First, as was predicted by many before the UN’s summit in Copenhagen, no one party will want to concede more than other parties, therefore any negotiated agreement will be minimal and certainly not the at the level the scientists suggest are necessary to avoid global warming and dramatic climate change. Second, the UN process will just take too long. We have been working on Kyoto since 1997, and it will take several more years to get a definite and binding agreement and the resulting timetables for implementation will be too long to achieve the goals set. More simply, it’s a case of too little too late. My third point is the UNFCC process and the Kyoto Protocol are attempting to manage, control and regulate the symptoms of the climate change rather than root cause of the problem itself. This approach is fraught with fundamental problems; from the collective process of setting equitable emission limits, to rules for measuring and monitoring of emissions, to validation and compliance.

The Copenhagen Accord is a step forward in the process but was ultimately developed outside the UN process by a small handful of nations and, as predicted, is much weaker than the treaty that has been in development for the past two years. Many are calling into question the UN’s process and its role in climate change moving forward. The U.N.'s own Yvo de Boer said in an interview with Reuters after the conference, "You could argue that it would be far more effective to just address climate change in the G20, whose members account for most carbon emissions… (But) it's not correct from an equity or from an environmental point of view because that would exclude many countries already on the front lines of impacts of climate change." Another suggestion, the Major Economies Forum might be the correct venue.

At the same time, there’s good news. We know technologies can advance and be deployed very rapidly with the right investments and consumer behavior can change just as rapidly with the right incentives. Case in point, in the last two years in the US coal use has dropped 11 percent while an estimated 190 new wind farms with over 16,000 megawatts of generating capacity have come online, all without legislative or institutional mandate. An argument in favor of directly investing in cures rather than managing the symptoms.

To this point, I draw the reader's attention to a recently published report from the Stockholm Environmental Institute:

"Analyses at the global level and in regions, both in poor and rich nations, clearly show that energy transformations towards a low-carbon future are technologically possible, even over the short term, and that they are socially desirable, and to a large extent economically profitable. Recent energy scenarios show that the EU can achieve 40 per cent emission reductions by 2020 with current technologies, and that India and China can bend their emission trajectories while increasing energy access and securing their economic and development goals over the coming decades."1

The clock is ticking. The environmental tipping point, the point of no return, lies somewhere ahead with the most recent scientific data suggesting it will occur sooner than we previously thought. For example, recent studies predict the polar ice cap could be gone in summertime as early as 2015 compared to previous model predictions of 2025. It might just be that if we get the economics right, a market driven strategy of investment and deployment of new technologies along with market interventions/incentives could trigger independent or small scale collective action that will turn the tide on carbon emissions and reverse global warming before the multilateral negotiation process completes the initial step of developing a definite and binding agreement that can be ratified for the 192 member nations.

1 A Copenhagen Prognosis: Towards a Safe Climate Future

It was 3 AM and I'm not referring to the Matchbox 20 song

After a 12 hour delay, the last 4 of which Party delegates waited patiently on station in the plenary room, UN Secretary General Ban Ki-moon called the session to order at 3AM on Saturday morning. Then taking less than a minute, the Secretary General made a short statement to the effect that UNFCC (United Nations Framework Convention on Climate Change) would recognize the "Copenhagen Accord" and brought down his gavel to close the session to seal "A Deal" if not "The Deal" that many had hoped for.

Copenhagen Accord