The United States, Post-Copenhagen: Where do we go from here?

The UN COP15 climate change conference in Copenhagen ended with disappointing results but the challenges to find solutions to mitigation and adaptation continue. The UN process has no formal agenda in the near term and will not likely begin the preparation meetings for COP16 before mid-year.

The focus in the United States leading up to COP16 will be on legislation. With Waxman-Markey off the table, the focus is on the compromise Boxer-Kerry Senate bill.

1. General Cap & Trade or Cap & Trade II - Without binding agreements with specific targets and methods, cap and trade legislation is facing an uphill battle in the United States. (One could argue that a treaty wasn’t achieved in Copenhagen because the U.S. and others didn’t have legislation in place at home prior to the conference.) The Boxer-Kerry bill is seeks to bridge gaps and is looking at coupling cap and trade with new incentives for expanding nuclear power and oil and gas drilling in the United States. Essential elements for Republicans and a lightening rod for Democrats. Look for the messages to focus on national security, energy independence and job creation.
   
2. General Carbon Tax - Anything called tax is unlikely to gain any traction in the U.S. Legislature.
   
3. Limited/Focused Programs - Should general carbon legislation not pass in the U.S. Congress, other alternatives actions include:

• Incentives for Clean Energy - American Clean Energy Leadership Act of 2009 was approved months ago by the Senate Energy committee encouraging utilities and others to use more alternative, clean energy sources. These programs could be expanded although this approach but alone would not be enough to achieve the 2 degree target.

• Industry Specific Programs - Bringing high carbon industries such as utilities, cement iron and steel up to state of the art technologies and best practices. Such programs would limit emissions in specific high emission industries, while providing funding for R&D in those specific industries. Critics say it's unfair to single out one industry.

• EPA Regulation - The Environmental Protection Agency has begun taking steps to regulate carbon, in case Congress fails to pass legislation. This approach is less comprehensive than legislation and already is being hit with legal challenges.

4. Do Nothing - Do nothing at the national level. Leaving action to the sub-national regions and states. Hope for the best.

Climate Change Comes of Age: Reflections of the 15th Conference of the Parties, Copenhagen 2009

Forty-five thousand people descended on the fifteen thousand person, Bella Center in Copenhagen in early December to participate in the COP15, the UN’s Climate Change Summit. A logistical nightmare on the outside; needless to say, not all the pre-registered and credentialed attendees got into the venue. After standing in line in snow and subfreezing temperatures for 13 hours over two days, I was one of the lucky ones who got in. A failed result on the inside; the acknowledgment of the creation of the non-binding, BASIC Copenhagen Accord. A step forward…yes, progress…yes, but not what the, perhaps unachievable, pre-conference rhetoric called for. The conference was unprecedented in many ways. Every one of the 192 UN member states was represented at the meeting, which was attended 119 heads of state, the largest such gathering outside of the UN’s New York City headquarters. In many respects, this was the “coming of age” event for climate change on the global stage. What follow are highlights of my personal thoughts and reflections from participating in this amazing event and what lies ahead:

1. What happened in Copenhagen was a failure of the process, not a lack of commitment by the Parties.
   
   Attempting to create a binding treaty of this complexity with unanimous vote of 192 highly diverse members is challenging in the face of a clear and present threat, impossible on a complex issue such a climate change. First, look for the structure to evolve toward that of the WTO & WHO, smaller consensus-based subgroup, with clear voting rules and the focus to be sharper on the development of the framework of goals, monitoring, verification and enforcement policies. Second, look for increased emphasis on building financial, intellectual resources and knowledge sharing capabilities to effectively and equitably deal with climate change as a “commons” problem. There’s a big role for business schools in this arena.
   
2. COP15 was more about development than about climate change.
   
   Several countries, particularly poor low-lying or drought-stricken countries are feeling the effects of climate change now and are intensely focused on the CO2 emissions issue. For most others, the fundamental discussions in Copenhagen always revolved around questions of economics. How could development nations balance their responsibilities while protecting job and economics competitiveness? How can poor countries protect financial subsidies promised by developed countries in Kyoto and Bali? How do fast growing emerging economies minimize restrictions and continue to grow? If Copenhagen taught me anything, it taught me that economics and climate charge are even more inextricably interwoven than I have understood in the past. All of which is context for business.
   
3. Sub-national regions step into the spotlight.
   
   Arnold Schwarzenegger generated more buzz than Al Gore. Schwarzenegger along with Jose Serra Mayor of Sao Paulo spoke of the future and how sub-nationals regions such as California, Sao Paolo and others are paving the way toward green economies that are delivering both economic growth and reduced environmental impacts in advance of national initiatives. Yes, an emotional story of hope and promise, Arnold never the less spoke of actions being taken, results being delivered now and path for moving forward. Given, the outcome of COP15 and the time it will take to move to the next step, look for the groups to become immediately more active taking action on their own.
   
4. Climate Change involves politics, get used to it.
   
   Much of the world looks to the U.S. for leadership and to take a leadership role, not because it is the biggest, the most powerful or bears the greatest responsibility, but because it is one to the few nations that can and historically its record of success if pretty good. As the World looks to the United States for leadership, transparency is critical, such that its intentions and actions are clear and coherent. What others must keep in mind when looking to the U.S. for leadership is that our leaders in the Executive Branch much work with the Legislature and within the Constitution when making promises and commitments to its nation partners. This is the political process. It requires procedure and must follow protocol to be effective, and must ultimately answer to the electorate. This is true in many of the other 192 countries that have effective, representative government.
   
5. China came to play
   
   Much has been made of China’s role in the negotiations in Copenhagen and only those close to the discussions really know what went on behinds closed doors. That said, let there be no doubt, China came to play. Flexing its political and economic muscles on the world stage, China firmly established that the climate change negotiations are in integral part of an overall strategy to gain the leadership position for the coming Low Carbon Economy. Game on.
   
6. The Elephant in the Room
   
   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 Intellectual Property Rights (IPR) issues being central to the discussion in Copenhagen.
   
   While IPR was not a prominent theme of the week and language was not explicitly included in the Copenhagen Accord IPR is the elephant in the room. Moving forward beyond Copenhagen IPR solutions could follow a number of paths 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. Stay tuned.
   
   7. For Want of a Price
   
   Governments want it. Economists want it. Regulators wanted it. Investors want it. Industry wants it. NGOs want it. What is it? Honest, fully–cost pricing, where environmental costs (carbon emissions) are incorporated in product pricing. Copenhagen didn’t provide it. Without a regulatory framework in place and resulting price set for carbon emissions, market forces cannot be leveraged to address these challenges on a universal basis. While pricing was not to be and should not be set in a forum such as the UNFCC, the failure to achieve a binding agreement puts the carbon markets into limbo for at least another year, until COP16 in Mexico.

Climate change came of age in Copenhagen, but much work remains to be done. Research-oriented business schools in large universities, such as Boston University, are in a unique position to participation in the coming transformation to a sustainable economy. Not only will this experience find its way directly into my teaching this spring and it also shines a light on emerging field, rich with research opportunities and new curriculum development in areas such as, of policy, economics, finance, operations, innovation and technology commercialization, while shaping a vision of the future an the role academic institutions will play in the development of the sustainable economy.

Is the concept of the nation-state getting in the way?

On the 12th day after Copenhagen a final conclusion came to me….

Will climate agreements will follow the evolution of trade agreements? I believe as trade agreements have evolved beyond the multilateral agreements envisioned when the WTO was formed in 1995 toward a wide variety of regional/local trade agreements, so too will, will climate agreements.
Multilateral negotiations need to focus on getting the policies/infrastructure right, establishing emissions targets, timing and carbon pricing policies, (managing the commons) but leave bottoms-ups implementation to entities at the local level. A combination of clears goals with flexible execution will address the technological investment challenge, prove to be economically feasible and politically the most practical.
Success in has been achieved at the regional level, in the U.S. California and Sao Paulo, Brazil were strict climate legislation has been put in place in advance of national level legislation without dampening economic development. Many other regional initiatives are being formed, in Asia, Latin America and most recently in New England/Mid-Atlantic regional in the United States. The EU is also moving in this direction as it tries to cope with differences between the oil dependent west and the natural gas dependent east.
Is the concept of the nation-state dead and ready to be cast aside? No, not in our lifetimes, but as with trade & natural resources, there is there is comparative advantage in regional areas on energy & energy resources that dictate a regional approach to implementation within the larger multilateral frame work.

For Want of a Price... A Climate was Lost

Much of the focus and cause of the non-result in the Copenhagen climate negotiations has on the “how” of climate change and opposed to the “what” in terms of targets. (We Have It Backwards - Dec 21, 2009). Focusing exclusively on reductions from historical emissions has greatly hampered the negotiations thus far, but is in fact only half the problem. While targets may satisfy the need on the policy side of the issue, they do not satisfy the need on the market side. A price signal in needed to make the market work, but way the negotiations are going now, the markets must wait for the political process to set pricing on carbon. Focusing on energy as a driver of climate change, the lack of pricing hampers mitigation efforts in three profound and related ways in terms of production, distribution and consumption.

First, on the consumption side, the lack of a price on carbon is leaving the low hanging fruit of energy efficiency investments still hanging on the tree. The now famous Mckinsey study demonstrates approximately 40% of the emission reductions could be achieved by conservation/efficienty investments that have a positive NPV. (Left half of Exhibit 1 below.) While these investments currently have a positive NPV without carbob porcing, setting a price for carbon will give consumers a complete picture of the true cost of their energy, demonstrate even shorter payback periods and should drive more rapid adoption of conservation/efficiently measures. At the same time, it will justify investment in the information infrastructure necessary support this implementation of these systems.

Source: McKInsey Study "Unlocking Energy Efficiency in the U.S. Economy"

Second, the economic uncertainty surrounding investments in new technologies, be they wind, solar, electric vehicles, carbon sequestration or others, is a significant barrier to investment in the potentially beneficial technologies. Here again, carbon pricing establishes true cost and allows industry players to develop confidence in their risk-adjusted return models for investments in these areas. A price on carbon makes investments on the right side of the chart (Exhibit 1) more attractive.

Finally, lack of discussion on carbon pricing has greatly hampered negotiations on climate commitments form the standpoint of developing countries where the uncertainty about the future and the cost is greatest. Carbon pricing offers a transparent and verifiable assurance of the comparability of effort across countries and incorporating price-based commitments into the treaty along with an emissions goal also establishes a basis for compliance during, as well as after, the treaty has expired. Ultimately, carbon pricing would clearly establish a leapfrogging strategy to clean emerging technologies in developing countries would be a clear advantage while diminishing the need for aid or new financing mechanisms beyond traditional sources from the World Bank/IMF.

Moving forward, a price-based framework has several advantages over the historical emissions based approach. It would get investment moving now rather than later, could break the log jam in the current negotiations and be enacted by COP16 in Mexico City next year.

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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