Global options for tackling climate change

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This article is part of our special report European Business Summit.

Following the agreement on a roadmap to negotiate a succesor to the Kyoto Protocol at the UN conference in Bali, EURACTIV examines some of the main policy options and instruments available for mounting a global response to climate change. 

Background

In May 2007, the Intergovernmental Panel on Climate Change (IPCC) presented a report - by its Working Group III - which makes a number of recommendations on climate change mitigation, including the use of 'green' technologies, reforms in taxes and market structures, and energy efficiency improvements.

While these options are being explored in various forms within individual states, regions, cities and even companies, coordinating a global response is more complicated. 

The 15,000-plus delegates who attended the 3-14 December 2007 Bali UN Climate Change Conference hailed from states with vastly diverse average levels of income, access to resources, population sizes and degrees of democratic consolidation and political stability. 

Not surprisingly, the roadmap agreed in Bali - much like the Kyoto Protocol - was conditioned not only by the technological and/or economic feasibility of the options on the table, but also by complex political considerations and international power dynamics.

Issues

  • Trading versus taxing

Placing a tax on CO2 emissions seems to be, at first glance, the most effective way of encouraging industries to emit less CO2 in order to avoid an increased fiscal burden.

"Most economists believe a carbon tax would be a superior policy alternative to an emissions-trading regime", say Kenneth P. Green, Steven F. Hayward and Kevin A. Hassett of the American Enterprise Institute in Washington, DC.

But imposing new taxes on industries is politically unpopular, and few politicians appear willing to risk their careers over the matter. In addition, coordinating a harmonised tax on carbon would be difficult in the EU alone, never mind at global level.

Establishing a carbon market similar to the EU Emissions Trading Scheme (EU ETS) with binding caps on CO2 output appears to be more palatable to industries and governments alike. 

If established correctly, carbon markets can in theory stimulate the development of clean technologies both in developed and developing nations, as industries compete to become 'carbon competitive' while reaping a profit from the sale of CO2 emission credits to those industries that are unable to significantly reduce their carbon footprints.

  • Pricing CO2

Despite disagreements over which option is more feasible, most experts would likely agree with environmental economist Charles Komanoff of the Carbon Tax Center, who argues that "making the price predictable is the most significant move you can make to control global warming".

Without reliable signals from the market, including a predictable carbon price tag, companies and states are reluctant to invest the necessary sums to facilitate the transformation towards low-carbon economic growth. 

  • A global carbon market embryo?

A collapse of the carbon price is precisely the problem that plagued the first round (2005-2007) of CO2 trading under the EU ETS. 

But the Commission is tightening the system, non-EU European countries like Norway are signing up to the EU ETS and the Union is determined to pursue its flagship initiative for fighting climate change (EURACTIV 29/10/07), despite pressure from a number of new EU member states who say the carbon constraints are hampering the development of their post-Soviet economies. 

The US is expected to launch its own carbon trading system before the end of 2009 after the arrival of a new US administration, with global carbon market linkages, including between US states and the EU ETS, possible in the post-2012 period.  

Other states are also entering the carbon market arena, with Australia announcing a plan to launch a cap-and-trade plan in June (EURACTIV 07/06/07). Moreover, a new International Climate Action Partnership (ICAP) including New Zealand and two Canadian provinces was launched in October. 

  • Sectoral approaches

But even with a functioning carbon market governed by the 'right' carbon price, energy intensive industries, particularly in the EU, are concerned about how they would fare if emitting CO2 and other greenhouse gases (GHGs) became highly expensive.

The iron and steel sector, for example, have pushed for separate arrangements to reduce emissions, with less stringent CO2 reduction requirements than those imposed on textiles, services, electronics and other less carbon-intensive industrial sectors.  

Ultimately, the Commission decided in its 23 January climate and energy proposals to expand its ETS to more sectors while allowing certain sectors to continue to receive free pollution permits for a limited time. Some sectors may even be indefinitely shielded from having to buy emission rights at auction, pending a Commission review of the situation (see EURACTIV's related coverage for details).

  • Carbon import tax

A further possible concession to the EU's energy-intensive sector would be to impose a tax on imports of foreign goods produced by energy-intensive industries operating in countries that do not have tough restrictions on CO2 emissions.

The idea, supported by French President Nicolas Sarkozy among others, has received scant support in EU circles, however, and was apparently dropped in the 23 January plans. 

But the Commission may still decide, in 2011, to oblige foreign firms with high CO2 emissions to participate in the EU ETS in order to access the EU market.

  • Trade preferences

On 30 November, the EU and the US announced what they termed "a ground-breaking proposal" for a WTO-wide deal on the full elimination of tariffs on 43 products identified by the World Bank as environmentally friendly. The deal would come under the current "Doha" negotiations on trade liberalisation. 

Much like the notion of a carbon import tax, however, the idea has not received wider international support. Bali conference delegates from developing countries in particular questioned the effectiveness and fairness of the plans. 

  • Technology, adaptation and development 

Improvements in clean technologies are seen as an efficient means to reduce the CO2 intensity of economic growth. But a debate on how such technologies would be financed is far from over, and the question remains a central concern for EU leaders, who have delayed difficult decisions on how 'strategic energy technologies' will be paid for.

In a July 2007 position paper, the EU industry group BusinessEurope argues that even if the EU ETS produces a stable, predictable and high carbon price, this alone "is likely to be insufficient" to stimulate the necessary investments in carbon capture and storage (CCS) and other technologies. 

Technology financing problems are even more acute in developing states, and Bali provided for a special transfer mechanism to facilitate an increase in the use of environmentally friendly technologies.

Efforts to adapt to the unpreventable effects of climate change were also given a boost when negotiators in Bali agreed to allocate 2% of the proceeds from Kyoto Clean Development Mechanism projects into a fund designed to help developing nations deal with threats such as rising sea levels, desertification and biodiversity loss.

  • Using less energy: the low-hanging fruit

One option that is often neglected in high level negotiations on climate change but championed by industry is improving energy efficiency at all points in the life cycle of goods, services and energy production and consumption.

McKinsey, the business consulting firm, estimates that the growth of global energy demand can be slashed by 50% over 15 years without compromising economic growth. This would, however, occur under the condition that policy makers "terminate distorted policies, make the price and use of energy more transparent, create new market-clearing and financing mechanisms, and selectively implement demand-side energy policies (such as new building codes and appliance standards) while also encouraging demand-side innovation by companies", the company argues.

  • Keeping the forests

Trees and other flora, particularly in high-density concentrations such as rainforests, sequester carbon and are thus crucial for reducing atmospheric concentrations of GHGs.

Deforestation is therefore considered to be an important (indirect) source of CO2 emissions, a fact that was highlighted at Bali, where delegates agreed to expand on existing mechanisms under the Kyoto Protocol that provide incentives for developing countries to prevent deforestation on their territories.

Positions

The EU supports the expansion of an international carbon market under the umbrella of a global commitment to reduce greenhouse gas (GHG) emissions by 25% to 40% by 2020 compared with 1990 levels. At Bali, the EU delegation also pushed for a number of other policies, including more contributions from developing states and efforts to curb deforestation, as part of its mandate for the talks.

At company level, the EU's High Level Group (HLG) on Competitiveness, Energy and the Environment argues in favour of sectoral approaches, saying these would prevent a disruption of clean technology improvements in developing countries. The HLG favours a 'bottom up' approach, whereby the sectoral targets would be "initiated by business together with public authorities", the HLG says in its final report

The US is in favour of technological innovation, energy efficiency improvements and sectoral industry agreements but, unlike the EU, Washington opposes binding emissions reduction targets, particularly if developing states like China are not bound by GHG reduction commitments. But the US position is expected to shift once the Bush administration leaves office in 2009, according to Eileen Claussen of the Pew Center on Global Climate Change.

The World Business Council for Sustainable Development (WBCSD) argues that global carbon markets should be linked, with the help of a special independent oversight body. A "secure and integrated international regulatory framework post-2012 with a deliberate multilateral approach" are seen by the WBCSD as "key to establishing a global carbon market". 

Possible linkages between a global CO2 regime and sectoral agreements have also been proposed by the WBCSD, which argues that a global carbon market could be built "progressively from local, national, sector or regional programmes, each contributing to the long-term goal".

In the run-up to Bali, a group of 150 major UK and EU companies, as well as the Prince of Wales, issued a statement calling for a "sufficiently ambitious, international and comprehensive legally-binding United Nations agreement to reduce greenhouse gas emissions will provide business with the certainty it needs to scale up global investment in low-carbon technologies".  

Similar calls for certainty in the regulatory environment have also been made by the EU's industry group BusinessEurope, which argues that only a "comprehensive, global, transparent and stable regulatory framework" can provide business with "the predictability that it requires to continue investments in research, development and deployment of technologies to reduce emissions of greenhouse gases and improve energy efficiency".

Lester R. Brown of the Earth Policy Institute in Washington, DC argues in favour of ambitious industrial restructuring in order to build "a new economy, one that can sustain economic progress, involves phasing out old industries, restructuring existing ones, and creating new ones. This new economy will be powered by renewable sources of energy, will have a more diverse transport system - relying more on rail, buses, and bicycles, and less on cars - and will recycle everything", he said.

But while ETUC, the European Trade Union Confederation, as well as other employee groups throughout the industrial world, supports urgent measures to mitigate climate change, there is concern that the employment aspect "has been grossly underestimated so far in international climate change negotiations", the group said in a press statement. 

According to Joël Decaillon, ETUC's Confederal Secretary, a global climate change deal should include "policies aimed explicitly at developing the jobs and training that correspond to the new low-carbon goods and services and managing the restructuring operations that could be triggered by a rapid transition to a low-carbon economy", he said. 

ETUC is also calling for the establishment of a special fund, "managed and financed in large measure by the public powers", in order to address any adverse effects of climate change policy on employment levels.

The environmental group WWF is in favour of a strengthened EU ETS with full auctioning rather than separate allocations of credits for energy-intensive industries. WWF also supports the idea of mandatory CO2 caps for individual power stations, an idea the group says is currently being put forward in California.

WWF has also started engaging with companies such as Johnson & Johnson and Lafarge in order to "identify strategies to address climate change", including through energy efficiency improvements.

Timeline

  • 3-14 Dec. 2007: Bali climate conference (COP 13): Start of UN climate negotiations on post-2012 framework (EURACTIV 17/12/07).
  • 23 Jan. 2008: Commission tables climate and energy package, including EU ETS review.
  • Nov./Dec. 2008: Poznan, Poland climate conference (COP 14): Midway point of negotiations (EURACTIV 15/12/08). 
  • 20 Jan. 2009: Inauguration of Barack Obama as the 44th President of the United States.
  • 28 Jan. 2009: Commission presents proposal for global agreement to replace Kyoto Protocol (EURACTIV 29/01/09).
  • Dec. 2009: Copenhagen climate conference (COP 15): Projected completion of UN climate negotiations on post-2012 framework;
  • End 2012: Deadline for ratification of any new climate deal.

Further Reading

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