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Investors look for Copenhagen climate agreement to set realistic targets

The private sector will shoulder much of the responsibility for implementing measures agreed at the UN climate change meeting in Copenhagen. NJ Watson reports

FOUR-FIFTHS of the hundreds of billions of dollars needed to mitigate climate change will come from capital markets. That is the assessment of Paul Clements-Hunt, head of the UN Environment Programme Finance Initiative. As a result, the private sector has a particular interest in the outcome of the 15th Conference of the Parties to the UN Framework Convention on Climate Change, which takes place in Copenhagen, the Danish capital, between 7 and 18 December.

"Any public[-sector] financing at the global level needs to be part of an efficient mechanism that feeds into the market and frees up private[-sector] capital," Clements-Hunt tells Petroleum Economist.

An essential step in enabling private-sector capital to flow freely into climate-change mitigation projects is to set long-term caps on greenhouse-gas (GHG) emissions. It seems likely the UN will agree on GHG reductions of 50-80% from 2000 levels by 2050, which climatologists say offers a realistic chance of keeping the average rise in global temperature to within 2°C of pre-industrial levels, the point at which the more extreme effects of climate change are expected to occur.

Corporations, utilities and financial institutions generally accept the need for reductions, but object to vague or badly defined targets. "We need a clear signal and strong commitment towards an 80% cut in carbon dioxide (CO2) emissions around 2050," says Francois Perrin, senior portfolio manager of green funds for Fortis Investments. "That is a target investors can support."

However, agreeing and signing a binding deal for an overall reduction target for carbon emissions in Copenhagen looks too much of a stretch. Last month, US Senator John Kerry, who chairs the Senate foreign-relations committee, signalled that the US administration has given up hope of reaching a global climate-change treaty at Copenhagen and is working towards a deal late next year. "We have to be honest in the process and deal with the realities that we don't have time in these four weeks to put the language together and flesh out every crossed 't' and dotted 'i' of a treaty," Kerry told reporters.

Complicating matters, as well as long-term targets, investors want clear short- and medium-term targets, serving as a roadmap to 2050. Says Eric Heymann, an economist at Deutsche Bank Research: "It is always easier for politicians to formulate very long-term objectives because they know that ultimately they cannot be held accountable for any failure to achieve them."

Tools of the trade

Few investors or utilities favour a globally agreed CO2 tax, leaving emissions-trading as the likeliest solution. However, as Perrin says, "there needs to be a reorganisation of the carbon market."

When, in 2005, the EU launched its pioneering cap-and-trade Emissions Trading System (ETS), it distributed too many emissions allowances – prompting a slump in the carbon price. After the end of the ETS' first phase, which ran from 2005 to 2007, the EU attempted to fix the problem for the 2008-12 period by reducing the number of carbon-emissions allowances. But this came unstuck when several central European countries sued the European Commission over the issue. In September, Poland and Estonia won legal victories when the Court of First Instance annulled the Commission's decision to lower those countries' quotas. The ruling, if upheld, could cause the whole system to unravel.

Utilities in central and eastern Europe, which are reliant on carbon-intensive coal to generate electricity, would like to see a deal now over allowances. They would also like to see a prompt resolution to another problem – the billions of euros' worth of GHG emissions permits awarded to them under the Kyoto Protocol, but that have not been used.

According to EU estimates, countries in the former Soviet Union still hold between 7.5bn and 10bn Assigned Amount Units (AAUs) granted under the Kyoto scheme, which have a combined estimated market value of €75bn-100bn. These countries still hold so many because their polluting industrial base collapsed in the 1990s in the transition from communism to a market-oriented economy.

Under Kyoto's rules, governments should still be allowed to sell their AAUs after the protocol expires at the end of 2012, although the EU argues that allowing countries to use these permits would destroy any efforts to slow climate change. At a meeting of EU environment ministers in October, Poland, the EU state with the largest number of such permits, urged the bloc to agree minimal limits on their use.

Analysts also say that emissions trading should be extended to more countries (Brazil, China, India), more sectors (aviation and maritime) and more GHGs (methane and nitrous oxides). Says Heymann: "The longer-term ideal is a global emissions-trading system whose participants include all the main emitters and that covers all the main GHGs."

Industry and investors also want to see some agreement over patent protection and protection of intellectual property. Companies in the industrialised world are raising large amounts from capital markets to spend on research and development (R&D) of energy-efficient technologies. To be able to recoup the high cost of R&D, these companies need a degree of protection for their innovations.

In addition, technology transfer between industrialised nations and developing nations is an important part of climate-change mitigation. "Developing countries must be helped now," says Heymann. "For the global climate it would simply be lethal if around 80% of the world's population, which still consumes relatively little energy, but in future will consume increasing amounts, were to increase its per capita CO2 emissions to the same levels as in western Europe or even the US and only then reduce their emissions again (see Figure 1)."

This conflict could be resolved by compensating companies for relinquishing patents, although if governments were to have to pay for this, the chances of establishing a self-sustaining private-sector funding mechanism would recede.

Some investors, such as Roberto Cominotto, portfolio manager of the Julius Baer Energy Transition Fund, says the world should put more emphasis on national plans rather than attempting to reach an elusive global deal. "If countries can find domestic reasons to start investing in new technologies that will limit climate change, that would be a stronger driver than any pressure from the international community," he says.


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