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The Road to Paris: Balancing ambition & commitment

Jonathan Shopley | 02 June 2015 |

With six months to the Climate Summit in Paris and the long-awaited successor to the Kyoto Protocol, the probability of a coherent global agreement on climate remains difficult to call: Jonathan Shopley reports on two recent events where sentiment veered towards the optimistic.

The Road to Paris:  Balancing ambition & commitment

The Political Response - Still in the Works

The last climate negotiations in Lima, Peru (COP20) set the stage for Paris in December, when the United Nations Framework Convention on Climate Change (UNFCCC) is expected to finally come up with a successor agreement to the Kyoto Protocol. During the six intervening years since negotiations in Copenhagen broke down in 2009, Christiana Figueres, Executive Secretary to the UNFCCC, and her team have been working tirelessly to ensure success in Paris. Figueres is also working hard to manage (down) expectations for Paris. The agreement, if there is one, will likely be a framework that will need further development in the years ahead.

The goal, and it’s still some way off, is for Paris to deliver a lean framework within which the collection of national Intended Nationally Determined Contributions (INDCs) -- “bottom-up” plans – can be evaluated, tracked and improved. It’s all about the ‘what’, little about the ‘how’ and some way from a coherent solution that bends the global GHG emission curve downwards far and fast enough to prevent catastrophic climate consequences.

The Business Response – An Assertive Call for Clarity

The UNFCCC is running a much more open process than in the run-up to Copenhagen, and has invited business to articulate its views and potential contributions. Business has responded loudly and clearly, and no more assertively than at the Business & Climate Summit convened recently in Paris. The Summit, representing 25 worldwide business networks together representing 6.5 million companies from more than 130 countries, had more than 2,000 business leaders calling for three imperatives for success at COP21 in Paris.

The first was the obvious closer alliance between business and governments to make climate policies more mainstream, predictable and pragmatic. Attendance and dialogue at the Summit demonstrated that call from business was being heard and considered by the UNFCCC and many national, sub-national and city governments.

The clearest and most widely supported imperative is a call for a robust and effective ‘price on carbon’ to de-risk private sector investment in low-carbon solutions. While a new study published by the Grantham Research Institute reports that 75% of global GHG emissions are covered by national regulations, business’s call for a clear price on carbon reflects frustration that much regulation is confused, weak and ineffectual. Of the 98 countries covered by the research, 47 including the 28 states in the EU, have introduced carbon pricing through either a carbon tax or a cap-and-trade system. The World Bank reports that the aggregate value of current carbon pricing is around $50 billion. However, that figure is a mere drop in the ocean when compared to the IMF’s recent finding that direct and indirect subsidies in support of fossil fuels stand at $5.3 trillion per year.

Despite this political schizophrenia, Ali Al Naimi, Minister of Petroleum & Mineral Resources for Saudi Arabia surprised the Summit by stating that the direction of travel is clear for the oil sector -- fossil fuels are on the way out of world energy mix, and Saudi Arabia will be shifting ‘from barrels to clean GWhs’. Similarly, when Tony Hayworth, chairman of mining (including coal) giant Glencore Xstrata stated that fossil fuels would need to be part of the global fuel mix for some decades to come to provide base load energy, he was challenged by Kerry Adler, CEO of solar company SkyPower who maintained that recent advances in energy storage would accelerate the displacement of fossil fuels by renewables.

However, as Purna Saggurti, Chairman of Global Corporate & Investment banking at Bank of America pointed out, although capital is relatively cheap with uncommonly low interest rates, little gets to low carbon opportunities because of high policy risk from disparate and muddled regulation.

Climate Finance & Carbon Markets – Poised for revival

The third business imperative calling for the creation of public funds to leverage private sector finance received plenty of attention at Carbon Expo in Barcelona – the annual gathering of participants in carbon markets and climate finance. The Green Climate Fund (GCF) set up by the UNFCCC to collect and disburse up to $100bn/yr by 2020 to developing economies has secured its initial $5bn, and after two years of intensive preparations is ready to put that capital to work in partnership with private finance. Many initiatives developed in the private sector, such as REDD+ or forest protection projects, could potentially receive support from the GCF in order to scale. Similarly, the Fund will be looking to form partnerships which build capacity and deliver energy efficiency and shifts to renewable energy sources in least developed economies.

Carbon Expo delved deeper into the detail of what ‘a price on carbon’ really means. Economists maintain that pricing carbon through taxes or cap & trade (C&T) schemes should be equally effective. However, in practice, the ability of C&T platforms to reduce emissions at lowest cost makes it the preferred option for the majority of businesses. Mistakes made in the design of the EU’s Emission Trading Scheme are being fixed, and lessons learned applied in new schemes around the world – from California, Quebec and Chile in the Americas to South Korea and China in the East. It is hoped that the Paris agreement will recognise these initiatives, and provide a framework which could link them into a global system.

Large ‘legacy’ corporates with the majority of their assets tied to the fossil fuel economy are using self-imposed shadow prices for carbon to ensure that capital investments anticipate a future when the operating costs of GHG emissions could be substantially higher than the current price of GHG emissions. The aviation sector is leaning heavily towards an international carbon offset trading scheme to help it deliver carbon neutral growth in the medium-term -- until it finds a commercially viable source of renewable aviation fuel.

Newer technology corporates like Microsoft deploy carbon pricing by applying carbon fees to their GHG emissions to accrue funds for internal reductions, purchasing renewable energy and carbon offsets. I was invited to chair a session to examine the ways in which carbon financing through offsetting can be deployed in supply chains, specifically tourism, apparel and food, to deliver climate mitigation and a range of additional positive sustainability impacts.

Climate finance and carbon markets have struggled to gain traction during the period of economic turbulence since 2008, but Caron Expo 2015 registered a clear change in sentiment and impact. However, as Paris is largely focused on the ‘what’ rather than the ‘how’, there remains some nervousness about the extent to which the Paris agreement will support further evolution in this critical area.

Communities – Front and Centreof the New Climate Reality

As has been the case throughout the 20+ years of climate negotiations, the world is split into those communities that are experiencing extreme weather – mainly developing economies in the south, and those that aren’t – mainly developed economies in the north. Interestingly, the divide between the two is narrowing. Climate and conflict refugees from the South fleeing to Europe have brought things home to the EU. Extreme weather in the US and Australia is persuading climate deniers and prevaricators that it could really be happening.

Against this background, politicians like Obama are repositioning climate change as a public health hazard; Laurent Fabius, France’s Foreign Affairs Minister, as a national and international security issue; and most importantly, business is reframing the climate issue as an incalculable, critical risk and an invaluable opportunity to innovate and pioneer a more sustainable economy with products and services that delight customers.

As Paul Polman, CEO of Unilever voiced on behalf of business at the Paris Summit: “the climate crisis is a development issue, and without development, there would be no markets for business …. that makes climate a huge opportunity to find new markets in transitioning to a clean economy”. And, Elon Musk’s Tesla car and Powerwall renewable energy storage battery was the oft quoted stand-out example of a business-led innovation that could change everything.