David Hone

Whether it is via the auction of allowances or the taxation of carbon emissions, climate policy is increasingly being seen as a source of revenue into the national treasury. For example, the Australian carbon pricing mechanism will raise several billion dollars per annum in its fixed price period (currently $23 per tonne CO2) and EU member state revenues from the ETS have risen as power generators in particular now face full auctioning of allowances, rather than the mainly free allocation that has existed since the system started in 2005.

The issue that the collection of revenue raises is what to do with it. Government already has a long established process for this. Money flows into the national treasury, with spending set through the Budget process that occurs on an annual basis. The principal link between revenue collection and spending is the political agreement on the size of the deficit or surplus, otherwise the two are largely independent. But carbon revenue challenges this model. For example, although the EU ETS Phase III Directive doesn’t (nor can it) dictate how auction revenue should be spent by Member States, it does suggest that it is used as follows:

Member States shall determine the use of revenues generated from the auctioning of allowances. At least 50 % of the revenues generated from the auctioning of allowances referred to in paragraph 2, including all revenues from the auctioning referred to in paragraph 2, points (b) and (c), or the equivalent in financial value of these revenues, should be used for one or more of the following:

1.  to reduce greenhouse gas emissions, including by contributing to the Global Energy Efficiency and Renewable Energy Fund and to the Adaptation Fund as made operational by the Poznan Conference on Climate Change (COP 14 and COP/MOP 4), to adapt to the impacts of climate change and to fund research and development as well as demonstration projects for reducing emissions and for adaptation to climate change, including participation in initiatives within the framework of the European Strategic Energy Technology Plan and the European Technology Platforms;
2. to develop renewable energies to meet the commitment of the Community to using 20 % renewable energies by 2020, as well as to develop other technologies contributing to the transition to a safe and sustainable low-carbon economy and to help meet the commitment of the Community to increase energy efficiency by 20 % by 2020;
3. measures to avoid deforestation and increase afforestation and reforestation in developing countries that have ratified the international agreement on climate change, to transfer technologies and to facilitate adaptation to the adverse effects of climate change in these countries;
4. forestry sequestration in the Community;
5. the environmentally safe capture and geological storage of CO2, in particular from solid fossil fuel power stations and a range of industrial sectors and subsectors, including in third countries;
6.  to encourage a shift to low-emission and public forms of transport;
7. to finance research and development in energy efficiency and clean technologies in the sectors covered by this Directive;
8. measures intended to increase energy efficiency and insulation or to provide financial support in order to address social aspects in lower and middle income households;
9. to cover administrative expenses of the management of the Community scheme.

A new report out recently from the International Council on Mining and Metals (ICMM) provides a detailed look at the current revenue recycling practices around the world. These include areas such as the following;

1. Compensating trade exposed industries
2. Support for lower income people to offset the carbon price.
3. Support for Research and Development on low carbon technologies.
4. Investing in low carbon / low emission projects and energy efficiency schemes.
5. Adaptation to climate change.

ICMM have built the report around a core principle which they extol, namely “apply climate change related revenues to manage a transition to a low carbon future”. The report is excellent and well worth reading, but it does raise a very fundamental issue around the direct hypothecation of carbon revenue. This is isn’t just a governance issue though.

Australia serves as an interesting recent example. The decision to link the Australian ETS with the EU ETS followed by the precipitous drop in EU carbon prices has caused Australian government carbon revenue projections to be adjusted (down) accordingly. Recent headlines in Australia suggest that those relying on government support for various energy initiatives are now concerned about the certainty of that support and the overall level of it going forward. This concern stems from the fact that carbon revenue has been earmarked against certain objectives, such as in the categories listed above.

The alternative approach is to largely delink the collection of revenue and its use, which is the standard practice for most government expenditure. After all, why should we imagine that the collection of carbon revenue and the needs of the economy to make the transition to a much lower emission state should follow the same path. In the very early years, expenditure on R&D and demonstration projects (e.g. CCS, solar thermal etc.) may require funding far in excess of the available carbon revenue, which is often low at this stage as governments introduce a new tax at a modest level or give the bulk of the ETS allowances away for free. Further, at this time the need for guaranteed support for those first tentative investments is critical for long term deployment pathways.

Some years down the road carbon revenue may be very large and probably in excess of the transitional needs, which then argues for the bulk of the money to flow to general revenue. This will lead indirectly to reductions in other taxes, but the linkage would be unspecified. In this case, forcing the use of a large revenue stream on specific objectives may become a market distortion in itself. It is the job of the underlying mechanism (e.g. carbon tax, cap-and-trade, energy pricing) to drive deployment of a new set of energy technologies, not government against the need to spend earmarked revenue.

This is an issue that will likely run and run, assuming carbon prices ever recover to some meaningful level. The ICMM report is a useful contribution to the discussion and certainly gives an excellent overview of current practices. However, it does enter the discussion with the somewhat myopic view of ongoing hypothecation.

As is well known by now, the EU MEPs voted against the specific backloading proposal that was put before the Parliament. However, the Parliament also voted against the outright rejection  of the proposal, which means that the Parliament formally has no position on backloading, possibly leaving the door open for a reformulated attempt at passage. I won’t dwell on that as it probably requires too much speculation and intrigue even for a blog.

The situation the EU finds itself in is spelled out in more generic form in the new Shell New Lens Scenarios. The scenarios tell stories about the future, but these are built around a series of paradoxes and pathways, with the latter illustrated below.

When the financial, social, political or technological capital encourage early action, it can result in effective change and reform. Room to manoeuvre exists and a new pathway forward is forged. But when such capital proves inadequate to withstand the stresses applied, behavioural responses delay change, causing conditions to worsen until ultimately a reset is forced or a collapse occurs. This is a trapped transition. 

The EU seems to be getting quite good at the latter, with the New Lens booklet giving the example of the EU handling of the financial crisis as a Trapped Transition Pathway;

The “can” keeps being “kicked down the road” while leaders struggle to create some political and social breathing space. So there is continuing drift, punctuated by a series of mini-crises, which will eventually culminate in either a reset involving the writing off of significant financial and political capital (through pooling sovereignty, for example) or the Euro unraveling.

Similarly for the EU ETS. While backloading was never the complete solution to the problems faced by the ETS, it could have given it enough momentum to see through a series of much needed reform measures, paving the way to a more robust and economically efficient climate policy framework. Instead, the Parliament has “kicked the can down the road”, setting up the conditions for further crisis later on. This in turn could do real damage to the ETS, leading to a very negative outcome, i.e. Write-off & Reset or Decay/Collapse. Many of those who opposed the backloading amendment argued that it was better to wait for the full structural reform discussion, but that discussion has no formal schedule and is unlikely to commence before the full debate on the 2030 roadmap. Even then, opposition will rear its head again and the structural reforms required could well be watered down.

The vote attracted quite a bit of media attention, with many articles and significant commentary.  Perhaps strongest of all was The Economist, which spoke of “profound consequences” that will “reverberate round the world”. The Financial Times took a different view in its editorial, effectively arguing that the backloading itself was akin to “kicking the can down the road” and instead called for the structural reform to start in earnest and “end the system’s absurdities”. This included border carbon adjustments, long term targets (of the 2050 variety) and dealing with the surplus of allowances.

I have and continue to be an advocate of emissions trading and carbon pricing, but it is looking increasingly unlikely that these systems will ever effectively trigger the one essential response to rising CO2 emissions, which is carbon capture and storage (CCS). There are too many other vested interests which continue to suck the life out of an ETS, including competitiveness concerns from participants, renewable energy targets, energy efficiency mandates, developing country needs and environmental justice to name but a few. These are all important policy desires, but they need to find their home elsewhere and not in the space occupied by an emissions trading system.

In the end if the ETS approach doesn’t deliver CCS in particular, then some form of mandated requirement could be imposed instead.

After a day in Brussels listening to European MEPs, it is clear that the Parliament vote next week on the Commission proposal to backload the auctioning timeline in Phase III of the European Emissions Trading System (EU ETS), is going to be very close. This is a policy proposal that was born out of the call by many participants in the EU ETS, as well as the European Parliament, to address the chronic allowance surplus and therefore begin to steer the CO2 price into a more useful range in terms of real action and investment. A positive vote on the proposal would also be the start of a more structured reform of the policy package designed to reduce emissions across the EU over the coming decades.

But in the frantic days left before the vote, clarity and reason are struggling to be heard over the clamour of opposition, so here are the top ten reasons why an MEP should vote to support the “backloading” amendment next week:

1. Market Confidence

The current CO2 price in the ETS is just a few euros. Even the assumption that there will be a robust price by 2030 (enough for deploying CCS in 2030s for example), but discounted back to now, should result in a higher price than the one we have. That means the market is discounting the ETS itself, in other words questioning its very existence in 2030. Nobody will invest given such an outlook. A positive vote for backloading will signal that the Parliament is prepared to act on the ETS and begin to restore confidence for energy investment decisions.

2. Low carbon Investment

Apart from its annual compliance function, which the ETS is delivering, its purpose is to provide an investment price signal. This in turn steers long term investment in the covered sector, providing support and justification for lower emission investment opportunities. The near zero price signal being seen today means the EU has returned to “business as usual” energy investment, which is even resulting in a resurgence of coal based power generation projects. This will just put upward pressure on EU emissions in the 2020s. 

3. Jobs

Rewind to 2008 and the €25-30 CO2 price, which in combination with the NER300 saw some 20+ CCS projects being considered. The construction of the world’s first CCS network was a real possibility. Today, with the exception of the UK where the necessary investment signal has been created in a national level ”carbon policy bubble“, these projects have been shelved. So too have the jobs that would have been created had they gone ahead.

4. Credibility

Investment depends as much on long term credibility of the policy structure as the policy itself. Business investment will not proceed unless there is a belief that the supporting policy framework is robust and long lasting and therefore able to deliver the necessary return on that investment.

5. Leadership

While there is an issue with the EU over leading on actual emissions reduction, this isn’t the case with leadership on policy development to reduce emissions. Today, many states, provinces and countries have implemented or are in the process of implementing an ETS on the back of the initial success in the EU. They are now watching developments here closely as the EU debates the future of the system. A decision to reject the backloading proposal will potentially undermine the implementation of emissions trading globally (see 10 below).

6. Support

There is a noisy opposition to this proposal, as there was opposition in 2003 to even having an ETS and again in 2008 to building a full policy framework for managing emissions over the longer term. But many companies, institutions, business associations and individuals see the clear merit of a functioning market based approach for reducing emissions and strongly support the proposal. The voice of some European business associations on this issue is not necessarily the consolidated view of business in Europe. 

7. Europe

The ETS was designed to build on the strength of a single EU market and deliver through the synergy that it offers. A weak ETS is leading to fragmentation of this goal as national policies are developed to fill the gaps. Just look at what the UK government is having to do to shore up investment cases which would otherwise be supported by the ETS. This only means a less effective and ultimately more expensive route to the same goal. 

8. Growth

This is all about investment in the EU energy system. Without investment guided by credible policy and clear market price signals, growth stalls.

9. Environment

The carbon price delivered by the ETS is the only mechanism in place to drive the development and deployment of carbon capture and storage. Without this one critical technology, the climate issue simply doesn’t get resolved. The demand for, abundance of and low cost of extraction of fossil fuels may well be unassailable this century, so atmospheric CO2 will continue to rise. 

. . . and most importantly at #10 (well it’s actually #1)

10. Economy and competitiveness

An emissions trading system can deliver the lowest cost emission reduction pathway for the economy, but to do this it needs to be left to do the heavy lifting. The very low price of CO2 in the EU today is not a sign of low cost abatement, but quite the opposite. Abatement is being driven by other policies, with the cost to the economy probably much higher than necessary. The ETS needs to be restored as the principle driver of change in the EU energy system. This will lower energy costs in the EU, which in turns helps competitiveness.

Supporting backloading now won’t deliver all this in one go, but it will get the wheels of change in motion and importantly, signal an intent on the part of the Parliament to correct the energy and climate policy framework and make the EU ETS central to the overall delivery of current and future emission reduction goals.

Back in the middle of last year, UNFCCC Executive Secretary Christiana Figueres tweeted:

Are you up to date with #climatechange acronyms? What is EASD? NMM? FVA? WEMA?

The answer is Equitable Access to Sustainable Development, New Market Mechanisms, Framework for Various Approaches and Workplan on Enhanced Mitigation Action. The fact that these are all linked together shouldn’t come as a surprise, given the importance that carbon markets, sustainable development and various national approaches have in developing a global approach to managing CO2 emissions. Two of these workstreams are of particular relevance to the development of a new global agreement and originated at the Durban COP under the Ad Hoc Working on Long Term Cooperative Action (AWG LCA), as outlined below:

The Framework for Various Approaches (FVA)

To conduct a work programme to consider a framework for such approaches (including opportunities for using markets, to enhance the cost-effectiveness of, and to promote, mitigation actions, bearing in mind different circumstances of developed and developing countries), with a view to recommending a decision to the Conference of the Parties at its eighteenth meeting.

 The New Market Mechanism (NMM)

Defines a new market-based mechanism, operating under the guidance and authority of the Conference of the Parties, to enhance the cost-effectiveness of, and to promote, mitigation actions, bearing in mind different circumstances of developed and developing countries, which is guided by decision 1/CP.16, paragraph 80, and which, subject to conditions to be elaborated, may assist developed countries to meet part of their mitigation targets or commitments under the Convention.

Both these workstreams continue, despite the formal end of the AWG LCA in Qatar. Although the initial focus on the NMM appeared to be solely on the development of a new crediting mechanism to provide offsets for developed countries (stemming from the text “ . . . may assist developed countries . . .”), the discussion has evolved. In particular, the FVA and NMM seem to be rapidly converging. At a recent meeting of the Climate Change Experts Group held under the auspices of the OECD, the Secretariat put up a slide which rather said it all.

Of course the two will remain different, but the integration of these two elements of the UNFCCC negotiations could be pivotal.

As part of its consultation process the UNFCCC also seeks the views of Parties and Observer organizations through a submission process. A recent call for submissions on the FVA and NMM has just closed, with the International Emissions Trading Association (IETA) submitting ideas on how FVA/NMM integration might work and the role that the NMM plays within such an approach. The IETA submission (IETA_FVA_NMM_March 2013) offers a pathway to deliver a functioning global carbon market that could then sit at the heart of the new agreement negotiated under the ADP (Durban Platform for Enhanced Action).

Much of the early debate at UNFCCC meetings focused on the specific role of a “market mechanism”. IETA defines a market mechanism as a process by which a market solves a problem of allocating resources, especially that of deciding how much of a good or service should be produced, but other such problems as well. The market mechanism is an alternative, for example, to having such decisions made by government. Rather, it represents the interaction of supply, demand and prices.

In the context of emissions mitigation, the trading structure within the Kyoto Protocol illustrates the part played by the market mechanism. Within its design, the functioning market mechanism is the Assigned Amount Unit (AAU), although many call the CDM the market mechanism. The AAU establishes the need for trade and creates basic supply and demand through the allocation process against national targets relative to actual emissions. This gives value to the AAU, which in turn creates demand and value for CERs under the Clean Development Mechanism (CDM). Without the AAU, the CER has no value and could not exist in a meaningful sense, as such the CDM alone isn’t a market mechanism.

IETA argues that the New Market Mechanism should be modeled on such a design, in effect replicating the role of the AAU under the Kyoto Protocol, but operating in a world of bottom up pledges, nationally designed trading systems and NAMAs – in other words, a series of various approaches operating within a common framework (the Framework for Various Approaches or FVA). This design for the core NMM instrument would give renewed value to the CER and allow the development of additional crediting mechanisms within a new framework. IETA argue that such an approach can scale-up beyond existing crediting mechanisms, such as the CDM and Joint Implementation (JI) to generate impact across entire sectors. Further, an FVA/NMM integration will enable countries to transition from project‐based crediting to real carbon pricing and economy‐wide trading of GHG emission reductions, by promoting mitigation across one or more sectors or sub‐sectors. The NMM will also embody a commitment to reduce emissions by the host country that reflects some level of aspiration across a sector or sub‐sector.

This is something of a brave new world for most countries, but it offers the opportunity for both developed and many developing countries to really embrace the idea of carbon pricing together with the operational and compliance flexibility delivered by trading of emission allowances. Without such an approach, mitigation costs are likely to be higher and less effective over the long term.

Dear ENVI Committee,

Next week you have to make an important decision on the future of the EU ETS. The Commission has proposed that 900 million allowances due to be auctioned at the beginning of this phase of the ETS be held back and returned to the market before the end of 2020. The objective is to remove a good portion of the allowance surplus that currently exists in the trading system and is putting extreme downward pressure on the resulting price of CO2 emissions. This isn’t a full solution to the problems that confront the trading system, but it is the only politically possible route forward that has been identified. It will provide the necessary breathing room for a more structural approach which must come over the next two years and which will cover the period through to 2030 and beyond.

The ETS was designed and implemented as the principal pricing mechanism to guide investment in power generation and industrial facilities across the EU such that long term CO2 reduction goals could be met at the lowest cost to society. Quite simply, it isn’t performing that role today. While Europe should be gradually shifting away from unmitigated coal and beginning to implement carbon capture and storage (CCS), coal consumption is on the rise and the CCS Demonstration Programme is on the brink of complete collapse. This is because the CO2 price in Europe today is effectively zero. The few Euros that an emissions allowance can command in the market is a reflection of future value, but even that is a cause for concern. At €4 today, this points to a price expectation in 2030 of €7, hardly an indication of a robust market based approach to managing emissions and introducing new energy technologies.

Many have argued that the market is working and delivering on the 2020 target. For this reason they have further stated that market intervention is not necessary. Unfortunately this is misguided and poorly informed thinking. While there is no doubt that annual compliance is functioning under the ETS and therefore the system will also force compliance in 2020, there is very clear evidence that longer term investment is not being guided by the ETS. Rather, investment is either not happening at all or is being driven by other factors and policies, some at EU level but many at Member State level as well. This is not leading the EU down a path of lowest cost emissions reduction, but is instead driving up energy costs in the EU. The very low price of CO2 in the EU does not represent low cost emission reduction opportunities being implemented, rather it is a very real symptom of a high energy cost pathway. This is important as it is not, or has ever been, the cost of CO2 that is impacting the competitiveness of EU industry. Even at previous levels of up to €30, in combination with the free allocation provisions for trade exposed industries, the CO2 price is a relatively benign factor.

The vote on backloading needs to be a “yes” vote. This signals the intention of the European Parliament to begin the process of restoration of the most cost effective approach to meeting Europe’s energy needs and reducing emissions over time. A “yes” vote won’t immediately restore the ETS to good health, but it is a start. Much work remains to be done. But following the advice of those who counsel for a “no” vote would mark the start of a very different pathway for meeting Europe’s energy needs – one that is less certain, more expensive and probably with much higher emissions over time.

Yours sincerely,

David Hone

Chief Climate Adviser, Royal Dutch Shell

Chairman, International Emissions Trading Association

The EU Emissions Trading System (ETS) is facing tough times. Last week saw the price fall to below €3 after the European Parliaments’ Industry & Energy (ITRE) Committee voted against the Commission proposal to amend the ETS Directive to allow for backloading of ETS allowances (a compromise mechanism which will shift the auction profile in Phase III to remove allowances in the short term). At such a price level the system isn’t really functioning, rather it is little more than a short term compliance accounting system for reporting on CO2 emissions.

In effect, this means that the EU doesn’t currently have an explicit carbon price to drive change in energy and infrastructure investment, despite 10 years of policy in place designed with that single goal in mind. The very low price level also implies that there is no expectation for a real carbon price ever developing. In theory these allowances could be bought and banked through to Phase IV. Assuming a cost of capital of 5% (and of course availability of capital to do so), a €3 allowance would only need to fetch €7 in 2030 to cover this, which would be well below the price of a market which is presumably driving investment in carbon capture and storage, surely a technology being seriously considered by then. So what is the thinking that might lead to an ~80% discount in market value? Three possible scenarios could lead to such an outlook;

1. The ETS has been stopped and the market doesn’t exist in the 2020s. In this case Phase IV would never be agreed and although there is formally no sunset clause in the system, it would effectively cease if no allowances for the 2020s were ever issued.
2. The surplus cannot be removed by then, even with tougher targets. New crediting mechanisms continue to flood the system.
3. Other policies will be doing the heavy lifting, leaving the ETS as a ”do nothing” policy instrument. The dominant policies will be ongoing renewable energy targets, CCS mandates, Emissions Performance Standards etc.

All of these are plausible, but I tend to think that the third one will be the ongoing problem. It is the problem today, as shown in the abatement curve chart below (an indicative CO2 price is shown on the vertical axis and the cumulative sum of reductions is shown on the horizontal access). The Renewable Energy Directive has brought projects forward which probably would not have happened until much later in the 2020s. This has had multiple effects within the EU energy system because of the presence of the ETS and its allowance based compliance. Whereas the 2020 goal might have been met through improvements in efficiency, fuel switching and the initial phase in of mature renewable energy technologies (all driven by the CO2 price), it has instead been met through a much less cost effective approach which forces the implementation of renewable energy projects first (including the less cost mature technologies), delays energy efficiency implementation and has the effect of pushing fuel switching and CCS into the 2020s and 2030s. The visible carbon price falls as a result, but the hidden carbon price operating in the economy is much higher.

 On top of this there was also the reduction in emissions as a result of the recession. This has had no real impact on the implementation of the renewable energy projects, but it further delays energy efficiency and pushes fuel switching and CCS into the 2030s and beyond. The resultant short term visible carbon price is near zero, but the same high hidden carbon price remains.

With a near zero carbon price, no visible sign of CCS and delays in implementing energy efficiency, policy makers may then turn to further mandates, such as the case with the Energy Efficiency Directive. This, in combination with yet another round of renewable energy targets, exacerbates the situation, leading carbon market traders to take the view that their allowances will have minimal value no matter how long they wait.

Very little of this is being discussed in the context of the backloading proposal. Rather, an emotive discussion about trade exposure, the cost of carbon for energy intensive industries and the right or not of the Commission to intervene in the market is dominating the airwaves.

The real discussion needs to be around the role of mandates when an emissions trading system is in operation. As the charts above show, backloading will have very little impact if the mandate issue is not addressed as well. Nevertheless, structural reform needs to start somewhere, so let’s hope the EU Parliament Environment Committee and the Member States will take a more positive view of the importance of the ETS and therefore the backloading proposal, when they vote in February and April respectively.

In a year which saw extreme weather rise up the political agenda and the consequences of a changing climate starting to sink into our collective psyche, action to actually address the issue of rising levels of CO2 in the atmosphere remained limited.

With regards issue recognition and despite arguments about attribution, the Bloomberg Businessweek headline after Hurricane Sandy was a telling moment. But events such as this seem to have a short half life, so it remains to be seen how lasting this will be.

 The principal policy instrument to trigger action, a price on CO2 emissions, did gain political traction and coverage, but its impact remained mute. Several jurisdictions introduced carbon pricing and others continued developing approaches and/or starting up schemes already in the pipeline. Notably, despite industry resistance, Japan introduced a modest carbon tax (although there has been a change in government since then so watch this space) and Kazakhstan leapt ahead of the pack by introducing an emissions trading system for startup this week. The Chinese trial systems began to take shape and there is now serious discussion about national implementation in the 2016 5-year plan. As of January 1^st the California ETS is up and running, as is the Quebec system. The Australian carbon price mechanism started in 2012 and importantly the Australian Government passed legislation to link their system with the EU ETS. But fierce opposition forced the EU to take a step back with regards its plans to cover international aviation under the EU ETS.

The EU did however take one major step forward during 2012, in its recognition that a carbon market created as a result of an ETS may need some government intervention from time to time to keep it on track and relevant. Although the issue is far from settled, there is at least a proposal on the table aimed at supporting the weak market in the EU. The move also establishes an important precedent for the future, not just in the EU but probably in the minds of policy makers globally.

With global carbon prices remaining low, the one critical technology for actually rescuing the emissions problem, carbon capture and storage (CCS), struggled badly. Shell did announce an important project in its oil sands in Alberta, but other than this little else happened. At the end of the year the EU managed to deliver a damaging blow to the technology by not coming up with a single project to support with its NER300 CCS funding mechanism, despite having nearly €2 billion in hand to spend. Instead, the money went to some twenty or so small renewable energy projects. It’s hard to overstate the importance of CCS, yet it seems increasingly distant in terms of commercialization and deployment.

From a climate perspective, the year concluded in Doha with two weeks of talks that did a lot to tidy up the UNFCCC process, but hardly pushed the agenda forward at all. If the “holy grail” of a global deal really is to be agreed by 2015, then something remarkable needs to happen during 2013.

Happy New Year!

After a week of talks in Doha at COP18, it is difficult to draw a clear conclusion about how the conference might conclude. Certainly there is discussion along the lines I discussed last week, but progress is slow and many of the historical divisions have resurfaced, despite the apparent progress made in Durban last year with the agreement for dialogue on the basis of all nations making commitments to act. I suspect that like many of these conferences, the last moments of the second week will see a rapid push for concluding text. Time will tell.

A key agenda item for this COP is the real start of discussions within the ADP, where the bulk of the negotiations towards a 2015 agreement should take place. There really isn’t a great deal of time for this to transpire, with perhaps as few as 100 negotiating days available between now and the end of COP21 in 2015. One hundred days to change the world and the process remains in the earliest of stages of thinking about what it needs to think about. To this end a roundtable was convened on Saturday such that the ADP Chair could seek input from the NGO community. Some industry colleagues approached me and said that the business community had a dozen seats in a lunchtime session with the ADP and as Chair of IETA, I was offered one. Initially this sounded like quite an opportunity, until we got into the room and realized that this was a single two hour session with all of the NGO community, not just those from business (otherwise known as BINGOs). Seated in a huge square in an enormous room in the cavernous QNCC (Qatar National Convention Centre) were the YOUNGOs, BINGOs, TUNGOS, INGOs, RENGOs, ENGOs, CINGOs, WGNGOs, FANGOs and RINGOs (young people, businesses, indigenous people, religions, environmentalists, cities, women & gender, farmers and researchers). Still, everybody was succinct and to the point and the business representatives were able to make three key points;

1. It’s about putting a robust price on carbon. Don’t expect voluntary action to be effective (in response to a presentation by Ecofys, see below). Many businesses support putting a price on carbon, just look at the recently released Carbon Price Communiqué.
2. A carbon price can deliver scale – just look at the large impact from the relatively small CDM. One billion CERs, ~$10-15 billion in carbon finance, about $100 billion in project investment.
3. The interaction of business with the ADP is critical to a successful outcome and needs to continue.

I delivered the first point – see below (thanks to ENB for the photo), between colleagues Jonathan Grant of PWC and Thierry Berthoud of WBCSD.

The session had started with a series of presentations from invited external presenters. Abyd Karmali of Bank of America / Merrill Lynch delivered a powerful presentation showing how tailored carbon price based financial mechanisms could deliver further project activity and therefore real reductions in the run-up to 2020. This was in stark contrast to a presentation prepared by Ecofys, which argued for a series of specific activities (wedges) to bridge the gap from where we might be in 2020 in terms of emissions to where we needed to be. This included activities such as company voluntary reductions, the voluntary “greening” of the assets of the 20 largest banks, the expanded use of voluntary offsets by companies and consumers and a global ban of incandescent lamps. These alone are supposed to deliver 5 GT of reductions by 2020.

While I won’t challenge the calculations themselves, the reality of implementing these measures is highly questionable, particularly the voluntary ones. This was the modus operandi of the late 1990s and it simply wasn’t a sustainable path forward. It certainly isn’t today. Even back then, company voluntary reductions were never meant to deliver a globally coherent pathway forward, rather they were to demonstrate to policy makers the types of actions that could be initiated given the right policy signals. In the case of Shell, we even established a modest internal carbon price through a small trading system to do this, again not to deliver major change but to demonstrate the possible. It concerned me that the ADP might take this proposal seriously, enough to overlook the real work that needs to be done to deliver the types of mechanisms discussed by Karmali. Such mechanisms are already being used, albeit on a modest scale, to drive real reductions using CCS in places like Alberta, the UK and the EU.

One of the features of a COP is the side event schedule. These are presentations put on by observer organizations which run in parallel with the main negotiations. They are attended by anyone interested in the subject, including national delegates, other observers and UNFCCC staff.  Today IETA, the Enel Foundation and the Harvard Project on Climate Agreements (Belfer Center for Science and International Affairs) joined forces to put on an afternoon session to discuss “New Market Mechanisms”. So far the attendance at COP18 side events has been a bit desperate, but this one attracted a huge crowd. The room was completely full with attendees standing 5+ deep at the rear.

Rob Stavins from Harvard led off and gave a broad introduction to the work the Center was doing on international market mechanisms and made a number of observations about market design and linkage. This was further supported by a second Harvard presentation by his colleague. Two business presentations followed, one by me on a possible framework which would foster an eventual global carbon market (Establishing a Global Carbon Market) and similarly by a representative from the Italian energy company Enel. The Environment Minister from Costa Rica offered concluding remarks.

The content was solid and interesting, but the highlight was the crowd. Clearly there remains a real and vibrant interest in the use of carbon markets and carbon pricing to drive emission reductions.

So that is a bit about the week that was. The gigantic QNCC felt a bit on the empty side last week, but that is being corrected as Ministers, their support staff and more observers arrive today and tomorrow. We shouldn’t forget that this is still a complex multilateral negotiation, sometimes bedeviled by bureaucracy, mystery and intrigue. This was summed up for me when a colleague commented that he had been in one of the contact group meetings, where “they square-bracketed a semi-colon” (which means that the use of the semi-colon was still being negotiated)!!!

On to week two.

This week sees the start of the 18th Conference of the Parties of the UNFCCC, or COP18 for short, in Doha, Qatar. This should be a busy transitional COP, with much on the agenda to resolve and important steps forward being taken toward a long term international agreement. But procedural issues, agenda disagreements and fundamental sticking points could still dominate, leading to a two week impasse. Let’s hope not.

At the core of the process lie three work streams which have evolved over many years.

The oldest of these is the discussion on the Kyoto Protocol (KP), which has now been running in one form or another for most of the twenty year history of the UNFCCC. Discussion on a second commitment period (KP2) over the past years have embodied the toughest issues in the climate negotiations, such as the role of developing countries in reducing emissions, engagement with North America (neither Canada or the United States will participate going forward) and the need to put a robust price on CO2 emissions. I am a big fan of KP, despite its shortcomings. It was designed with carbon pricing as its central theme, allowed countries to trade to find lowest cost abatement pathways and through its architecture encouraged signatories to implement cap-and-trade based policy frameworks within their respective economies. The simple but clever ideas within it have not been matched since in terms of effectiveness and efficiency despite years of negotiations. Given sufficient willingness, there are clearly routes forward by which KP could evolve to become the much sought after “21st Century global agreement”, but instead it is reaching the end of its shelf life. There seems to be no resolution with North America under this banner, developing countries appear reluctant to let it be the approach to govern their much needed actions and even the country of its namesake city is unwilling to sign again on the dotted line. Australia and the EU remain as the KP bedrock, if for no other reason than to rescue the CDM and consummate their carbon market linkage with a common approach to accounting, offsets and single market currency (AAUs and CERs). The parties do need to agree on KP2, despite the lack of critical mass, and then roll forward its inherent carbon market architecture into the new grand design.

Next comes the discussion on long term cooperative action, or LCA, a workstream which appeared in 2007 at the Bali COP and is home to a broad range of developments from the Green Climate Fund (GCF), the Nationally Appropriate Mitigation Action (NAMA), the much discussed New Market Mechanism (NMM) and more recently the Framework for Various Approaches (FVA). It was meant to deliver the grand deal at Copenhagen in 2009 but didn’t and now labours on with many loose ends and partially thought through ideas which have not been implemented or even fully negotiated. Nevertheless it has been a useful testing ground for new thinking, but has not yet delivered any real mitigation action. It needs to stop now, but difficult issues remain such as the funding of the Green Climate Fund and the modalities for actually spending any money that may arrive in its coffers. These spinoffs from the LCA will need to continue under one of the Subsidiary Bodies or within the ADP (see below) discussions, but the parent discussion should be put to rest in Doha.

Now comes “the new hope”, the Durban Platform for Enhanced Action. For some, the parties at COP17 simply kicked the can 9 years down the road knowing that little new progress would be made, but for many this represents a much needed and major reboot of the process after years of making almost no progress at all on the respective roles of developed, emerging and developing economies. As Harvard’s Rob Stavins noted in his blog of January 2012;

Now, the COP-17 decision for “Enhanced Action” completely eliminates the Annex I/non-Annex I (or industrialized/developing country) distinction.  It focuses instead on the (admittedly non-binding) pledge to create a system of greenhouse gas reductions including all Parties (that is, all key countries) by 2015 that will come into force (after ratification) by 2020.  Nowhere in the text of the decision will one find phrases such as “Annex I,” “common but differentiated responsibilities,” or “distributional equity,” which have – in recent years – become code words for targets for the richest countries and a blank check for all others.

We should not over-estimate the importance of a “non-binding agreement to reach a future agreement,” but this is a real departure from the past, and marks a significant advance along the treacherous, uphill path of climate negotiations.

Although there have been some opening salvos fired in the ADP (Ad-Hoc Working Group on the Durban Platform for Enhanced Action) in various inter-sessional meetings this year, the heavy lifting for this work stream needs to start at COP18. In recent months the IEA, the World Bank, PWC and others have all made it abundantly clear that unless some truly meaningful progress is made in the sort term, the 2 deg.C goal will pass us by (it may already have) and that before we know it we will be looking at a 4 deg.C outcome, along with all its consequences. Even the timetable for the ADP, which seeks to reach agreement by 2015 for implementation in 2020 is problematic in terms of the need for immediate action, but it is what it is.

The ADP needs to define a work programme that embraces the five primary strands of action coming out of the KP and LCA, namely;

• National action defined through specific targets, goals and actions, but aligned with the overarching mitigation objective. This would also include REDD.
• An underlying carbon market infrastructure as currently embodied by the KP but adapted to the applicable framework for mitigation action. Without an evolving price on carbon in the international energy markets, mitigation action will stall. This work stream should also pick up the NMM discussion.
• A funding mechanism that can leverage private sector finance for kickstarting technologies and helping less developed economies invest in a low carbon pathway forward. This is the GCF.
• A continuation of the work of the TEC and CTCN to share knowledge and best practice arising from technology implementation.
• A robust approach to adaptation.

Recently the World Business Council for Sustainable Development resurfaced work that it undertook back at the start of the LCA, but which is highly relevant to the first of the two prospective work areas above. “Establishing a Global Carbon Market” looks at how the substance of the KP carbon market can be applied much more broadly to an evolving world of various approaches.

The above represents a tall order for two weeks work, but with some 10,000 people in tow there is certainly enough labour at hand to get this heavy lifting done. A refined single track approach will bring much needed focus back to the discussions which then paves the way for at least some hope that the 2015 goal for a new agreement can be met. In summary, the big asks for this COP are:

1. Agreeing a continuation of the Kyoto Protocol through to 2020 and then politely ushering this Grand Dame of the UNFCCC off the stage with some reverence and applause.
2. Bringing closure to the LCA work programme and shifting some key components (e.g. GCF, TEC) into the formulation of the ADP.
3. Establishing a clear work programme for the ADP, which incorporates as a priority, the foundations for a continuing and evolving global carbon market.

Good luck and success to all the delegates.