Looking for Signs Along the Road to Copenhagen

The path to a new international climate change treaty is filled with potential twists and turns that will impact how businesses operate in a carbon-constrained economy.

United Nations climate negotiations are planned in Bonn later this month, a U.S. House of Representatives climate bill is expected by May, a U.S. Environmental Protection Agency Greenhouse Gas Reporting Rule is due to be published by June, and an additional climate bill from the U.S. Senate is possible at any moment.

Each of these theaters of emerging climate policy has the potential to impact business in several ways, including raising the cost of energy, imposing new production process requirements, and changing competitive dynamics all around.

We’re taking this opportunity to look at which developments businesses should monitor over the next several months on the road to the U.N. Climate Change Conference in Copenhagen in December. In the second part of this series we’ll explore how climate policy is likely to affect the business community, and how companies can engage in the discussion and help shape future climate policy.

1. Sealing Leaks: Negotiations for an International Treaty

If advocates have their way in Copenhagen this December, negotiators will close the deal on a global treaty for greenhouse (GHG) gas emissions. Such a treaty, which is essential (PDF) for combating the critical problem of “leakage” (when sources of emissions migrate to the places of least regulation), would outline common but differentiated responsibilities—holding all countries responsible to protect the global climate, but taking into account their different historical contributions and relative capacity to act in requiring commitments.

In practice, such an agreement would require developed countries to make significant reductions to their aggregate, absolute, point-source emissions, and would require developing countries to reduce their intensity of emissions and abide by new sector-specific standards. It would also aim to promote innovation by creating positive incentives for low-carbon energy and activities all around.

What this means for business:
A global treaty will establish parameters that shape domestic legislation, as well as border measures enforceable (PDF) under the World Trade Organization -- creating many layers of price and risk for companies that use, produce, or manage value chains that rely on carbon-intensive energy.

Specifically, the treaty is expected to outline regulations and incentives related to not only reducing emissions, but adaptation, technology transfer, finance and international development, a global carbon market, and deforestation.

In spite of these concrete subjects, the Copenhagen meeting itself (known as “COP 15”) is largely symbolic. The real action will take place at the various United Nations Framework Convention on Climate Change (UNFCCC) meetings leading up to Copenhagen (see sidebar), and also afterward.

As the Economist has pointed out, Kyoto, Copenhagen’s 2001 predecessor, was a “bust up.” The actual deal wasn’t completed until another meeting the following year. Thus, Copenhagen is just one stop -- albeit one with a big agenda -- along a road of continuous negotiations.

What to watch:
A key area to watch is interactions between country coalitions.

The most influential is the relationship between developed and developing countries—what the UNFCCC calls “Annex 1” and “non-Annex 1” countries—which has reached a stalemate over who should act first.

Other coalitions, known as “party groupings,” include the Alliance of Small Island States, the Least Developed Countries, the European Union, the Umbrella Group and Environmental Integrity Group, OPEC, CACAM, the League of Arab States, and the Agence Intergouvernementale de la Francophonie.

To stay close to the global negotiations related to Copenhagen this year and onward, follow the UNFCC press headlines, COP 15 News, UN News Centre, Earth Negotiations Bulletin, Climate Action Network, and Third World Network.

2. Critical Path: The United States Senate

In order for a treaty to work, the U.S. must ratify it -- and for the first time, this is possible. U.S. President Obama wants to reduce emissions by 80 percent by 2050, is committed to vigorous diplomatic engagement, and has called on Congress to enact a market-based cap. More generally, there is growing evidence that clean energy is not at odds with jobs, and consensus among economists (PDF) that now is the time to act.

Nonetheless, ratification requires a two-thirds vote by Congress, where politics, not policy, rules. This will take two steps.

First, explains Al Gore, who failed to get the U.S. to sign the Kyoto Treaty in 1997, the Senate needs a clear picture of how the U.S. will actually meet its targets, which will almost certainly depend on both the Senate and the House approving a centralized cap-and-trade system. Second, in addition to the 60 Senators needed to support regulation, a full 67 are required to ratify the international treaty. The critical path, therefore, is winning over “brown state” Senators, who are concerned about unemployment.

What this means for business:
Centralized emissions regulation is likely to happen during this Congress and maybe even this year. But ratifying the treaty, while possible, is not likely to happen in time for the Copenhagen meeting in December. Elliot Diringer of Pew Center on Global Climate Change and Joseph Romm of Climate Progress fall generally in this camp. Others expect a treaty, albeit a watered down version.

As an optimistic way forward, Senate Majority Leader Harry Reid is planning to strategically sequence legislation in 2009, beginning first with a renewable energy bill, before introducing a measure to improve grid transmission. Once those foundations are laid, he will tackle a cap-and-trade.

What to watch:
As Congress negotiates the details of international competition, technology, cost containment, and offsets, energy and climate bills will develop in both the House and the Senate. Watch for markup on a climate bill by Memorial Day in the House, where 55 of 126 fence-sitters -- which include fiscally conservative “blue dog Democrats” -- need wooing to achieve a 163-vote majority. In the Senate, Reid aims to hold a floor debate on a climate bill by the end of the summer, when Senate supporters will need to win over 13 of the 21 senators now undecided.

If and when discussion turns to ratification, the collection of moderate Democrats from the Midwest, the Rust Belt, and the West (known as the “Gang of 15”) will be critical to achieving support from the additional seven senators that are needed. Given the rocky economy, the central issue will be whether a commitment represents an investment or a cost, especially for U.S. manufacturing.

Watch how opinion leaders like the 17 players most influential to cap-and-trade affect the discourse, as well as influential climate change skeptics such as Senators Joe Barton and James Inhofe, in part with the help of contrarian scientists.

3. Game Theory: The U.S.-China Axis of Emissions

But the real theater to watch, says Jonathan Lash, director of the World Resources Institute, is the interaction between the United States and China -- the No. 1 and No. 2 greenhouse has producers that emit more than 40 percent of the global total -- which Lash refers to as the “axis of emissions.”

“If the U.S. and China find agreement, the world will move,” according to Lash. Romm, of ClimateProgress, goes further, saying that Obama’s entire presidency and the fate of the planet depend on it.

Getting the 67 U.S. Senate votes needed to ratify a treaty, says Romm, will not happen without binding commitments by China to cap emissions by 2020. In response, Obama is taking negotiations with China seriously. Secretary of State Hillary Rodham Clinton visited China as part of her first diplomatic mission last month, which included a two-day stop in Beijing devoted to climate. She was accompanies by  new climate change envoy Todd Stern, who believes “nothing is more important for dealing with (climate) than a U.S.-China partnership."

So far, however, China firmly opposes binding commitments, resists the need to act in advance of the U.S., and instead calls on developed countries like the U.S. to provide financial support and a transfer of technologies. Chinese leadership has taken this stance because it believes the country should be as unrestricted in industrializing as the U.S. was under the Industrial Revolution. Clinton’s retort? Everybody knows better today.

Regardless of this debate, much of China’s emissions come from manufacturing goods headed to the West, and deciding whose emissions are whose and what constitutes progress is far from settled.

What this means for business:
Diplomats will look for every opportunity to build common ground, and reports by the Pew Center, the Asia Society (PDF), and Brookings Institution provide roadmaps. One big opportunity is for the two governments to share investments in R&D: China wants help with technology and finance but most cleantech in the United States is owned by private companies and the U.S. Congress is unlikely to make major appropriations.

Among investments, two technologies are wildcards: carbon capture-enabled coal and nuclear. Although evidence shows that they should be the low-carbon energy choices of last resort, coal is enticing because each country has such huge deposits, and public attitudes in the face of climate change are evolving more favorably towards nuclear.

What to watch:
For both the U.S. and China to commit to an international climate treaty, the U.S. will need to lead the way with binding commitments and each country must show successive signs of good faith.

If it happens, it’s most likely that China will sign “process-oriented” commitments, such as adopting emissions-per-GDP (or “intensity”) targets, renewable energy requirements, sector-specific emissions limits, plant- and building-efficiency standards, and possibly carbon taxes.

After that, U.S. Congress might approve a cap-and-trade scheme in anticipation that China would follow. A key event to watch is the April meeting in London between U.S. President Obama and Chinese President Hu Jintao.

There, the leaders intend to reveal more about their “strategic dialogue," which Clinton’s visit initiated.

Ryan Schuchard is manager of environmental research and innovation at Business for Social Responsibility.