In discussions with our clients and other observers at the Copenhagen climate change conference, I have heard many quote some variation of the following: COP15 is not a climate change negotiation, it's a trade negotiation.
Indeed it is, and the magnitude of the money at stake has less to do with the tens of billions of dollars for direct finance for adaptation and mitigation that developed countries are beginning to agree to commit, and much more to do with the possibility of trillions of dollars at risk from the impact on the international competitiveness of certain industries in developed or developing countries that could be created if climate change regulations are unilateral, uncoordinated and not global in nature.
Concerned about the impact of a lack of a global agreement on European industry, the EU has adopted regulations that have provisions to address what is commonly called carbon leakage. As the next phase of the ETS is expected to bring substantially higher compliance costs to firms, some business sectors could have an incentive to move away to geographies with less stringent or no carbon constraints. This exporting of industries, along with their emissions, would of course override the environmental impact of the scheme and materially harm the EU economy.
The EU plans to limit this leakage by compensating sectors deemed to be at risk of leakage. Through a preliminary assessment, the EU identified the sectors and subsectors within its economy most likely to be at risk of carbon leakage:
This shortlist of sectors (which is still susceptible to change) will be different in other geographies. And governments and regulators could address the leakage issue in a variety of ways. As an example, the Waxman-Markey bill that passed the U.S. House of Representatives earlier this year contained provisions for a slightly different mechanism through an “Emission Allowance Rebate Program” for certain industrial sectors.
These protectionist mechanisms could disappear altogether. There are alternative solutions to address carbon leakage, such as sectoral approaches, and discussions around these solutions are an important part of what people have come to Copenhagen to negotiate.
Many of these solutions have been debated at length prior to the COP15, but the draft agreements tabled on Friday do not contain any language on how this key issue would be dealt with. Given the amount of money potentially at stake, I am eagerly looking forward to learning how the environment ministers and heads of state that will arrive this week propose to do so.
What does this mean for business?
One, that you should have already built or should begin to consider building a view on the degree of potential exposure of your organisation to the coming carbon regulations.
Two, that the topics being discussed in Copenhagen have an important potential to tilt the competitive playing field internationally.
Three, that you should be very closely monitoring the developments this week for the very important signposts of the things to come and the overlap between climate and trade.
Mauricio Bermudez-Neubauer, based in London, is carbon markets lead in Accenture's Sustainability Services Group.
Click here for full coverage of COP15 from the GreenBiz.com and ClimateBiz.com teams, including posts from Copenhagen by Executive Editor Joel Makower and Senior Contributor Marc Gunther, and from dozens of guest contributors from the business world.
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