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Is a Sector Approach the Best Alternative to a Global Climate Deal?

<p>Although an ambitious global agreement is the optimal outcome, pursuing a sectoral approach could succeed in reducing greenhouse gas emis</p>

Cancun will be one more step on the road to establishing a workable framework for controlling global greenhouse gases. The Mexican government has worked hard to progress the agenda since Copenhagen, but a global emissions deal will remain elusive.

Last month's midterm elections quite certainly mean that the U.S. will be unable to subscribe to any legally binding commitment at the U.N. negotiations over the next couple of years. Public and sovereign debt will inhibit Europe's fading leadership. Japan will be hard-headed in replacing the existing Kyoto framework with one that encompasses all major emitters. And major emitters from emerging markets will be keen to perpetuate the current regulatory structure while avoiding any measures that inhibit their ability to grow or that result in foreign accountability of their emissions performance.

Let's be clear: Not only is a global deal focused on economy-wide emissions targets unlikely, it is also insufficient and undesirable as it will likely produce a lowest common denominator outcome.

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Conscious of the dilemma, the Mexican government has worked to escalate the role of businesses in the policy-making process. What can we expect from business at COP16 and beyond?  This is partly answered by the work we have been commissioned to do by ProMexico, the government body that supports Mexico's industry and exporters, in a paper we are presenting in Cancun.

In the absence of a global climate agreement, it's clear that a patchwork of carbon regulations will continue to develop. The Western Climate Initiative's cap-and trade scheme for seven western U.S. states that is due to start in 2012 and the EU's Emissions Trading Scheme (ETS) are the two largest examples. Other carbon controls are in the pipeline in countries such as Japan, South Korea, China, Mexico and Australia. 

This uncoordinated and unilateral application of carbon policies raises the potential for carbon leakage. Since companies could have incentives to relocate high emissions operations to markets with a lighter or non-existent constraint on carbon, climate policies will likely be accomplished by mechanisms to prevent leakage, such as rebates or border adjustments. Europe has already moved in that direction. Such measures not only weaken the environmental performance of systems like the EU's ETS, they raise important questions about the effects of piecemeal climate policies on trade and international competitiveness.

What can be done? Consider the complexities of seeking political agreement among negotiators representing nearly 200 governments. And consider the relative simplicity of gathering the leaders of the world's major emitting industrial sectors. Indeed, some of the senior executives from energy-intensive industries who we have spoken to say it's time that policymakers gave a more prominent role to businesses by formalizing and institutionalizing their participation in climate policy negotiations.

Just five industrial sectors account for 20 percent of global emissions and these sectors are concentrated in a small number of countries. They clearly represent the low hanging fruit in the race for emissions abatement. Steel and cement industries alone account for some 15 percent of global emissions. Using technology available today, these two sectors could reduce their emissions by 35 percent from 2000 levels by 2030. Those reductions would be equivalent to the entire annual emissions of the Japanese economy.

This does not necessarily mean that sector carbon agreements are the only way forward. A binding and ambitious global agreement is of course the optimal outcome. But our analysis indicates that these key industries would like governments to explore this avenue further.

The question then comes down to how to create a more level playing field to allow these sectors to agree to emissions reductions globally without putting their particular countries at a competitive disadvantage. Innovative systems that combine performance incentives (such as Japan's Top Runner program) with border adjustment measures could be an effective first step.

This should not be about imposing rules on others, but rather about jointly agreeing on a global sectoral system that integrates carbon and trade. Using emissions performance-based benchmarks, free allowances or rebates could be used for exporters, and combined with border adjustments such as tariffs, taxes or allowance purchase requirements for imports. Technology diffusion and funding for R&D in breakthrough technologies should also play a role.

The key principle is that if we were to go down the route of sector-based policies, trade and carbon issues could be brought together. They are, of course, only one of the ways to deal with the implications from multiple and disconnected carbon control policies. But even if that route it not taken, we can at least agree that, given the unlikely outcome of any global deal, now is the time for the private sector to step forward and take the initiative.

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