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SpirE-Journal 2012 Q4

Durban: The Next Phase for Climate Change

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Durban: The Next Phase for Climate Change

In the early hours of 11 December 2011, 194 countries agreed to a new climate change deal in Durban, South Africa. The ‘Durban Platform’ builds on previous partial deals over the past two decades. It commits both developed and developing countries to agree on legally binding limits to greenhouse gas emissions. The Durban Platform has succeeded in including China (the world’s largest emitter) and the US (the world’s second largest). What does all this mean for business? 

In 1992, countries joined together in the United Nations Framework Convention on Climate Change to address the need for the global reduction of greenhouse gas (GHG) emissions. By 1995, these countries realized stricter measures needed to be adopted, and made a fresh agreement in Kyoto. The Kyoto Protocol set binding GHG-reduction targets for 37 industrialized countries and the EU – on average, a 5% reduction against 1990 levels from 2008 to 2012.

What Kyoto was

While the 1992 Convention only encouraged industrialized countries to stabilize GHG emissions, the Kyoto Protocol committed them to doing so.

Developing nations cited that industrialized nations were primarily responsible for the high levels of GHG emissions in the atmosphere, due to over 150 years of industrial activity. The new Protocol should place a heavier burden on those high-emitting nations, they argued. This principle is called “common but differentiated responsibilities.”

To compensate for the sting of “binding targets”, the Kyoto Protocol proposed different paths and mechanisms for meeting goals. For example, one way countries could compensate for their emissions would be by increasing the volume of forests, called “sinks”, which remove carbon dioxide from the atmosphere. “Sinks” can be accomplished either on one’s own territories, or one could invest in foreign projects that create such “sinks” in other countries.

While the Protocol stipulated that countries must meet their targets primarily through national measures, three international market-based mechanisms were allowed.

The “carbon market,” based on the notion of carbon as a commodity and carbon emissions trading across countries. Parties committed to the Protocol (known as Annex B parties) were allowed a certain level of emissions, or “assigned amounts” over the 2008 – 2012 commitment period. These emissions are counted by “assigned amount units” (AAUs). It is possible for a country to have emissions “to spare,” or units that have not been “used.” One country can then “sell” these spare units to another country that has gone over its allotted “assigned amounts”. Thus, emissions are tracked like any other commodity between parties, creating a “carbon market.”

The clean development mechanism (CDM) allows an Annex B country to implement an emission-reduction project in a developing country (called an Annex A country). Examples include a rural electrification project using solar panels. This mechanism allowed developing countries to “leap frog” older clean technologies. Such projects earned certified emission reduction (CER) credits, each equivalent to one ton of CO2, which could be counted towards meeting targets.

The joint implementation (JI) mechanism allowed an Annex B country to earn emission reduction units (ERUs) from an emission-reduction or emission removal project in another Annex B country, each equivalent to one ton of CO2, which could be counted towards meeting its target. Joint implementation offered both parties a flexible and cost-efficient means of meeting targets while the hosting party benefited from foreign investments and technology transfer.

Where Kyoto failed

The Kyoto Protocol endured a decade of rapid change. It did, however, suffer from major shortcomings.

When Kyoto was adopted in 1997, China was considered a poor, developing country, and as such, had far fewer obligations. Since 1997, China has developed at breakneck speed, accounting for 2.2 billion tons of the world’s GHG emissions in 2010 and thus becoming the world’s top GHG offender. The US and other nations are now calling for China to be held to the higher standards that eluded it in 1997.

Following shortly behind China is the US, which was historically the largest polluter at 1.5 tons reported in 2010. The US signed the Protocol but did not ratify it in Congress, withdrawing itself from the legally binding obligations. Thus, the Kyoto Protocol functioned without including the world’s top two GHG polluters within its provisions.

The Difference with Durban

While the 1997 Kyoto protocol was the world’s only treaty laying down GHG-reduction mandates, it only applied to (some) developed countries. The Kyoto protocol targets expired last year, and among all major developed countries, only the EU has agreed to a continuation. In a significant blow to the future of the Kyoto Protocol, Japan, Russia, and Canada all dropped out, with the US never ratifying it in the first place.

In Copenhagen in 2009 and then Cancun in 2010, most countries and all of the largest economies set up national GHG reduction targets up to 2020. But these targets were all voluntary, not legally binding. By the time of the Durban convention, it was becoming clear that time was running out and more concrete plans had to be drafted.

Previously, developing nations insisted that the brunt of the economic burden for tackling climate change should lie with industrialized nations. The Durban Platform marked the first time that world governments committed themselves to a comprehensive Green agreement including both developed and developing nations. In fact, the new Platform completely did away with the “common but differential responsibilities” language.

While there were no discussions about how fast or how far participating countries should be cutting GHGs, the principles for future negotiations were settled. Negotiations would have to be wrapped up by 2015, culminating in a ready-to-sign document, with governments having until 2020 to ratify it. It would also be the first time that the Big 3 (China, India, and the US) that make up almost half of the world’s emissions agreed to begin negotiations on a legally-binding treaty to cut emissions. This is an especially symbolic move for the US, which had earlier made clear that Congress would never ratify the Kyoto Protocol.

Durban: Likelihood of Adoption

The EU and smaller island nations have already committed themselves to the Durban framework. With China’s own 12th Five Year Plan already in action with its own emission caps, it seems that the world’s biggest emitter has also given its’ nod of approval. However, the US poses a unique problem. The Republican majority in the House of Representatives still largely holds that human-made climate change is either exaggerated or simply nonexistent, as did eight of the nine 2012 Republican presidential candidates. With the issue of ratification still looming, it is difficult to say for sure whether the United States will sign in 2015.

Economic Impact

The Durban Platform’s economic impact will come largely from the Green Climate Fund, which aims to fundraise USD100 billion annually from both public and private funds. In Britain, the Green Climate Fund is set to cost 1 billion British pounds a year or 6 billion British pounds by 2020.

While a globally-binding agreement is still far-off, it is now the time for businesses and investors to start thinking about viable green-business ventures in developing countries that could win GCF funding. Early movers will make the biggest impact on the future direction of the Fund.

Some developing countries that stand to gain from the GCF, like China, are not lacking in funding, but instead in knowledge and technology. The GCF offers a tremendously attractive platform for experimentation in Green technologies.

Conclusion – the Business response to Durban

The world is waking up to a hard truth — that it is sleepwalking into a global climate crisis and that its decisions in the next few years will determine the quality of life of future generations of humanity.

The Durban Platform was criticized from all sides for lacking ambition because it failed to lock countries into legally binding targets. But looking at the European Union’s struggles over who would pay the price for bailing out Greece, it was perhaps unrealistic to expect one meeting alone to finalize legally binding targets across both developed and developing countries. To paraphrase Marx, history only places problems on the table when they are ready to be solved. However tenuously, Durban laid the foundations for a future legally-binding treaty that will be hard for politicians to shake off. But it remains to be seen what structure will be erected upon these foundations.

Kyoto created a stick – emissions reduction targets – that bound the EU, Japan and other countries. This spurred growth in many emerging Green product categories as countries worked hard to meet their targets. The beneficiaries included combined cycle and gas-fired power stations, Green building technologies and of course a whole array of renewable energy technologies for use in vehicles and electronics – solar power, fuel cells, bio-fuels, wind and wave power, geothermal energy and so on.

If Durban leads to a legally binding treaty, that stick will become far more powerful from the inclusion of China and the US. This will continue to drive government efforts to promote Green technologies – efforts that are very much needed to bring many Green technologies like solar power generation to their tipping points of commercially viable mass-market adoption. The uncertain future of nuclear power generation in the wake of the Fukushima earthquake makes this task all the more urgent.

However Durban has created not only a stick but a carrot in the form of the USD 100 billion a year GCF. This funding will hopefully support not only infrastructure-building but also innovation and experimentation. Companies will now be well-incentivized to put forward Green projects, particularly in emerging economies that are seeing the most rapid rates of greenhouse gas growth (partly because much of the manufactured goods consumed in the First World are now made in the Third).

Which companies stand to gain the most? Not only those with the best track record in Green technologies, but those who can combine this with strong capabilities to execute in developing countries, including the very poorest ones.

Yvo De Boer, Ex-UN climate chief, commented that the momentum from Durban would create the potential for more public-private partnerships that would aid developing nations in achieving green growth. This would create more jobs, alleviate poverty, improve infrastructure as well as tackle climate change. Companies in the energy efficiency and renewable energy sector should see more opportunities as a result.

Will Durban go down in history as the place where the tide was turned against climate change? Probably not, since legally binding targets were not agreed. Will it be remembered as the beginning of the end of the infamous gridlock between developed and developing countries over climate change? Only time will tell.

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