Kyoto II – Is it a Done Deal?

By Frank-Jürgen Richter

Business Times, October 28, 2015

This is a somewhat flippant headline as a new climate deal is a serious matter. It is being pursued by the United Nations Intergovernmental Panel on Climate Change (IPCC) that wassetupin1988 to “stabilise greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic (ie human-induced) interference with the climate system”. Regular meetings known as COP (Conference of the Parties) discuss the reports, now in version 5 as of 2014. The most notable meeting was COP3 at Kyoto 1987, which led to a globally binding Protocol – its first commitment period started in 2008 and ended in 2012. The second commitment period began on Jan 1, 2013, to end in 2020.COP21 will take place in Paris in December 2015 and I venture that it will be a “done deal” – “Kyoto II” will be signed off.

I read an academic paper a while ago about the 1987 Montréal Protocol which led to a ban on the use of CFCs (chlorofluorocarbons). Discussions took several years but were aided by (a) being tightly focused on “ozone issues” using a composite weighting function that combined the effects of all pollutants into a single number; (b) having firms cease CFC use much earlier than the convention date as the US had already banned CFC use in aerosols; (c) the CFC sector in each country did not include the entire spectrum of their national economy, and (d) a well-informed public demanded the easily visualised “ozone hole” be filled in as soon as possible to protect their personal health. Heads of government came to Montreal ready to sign, and within 90 days the ban on CFCs’ use had become globally binding.

In contrast, the COP meetings concern the total economy of every nation and the simplifying aspect of Montreal now confuses the COP debates – in particular the widely-bandied term “carbon footprint” of a nation, which is derived from an agreed formula combining the effects of many atmospheric pollutants into a number called the CO2 (carbon dioxide) equivalent.

Sadly the public too strongly associates the overall footprint with burning carbon. It is true that burning fossil fuel produces CO2 as well as other pollutants, but cows create methane which is about 25 times worse than CO2: CFCs have a weighting of 10,000andSulphur Hexafluoride (used in dielectrics) is some 23,000 times worse than CO2. These all contribute to global warming in complex ways.

The forecasting of emissions by country is difficult and political. Yet the world’s two main polluters – China and the US – have agreed on a strategy of mitigation which will pull other nations into line. When President Obama met President Xi in November 2014 in China they agreed to cap their emissions: the US to reduce by 28 per cent by 2025, and China to reach a peak by 2030 or before. They reaffirmed their commitment when President Xi visited the US in September 2015. President Xi also reconfirmed his commitment to a national carbon trading scheme.

The Kyoto Protocol established rules for carbon trading. Essentially the trading scheme’s governing body sets a cap on allowable emissions. It then distributes or auctions off emissions allowances that total the cap. Member firms that do not have enough allowances to cover their emissions must either make output reductions (or change technologies) or buy another firm’s spare credits. Members with extra allowances can sell them or bank them for future use.

Cap-and-trade schemes can be either mandatory or voluntary. But the market will choose the easiest means to save a given quantity of carbon in the short-term, which may be different from the pathway required to obtain sustained and sizable reductions over a longer period: a market-led approach is likely to reinforce technological lock-in. For instance, small cuts may often be achieved cheaply through investment in making a technology more efficient, whereas larger cuts would require scrapping the technology and using a different one. Furthermore caps increase costs which are passed on the consumers.

The 2006 Stern Review for the UK government said three policy actions needed to be taken worldwide – carbon pricing, technology policy enhancement and increasing energy efficiency. This could have been done at the time for about 1 per cent of global GDP – the increased costs of carbon-intensive goods – and delay would simply increase the costs to us all.

The Governor of the Bank of England, Mark Carney, recently told bankers to beware of the vast financial implications of investment swaps as traders exited “dirty” situations. He noted as well as physical and liability risks, UK insurers, which manage almost£2 trillion (S$4 trillion), also face threats from the re-pricing of investments in fossil fuels in the move toward a lower carbon economy.

Such large figures merit consideration in today’s weak growth scenario as costs are rising on many fronts. Notwithstanding the accord struck through the Trans-Pacific Partnership linking the US, Japan and10other Pacific Rim nations, it arrives as Asian, European and North American investment climates waver.

Further, the IMF has just forecast lower 2015 growth than last year. Overall costs for many rich nations will increase as we aim for the next global Sustainability Development Goals recently agreed at the UN (they have nuances included about climate change). And costs will increase if the new climate change protocol is agreed in Paris.

As the globe undertakes more robotisation, while ultimately good for humanity (getting rid of dangerous or repetitive jobs so freeing people to be creative), it will increase short-term costs associated with economic migration. However, I believe there is a worldwide crusade to save our planet; and so, as with the Montreal process, the Paris meeting ought to be “a done deal”.

The writer is founder and chairman of Horasis, a global visions community.