Key Points:

If a new agreement can be reached in Paris, Australian businesses may finally be given some stability and certainty as to where Australian climate policy is headed.

Governments are aiming to produce a new international agreement in Paris later this year, defining the next stage of the global effort to reduce carbon emissions. Yet the recent Climate Change Conference in Lima suggests the road ahead remains a bumpy one. Australia may have put its money where its mouth is with its $200m commitment to the Green Climate Fund during the Lima Conference, but the real focus will be on each country's commitment to emissions reduction beyond 2020, with indicative pledges required to be announced in the first half of 2015.

The Lima Call for Climate Action

The Lima Climate Change Conference convened from 1-14 December 2014, in Lima, Peru. It brought together approximately 11,000 participants, made up of government officials, UN representatives, civil society organisations and the media to form the 20th session of the Conference of the Parties (COP 20) to the UN Framework Convention on Climate Change (UNFCCC).

The primary aim of Lima was to continue to draft an agreement to be negotiated and decided upon at the next Conference of the Parties to the UNFCCC scheduled to be held in Paris in December 2015. This goal appeared attainable due to the optimism instilled by the US-China joint announcement on Climate Change made only a few weeks prior, whereby the US committed to a 26-28% reduction of 2005 emission levels by 2025, and China announced an intention for its emissions to peak by 2030 (or sooner), and 20% of its energy sourced from non-fossil fuels by the same date. Yet in what may now be considered typical of UNFCCC conferences, negotiations continued for two days beyond the scheduled closure and left much to be desired. The Conference did make progress in elaborating the elements of a draft agreement. Each element of the draft text has two or three disparate options still to be negotiated.

The terms of the text reflect a continued commitment to the established principle of common but differentiated responsibilities and respective capabilities (CBDRRC), which recognises differences in the contributions of some nations to climate change, and their capacity to address the challenges. A deep rift remains between developed and developing nations on how this principle should be expressed in the agreement text. Although developing nations fought hard for assurances that the new agreement would entail climate finance and adaptation assistance, the draft text does not specify that a country must pledge funds or commitments beyond mitigation. It is likely that this issue of differing obligations will continue to complicate negotiations in the lead up to Paris.

The decision of the Lima Conference calls on all countries to establish their domestic commitments, or Intended Nationally Determined Contributions (INDCs), by the first quarter of 2015. This is to ensure that all pledges will be on the table well before the Paris conference. However, negotiators failed to agree on the format or scope of INDCs and the information to be submitted, which will make comparison of pledges difficult. Although INDCs must represent a “progression beyond the current undertaking of that Party”, a formal mechanism to assess whether the aggregate effect of all INDCs will hold temperature rise to below 2°C (being the UNFCCC target), was not devised, although the UNFCCC secretariat will prepare a synthesis report on the aggregate effect of the submitted INDCs by 1 November 2015.

While requiring that the INDCs must represent actions beyond what each country is currently undertaking (so as to prevent any "backsliding"), the Lima Call to Climate Action provides that any indicative pledge submitted is "without prejudice" to the INDCs ultimately contained in the 2015 agreement, and that it is for each country to decide what quantifiable information is provided with the INDC (eg. reference point for emissions reductions, timeframes, assumptions etc.).

Many discussions centred on the legal form of a new treaty (whether emissions reduction targets should be legally binding or voluntary) and the development of an accountability mechanism to ensure such targets cannot be evaded. In order to avoid the need to have any treaty struck at Paris ratified by Congress, the United States maintained that targets should be voluntary, based on domestic action. In contrast, the United Kingdom and Australia, amongst others, continued to press for a legally binding agreement with a rigorous accountability mechanism. This issue could not be resolved in Lima and may be one of the many potholes on the road to an agreement in Paris. However, the focus on each country nominating domestic action as part of its INDC, thus providing a bottom-up approach rather than rigid internationally set targets, may well avoid a repeat of the near death experience of climate change negotiations at Copenhagen in 2009.

Positively, the Green Climate Fund (GCF), which manages climate finance required by developing countries to mitigate the impacts of climate change, attained its initial $10 billion target during the Conference. Although there were no significant decisions to be made on climate finance, the GCF was a prominent discussion point and contributions were made by both developed and developing countries to reach the target.

Evaluating Lima: another pothole or a turning point?

The Lima Call for Climate Action has received mixed reviews, with many commentators suggesting it is a weak compromise that achieved just the bare minimum needed to keep negotiations alive. It certainly falls short of what was expected following the success of the UN Climate Summit in New York in September 2014 and the breakthrough announcement from China and the United States. It is therefore particularly concerning that the UNFCCC process is still unable to deliver results despite changing domestic attitudes and progress made in other forums.

However, it seems clear from Lima that a future agreement will allow nations to establish their own targets – and that the success of that agreement in averting severe climate change will depend on whether nations set themselves ambitious INDCs. It is highly unlikely that a new agreement will seek to be as ambitious as the Kyoto Protocol by establishing a uniform international carbon market. So again, carbon pricing mechanisms are therefore likely to remain under the auspices of domestic initiatives or bi/multi-lateral agreements.

Past UNFCCC conferences suggest that collective international pressure will not be sufficient to force a country into action or to take more significant action on climate change. But Lima may have been the turning point: poor performing countries, such as Australia, were named, shamed and called to action. If and when this translates into trade impacts, then there is likely to be an escalation in pressure, internally and externally, to take stronger action.

Australia: the pressure is on

From day 1 of Lima, Australia was scrutinised for "not recognising the issues". Australia was named as the worst performing industrialised country on climate change action and second-bottom, above only Saudi Arabia, for its carbon emissions levels. Other countries perceived Australia’s position as both "confusing and disappointing". It was not until it was revealed that Australia would finally contribute to the Green Climate Fund that Australia was cut any slack by other delegates. Foreign Minister Julie Bishop announced a $200 million contribution would be made to the GCF over four years, although these funds will be siphoned from Australia's current aid budget rather than being given as a new and additional pledge.  Accordingly, pressure is on Australia to announce a solid INDC and a clear commitment to cut emissions. The shape and size of this commitment is still unknown, however the Government has established a taskforce to set Australia’s INDC by June this year. Under the previous Labor government, a conditional "Kyoto 2" target ranged between 15-25% on 2000 levels by 2020. The Australian Climate Change Authority recommended in its Targets and Progress Review (February 2014) that a 40-60% reduction by 2030 is a more appropriate response to the latest science and is necessary to achieve the goal of keeping global average warming below 2 degrees. The present Government has not provided any indication of a likely target. Even if it has the desire to adopt an indicative commitment in these ranges, it may be hard pressed to get anywhere near them due to recent changes in carbon abatement policies and the continuing uncertainty over the renewable energy target which may have diminished Australia's capability to reduce emissions by that scale within that timeframe.

At present, the Emissions Reduction Fund (ERF) is the centrepiece of the Australian Government's Direct Action Plan to reduce emissions. The ERF provides incentives for emissions reduction activities across the Australian economy. However, there remains considerable doubt as to whether the ERF can deliver on Australia's 5% emissions reduction target by 2020, let alone any future target. As it is based on public funding, the ability to scale up the ERF to meet any future target taken to Paris would translate into a significant future budget expense. Details of the proposed Safeguard Mechanism, including whether this could develop into a kind of baseline and credit carbon trading scheme, have not yet been released. To find out what you need to know about the ERF, as well as the Carbon Farming Initiative, see the Clayton Utz briefing note.

Looking forward

If a new agreement can be reached in Paris, Australian businesses may finally be given some stability and certainty as to where Australian climate policy is headed. A clear and transparent statement in early to mid-2015 regarding the extent of future domestic action (ie. beyond the ERF), coupled with an aspirational (or even binding) target may allow businesses to make longer-term strategy and investment plans, without fear that a subsequent national government will turn the tables.

Lima continued laying the ground rules and paved a way to reaching an agreement in Paris later this year. Despite this, there remain many twists and turns (and potholes) on the road to Paris which will need to be negotiated (pun intended).