Lima Climate Conference Paves the Way Toward a Climate Agreement in Paris

The 20th session of the Conference of the Parties("COP") of the United Nations Framework Convention on Climate Change ("UNFCCC") and the 10th session of the COP serving as the meeting of the Parties to the Kyoto Protocol ("CMP") took place in Lima, Peru, in December 2014. Signed in 1992, the UNFCCC sets the goal of preventing dangerous man-made interference with the global climate system.

In 1997, to better fight the effects of climate change, the Kyoto Protocol was adopted to legally bind developed countries to emission reduction targets. The last commitment period of the Protocol will expire in 2020, thus creating the need for a new agreement.

The 194 countries attending the Lima COP/CMP have reached decisions that provide for the foundation of a new climate change framework. They have agreed on two initiatives: the Lima Call for Climate Action and the draft elements for the new agreement to be adopted.

The Lima Call for Climate Action requires all countries to describe their proposed emissions reduction targets in a clear, transparent, and understandable way, in order to assess whether these contributions are fair and ambitious. The UNFCCC secretariat will publish the contributions and prepare a synthesis report. The European Union declared its willingness to assist in this process and engage in constructive discussions with other countries about their proposed targets.

In Lima, parties have also begun compiling the draft elements of the new agreement, intended to be adopted during the 21st COP/CMP, which will take place in Paris in winter 2015. This agreement aims to merge all binding and nonbinding arrangements under the UNFCCC and to build a single comprehensive regime in the form of a new protocol, thus replacing the Kyoto Protocol. This regime will be binding on all parties to the UNFCCC, including certain developing countries. 

The expectations surrounding the 21st COP/CMP are, therefore, very high, since the new agreement will provide for the climate action legal framework from 2020 onward. 

China Aims for National Carbon Market by 2016

In November 2014, the United States and China issued a joint announcement recognizing that each nation had a "critical role to play" in combating global climate change—and announcing measures to be taken by each nation in that regard. 

Following recommendations made in August 2014 by the Energy Research Institute (a think tank led by the National Development Resource Council ("NDRC")), China committed to "peaking" its carbon emissions by 2030 and to use its best efforts to peak before this date. China also pledged to increase the share of non-fossil fuels to 20 percent of primary energy consumption by 2030. These goals will be incorporated into China's next three "five year plans," with the current plan due to expire in 2015. 

A core component of China's climate change strategy involves the establishment of a national carbon market by 2016, which will also be incorporated into the next "five year plan" and is expected to cover 40 percent of the nation's economy. Further emitting sectors will be brought within the scheme after 2020, and links to international markets may be sought within the decade.

Seven regional pilot schemes are now up and running, covering the cities of Beijing, Tianjin, Shanghai, and Shenzhen, as well as Chongqing, Guangdong, and Hubei provinces. Twenty-four million tons of carbon dioxide equivalent were traded under these schemes in 2014, and this number is predicted to rise to 40 million tons in the coming year. 

The NDRC estimates that the national scheme will regulate between three billion and four billion tons of carbon dioxide and will be worth between 60 billion and 400 billion yuan (or between US$10 billion and US$64 billion) by 2020. This would create a market roughly twice the size of that in place in the European Union, currently the largest in the world.

Under outline rules released in December 2014, the State Council will establish a total emissions cap to be divided between the provinces and regions. Carbon permits will be allocated free of charge at first, with the scheme transitioning to paid allocations when appropriate. While certain provinces will be ready to join the scheme in 2016, others will be given more time to prepare. 

The pilot schemes have seen a relatively high level of compliance by emitters. However, concerns have been raised in the past about a lack of transparency as to emissions levels on the part of companies and local governments. A further challenge is the existence of significant variations between the schemes, including as to allocation methods, monitoring, reporting, and verification, and whether banking or borrowing is allowed. 

With the advent of a national market, China will become the focal point of carbon trading in the Asia-Pacific, overtaking South Korea, which launched its mandatory carbon trading scheme in January 2015 (currently, the second largest in the world). New Zealand and Kazakhstan also have emissions trading schemes in place, while similar schemes are being developed in Thailand, Vietnam, and Indonesia.

The UK Energy Savings Opportunity Scheme 2014

The Energy Savings Opportunity Scheme ("ESOS") Regulations (SI 2014/1634), which came into force on July 17, 2014, requires large undertakings in the UK to carry out an energy audit and notify the Environment Agency ("EA") of compliance by December 5, 2015. Participants must carry out an assessment in each subsequent four-year compliance period ending on December 5, 2019, 2023, etc. While there is no obligation to follow any recommendations, the assumption is that having carried out such an assessment, participants are then likely to take action to reduce their energy use. ESOS is the UK's method of transposing its obligations under Article 8(4) of Energy Efficiency Directive 2012 to promote energy efficiency. 

In the first four-year period, an undertaking must participate if, as of December 31, 2014, it either: (i) employed at least 250 people; or (ii) employed less than 250 people but had an annual turnover in excess of €50 million and an annual balance sheet in excess of €43 million; or (iii) was part of a corporate group that included an undertaking that meets the criteria at (i) or (ii) above. 

In group situations, compliance responsibility rests with the highest UK parent unless all group companies agree otherwise in writing. Global parents and overseas undertakings not carrying on a UK business are not subject to ESOS. An "undertaking" is determined by reference to section 1161(1) of the Companies Act 2006, i.e.: limited or public companies, trusts or partnerships, unincorporated associations, not-for-profit bodies engaged in a trade or business (which could include some charities), and some universities. 

Public bodies and companies in insolvency are excluded. For these purposes, a "public body" (in England, Wales, and Northern Ireland) is a contracting authority as defined in Regulation 3 of the Public Contracts Regulations 2006 (SI 2006/5). This includes government departments, local authorities, police, and fire authorities. Global parents and overseas group undertakings are not required to participate. 

In carrying out the assessment, participants must ensure that at least 90 percent of their total energy consumed in the UK in buildings, transport, and industrial processes is covered over a 12-month reference period. The compliance package in respect of the audit has to be signed off by a qualified lead assessor that meets special competency requirements.

The EA has indicated it will take a light-touch approach to ensuring compliance, although failure to comply can lead to civil fines. Financial penalties vary according to breach but range from a fine of up to £5,000 for failure to maintain records to up to £50,000 for failing to carry out an audit. Penalties may also include additional fines of £500 per day for noncompliance, together with the costs of the compliance body in carrying out additional auditing activity to check ESOS compliance. The EA can also publish a penalty notice setting out the breach on its website. 

Undertakings should therefore assess whether they are caught by the qualification criteria as of December 31, 2014 and take steps to ensure compliance by December 5, 2015.