Arriving home from the Copenhagen climate change conference last weekend, I was surprised by two things. The first surprise was that the Washington, D.C. area was blanketed in much more snow than what I left behind in Denmark. The second was that, generally, the majority of the media commentaries on “what to take away” from the United Nations climate change conference held in Copenhagen were much different than what I took away from the meetings.

As widely reported, it is indeed true that the Fifteenth Conference of the Parties (COP15) of the United Nations Framework Convention on Climate Change (UNFCCC) was poorly organized by the Danish Government and was doomed before it started because of unrealistic expectations that 193 nations (not including the aspirational proxy “nations” of the global aviation and shipping sectors) could somehow bridge their vast disagreements and reach a consensus on a “Post-Kyoto” treaty to mitigate global greenhouse gas (GHG) emissions. It’s also true that COP15 resulted in the Copenhagen Accord (the “Accord”), a lastminute political agreement struck between the United States and a handful of other nations (China, India, Brazil and South Africa) that establishes no new GHG reduction commitments nor establishes a clear 2010 roadmap to achieve a legally binding Post-Kyoto treaty.

The foregoing has been initially analyzed as demonstrative of a disappointing outcome, a catastrophic breakdown in the UNFCCC process, and a minor yet dubious victory for the Obama administration. My surprise is not that these conclusions are inaccurate; it’s that they maintain the same contextual perspective that doomed the meetings to failure in the first place. The resulting analysis therefore misses the larger and more salient take-aways.

Instead, I came away from the meetings with three thoughts. First, never let the Danish government host another round of climate change meetings (ever). Second, the UNFCCC consensus- based process is a major obstacle to achieving its own desired outcome and large GHG emitting nations will likely begin to negotiate under alternate forums. Third, the long-term impact of the Copenhagen Accord on U.S. climate change policies should not be dismissed or underestimated.

Looking ahead to 2010 and beyond multilateral negotiations to take realistic and effective action to mitigate carbon emissions is now on a distinctly different trajectory. The Accord effectively reconfigures the negotiating table that had previously pitted the developed countries against the developing countries, regardless of economy size or level of GHG emissions. It does so by removing a very large structural problem embedded in the Kyoto Protocol - the failure to recognize and account for GHG emission reductions by emerging countries with rapidly expanding economies, such as China, India, Brazil, South Africa, Mexico and Korea. With China and India now solidly engaged in an international treaty and U.S. cap-and-trade legislation appearing more, rather than less, likely, the biggest questions are now when and what and not if.

The Accord provides a new framework that could — and I underscore could because the language itself is sparse on specifics and is ambiguously forward-looking — enable the largest GHG emitting nations comprising the Major Economies Forum (i.e. the 17 major GHG emitters that together account for nearly 90 percent of total global GHG emissions) to directly coordinate their GHG mitigation and adaptation measures outside, yet in coordination with, the consensus-building process of the UNFCCC. Procedurally, this revised structure is critical because it diminishes the political and logistical chaos witnessed in Copenhagen where consensus-building requires trying to satisfy all things for all nations regardless of their carbon emission levels or climate change risks.

Combine this with China’s new seat at the table, all this means the Copenhagen Accord arguably amplifies the possibility that the U.S. will take steps in 2010 to establish a carbon price through a mandatory cap-and-trade regime. Taking China’s reluctance to make commitments off the table, removes a very large argument impeding the Senates ability to garner 60 votes for passage of a number of key moderate republican senators or their staff have already praised the interim Copenhagen Accord as progress, indicating an increasing willingness to vote for a Senate bill in 2010.

Finally, in the near term, the COP15 both exacerbates ongoing regulatory uncertainty related to the future risks for any carbon-intensive industry (e.g. energy, steel, paper, chemicals, shipping) and provides small steps forward to improve carbon finance investments in emission reduction or offset projects.

Organizational Chaos

As noted above, COP15 was poorly planned and even more poorly executed. There was chaos outside as the result of the abject irresponsibility and failure of the Secretariat of the UNFCCC and the Danish government to calculate simple math. Both had collectively registered approximately 50,000 accredited delegates for the COP15 meetings, knowing that the COP15 venue on the outskirts of Copenhagen (the Bella Center) has a maximum capacity of 15,000. Nearly two thirds of the accredited delegates (mostly non-governmental organizations and private sector representatives) arriving from around the world were literally left out in the cold to freeze, relegated to standing in line for 10 hours at a time in the futile hope of getting inside. Some delegates never got inside at all during the second week of COP15. The stunning lack of event planning or forethought produced a high level of frustration throughout Copenhagen and added an unnecessary negative tone to the already contentious discussions going on inside.

Unrealistic Pre-Game Copenhagen Expectations

Inside the Bella Center, there was a sense of optimism, pessimism, and exhaustion equally caused by trying to overcome intractable differences between the participating nations. At the beginning of 2009, the purpose of COP15 had been to complete negotiations for a new multilateral agreement on climate change that could come into force after the Kyoto Protocol’s first GHG reduction commitment period comes to an end in 2012. But, even as early as February 2009, it became clear that the goal was going to be unreachable given the range of disagreements and the fact that the U.S. was unlikely to pass domestic climate change legislation in advance. In November, 2009, the objective of the COP15 meetings was abruptly changed to developing a political agreement, or an “agreement to agree” to something in 2010 at the COP16 meetings in Mexico City.

Yet even with the downgraded focus, reaching consensus on an ambitious political agreement required a negotiation breakthrough that was not going to happen. Developed countries were going to have to agree to set new binding GHG reduction commitments for themselves, acquiesce to the demands of developing countries for billions of dollars in climate change mitigation and adaptation financing, and accept less than significant GHG reduction commitments from high-emitting developing nations, with little or no assurance that those reduction commitments would be measurable, reportable and verifiable. The U.S., for example, was essentially going to have to sacrifice its economic and political selfinterest in exchange for empty promises. Developing countries, on the other hand, had no real incentive to take responsibility for their own emissions or make concessions to the developed countries until the developed countries made more aggressive reduction commitments and agreed to pay more to developing countries. It therefore came as no surprise that COP15 was largely a giant frustration and prolonged stand-off. For the most part, the COP15 was an enormous reception while everyone waited for the last few minutes to arrive when real negotiating might start.

What was noteworthy about COP15, however, was that the U.S. re-entered the UNFCCC process in a meaningful way and was willing to try and bridge the substantial positional gaps. As a preliminary gesture of its seriousness, the Obama administration brought to Copenhagen a negotiating number of 17 percent GHG reduction from 2005 levels by 2020, the same commitment level currently being debated by the U.S. Senate as part of comprehensive federal energy and climate legislation. The Obama administration had entered COP15 willing to make reasonable concessions to reach a broad political agreement, provided that developing nations — China first and foremost — were also willing to make similar concessions. The U.S. had no plans, however, of committing to long-term climate financing without Congressional authorization to do so.

China appeared willing to negotiate with the U.S., stating in November that it would reduce its carbon dioxide emissions per unit of gross domestic product (GDP) by 40 to 45 percent by 2020. The roadblock, however, was that China was staunchly unwilling to allow for independent verification of its GHG mitigation efforts.

Also, many nations wanted to establish as a goal a 50 percent reduction in GHG emissions by 2050. China nixed that proposal outright. As an alternative goal, countries discussed setting a very loose GHG reduction target aimed at limiting the increase in global temperatures to 2 degrees Celsius (please do not ask how GHG reductions to achieve that goal would be calculated per nation). The developing world then put on a good show for massive climate financing and funding from the developed countries to pay their “climate debt.” Sudan and Venezuela were particularly ridiculous with shenanigans to thwart any realistic agreement. China, continued to refuse to budge on the issue of verification and appeared willing to walk away empty-handed. Similarly, the U.S. refused to budge on the issues of verification and long-term climate financing.

The Net Result - the Copenhagen Accord

But on the final night of COP15, President Obama and the leaders of a few key countries, including China, India, Brazil and South Africa, sat down together and hammered out the final text for what would become the Copenhagen Accord. The breakthrough was on the issue of GHG reduction transparency and verification. President Obama got China’s support for the text by agreeing to a provision stating that China and other developing nations could communicate their GHG reductions through “international consultations and analysis” rather than more intrusive examinations and assessments.

The Accord itself is a whopping three pages long. Short on substance, it sets up a new framework where each participating country will commit to abide by a domestic carbon mitigation obligation it develops on its own, which could likely take the form of a cap-and-trade mechanism, command and control environmental regulations, or a scheduled national action plan.

The Accord has 12 parts, as follows:

  1. Climate change is a one of the greatest challenges of our time. To achieve the ultimate objective of the UNFCCC to stabilize GHG concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate, recognizing existing climate scientific consensus that any increase in global temperature should be below 2 degrees Celsius, the Parties emphasize strong political will to urgently combat climate change in accordance with the principles of differentiated responsibilities and respective capabilities. The Parties therefore recognize the potential impacts of response measures on vulnerable developing nations and stress the need for international support for climate change adaptation.
  2. Consistent with climate science and on the basis of equity, the Parties agree to cooperate in achieving the peaking of global and national carbon emissions as soon as possible, recognizing the time frame will be longer in developing countries.
  3. Developed countries agree to provide adequate, predictable and sustainable financial resources, technology and capacity-building to support adaptation programs in developing countries.
  4. Developed nations commit to implement individually or jointly quantified economywide emission targets for 2020 based on a format to be given to the UNFCCC Secretariat by Jan. 31, 2010. Delivery of GHG reductions and financing will be measured, reported and verified in accordance with existing and future guidelines ensuring accounting is rigorous, robust and transparent.
  5. Developing nations will implement GHG mitigation measures in the context of sustainable development. Least developed nations may undertake voluntary actions. Other developing countries shall communicate mitigation actions every two years on the basis of guidelines to be determined, and will be subject to domestic measurement, reporting and verification, and communicated to the COP with provision for international consultations and analysis that will ensure that national sovereignty is respected.
  6. The Parties agree on the need to provide positive incentives to reduce emissions from deforestation and degradation through immediate establishment of a mechanism to enable mobilization of developed nation financial resources.
  7. The Parties will pursue various approaches, including establishment of carbon markets, to promote mitigation actions.
  8. A collective commitment by developed nations will be to provide $30 billion in climate change funding between 2010 and 2012. Developed nations commit to a goal of funding developing nation adaptation programs up to $100 billion by 2020, with a significant portion flowing through the Copenhagen Green Climate Fund.
  9. A high level panel will be established to study the contribution of potential revenue sources, including alternative carbon finance, to meet the $100 billion goal.
  10. The Copenhagen Green Climate Fund will be established as an operating entity under the UNFCCC to support projects, programs, policies and activities in developing nations, including REDD-plus, adaptation, capacity-building, and technology development and transfer.
  11. A Technology Mechanism is to be established to accelerate technology development and transfer, and will be guided by a country-by-country needs approach.
  12. This Accord will be subjected to a full assessment in light of the UNFCCC’s ultimate objective, including in relation to temperature rises of 1.5 degrees Celsius.

As stated, it’s significant that the Accord requires GHG mitigation actions of larger developing countries like China and India. This is a major improvement over the Kyoto Protocol. The major failure of the Accord is that binding GHG reduction commitments from both developed and large developing nations are noticeably left blank for the time being and will be the primary lynchpin of future negotiations.

From a business perspective, the inclusion of Item No. 7 is critical in that it maintains the concept of developing a global carbon market or series of linkages between national GHG capand- trade regimes.

On the issue of climate change funding, the “goal” of marshalling $100 billion for developing countries is a very loose one and potentially meaningless. But, it also is spelled out in a manner that allows the private sector to come to bear more so than direct government-to-government or multilateral financial institution funding. For example, one major option the nations will consider is developing an expanded carbon emissions offsets regime like the existing Clean Development Mechanism (CDM) under the Kyoto Protocol. This would develop and fund emission reductions in developing countries and generate offset credits to be used for compliance under a U.S. or other developed nation cap-and-trade regime. Recent economic analysis project that private sector carbon finance under such an expanded offsets regime would generate exponentially more financial flows to developing countries than $100 billion. In fact, a much less publicized outcome of COP15 was released by the UNFCCC Secretariat, of an agreed set of changes to the CDM offset regime titled Further Guidance Relating to the Clean Development Mechanism. Under that side agreement, the CDM Executive Board will begin to streamline offset project registration and credit issuance procedures. The guidance also calls for improvement to the CDM system including new “continuous performance monitors” for third party project verifiers. Unfortunately, the guidance did not break any new ground on the inclusion of new offset project types - particularly forestry and carbon capture and sequestration. Similarly perhaps more significant than what the Accord includes is the issue noticeably absent from the text. If future UNFCCC negotiations move forward, whether under the UNFCCC or the MEF, the parties will need to address the following issues:

  • Targets and timetables.
  • Establishing compliance mechanisms (e.g. cap-and-trade) and facilitating international carbon market linkages on a nation-tonation or industrial sector basis.
  • Setting transparent metrics for measuring commitments and compliance.
  • Creating programs and methods for providing developing countries with adaptation funding and methods for incentivizing private sector carbon finance.
  • Establishing domestic GHG policies that are consistent with global international trade rules.

While the Copenhagen Accord is incomplete and not nearly as groundbreaking as some had hoped, it is potentially significant for what it does to the negotiation parameters. It places the onus on the U.S., EU and China to lead through the establishment of some kind of climate change mitigation mechanisms based on the principle of differentiated responsibilities and respectable capabilities. So, after nearly 17 years of UNFCCC negotiations, the Accord can oddly be viewed as a success because it sets up next steps that would circumvent the need for a consensus-based UNFCCC agreement separating high emitting developing countries from least developed countries.

Impacts on U.S. Climate Policy Are Immediate in 2010

Going into the Copenhagen COP15 meetings, the U.S. Senate had reached a noticeable impasse in its debate over energy and climate change legislation. The leading Senate bill — the Clean Energy Jobs and American Power Act (S. 1733) — was in the process of being largely re-written by a group of three Senators (Sens. Kerry, Lieberman, Graham) to appeal to moderate Democrats and Republicans. Developing this new “tripartite” Senate climate bill had been anticipated to conclude with the new bill’s release in time for Copenhagen. That did not happen. What the senators did release was a joint statement on a set of vague principles for the legislation that seeks a market-based capand- trade mechanism as well as significant promotion of clean coal, nuclear energy, and renewable technologies.

Now that the Copenhagen meetings have concluded and domestic healthcare reform legislation is nearing passage, the Senate appears intent on moving forward with climate change legislation by late spring or mid-summer of 2010. That process will be delayed later due to Copenhagen, but for no other reason than there is no longer any urgent need to meet or catch up to any international expectations. The delay gives Senate proponents adequate time to overcome the significant issues of contention over cap-and-trade policies and carbon market design, before 60 senators are ever going to be willing to support a comprehensive energy and climate bill.

The probability that some kind of climate change legislation will be passed in 2010 is also higher due to the confluence of a number of other interrelated issues. President Obama’s primary objective will be to focus on concluding healthcare reform, tackling financial services sector reform, and climate change, probably in that order. A continuing part of the 2009 American Recovery and Reinvestment Act is the development and deployment of clean energy and energy efficiency upgrades.

In addition to the positive outcomes of Copenhagen, the main thrust underneath climate change legislation will continue to be avoiding the prospect of EPA regulation under the Clean Air Act. On Dec. 15, the Environmental Protection Agency issued its long-awaited “endangerment finding” which concluded that GHGs threaten public health and welfare. The finding is a first step toward EPA setting limits and regulations on GHG emissions from large stationary sources, potentially at a threshold of 25,000 tons of carbon dioxide per year. In March, EPA expects to issue emission limits on GHGs from cars and other vehicles. The Obama administration has repeated expressed an interest in avoiding EPA regulation through completion of standalone legislation that addresses carbon appropriately and at significantly lower cost.

Impacts on U.S. Businesses

U.S. businesses are affected immediately by the Copenhagen Accord. The interim nature of the agreement will prolong the regulatory and investment uncertainty surrounding carbon risk management and carbon finance transactions. The European Union emission allowance price, for example, has plummeted since last week and will likely continue to be affected by the perceived uncertainty over the future of national or regional mandatory carbon markets.

More broadly, companies deploy capital in markets that they are confident earn adequate risk adjusted returns while climate change and national mitigation measures will be transformative and usher in a new economic paradigm for how we do business, policy driven carbon markets and investments involving carbonintensive industries. The policy is not clear enough, or mandatory enough, for the anticipated tidal wave of investments to begin flowing.

The Copenhagen Accord simply extends the horizon for investments in clean energy, energy efficiency, and carbon emission reduction investments. Many investments and funds that tally in the billions at this point will continue to wait for the U.S. to make the next move. The above notwithstanding carbon-intensive industries will likely decide that early 2010 is the time to take further long-term strategic steps to diversify and reduce their carbon intensity. If U.S. cap-and-trade legislation does not pass

in 2010, EPA will move forward with command and control regulations. If those regulations get mired in litigation, which is assured, international GHG abatement measures and actions will proliferate unabated. The question for businesses is only one of timing, of identifying realistic clean energy and carbon finance opportunities, and of developing and deploying a strategic low carbon plan to mitigate carbon risk.