So why were the media headlines negative after the conference? In part, expectations were extremely high: the unprecedented attendance of more than 110 heads of government created conditions where stakeholders and governments alike believed the very challenging negotiations could produce more far reaching results. Contributing to the difficulty in achieving anything was:
• Slow progress in negotiations at the conference in the week before the heads of government arrived in Copenhagen
• Organisational chaos at the conference centre that led to many high profile and long standing non-governmental bodies and leading climate change mitigation stakeholders being excluded from
the building
• Frustration at the lack of progress led the US and China in a group of five countries to draft their own ‘Copenhagen Accord’. This in turn caused considerable tension among negotiators in the global diplomatic community where negotiation and wider consensus is the norm.
Despite the headwinds, there was achieved a positive basis for momentum for the next stage of the process.
• The Accord agreed deep cuts in emissions are required and global warming should be limited to below two degrees
• Leading developing countries have for the first time agreed to take actions to slow their emissions growth. While measurement and verification processes are still to be agreed, this is a major step forward for climate change mitigation and the low carbon economy
• Developed countries have collectively committed to provide ‘approaching $30bn’ for the period 2010-2012 and $100bn by 2020 for mitigation and other actions in developing countries
• Continued domestic agendas in individual major economies to achieve emissions targets, and clean energy uptake, will continue irrespective of global diplomatic efforts
Background to the Copenhagen Conference
Governments negotiated a UN ‘Framework Convention’ on climate change back in 1992, with the ambitious objective of avoiding dangerous climate change. This had a key principle that actions would be based on common but differentiated responsibilities, a UN phrase meaning developed countries would act first as the process of their industrialisation had caused much of the problem. Five years later in 1997 a Kyoto Protocol was signed under this convention setting binding targets for industrialised countries to be achieved in the 2008-2012 period. This established the international emissions trading options and created the impetus for national or regional emissions trading markets such as the EU’s Emissions Trading Scheme, as well as national implementation policies.
With 2012 looming, a two year process had begun to sort out a new round of commitments, both under the Kyoto Protocol and a new binding ‘global deal’ involving national actions from developing countries, as well as developed countries (to include the US, which had pulled out of the Kyoto Protocol). Emissions from rapidly growing developing countries such as China, Brazil and India were on the radar screen and climate science itself indicated substantial emissions reductions would be required globally – impossible to meet by industrialised countries alone. Finance was a core ‘lubricant’ for the deal, as industrialised countries had promised to provide finance and technology assistance to poorer countries.
Key elements of the Copenhagen Accord
Agreed deep cuts in emissions are required, with a view to limiting warming to below 2 degrees, as well as cooperation to peak global and national emissions ‘as soon as possible’.
Comment: Two degrees is often linked to atmospheric concentrations of greenhouse gases of 450 parts per million, or emissions cuts in order of 80% by 2050; some small island countries seek an upper limit of 1.5 degrees, given the threat to their survival. Peaking global emissions ‘as soon as possible’ is rather weak, the EU, for example, has a position this must occur by 2020 at the latest. Small island states say this should occur by 2015 to be on track for the far greater reductions needed by 2050.
Industrialised countries: Agree 2020 targets.
Comment: Many have already indicated a target or a range. The EU will stick with its 20% target by 2020 (it would not agree to raise that to 30% although by all accounts it was close: several countries supported a 30% goal, including the UK, and further pressure on the EU can be expected); the US has indicated a 17% reduction target over 2005 levels, consistent with legislation going through Congress.
Developing countries: Agree transparency provisions for national actions they take (these may be ‘voluntary’ emissions targets; or may be policies on renewable energy – with several developing countries, including China and India, highlighting domestic decisions on clean energy).
Comment: Transparency (or ‘monitoring, reporting and verification’, ‘MRV’) was a tension point: countries accessing financial support will need to be able to show what they achieve on the other hand there was concern about encroachment on national sovereignty. MRV issues, although technically complex, are also important for compliance.
Finance: Developed countries agree to provide close to $30bn for the 2010 to 2012 period (with the EU, Japan and US pledging just over $25bn); by 2020 $100bn will be provided from a mix of public and private sources, which will be assessed by a high level panel, and a Copenhagen Green Climate Fund will be established.
Comment: Early legal assessment of the Accord suggests finance decisions may require a formal decision by all parties under the UN; however countries may act earlier in this area, and further effort can be expected, including through the G20 during 2010.
There were many unprecedented ingredients in Copenhagen: 40,000 people attending, over 110 heads of state and government, and considerable negotiating time in the lead up both inside and outside the UN. While the final result was underwhelming, it reflects the complexity of transforming energy economies and the range of perceived national interests and sensitivities.
The immediate aftermath of the conference was bounded by fierce criticism and finger pointing at specific countries on the one hand, and on the other a pitch that a global deal on climate was indeed sealed. The reality is few expected a legally binding treaty to be finalised in Copenhagen, with challenges from the US hampered by domestic legislation still going through Congress. Nevertheless with the world’s media watching and more than 100 world leaders attending, the stage had been set for agreeing a stronger mandate for a binding treaty in 2010. Copenhagen, however, was one meeting of the UN process, a process which given its scope and consequence for transforming economic activity has moved relatively fast, with ever stronger reminders from climate science itself that greater urgency is warranted.
Continued political effort during 2010 can be expected through the UN, G20 and other processes to pave the way for a stronger, binding agreement in Mexico, particularly as many heads of state now have a stronger personal stake in the process. At the same time the implementation will proceed with domestic legislation on clean energy, transport, and emissions from EU to China, firmly on the agenda, and a particular focus in the US Congress. UK Secretary of State Ed Miliband indicated at a post-Copenhagen debrief that agreement on a legally-binding treaty is a priority for the UK, as is getting the finance part of the Accord moving swiftly, so there will be clear efforts to retain political momentum building on Copenhagen.
Copenhagen and its successor conferences are important milestones on the world’s road to a low carbon future. But on top of the political impetus there are many 20-30 year commercial drivers of investment returns in the low carbon sector – it is not a short term bubble.
• Energy independence and security. 78% of oil reserves are owned by OPEC countries. 31% of natural gas reserves are owned by former Soviet Union countries and 41% by Middle Eastern nations • Water and resource scarcity. Less than 3% of the world’s available water is fresh, and 70% of this is frozen. Some 240 water basins around the world cross national borders so pressure on scarce water resources is expected to increase.
• Demand increase from population and developing economy growth. The world population is currently 6.8 billion people and is forecast by a recent UN report to rise to over nine billion by 2050. The US Energy Information Administration forecasts world energy use to increase by 44% between 2006 and 2030.
• Climate change being widely recognised as an immediate threat to both the global economy and political stability
• The falling cost of renewable energy generation and increasing cost savings from energy efficiency
• ‘Green collar’ job creation and long term national growth strategies.
All these drivers coming together over an extended period provide a highly attractive and sustainable investment opportunity that offers exposure to long-term non-cyclical investment themes. As the economics of investing in the sector have become increasingly attractive, financial investment into it has grown from $35bnin 2004 to $155bnin 2008.
However, future investment requirements need to be far larger. The International Energy Agency (IEA) estimates cumulative energy investment of more than $26 trillion is required between 2007 and 2030. New Energy Finance considers $7.3 trillion of this amount will be required for renewable energy and $5.7 trillion for energy efficiency, equivalent to an annual investment of $542bn across all asset classes. The UN estimates that more than 80% of the required investment will need to come from the private sector.
The low carbon investment sector is based on strong 20-30 year drivers. It is diverse, very large and extends beyond renewable generation into energy efficiency, water and waste management. Attractive returns are available to investors in both private equity and public equity.
