Road from Copenhagen – What next for private players..
The Copenhagen hangover seems done with and reams of paper have been written on its failure, but now is the time to shrug-off and think – what next? One of the most anxious questions from Copenhagen is how will the private market players be affected, especially in emerging economies like India and do these agents have an opportunity to play a proactive role in the post-2012 emission mitigation process.
In today’s well-established carbon market private players could span from investors (include those of private equity), enterprise owners, equipment designers, consultants, certifiers to even commodity traders.
The Copenhagen Accord requires developed countries to list their economy–wide mitigation targets for 2020 by end of January 2010. These countries, termed as Annex-1 parties, can undertake a domestic climate policy where private players participate to meet the overall targets.
While the European Union (EU) has already legislated a cap-and-trade market in its EU 2020 Energy and Climate Package passed in December 2008 to reduce greenhouse gas emissions by 20% by 2020 from its 1990 levels, the United States is contemplating cap-and-trade or carbon tax to kick start its foray into domestic carbon mitigation policy.
The key feature in these schemes is discovery of a carbon price through a market mechanism which would help individual players to make strategies to reduce their carbon emissions and profit from it. In short, developed countries could well chart out their own course to reduce post-2012 GHG emissions and their private players could have sufficient incentives based on their own stable domestic policy environment.
But what about private players in developing countries? How could they play a role?
The Kyoto Protocol provided developing countries also a motivation to get involved in the global action on climate change mitigation.
As per the Protocol, the carbon mitigation projects in developing countries (also called as Non-Annex-1 countries) can trade their carbon reduction credits approved by the United Nations (UN) to the developed countries, to enable the developed country market players to meet their own emission targets.
The scheme called, Clean Development Mechanism (CDM) has so far generated 362 Million credits (1 credit – 1 tonne of CO2 reduced) with 1976 projects registered as on December 2009.
The major emerging economies of China, India, South Korea and Brazil accounted for a staggering 90% of the credits issued till date. However, with the Protocol commitment period ending in 2012, the continuation of sale of credits is a big concern for the developing country market players.
However, with the Protocol commitment period ending in 2012, the continuation of sale of credits is a big concern for the developing country market players. The European Union through its private market players have been playing an active role in buying the UN certified carbon credits generated world over by Non-Annex-1 countries till date.
However, the EU 2020 package states that in the event a global treaty not being reached for the post-2012 regime, it will continue to buy carbon credits only from least developing countries (LDCs). This implies that major emerging economies could well face severe resistance in selling their carbon credits post- 2012 casting serious concerns for the private players in these countries planning to invest in the next industrial energy efficiency or renewable energy projects. So where could the drive for private players in key emerging markets come from in the post-2012 regime? Are private players being left out in future international climate cooperation? What are the positive signals a private player can hope that indicates strong incentive to continue to invest in carbon mitigation projects?
Para 5 of Copenhagen Accord asks developing countries to list their mitigation goals also by end of January 2010. These could emerge in the form of 25% reduction in baseline carbon intensity by 2020 over 2005 levels as India had reluctantly put forward. Further, the para goes on to say that the developing countries can list their Nationally Appropriate Mitigation Actions (NAMAs) which would be entitled to receive international funding subject to international measurement, reporting and verification (MRV). Additionally, developing countries can also undertake autonomous mitigation actions to be communicated through bi-annual national communications. Consequently, in case the Accord is implemented to the letter, where will the private market players in key emerging economies stand with the above provisions of the Accord on one hand and the apparent limitations to be set by the developed countries on the other. In 2010, there could be three major windows of opportunity/ positive signals for carbon market to grow in the emerging markets in the post-2012 regime. Firstly, the United States (US) Senate could pass the Kerry-Boxer cap-and-trade or similar bill for its domestic market, where UN certified carbon credits could be permitted. As per New Energy Finance, a research firm, the US carbon market could be twice the size of the European carbon market in 2020 and the new avenue of demand could be a big boost to private players in emerging markets aiming to sell carbon credits.
However, it is essential that the shortcomings of existing project-wise crediting mechanism are resolved and UN moves to a more a reformed sectoral or programmatic approach. The contrarian scenario of either US having a domestic carbon tax or setting restrictions on imports of credits could have deep negative repercussions in emerging economy carbon markets.
Second, there is a need to define how the NAMAs could provide incentives or arbitrage opportunities for the private sector players. In other words, could NAMAs be commoditised?
In case NAMAs, the prerogative of definition of which lies with developing countries, identifies national policies or schemes which are largely government driven, then the arbitrage opportunities for private players diminish significantly.
Example could be some fiscal incentives or refurbishment schemes for thermal power plants (which are largely government owned). At the extreme, the NAMA mechanism could mirror existing large development projects carried out under World Bank or Global Environmental Fund (GEF) through national governments, where accountability, transparency and effectiveness are infamously poor. Any attempt, by the developing countries to undertake large government programs under NAMAs would not only imply similar shortcomings, but also allow Overseas Development Assistance (ODA) to be repackaged to some extent under NAMAs.
While many governments in developing countries would be happy to receive the windfall and enlarge their bureaucracy, the move could seriously affect private market confidence and slow the process as witnessed over the recent performance of international development programs like the Millennium Development Goals. It could imply that the mechanism will take the developing countries back to the license Raj era where the private player is at the mercy of national governments and their political intentions. Thirdly, as noted earlier, a key indicator of a functioning domestic climate policy is its carbon price. Implementing a robust sectoral cap-and-trade or tax within India/ China where the long term goals are reconciled to ensure steady growth in carbon prices could help in establishment of a domestic carbon market.
The market could help in adding more transparency with independent verification and reporting under an umbrella organisation like the UNFCCC within each of these countries. These markets would primarily help in leveraging domestic market investment towards mitigation projects.
However, as witnessed in India that despite the Energy Conservation Act was passed in 2001, the Bureau of Energy Efficiency (BEE) has so far neither been able to mandate energy efficiency implementation nor bring the idea to the mainstream of sectors and society. If BEE is not made proactive by the Government and sheds its lackadaisical image, it could easily signal as deterrence to private sector investments in clean technology. To conclude, while the private players in developed economies can hope for some carbon reduction schemes in future, their counterparts in emerging economies face a huge uncertainty and this could be damaging to the global climate mitigation process as a whole. Without efficiently driven carbon markets in emerging economies there could be lack of transparency and private players could return to business-as-usual if the incentive provided in domestic markets is lacking in scale and sincerity. Therefore, it is crucial that the role of private market players in emerging economies are also reconciled while the international governments decide the future climate policy, at the end of January 2010 and later in Bonn and Mexico. Or else, farewell to the global carbon market and welcome back to government steered measures, where speed, performance and efficiency usually take a backseat. About the author: Umashankar Sreenivasamurthy is an energy and climate policy research analyst with over six years professional experience. Recently, he has co-authored an economic analysis paper titled “EU Climate Policy Impact in 2020” at Ecofys Netherlands to forecast for the first time the weakening of the flagship European Union emissions trading scheme (EU ETS) in phase three due to current recessionary effects. The paper was commissioned by the Netherlands Government and also included in its national environmental policy message for 2009. Earlier, as a research associate at the Faculty of Economics, University of Cambridge he published a paper in the leading peer-reviewed journal ‘Climate Policy’ on post-2012 international climate cooperation matters with Indian iron and steel sector as case study. Umashankar has worked extensively on industrial energy audits at The Energy and Resources Institute (TERI), India and on Clean Development Mechanism (CDM) projects at Ernst & Young, India. Umashankar holds a Master of Philosophy (MPhil) degree in Engineering for Sustainable Development from University of Cambridge, United Kingdom (UK) and a Bachelor of Engineering (Mechanical Engineering) degree from National Institute of Technology, Trichy, India. He is member of the ‘Climate Strategies’ academic network in Europe and a Certified Energy Auditor from Government of India.
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