Not quite home and dry

There is still much work to be done negotiating the details of the Kyoto Protocol – and always the danger of an unwelcome surprise. But Mark Nicholls finds business now looking towards practical issues of implementation

The annual meetings to thrash out the details of the UN climate change agreement are developing a reputation for throwing up surprises.Will COP 7, due to take place in Marrakech in October and November continue the trend? At the 1997 conference in Kyoto in Japan, a deal was unexpectedly reached at the eleventh hour that created the eponymous Protocol, which imposes binding greenhouse gas (GHG) emissions reductions on the industrialised world for the period 2008–12.

At the last two COPs (conferences of the parties to the United Nations Framework on Climate Change (UNFCCC)), the world was first stunned by a failure to reach agreement in The Hague last November, then astonished to see a deal struck in Bonn in July, despite the US rejection of the treaty in March. In Bonn, the European Union was able to persuade enough countries – including, critically, Japan and Russia – to stick with the Protocol to ensure it can still enter into force.This requires ratification by a minimum of 55 countries, which must represent at least 55% of industrialised world GHG emissions in 1990.

The Bonn meeting broke up, however, without the translation of the political deal into a legally binding document. At the time, UNFCCC officials were confident that the legal agreement was practically a formality that another day around the table would have delivered. Others are less confident.

While few predict a collapse of the Bonn agreement, there are significant risks that the coalition brought together on Kyoto could yet unravel. The most pressing issue is to agree on the nature of a compliance regime. In Bonn, it was agreed that countries with binding targets – the industrialised nations of the so-called ‘Annex 1’ – that failed to meet their Kyoto emissions reduction goals would face tougher targets after 2012.

What was left undecided was whether this regime would be legally binding. Japan and Australia, particularly, oppose tough compliance rules.The developing world and the European Union, on the other hand, are keen to see a structure with legal consequences for non-compliance.

Furthermore, Russia will be pushing for an increase in its carbon allowance granted under ‘Annex Z’ in Bonn. As part of the compromise deal, Canada, Japan and Russia will be allowed to count millions of tonnes of carbon stored in forestry and farmland towards their Kyoto emissions targets.

Because the key Russian specialist was not present at those discussions, Russia won an agreement to renegotiate its allowance. Since July, it has demanded a figure of 33 million tonnes of carbon, compared to the 17 million tonnes (equivalent to 62.3 million tonnes of carbon dioxide) it was granted in Bonn.

But while there is a strong likelihood of further horse trading, and always the possibility of other countries walking away from the Protocol, most negotiators remain positive. “There’s a certain amount of political work that needs to be done,” says Justin Mundy, a director at specialist insurance firm Aon Carbon, who is currently seconded to the EU negotiating team. “But I’m quite optimistic – the issues are not, technically, that difficult.”

“It’s not a foregone conclusion,” says James Cameron, counsel to US law firm Baker & McKenzie with long experience of the climate negotiations, “and there will be some backtracking. But the momentum is too strong.There’s commitment at headsof- state level to see the Protocol ratified.”

Aside from the political questions that still need to be resolved, there is a mountain of technical matters that need to be addressed (see pages VI–VII).

“We’re getting into the nuts and bolts of how to put together a regulatory framework,” says John Palmisano, managing director at brokerage Evolution Markets in Washington. “It’s not particularly sexy, but it’s extremely important.”

For example, although it may seem at best peripheral, the design of registries under Kyoto – that will track the transfer of the various types of emissions credits as they are delivered and traded – promises to at least cause headaches in Marrakech, and could even undermine the development of domestic trading schemes, says a UNFCCC specialist.

Registry design was barely discussed in Bonn, but the system is likely to comprise national registries operated by Annex 1 countries alongside a centralised registry for credits generated under the Clean Development Mechanism (whereby investors in Annex 1 countries can earn credits from carbon avoiding or reducing projects in the developing world).

“This may be a technical discussion, but it’s so complex because you have to foresee and prepare for all the functions that the registry will have to perform,” he says.

Questions of governance of the Protocol’s flexible mechanisms – which combine technical details with political controversy – are also likely to prove thorny. For example, the role of the CDM’s Executive Board could see disagreement, particularly between Annex 1 countries and the developing world.

The negotiations at Marrakech are likely to decide exactly what function the Board will perform. This will range from a general oversight of the CDM, with much of the development of projects delegated to private sector ‘operational entities’ such as consultancy and audit firms, to more prescriptive,‘ hands-on’ responsibilities.

One issue that is unlikely to be high on the agenda – but will be closely watched by a number of national delegations and business observers – is that of the interplay between national emissions trading schemes and the Kyoto agreement.

The Protocol itself says little about the potential integration of national emissions trading systems and its own proposed international emissions trading regime. It makes no prescriptions as to how individual countries meet their targets – although many are moving towards emissions trading schemes that mirror, and will ultimately be connected to, an international carbon market.

Aside from the UK, both Switzerland (see pages XVI–XVII) and Norway have recently announced plans to introduce domestic carbon trading systems. The EU aims to launch a scheme spanning its 15 member states in 2005, and voluntary, company- or sector-wide programmes are proliferating.

The biggest potential integration issue, says Cameron at Baker & McKenzie, is ensuring the US – although it has rejected Kyoto – does not develop a domestic climate change strategy that sees it take a divergent path to the rest of the world.

“This is the real diplomatic challenge – to ensure that a gap doesn’t grow between the US and the Kyoto Protocol.”

The Japanese government, especially, is keen to see the US government re-engage with the process, and is believed over the summer to have been privately encouraging the US to table its own alternative to Kyoto at COP 7.

Even before 11 September, however, there was little evidence that Washington was spending much time developing a substitute plan – and the Bush administration is now preoccupied with the terrorist threat.

A more promising approach, says Cameron, is to ensure that multinational companies, and particularly US multinationals, are drawn into the process in the hope that they will encourage the US government to adopt parallel domestic mechanisms to those adopted under Kyoto.

“Where gaps appear [between different compliance regimes] is where global companies can become disruptive of international agreements: they prefer global regimes,” says Cameron.

Richard Rosenzweig, a managing director at US environmental and energy brokers Natsource, notes that the disengagement of the US from an active role in the negotiations – now likely to be even more pronounced following last month’s terrorist attacks – will leave a void in Marrakech.

“We had expected US firms to be closely involved with the negotiations. But I think that other companies will play more of a role. Lobbying [for a flexible Protocol] from around the world will increase.”

But there are signs of a shift in corporate attitudes to the Kyoto process. After the high drama of The Hague meeting, some firms are shifting their attention to working on the mechanisms from the bottom up.

Oil and gas giant Royal Dutch/Shell, for example, has shifted its focus on the CDM from the corporate to the business unit level.“The [Kyoto] process is by and large there,” says David Hone, Shell’s Londonbased vice president of climate change.“It now needs people to start doing projects.”

The climate group at the company level is now looking at assisting local operating units in putting together CDM projects. Hone says that Shell’s Nigerian operation, particularly, is keen to begin work on such schemes, and that the company has been in discussions with government representatives to assist them in putting the institutional framework in place to manage the CDM process.

But while Hone says that Shell has no plans to lobby directly at COP 7 – “there’s enough people already doing that” – he is still concerned that the Kyoto mechanisms could be unnecessarily complex.

“There’s great interest among our operating companies in the CDM. But we’re looking for simplicity and clarity – there’s still a risk that we end up with a system that’s far too complicated.” EF