COP21: A climate of expectation

Two electric cars charging on a street in the center of Paris

With COP21 underway, there is no denying international and national climate change developments will impact business competitiveness and future economic activity.

This is the first in a series on the topic of climate change and its implications for business and accounting.

By Martijn Wilder AM and Ilona Millar

In the lead-up to COP21, which began yesterday in Paris, hundreds of thousands of people around the world marched to demand action to stop climate change.

The UN conference, which is widely seen as critical to limiting an average rise in global temperature to 2º Celsius (2C) above pre-industrial levels, is being attended by negotiators from 195 countries and the political leaders of 147.

Over the next two weeks, the goal is to finalise a new treaty on how to curb the rise – something that proved out of reach in Copenhagen in 2009. However, as the protests across all the main continents over the last few days have shown, this time around people expect real results.

And indeed, there is a growing sense of optimism that in Paris an agreement – a pathway with short- and long-term milestones, and a clear system to measure and facilitate future progress – will be secured.

Adding impetus to proceedings, the world’s biggest polluter, China, has just declared that it wants to lead the charge against global warming.

Background

The Conference of Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC) and the Meeting of Parties (CMP) to the Kyoto Protocol are convened annually between November and December.

As COP21 denotes, this year is the 21st COP and it is also the 11th CMP. It runs from 30 November to 11 December at the conference centre in Le Bourget, and is the penultimate forum for nation states to deliberate and seek global agreement on steps to address the causes and effects of climate change.

Widely accepted science dictates that in order to prevent dangerous climate change it will be necessary to limit global warming to less than 2C above pre-industrial levels. Without concerted action, warming is expected to be over 4C by the end of the century.

The impacts of such a scenario would be significant. For example, in Australia there would likely be hotter, drier summers, meaning less water for agriculture, increased drought and bushfires, further bleaching of the Great Barrier Reef, storms of greater intensity and coastal developments impacted by rising sea levels.

For six years now, national governments (known as Parties to the UNFCCC) have been negotiating a new global climate change agreement to commence in 2020. As part of negotiations, all Parties – representing both developed and developing nations – have put forward indented nationally determined  contributions (INDCs), which constitute the unconditional and conditional actions each country is willing to take to limit or reduce greenhouse gas emissions (GHGs) between 2020 and 2030.

To date over 125 pledges have been submitted. Unfortunately, their sum total is only expected to limit global warming to 2.7C. Clearly, more significant cuts in GHGs will be required.

Even so, and although there is still much work to be done to align the interests of all Parties, if agreement can be reached in Paris it will at least provide a framework through which countries are accountable for their INDC pledges. It would also create a means to regularly review the scope of the pledges and facilitate the flow of significant finance to support mitigation and adaptation activities in developing countries.

What to expect

A new global climate change agreement would guide the mitigation, adaptation, financing, technology and capacity-building commitments of Parties for the period beyond 2020, as well as put in place processes for reporting against them.

It is important to note, however, that while a “Paris Agreement” would govern the relationship between countries under international law, the commitments contained in any jurisdiction’s INDC will still need to be enshrined in domestic regulation and policy before they have direct bearing on citizens and industries.

International perspective

A Paris Agreement is expected to take the form of a new international protocol, agreement or outcome with legal enforceability, and supplement the UNFCCC. It is likely to be significant in the following ways.
  • Its intention is to collectively put the world on a path to stabilising GHG emissions and thereby limit a global average temperature increase to at least 2C. To achieve this, Parties will have to significantly increase what they have so far stated to undertake.
  • Unlike the Kyoto Protocol, which only imposes targets on developed nations, an agreement is likely to provide a common framework that applies to all countries.
  • The nature of contributions from all countries will be different, having regard to their evolving economic and national circumstances. In other words, actions will be determined by a bottom-up methodology, rather than top-down targets.
  • A clear process to periodically review and strengthen individual countries’ targets is expected to provide greater transparency and accountability around national efforts to reduce or limit GHG emissions.
  • Strong emphasis is likely to be placed on the provision of new and additional public and private climate finance; in particular, to support mitigation and adaptation activities in developing countries.
  • Parties will be expected to meet their contributions collectively; for example, through market-based mechanisms and emissions trading.

The national level

The INDCs pledged by Parties will be central to the implementation of a Paris Agreement. Notably, the form and content of INDCs is country-specific. Expression ranges from absolute emission reduction targets, to emission intensity, and to action relative to business-as-usual scenarios. The sectoral coverage of INDCs also varies widely.

A number of Parties’ INDCs have and still are being framed as contributing to “sustainable economic development”, “low/zero carbon development” or “green growth”. Accordingly, many propose domestic mitigation policies and actions to increase the use of renewable energy, decrease reliance on fossil fuels, promote energy efficiency, reduce deforestation and land degradation and enhance sustainable agriculture.

Examples of the types of policies proposed or being implemented include the imposition of standards for emissions from vehicles and industrial processes, mandatory targets for the use of renewable energy and improvements in energy efficiency, and removal of fossil fuel subsidies.

Related: Sustainability – the great balancing act

A number of countries are also pursuing carbon pricing through the introduction of emission trading schemes (ETS) and the adoption of carbon taxes. There are now over 50 national and sub-national ETS and carbon taxes applied globally, with many more under consideration.

In addition, non-regulatory approaches, such as the use of incentives for clean energy technologies and voluntary programs for abatement and carbon neutrality for business, are also being pursued.

Further, although the primary focus of INDCs is on mitigation, Parties have been asked to identify their intended contributions with respect to adaptation.

Such polices aim to reduce a country’s vulnerability to the potentially adverse effects of changes to national and regional climate systems. This is of particular relevance to developing countries, which seek support in their adaptation of measures to improve resilience against – and to mitigate – climate-related risks.
Down to business

Most business leaders know there is a need to be proactive in responding to climate change.

Earlier this year, a joint statement by BG, BP, Eni, Shell, Statoil and Total to the UNFCCC and COP21 President, Manuel Pulgar-Vidal, formally recognised the importance of the climate challenge. It noted that the energy giants were already taking action to limit emissions through measures such as growing the share of gas in their production, energy efficiency, providing renewable energy, exploring new technologies and investing in carbon capture and storage (CCS).

In Australia, a broader industry statement was released on 16 September 2015 in which the CEOs of AGL, BHP Billiton, GE, Mirvac, Santos, Unilever, Wesfarmers and Westpac Group asserted their support for the Australian Government securing an effective outcome at COP21.

They said it was important to “put the world on the path to limiting global temperatures to less than 2º Celsius” and recognised the critical nature of agreeing on goals and pathways to achieve them, despite the challenges.

Clearly, the implementation of INDCs will have direct and indirect impacts on businesses.

For those that are fossil fuel-driven, increasing regulatory limits on carbon-intensive industries and incentives for renewables may affect competitiveness. In turn, their customers could be hit by a “pass-through” of increased costs from suppliers.

In addition, divestment campaigns have become extremely high profile in recent years and will continue to direct significant focus onto the role that fossil fuels play in exacerbating climate change. They will certainly drive more examination of the future use of the world’s 60-80 per cent remaining oil, gas and coal reserves.

While there is no suggestion that fossil fuels will not continue to be the major source of global energy in the short-term, over the medium- and longer-term changes to the fossil fuel sector will be dramatic and, inevitably, pressure will continue to mount on investors and on regulators to further limit the emissions it generates.

Emerging opportunities

The new “green economy” offers a growing number of opportunities to businesses that produce low emissions goods and services. Indeed, renewable energy technologies are now reaching a point of disruption and will, in many parts of the world, displace coal and gas power stations.

Unlike coal and natural gas, the input for renewable energy is not subject to global energy market volatility. With the technologies constantly evolving and costs declining, the changing regulatory environment can only be a fillip for the clean energy sector.

Obviously, all businesses will need to monitor changes and adapt to remain competitive. Those that are able to embrace new energy solutions, diversify and innovate, will be best placed to manage the transition to the low carbon economy that will – quite possibly accelerated by an agreement in Paris –  emerge in coming decades as, through necessity, countries respond to climate change.

Martijn Wilder AM is head of Baker & McKenzie’s Global Environmental Markets practice. He focuses on climate law and finance, federal and international environmental law, environmental and clean energy infrastructure projects and agribusiness. Ilona Millar is a special counsel in the Environmental Markets team at Baker & McKenzie.