Intelligent Financial Engineering Needed for Climate Deal

Work continues on an international climate change framework to succeed the UN’s Kyoto Protocol, which expires in 2012. In addition to political hurdles, Yvo de Boer, executive secretary of the UN Framework Convention on Climate Change, says a major challenge going forward will be "to focus on intelligent financial engineering that will help private capital flow in the right direction from a climate change point of view." On increasing the participation of developing nations, he says, "the challenge will be to find the correct balance between creating investment opportunities, creating markets, creating international cooperation" without "creating the impression that you’re actually subsidizing the competition to take your jobs away from you."

Can you summarize where international negotiations are at the moment on climate change? There has been a recent meeting in Bangkok, led by the United Nations, and a separate U.S.-led meeting for major emitters. What’s the lay of the land now and what can we expect going forward?

There was a major breakthrough in the climate change negotiations in Bali in December of last year, where governments agreed to formally launch negotiations, determine the agenda for those negotiations, and decide if there should be an agreed outcome by the end of 2009. So basically we are at the beginning of a two-year negotiating process.

The meeting we had in Bangkok just a couple of weeks ago basically mapped out how the work will be managed for the rest of this year, thereby also indicating which issues may need a little more time to ripen and should be taken up in 2009, rather than 2008. What we have at the moment is a very clear indication of what issues will be discussed at the three remaining meetings that will take place this year.

What can we expect? What is a good deal going to look like?

A good deal is going to be a very intelligent one, in the sense that we know that if the world economy grows as projected, over the next twenty-five years, we will be investing $20 trillion to provide the energy infrastructure that’s necessary for that economic growth to take place. We also know that if we invest $20 trillion, not taking climate change into account, it’s going to push greenhouse-gas emissions up by 50 percent, instead of down by 50 percent.

The key challenge, to my mind, is to focus on intelligent financial engineering that will help private capital flow in the right direction from a climate change point of view rather than the wrong direction. In other words, how can we use probably still quite limited public resources to leverage much larger private financial flows toward a climate change goal? That’s one aspect.

The other aspect that I think is critical is to remember the political requirements that are out there in order to not just get to an agreement in [the UN Climate Change Conference in] Copenhagen at the end of 2009 but to get to an agreement in Copenhagen that will actually make it through the U.S. Senate and be acceptable to a number of other countries as well. There also needs to be a focus on those political requirements.

One of the aspects of Congress’ proposal right now on climate change would require importers to buy emissions allowances through a U.S. cap-and-trade program, if the exporting country is not making reciprocal emissions reductions. The European Union has had a similar discussion on this sort of import tariff issue. How would such a policy affect negotiations in the goal for a multilateral approach to climate change?

You’ll have noticed that the Europeans, in the summit meeting that they had, ultimately actually toned down the language quite considerably on this particular topic. I am happy about that because, as I indicated, we are at the beginning of a two-year negotiating process and I don’t think that it’s particularly constructive to then get out a big stick and start threatening people with what will happen if there is a failure to reach agreements. I am happy that the European language is more nuanced.

On the legislation that is currently before the House in the United States, the question is how would that terminology be interpreted? And I say that because the climate change convention contains the principle of common but differentiated responsibilities and capabilities. So the convention recognizes that different countries have different historic responsibility for this problem, a difficult economic capability to address it, and differing agendas in terms of economic growth and emissions eradication. That’s what that language is in the convention and that’s why, in fact, in the draft leader statement that’s being worked on for the major economic process, that principle is also being referenced.

Probably there are very few people, at least very few sensible people, that would expect developing countries to do exactly the same as rich nations. The question then is, politically, what kind of engagement and further engagement by developing countries would be considered meaningful to avoid falling into the same fatal flaw trap that the Kyoto Protocol fell into in 1997.

Is there an incentive for bringing a country like China or India into a mandatory framework? Is it technology transfer?

That’s what I meant by the intelligent financial engineering. It’s a matter of finding out why technologies are not making it into the market and that has to do with at least three factors. One is return on investment, which is sometimes too small. A second one is perceived risk. And a third factor is size of market. In designing a Copenhagen agreement, how can you create provisions that address at least those three barriers to ensure that those kinds of technologies that we need are drawn into the market? I firmly believe that it’s a matter of creating investment opportunities. A matter of stimulating government-to-government cooperation rather than trying to subsidize your way out of what is a $20 trillion investment.

Is it possible to bring these larger industrializing countries into a mandatory framework? There is just real concern that whatever is done on the side of the developed nations might be thwarted by emissions in developing countries.

There are two pretty big misconceptions out there. The first misconception is that major developing countries like China, India, Brazil are doing nothing to address climate change. In fact, those countries have very respectable national climate-change strategies to limit the growth of their emissions. Some of those strategies are more impressive than the goals some industrialized nations have. It’s not a matter of developing countries doing nothing at the moment.

The other major misconception is that developing countries have no obligations under the conventions and Kyoto Protocol. In fact they do. Both the convention and the protocol oblige all countries, so also developing countries, to undertake policies and programs to limit the growth of their emissions. The thing though is that the convention and protocol also specify that rich nations need to provide the finance and the technology that will make it economically viable to take that action. That’s why the Bali language talks about real, measurable, and verifiable action on the part of developing countries, providing real, measurable, and verifiable technology and money is made available.

The challenge there is to make that more specific to see if we can get to more specific engagements on the part of developing countries, providing more specific financial and technological supports. There the challenge will be to find the correct balance between creating investment opportunities, creating markets, creating international cooperation on the one hand, without falling into the trap of creating the impression that you’re actually subsidizing the competition to take your jobs away from you.

What happens if UN talks fail to come to any agreement? Or if the only agreement that can be achieved is so watered down that it makes little impact on reducing emissions? How does the world look going forward if these multilateral talks can’t produce something meaningful?

First of all I would agree with people who say that the Kyoto Protocol doesn’t come anywhere near delivering what the scientific community tells us that we need to deliver. But, at the same time, I believe both the convention and the protocol contain a fantastic architecture through the flexibility mechanisms that they’ve created and through cooperation between rich and poor nations, so it’s not as if we’re starting from scratch. We actually have a lot of very good work on which we can build.

Secondly, I find it inconceivable that after those very clear signals from the scientific community on what awaits us if we fail to act on climate change, and after the very clear statements from heads of state and government at the event that the UN secretary-general organized in September of last year, where heads of state and government said we’ll take this seriously, we want to move forward—I find it inconceivable that Copenhagen will fail or fail to come up with something credible in terms of the scientific agenda. But we’re certainly not going to get there without political leadership at the very highest level.

Theoretically if you should fail, what happens then? Do people go off and do their own thing? Does climate change work just stop? Will you try again?

Well, first of all, I don’t think it’s going to fail, and I think it’s a little early to start planning for failure. In fact, I’m quite confident about the process. But having said that, the UN Climate Change Convention is not the only game in town. The EU emissions trading scheme is not contingent on an international agreement being achieved. The European Union has said that it will do its minus 20 percent by 2020, even if there’s no broader international agreement; they’ll go to minus 30 [percent] if there is agreement but they will do minus 20 anyway. The [Regional Greenhouse Gas Initiative] states in the United States will continue developing their emissions-trading schemes. Whatever happens in the international arena, there are twelve climate change proposals before the U.S. House at the moment, irrespective of what happens in Copenhagen. I’m sure that Gov. Arnold Schwarzenegger (R-CA) and his friends around the corner will continue their action on climate change no matter whatever happens internationally.