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Issue Brief: Was Copenhagen A Train Wreck or Breakthrough?
Jan 19, 2010
The Copenhagen Climate Summit Dec. 7-18 marked the 15th time since 1992 that representatives of more than 190 countries met under the auspices of the United Nations Framework Convention on Climate Change (UNFCC) to negotiate an agreement on global warming. Like the meetings before it, the outcome was inconclusive and opinions vary about how much progress actually was made. Respected climate activist Bill McKibben thought the conference was a "train wreck," while David Doniger, policy director for the Natural Resources Defense Council, heralded it as a "significant breakthrough" of new cooperation among major emitting countries.
Both views have merit. In the lead-up to Copenhagen, major developing as well as developed countries made domestic commitments to control their greenhouse gas (GHG) emissions, which could have more teeth than what comes out of any international agreement. Especially notable was President Obama's 11th-hour meeting with the heads of state of the four highest-emitting developing countries (China, India, Brazil, and South Africa), leading to the final three-page accord. This outcome may work to the president's advantage as he now seeks congressional approval for a cap-and-trade program to cut U.S. emissions nearly 20 percent below 2005 levels by 2020. Unlike the 1997 Kyoto Protocol that the U.S. Senate never ratified, the president this time can argue that major developing countries are participating in a global emissions management plan, and that the United States isn't bound to any internationally imposed targets.
New Accord Falls Short
Still, the Copenhagen Accord fell short of its goal of a legally binding agreement to achieve what has eluded the UNFCC all along: a plan to stabilize global GHG emissions at 1990 levels and then reduce them to avoid "dangerous anthropogenic warming." Since 1992, annual GHG emissions have grown more than 25 percent, and the atmospheric concentration of carbon dioxide, the principal greenhouse gas, has increased from 356 parts per million (ppm) to 387 ppm.
In 1992, scientists representing the Intergovernmental Panel on Climate Change (IPCC) thought 550 ppm would be the outer limit to avoid dangerous warming. Now the IPCC thinks 450 ppm would be a more prudent level to avoid runaway glacial melting, sea level rise, growing severe storms, heat waves, and drought. Nothing in the Copenhagen Accord assures this level will be avoided. In fact, some scientists, including James Hansen of the National Aeronautics and Space Administration, now believe the safe atmospheric level for CO2 is 350 ppm. McKibben has launched an environmental campaign called "350.org" to rally support for more stringent controls.
KEY PROVISIONS OF COPENHAGEN ACCORD:
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So where do we go from here? The next Conference of Parties to the UNFCCC will take place in Mexico City at the end of the year, and Germany will host an interim ministerial meeting this summer. However, a key deadline is coming right up. On Jan. 31, member nations are supposed to declare how much they intend to curb their GHG emissions by 2020.
Given that barely a month has passed since the close of the Copenhagen meeting, few new announcements are expected by Jan. 31. Meanwhile, the Climate Risk Management team at RiskMetrics has been tracking the national policy commitments already declared. These include regulations that have been enacted into law, such as those in the European Union, as well as policy goals stated at the Copenhagen meeting but not yet legislatively approved, such as in the U.S.
RiskMetrics takes this information to assess companies' level of exposure to carbon-related regulations, employing a proprietary Weighted Average Country Carbon Reduction Target (WACCRT) model. The WACCRT model enables comparisons of emissions reductions — and associated compliance costs — under existing laws and those intended to come into effect in the 2013-2020 time frame, per declarations under the Copenhagen Accord.
To determine a company's compliance costs, measures are made of its GHG emissions in regulatory jurisdictions where it has exposed assets. It is assumed that all emissions reductions are achieved at a stated price per ton of carbon dioxide equivalent (CO2e), with three different pricing options provided. The model does not account for variations in caps across facilities, but does factor in whether the company's emissions are trending up or down, which affects the expected amount of emissions reductions that it has to achieve.
Four major emitting industries being affected by carbon regulations are energy, materials, industrials, and electric power. For companies in these sectors analyzed by RiskMetrics, the average projected change in emission reductions in the 2013-2020 time frame is as follows:
Sector | Reductions under Current Regulations | Reductions under Projected Regulations | Change in Projected Emission Reductions |
Energy | 3.42% | 11.38% | 7.83% |
Materials | 4.07% | 11.41% | 7.36% |
Industrials | 7.21% | 13.68% | 8.38% |
Utilities | 6.27% | 14.03% | 8.76% |
Not surprisingly, the energy and material sectors face the lowest overall percentage reductions because their operations tend to be widely dispersed around the globe, including in jurisdictions not likely to enact GHG emission curbs by 2020. By contrast, the industrials and utility companies analyzed by RiskMetrics have a greater concentration of assets in industrialized countries. Electric utilities, in particular, tend to operate in their home markets only. Hence, the concentration of large-emitting utilities in Europe already subject to GHG regulations, and those in the U.S. likely to be subject to regulations by 2013, accounts for that industry's greatest overall exposure to projected GHG regulations and greatest increase in exposure.
More telling are intra-industry comparisons between companies to reveal the extent of their individual regulatory exposure. The table below compares four companies in the integrated oil and gas sector:
Integrated Oil & Gas Sector | Reductions under Current Regulations | Reductions under Projected Regulations | Increase in Projected Emission Reductions |
Amerada Hess | 1.02% | 3.99% | 2.97% |
TOTAL | 15.59% | 23.71% | 8.11% |
Occidental | 0.00% | 15.74% | 15.74% |
Petrobras | 0.23% | 30.90% | 30.67% |
Here the WACCRT results show that each company has a different story to tell:
- Amerada Hess has relatively little exposure in Europe and only one-sixth of its GHG emissions are in the U.S. By contrast, more than 60 percent of its emissions are concentrated in Malaysia and Equatorial Guinea, two countries that have not announced any emission targets. Accordingly, Amerada Hess has relatively little exposure to current or future regulatory controls.
- Total SA (rated AA in RiskMetrics' Intangible Value Assessment analysis), on the other hand, has an extensive presence in Europe, where more than half of its emissions are located, making its current regulatory exposure one of the highest in the industry. However, its projected growth in exposure is relatively limited, given that 30 percent of its remaining emissions are in Africa.
- Occidental Petroleum Corp. (BBB) faces the opposite outlook. Its emissions are heavily concentrated in North America, accounting for four-fifths of its total. As regulations come into effect in the U.S. and Mexico, Occidental faces a nearly 16-percent reduction in its projected carbon emissions.
- Petrobras (A), surprisingly, may face the greatest increase in regulatory exposure of all. That is because Petrobras operates almost exclusively in Brazil. As the world's fifth-largest carbon emitter, Brazil enacted a law on Dec. 29 calling for a 39-percent reduction in the country's GHG emissions by 2020. The new law is subject to several decrees , however, setting out responsibilities and regulations for the energy, industrial, farming, and environmental sectors. President Luiz Inacio Lula da Silva is expected to sign the decrees this month after consulting scientists and other experts.
As the new Brazilian law illustrates, actual implementation of GHG regulations is more critical than passage of the laws themselves. Accordingly, regulatory developments must be monitored closely. The Climate Risk Management team at RiskMetrics will continue to track GHG policies as they are implemented around the globe and adjust its WACCRT model as warranted.