ClimateIntel.com

The two-week Copenhagen climate change conference (COP15), part of the ongoing effort to negotiate a successor to the 2007 Kyoto Protocol, commenced this week.  Only a few days into COP15 the mood is less than optimistic and parties are not overly ambitious, leaving many to wonder whether a new agreement can be reached or whether COP15 will produce only another roadmap for a potential agreement. 

Delegates have been staking out their positions amidst discussions on long-term cooperative action, a shared vision, finance, mitigation and technology under the Ad Hoc Working Group on  Long-term Cooperative Action under the Convention (AWG-LCA); Annex I emission reductions; and the potential consequences under the Ad Hoc Working Group - Kyoto Protocol (AWG-KP) and Reduced Emissions from Deforestation and Degradation (REDD) under the Subsidiary Body for Scientific and Technological Advice (SBSTA). Talks about the leaked “climate gate” e-mails abound and the leak of Danish text, that gives wealthier, industrialized nations more power, has already created a rift between industrialized and developing countries.  U.S., China, Brazil, India, etc., who have pledged new reduction targets, have been criticized for their lack of aggression in reducing greenhouse gas (GHG) emissions. 

At the helm, UN Climate Chief Yvo de Boer believes failure is not an option and an agreement is a must.  At a minimum, his focus includes the following:

1. How and to what extent industrialized countries will reduce their GHG emissions?
2. How China and India, and other major developing countries, will limit the growth of their emissions?
3. The origination of financing for developing countries that need assistance monetary assistance for GHG emission reduction and adaptation.
4. The management of money.

President Obama, Secretary of Energy Stephen Chu and EPA Administrator Lisa Jackson are scheduled to attend the final week of COP15.  The U.S. will likely discuss its new emission reduction target of 17% below 2005 levels by 2020, with a trajectory to 42% reduction by 2030 to meet the goal of 83% by 2050, as well as actions taken by EPA to address GHG emissions.  While China has found the U.S.’s position to be underwhelming, State Department envoy Todd Stern fired a shot across China’s bow, declaring that the more advanced developing countries must reduce their GHG emissions and that the U.S. would not provide funds to China for development of greener industry.

COP15 concludes on Friday, December 18 and a final agreement appears highly unlikely.  With the U.S. and China seemingly drawing lines in the sand, the final week would seem to portend much in the way of atmospherics.

After international negotiators met in Barcelona at the beginning of November, predictions on the likely outcomes-or lack thereof-from December’s Copenhagen conference have popped up everywhere. In the immediate aftermath of the Barcelona meetings, the consensus amongst those in the United States and the West more broadly was that Copenhagen was headed for failure-at least insomuch as a legally binding treaty with emission reduction targets like Kyoto Protocol is off the table.

Since then, the situation has become more muddled. Evidence abounds for those looking either to take a more optimistic view of the upcoming meeting, or those looking to bolster the more pessimistic outlook.  In recent days, the optimists may be gaining more evidence. President Obama’s recent trip to China gave rise to several positive announcements with regard to the two country’s climate action, including from a joint statement released at the end of these bilateral meetings, which noted that-

The United States and China, consistent with their national circumstances, resolve to take significant mitigation actions and recognize the important role that their countries play in promoting a sustainable outcome that will strengthen the world’s ability to combat climate change.  The two sides resolve to stand behind these commitments.

In the past few days, both countries have backed up that statement by announcing that they will come to Copenhagen with hard commitments to emissions reductions; the U.S. “in the range of 17%” while Chinese have pledged to reduce the carbon intensity of their economy by 40-45%. Just pledging commitments of any kind is a significant step for Copenhagen; it was disputes over commitments like these that derailed the Barcelona talks.

The nature of these commitments, however, may give the pessimists some ammunition-President Obama’s commitment is still tied to action in the Congress, where any outcome is far from certain. In any case, a reduction of 17% is much less than many developing countries were calling for and much less than the IPCC suggested cuts of 25-40% by 2020. For China, some experts have noted that currently enacted policies seem designed to cover fully China’s commitment, meaning that the Chinese have essentially pledged themselves to “business as usual” emissions.

The pessimists can also point to the outcome of a hastily convened meeting between Danish Prime Minister Lars Lokke Rasmussen and leaders of Pacific Rim nations. Describing that meeting, US Deputy National Security Adviser Mike Froman said, “There was an assessment by the leaders that it was unrealistic to expect a full, internationally legally-binding agreement to be negotiated between now and when Copenhagen starts in 22 days.” Should an agreement like this actually come out of Copenhagen, it might give the U.S. Congress a chance to pass binding climate legislation; it might be possible that a 2010 meeting in Mexico City would become the new goal date for a binding international treaty.

For some, any lowering of expectations for December undermines any hope of success because it takes the pressure off of international negotiators; the Kyoto Protocol, after all, came about as the result of 11^th hour actions, similar to the commitments now coming from the U.S. and China. It is possible that the situation is not as dire as it seemed the first week of November, and that the two negotiators with the most power might be committed to an ambitious meeting after all. And so, it remains possible that December could still hold some surprises for all prognosticators of international climate policy.

Based on petitions filed by a consortium of Chinese auto producers, China’s Ministry of Commerce (MOFCOM) recently initiated investigations into alleged dumping and subsidization of U.S.-made autos.  The investigations, which according to MOFCOM’s initiation notices cover “saloon and cross-country cars” with engine displacement above 2,000 cc, could result in the imposition of antidumping and countervailing duties on imports of covered U.S. autos exported to China.  Some trade analysts view these investigations as a politically motivated response to the recent U.S. announcement of special “Section 421″ safeguard duties on Chinese-made tires, pursuant to a China-specific provision of U.S. trade law that allows the President to restrict imports of Chinese goods found to be causing market disruption.

MOFCOM’s countervailing duty investigation is notable because it is the first to target U.S. government funding to automakers intended to spur the development of next-generation clean energy drive-trains.  The programs subject to MOFCOM’s investigation include the U.S. Department of Energy’s Advanced Technology Vehicles Manufacturing (ATVM) Loan Program, the Troubled Asset Relief Program (TARP), the “Cash for Clunkers” program and various tax incentives related to hybrid and electric autos.  Of the thirty-one distinct U.S. federal and state programs under investigation by MOFCOM, most are related to U.S. government efforts to stimulate the U.S. auto industry’s transition to the production of more efficient and greener vehicles.

The investigation also highlights a tension between the Obama Administration’s energy policies and international trade rules.  On the one hand, the Administration is concerned that U.S. global leadership in green technology innovation is waning and has launched a series of initiatives - including financial assistance programs like ATVM - intended to restore U.S. leadership in this area.  Speaking at a recent energy conference, U.S. Energy Secretary Steven Chu suggested that the U.S. is behind other countries in high-tech green manufacturing areas such as solar photovoltaic technology, hybrid vehicle batteries and high-voltage transmission lines, and he urged aggressive action to promote these and other emerging green technologies.  U.S. Rep. Bobby Rush (D-IL) sounded similar themes in opening a recent hearing before the House Subcommittee on Commerce, Trade and Consumer Protection, on the topic “Growing U.S. Trade in Green Technology,” where he exhorted the U.S. to adopt “a strong long term export promotion policy to turn our economy toward what will make us a global leader.” 

On the other hand, government assistance programs intended to stimulate production and export of specific technologies may fall within the definition of “subsidy” in the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement).  Such subsidies, when found to be conferred on specific industries (and when other conditions set out in the SCM Agreement are satisfied), may be countervailed through the imposition of import duties that offset the competitive advantage bestowed by the subsidies.  The SCM Agreement contains no exception for subsidies that purport to advance environmental purposes.  In 1995, when the SCM Agreement became effective, it included exceptions for certain environmental subsidies.  These exceptions lapsed in 2000, however, leaving subsidy programs with purported environmental purposes vulnerable to countervailing duty actions.

The U.S. and its major trading partners - many of whom are actively promoting emerging green energy technologies - will need to remain cognizant of the risk that their promotion of domestic champions could also spur trade friction.

 After a week of talks-sometimes heated, sometimes not-of two key negotiation groups of the UNFCCC, there remains considerable work to be done to meet the goals of the Bali Action Plan. In fact, at the end of the week, it appeared a near certainty that there would be no binding legal agreement developed at the Copenhagen meetings upcoming in December, with only a political agreement being developed at that meeting. At the same time, however, there was considerable work on a number of other issues that would make up any new agreement, leaving some negotiators with the hope that an agreement could be reached in 2010.

The major sticking point for Parties seemed to be the level of ambition-or, more truly, the lack of ambition-on display from developed countries. The gap between developed country commitments and those called for by developing countries (with the general accompaniment that those larger commitments are “required by science”) proved a stumbling block throughout the week. Those debates also created the most dramatic moment of the conference when, on Monday afternoon, the Africa Group walked out of negotiations, demanding that the issue of “numbers” be resolved before negotiations continued. While the Africans were eventually brought back to the table, the stalemate over emissions cuts remained.

In other areas, however, more substantive progress occurred, particularly in the areas of developing country mitigation actions, cooperative sectoral approaches, technology transfer and forest carbon. On developing country mitigation-addressed under paragraph 1(b)ii of the Bali Action Plan-the Parties significantly consolidated their work on Nationally Appropriate Mitigation Actions (NAMAs), and released a new document outlining plans for long-term development strategies, a registry of NAMAs, and the scale and scope of these actions. Those negotiators working on cooperative sectoral approaches continue to have significant work to accomplish, but a newly released document includes language addressing “bunker fuels”-the fuel oils used in international marine and aviation transport. The contact group addressing forest carbon pushed forward on a concept known as REDD+, or “Reducing Emissions from Deforestation and Degradation,” discussing ways to finance, implement and monitor forest protection programs.  The “+” in REDD+ indicates the intent that this effort go beyond current voluntary programs and initiatives developed by the UN-REDD Programme.

With scant weeks before Copenhagen-which once loomed as the deadline for developing a binding successor to the Kyoto Protocol-the world is left in somewhat of a confounding situation: while significant progress has been made on a number of issues, the distance to a binding agreement seems as far as it did a year ago.

With fewer than six weeks to the UNFCCC meeting in Copenhagen-the deadline set by the global community to agree on a replacement to the Kyoto Protocol-the distance to a viable climate treaty remains great.  One of the most important areas of work that remains in flux regards the commitments, if any, the developing world will make to lessen or mitigate their growing carbon emissions.

There is broad consensus that, should developing countries continue on a business-as-usual trend of emissions growth, it will swamp any reductions made by individual developed nations, including the United States.  What should be done given that fact is another matter, as the nature and scope of commitments, if any, to be made by at least some developing countries is heatedly contested.  Developing countries often have less capacity for creating a sustainable economy. At the same time, some of the heaviest costs of emissions reductions can be avoided by developing countries, because in many cases, they are working to avoid future emissions, not reduce their current levels. While clear in both principle and practice that developing countries have a right to further economic growth, it is the global community’s responsibility to find ways, including through financing mechanisms and technology transfer, for that growth to not come at the expense of the environment.

The concept that negotiators have settled upon is that of the Nationally Appropriate Mitigation Action (NAMA). Unlike the commitments made by developed countries, which are specific, mandated, measurable commitment, NAMAs are voluntary actions supported by technological and capacity assistance from the developed world.

While negotiators reached agreement on the concept at the meeting in Bali, Indonesia in December 2007, as part of the Bali Road Map, there remains considerable negotiation to be done on the specifics. Work on the issues will continue at next week’s meeting in Barcelona. The major issues include:

• The types of actions that qualify as NAMAs-including countrywide or sectoral intensity targets, energy efficiency or renewable energy goals, cap-and-trade or carbon tax systems or participation in emissions trading schemes such as the Clean Development Mechanism;
• The development of monitoring, reporting and verification principles and oversight bodies;
• The creation of a registry of NAMA projects and the development of a life-cycle analysis methodology for NAMA projects; and
• The scope and enabling mechanisms for development and capacity assistance;

In other areas, more significant differences remain.  A major continuing issue involves whether NAMAs are contingent on and congruent to funding provided by the developed world, or can be attempted unilaterally.  Also remaining to be determined is the relationship of NAMA activities to any future flexible mechanism, which might replace or modify the Clean Development Mechanism, Joint Implementation and emissions trading as we know it.

In introducing a hearing earlier this month on “Growing U.S. Trade in Green Technology,” Congressman Bobby L. Rush (D-IL), who chairs the House Subcommittee on Commerce, Trade, and Consumer Protection, painted a dismal picture of U.S. competitiveness in the field of emerging environmental, or green, technology.  There is no single definition of green technology, but the concept is widely understood as encompassing emerging technologies related to renewable energy, energy efficiency and the conservation of natural resources.

Citing statistics from the New America Foundation, Congressman Rush claimed that, over the last decade, the U.S. has moved from a positive overall green technology trade balance of $12 billion to a deficit of nearly $9 billion.  For some green technologies, the trade deficit has grown particularly severe.  According to written testimony submitted for the hearing by Steve F. Hayward of the American Enterprise Institute, the U.S. trade deficit for wind power components has, in recent years, grown to $20 billion.  To correct this imbalance, Congressman Rush urged the adoption of a vigorous and long-term U.S. export promotion policy to reclaim U.S. green technology leadership.

Expert testimony before the hearing addressed a variety of factors explaining the seeming decline in the global competitive position of U.S. green technology firms, including stiff tariff and non-tariff trade barriers maintained by major trading partners of the U.S.  These barriers to trade in green technology are maintained even as many U.S. trading partners provide substantial assistance to their domestic green technology firms, exacerbating the negative impact on U.S. firms.

For example, according to written testimony submitted by GE’s Managing Director for International Energy Policy, Timothy J. Richards, 91 of 153 WTO member states impose tariffs on wind turbines and solar panels.  In the case of wind turbines, the WTO-wide mean tariff rate is 7.4%.  These tariffs are also highly variable among WTO member states.  In the case of wind turbines, while the U.S. has bound its tariff rate at 1.3%, China applies a tariff rate of 8%.  Brazil’s is even higher at 14%.  Also according to Richards’ testimony, many WTO member states, including Canada, China and the U.S., have recently adopted procurement policies that effectively bar competition from foreign suppliers.

Several witnesses advocated that a central aspect of a U.S. strategy for promoting U.S. green technology exports should be a renewed commitment to an old idea - an Environmental Goods and Services Agreement (EGSA) under the WTO.  The basic principle underlying EGSA is to liberalize global trade for a defined range of green technologies to promote efficient and rapid global dissemination of these technologies.  The mandate for the negotiations dates back to the 2001 Doha Ministerial Declaration, which at paragraph 31(iii) calls for “the reduction, or as appropriate, elimination of tariff and non-tariff barriers to environmental goods and services.”  While this mandate does not expressly identify greenhouse gas emissions, the ongoing EGSA negotiations have, in recent years, come to be seen as an adjunct to the global negotiation of a successor to the Kyoto Protocol to the U.N. Framework Convention on Climate Change, which is set to expire in 2012.

The Bush Administration strongly supported EGSA, and in 2007 attempted to reinvigorate the talks with a multilateral proposal, submitted jointly with Canada, the EU, Japan, Korea, New Zealand, Norway, Taiwan and Switzerland.  This proposal identified a “Potential Convergence Set” of green technologies, mostly related to climate change mitigation, that might be more amenable to inclusion in the first phase of a market-opening agreement.  The Obama Administration recently signaled its agreement with the Bush Administration’s approach, and earlier this month resubmitted the 2007 proposal to the WTO entity overseeing the talks - the Committee on Trade and Environment - Special Session.

Notwithstanding the sense of urgency evident at Congressman Rush’s hearing to advance the competitive position of U.S. green technology industries, however, EGSA appears to face the same hurdles today as it did when sought by the Bush Administration.  One such hurdle is that the EGSA negotiations are currently linked to the broader trade negotiations in the ongoing Doha Round.  Unless WTO member states agree to sever the EGSA negotiations from the Doha Round, EGSA’s prospects will remain linked to highly controversial and difficult aspects of these negotiations - such as agricultural subsidies - that have defied resolution.  Further, the EGSA negotiations have not been able to overcome a deep divide between the proponents of the 2007 proposal and a group of developing countries, led by Brazil, that seek the inclusion of biofuels in any EGSA. 

While U.S. law- and policy-makers seem to agree that they must quickly find new ways to stimulate U.S. green technology industries, EGSA remains a distant and uncertain prospect.

The International Air Transport Association (IATA) called on the UN Summit on Climate Change to support a “sectoral” approach to reducing aviation emissions under the leadership of the International Civil Aviation Organization (ICAO).  IATA, which represents some 230 airlines responsible for more than 90% of scheduled international air traffic, outlined the industry’s commitment to three sequential targets:

• Improving CO₂ efficiency by an average of 1.5% per year through 2020;
• Stabilizing net CO₂ emissions from 2020 onward; and
• Achieving a “long-term aspirational goal” of a 50% cut in CO₂ emissions by 2050 compared to 2005.

The aviation industry is currently responsible for approximately 3% of the man-made global climate change impact.

IATA and other aviation trade groups have emphasized the need for a sectoral approach.  Rather than regulating specific airlines or countries, the proposed sectoral approach would regulate the industry as a whole, thereby promoting effective cross-border regulation and level competition.  IATA’s Director General warned that “uncoordinated national and regional schemes are creating a patchwork of punitive taxes that fill government coffers, but do little or nothing to effectively manage aviation’s emissions.”  While IATA has enumerated certain guiding principles for the sectoral approach, including open access to carbon markets, the specific policy proposals will be developed in coordination with ICAO for potential inclusion in a post-Kyoto climate framework.  Aviation industry members will gather next in Montreal to formalize a proposal to take to the climate talks in Copenhagen.

In their article “The U.S.-China Clean Tech Opportunity,” co-authors Mario Mancuso and Asma Chandani of Akin Gump describe the opportunity for the United States and China to collaborate on clean energy technologies and assess some of the current challenges to a transparent and level-playing field in clean tech trade and investment between the two countries.  In particular, the authors examine the implications of (i) export controls, (ii) enforcement of intellectual property rights and (iii) regulatory barriers and protectionism.  The authors propose concrete steps that the United States and Chinese governments can take to create the framework and conditions for an open, functioning and competitive clean technology market.  Such an approach would lay the foundation for a clean tech future that the world wants and needs and introduce the next constructive chapter in one of the most important bilateral relationships in the world.

The Hon. Mario Mancuso is a partner at Akin Gump Strauss Hauer & Feld, LLP, an international law firm that opened its Beijing office in 2007.  He previously served as a senior U.S. Defense Department official (2005-07) and as U.S. Under Secretary of Commerce (Industry and Security), U.S. Chair of the U.S.-China High Technology and Strategic Trade Working Group, and member of the Committee on Foreign Investment in the United States (2007-09).

While United States and Chinese diplomats are working to forge cooperation between the countries on climate issues, the Chinese government’s huge clean tech investments may help that country pass the U.S. as the worldwide clean technology leader.  Could this “competitiveness crisis,” as one group terms it, have implications for the U.S. economy and the clean tech industry?  The results of this global race for dominance in the cleantech sector could significantly impact not only the national economy, but also the condition of the global environment.

Chinese Energy Investments

The Chinese are investing approximately 3% of their GDP on cleantech and renewable energy, as compared to less than half a percent of GDP in the U.S.  During early summer, the Chinese government floated plans to spend at least $440 billion in another stimulus package-all of that money going toward new cleantech investment.

The Chinese government also set a number of demanding goals for renewable energy and clean tech production and installation, including-

• Increasing renewable energy production from wind to 150GW by 2020, from an earlier goal of 100GW, and solar production from 1.8GW to 20GW by the same year
• Increasing production of plug-in hybrid electric vehicles to 500,000 by the end of 2011, up from 2,100 in 2008
• A raft of transportation spending initiatives and policy reforms, including $1 trillion for increased railway infrastructure, tax programs to incentivize the purchase of fuel-efficient cars and increased fuel economy standards
• Strict energy-efficiency standards in building codes, home appliances and amongst China’s top 1000 energy consuming businesses.

China is also moving full speed ahead in the race to dominate nanotechnology research, a likely source for many of the cleantech industry’s future breakthroughs.  These investments, combined with what some see as a willingness to use border measures and anti-competitive bidding practices to discourage foreign participation in the Chinese cleantech market, position Chinese manufacturers to be a dominant player in the global cleantech market.  Indeed, China’s rise in the cleantech space has prompted some U.S. analysts to question the wisdom of investing in domestic cleantech manufacturing capacity, versus simply ceding manufacturing to China and focusing on domestic installation of less expensive Chinese equipment. 

When Cleantech Doesn’t Mean Cleanup

While China has made significant strides in cleantech investment and implementation, it has continued to resist international calls for binding emissions caps or reductions.  Instead, citing its prerogative as a developing nation, China has focused its pledges on reducing energy intensity-a measure of carbon emissions in relation to GDP.  This poses several challenges for international efforts to stabilize carbon levels.  First, with China becoming the world’s largest net emitter of CO₂, internationals effort to freeze global emissions will be an exercise in futility without China (and other large developing countries) making binding commitments.  Second, even under China’s current emissions-rate based goals, China has yet to meet any of the benchmarks necessary to achieve its efficiency goals of reducing emissions 20% by 2010.

China’s aggressive investment in the cleantech sector, combined with its continued refusal to reduce its net emissions, illustrates a major flaw in the assumption that investment in clean energy infrastructure and manufacturing capacity will automatically lead to both a cleaner environment and more robust national economies.  If, as some critics argue, China has opted for the robust economy while leaving the cleaner environment to others, China could reap disproportionate economic benefits from global cleantech investment, while shifting a disproportionate economic and environmental burden to other counties.  This, in turn, could undermine other countries’ efforts to fund today’s environmental cleanup efforts through long-term economic growth in their domestic cleantech industries. 

American cleantech companies are poised between a radical expansion of their potential markets into China and other cleantech-hungry developing countries and the specter of foreign companies, energized by concerted investment in their home nations, outcompeting them both overseas and at home.  This high-stakes race for cleantech hegemony will be hard fought, with China and the U.S. just two of the countries competing.  The race to be a global leader in actual emissions reductions, however, remains any country’s to win.

Last year, Swedish Company Vattenfall announced its plans to go on-line with a major pilot program to test carbon capture and sequestration at a coal-fired power plant.  The company recently acknowledged that permitting snags fueled by local opposition render it unable to commence geologic sequestration of captured CO2.  Vattenfall intended to begin capturing CO2 at its 30-megawatt Schwarze Pumpe facility, located in Spremberg, Germany, and sequestering it in the nearby Altmark depleted gas field by March or April 2009. Residents of the host-city, however, have expressed concerns about the safety of geological sequestration, preventing the final permitting approval for the site and creating questions about when - or if - the site could be available for any CCS operations. 

Vattenfall’s experience at this project is not an isolated incident.  Vattenfall reported delays in obtaining approvals for one of its Danish storage projects pointing, in part, to public opposition by local stakeholders.  In June, German news sources reported that activists were protesting plans by electric utility RWE to transport captured CO2 by pipeline from a powerplant near Cologne to a sequestration site on Germany’s North Sea Coast.  The Wall Street Journal also reported in April that Royal Dutch Shell had run into challenges siting a sequestration facility in Barendrecht, Netherlands, due to grass roots opposition from local residents. 

Public opposition is likely to be a critical strategic and legal consideration for US projects.  On Friday, August 21, Battelle, the lead partner in a Midwest Regional Carbon Sequestration Partnership project announced that it was abandoning plans to participate in a $92 million public-private demonstration project to site a geological sequestration project in Western Ohio.  While the partner cited only “business reasons” for its decision, the reported public opposition to the project could not have helped. 

These setbacks illustrate the significant challenges that the siting and permit-approval process can pose, particularly in the face of public opposition, to an otherwise promising project.  This will be particularly true during the early stages of a CCS deployment.  US policymakers and investors would do well to watch and learn from these early case studies, and to ensure that they devote the legal, political and community relations resources needed to ensure that proposed projects move forward in a realistic and timely fashion.