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.

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In the second post of our series examining the incoming Obama administration and its push for a national climate change policy, we turn to the current political environment; firstly examining the domestic climate, at both the state and national level, and then toward  to international negotiations to replace the 1997 Kyoto Protocol, which continued last week in Poznan Poland.

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President-elect Obama inherits a dysfunctional domestic climate change policy: while the federal government has either stalled, or actively opposed, greenhouse gas (GHG) control, state governments have established their own control programs. While recent efforts to enact federal legislation have exposed many challenges to a national climate policy, opportunities for strong national leadership exist. Three significant areas of action in domestic climate policy are outlined below.

National Climate Change Legislation

The current Congress has made progress on energy efficiency and renewable energy—most notably, the extension of the Investment Tax Credit (ITC) and the Production Tax Credit (PTC), and the increased stringency of auto mileage standards in the 2007 Energy Independence and Security Act.  While, a comprehensive statute to control GHG emissions advanced further than ever before, there remain substantial roadblocks to passage. The two most significant efforts of the last year are the Lieberman-Warner Climate Security Act (Lieberman-Warner) and Dingell-Boucher bills. Lieberman-Warner failed on a vote to end debate in early June, despite significant support from industry. The Dingell-Boucher bill was released only as a discussion draft, and with Congressman Waxman taking over as chairman of the House Committee on Energy and Commerce, its future seems bleak.

President-elect Obama’s campaign platform contained a cap and trade system similar to those in the failed legislation, but also included both more aggressive reduction targets and a 100% auction of carbon credits. As the fight over the Lieberman-Warner bill and the Waxman/Dingell face-off show, divisions within the Democratic caucus will remain a significant obstacle.

A side note: because of the perceived mishandling of the Lieberman-Warner bill before the Senate, Akin Gump lawyers suspect that Majority Leader Sen. Harry Reid will turn to Sen. Jeff Bingaman of New Mexico to help shepherd any climate legislation through the Senate. While Sen. Bingaman has been an advocate of GHG control, his previously introduced legislation on climate change has included much more modest emissions control targets and limited carbon auctions; the Senator’s leadership may provide a significant moderating influence on any potential legislation.

Executive Agency Action

The Environmental Protection Agency (EPA) has largely opposed efforts to regulate carbon under exiting statutes, primarily the Clean Air Act.  For example, it opposed state efforts to have carbon dioxide ruled a “pollutant” for purposes of the Clean Air Act, a position rejected by the Supreme Court in Massachusetts v. EPA.  The Agency also denied the state of California’s petition to regulate emissions from automobiles. President-elect Obama has criticized the EPA’s recent actions and it seems likely that he would act quickly to reverse course in a number of areas.

Important changes are coming to the EPA’s regulation of GHG’s even before the accession of the Obama administration. In recent weeks, EPA issued a landmark decision on power plant construction. In a case about a power plant on American Indian land in Utah, the agency’s own appeals board ruled that EPA erred in refusing to consider requiring best available control technology (BACT) for GHG emissions control. For the short term, this essentially the freezes the permitting and construction of new power plants; the decision places the burden on the incoming administration to determine what will meet BACT standards and how power plants will be permitted going forward.

State Action

In stark contrast to the federal government, state governments have pushed ahead aggressively with GHG control pacts, both as individual states and as part of regional compacts. In the northeast, ten states (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont) created the Regional Greenhouse Gas Initiative (RGGI), the first mandatory, market-based emissions control program in the United States. RGGI’s goals are modest—a 10% reduction in GHG emissions by 2018—but it provides an important guidepost for future programs.

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 On Monday, December 1 the U.N. Framework Convention on Climate Change (UNFCCC) commenced in Poznan, Poland.  The conference, if all goes as planned, will lay out a schedule for consensus on a successor to the Kyoto Protocol for agreement by December 2009 in Copenhagen.  While many see an agreement in the near future, many fear that a lack of U.S. support due to the recession and change of administration will hinder an international agreement.

During the first week of discussions, five major issues confronted conference participants:

1. Shared vision.  This issue, which encompasses both emissions reduction targets and the differentiated responsibilities for reaching those targets, has already received significant discussion at the conference, as the working group tasked with long-term cooperative action met on Tuesday, December 2. At that meeting, a number of proposals were issued: the Japanese endorsed a 50% reduction in emissions from 1990 levels by 2020, while the EC suggested a more ambitious 85% decline. The Chinese, while not endorsing a long-term goal, did support a 20-40% reduction by 2020; the Chinese also stressed equity issues, noting the divide between developing and developed country responsibility for historic emissions and pushing for industrialized countries to take dramatic action as a leadership gesture.
2. Tech transfer. Perhaps the most contentious issue at the conference is how to transfer low carbon technologies to developing nations. Strong words leading up to the COP from the Chinese and Indian governments threatening to undermine intellectual property rights and utilize compulsory licensing have laid the foundation for heated discussions during the second week of the conference.
3. Financing.  This issue is shaping up to be another contentious one, as developing countries push for further help in mitigating climate change, as well as adapting to its effects; at the same time, the global economic slowdown makes developed nations less interested in significant outlays of financial aid. Senator John Kerry, an observer at the conference and an ally of President-elect Barack Obama, said “The bottom line is we are not going to be in the position we were two years ago in the short term to do as much technology transfer or economic assistance in terms of transitional issues that might have led other countries to participate.”
4. Adaption.  Many developing countries are pushing for funding not just to prevent further greenhouse gas emission, but also to adapt to the effects of climate change that have already come.
5. Mitigation.  Though significant discussion on this topic is likely, many participants find it unlikely that hard emissions reduction targets will come out of the Poznan conference. So far, only European countries have committed to hard reduction targets, and it is unlikely that many other countries will join them.

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On the cusp of the Poznan U.N. Climate Change Conference, data just published by the U.N.’s climate secretariat show that many industrialized nations’ greenhouse gas (GHG) emissions have been rising.  The emissions data underscore the difficulties that some industrialized countries are having in meeting their existing emissions reduction commitments under the Kyoto Protocol, which run through 2012, as well as the enormity of the challenge in reaching the deep emissions cuts that many U.N. members say are urgently required.  The new data will also likely re-open a longstanding debate concerning the reliability of the various methodologies employed to calculate national emissions levels.

Under Article 4.1(a) of the 1992 U.N. Framework Convention on Climate Change (UNFCCC), all member states are obligated to report, on a periodic basis, GHG emissions from anthropogenic sources and the removal of GHG sinks (such as through changes in land use or forest cover).  Pursuant to a series of decisions of the Conference of the Parties to the UNFCCC, the 41 industrialized countries identified in Annex I to the Kyoto Protocol must provide more detailed emissions data on an annual basis.  Non-Annex I countries, which include China, India, and other large industrializing countries, are not subject to these more rigorous emissions reporting obligations.

The report, which covers the period 1990 through 2006, confirms that the United States, the EC and Russia remain the largest three Annex I emitters.  The report also shows for each of these jurisdictions that, while 2006 emissions represented a slight drop from 2005 levels, those same emissions were somewhat higher than 2000 emissions.  The United States remained by far the largest Annex I emitter, at just over 7 billion tons in 2006 (according to some sources, China has now eclipsed the United States as the world’s largest GHG emitter).  Total EC emissions were just over 4.1 billion tons, while Russian emissions were 2.2 billion tons.  This represented a drop from those countries’ 1990 emissions of 2.2% and 34%, respectively.  In contrast, U.S. emissions grew 14.4% over the same period.

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 During a meeting of the European Union Council last month, Environmental Ministers from European Union (EU) companies met to establish the EU’s position on a post-Kyoto international climate change policy and reviewed the status of the EU’s own package of climate change legislative proposals.  While the climate policy issues were largely prospective in nature, the meeting indicated that European Ministers do not appear to be letting the current financial turbulence undermine their support for a robust post-2012 climate agreement.

Preparing for Post-Kyoto Treaty Negotiations

The next round of negotiations under the United Nations Convention on Climate Change (UNCCC) is scheduled for December 20, 2008 in Poznan, Poland.  During the EU Council meeting discussions related to that meeting, the parties reiterated the importance of achieving worldwide consensus by the end of 2009, to ensure a replacement regime for the Kyoto Protocol by the end of 2012.  Among the EU Council’s key conclusions and statements on upcoming negotiations, the Council:

• Reaffirmed its commitment to the Bali Roadmap, with a goal of completing the successor agreement to the Kyoto Protocol at the scheduled talks in December 2009 in Copenhagen, Denmark.
• Stated that any post-2012 agreement would need to limit global average temperature increase to not more than 2°C above preindustrial levels” - a limit that would require 50 percent reductions in global emissions from 1990 levels by 2050, with emission levels peaking and starting to decline by 2020.
• Called on developed countries to propose economy-wide, medium-term emission reduction targets at a “comparable level of effort” to the commitments made by the EU.
• Noted that “the least developed countries should not be subject to obligatory emission constraints” but encouraged them to link sectors, where appropriate, to the international carbon markets.
• Stressed the importance of reducing emissions from deforestation and forest degradation.
• Discussed the importance of energy efficiency and the transfer of clean technology.
• Recognized the threat to competitiveness posed by carbon leakage, and the need to achieve a level playing field between industrialized and developing countries.

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In the run-up to the fourth session of the Ad Hoc Working Group on Long-Term Cooperative Action (AWG-LCA), China, India and Brazil have sharply reiterated their views that the burden of reducing greenhouse gas (GHG) emissions lies, in the first instance, with developed countries.  The AWG-LCA, convened as part of the U.N. Framework Convention on Climate Change (UNFCCC) Bali Action Plan of December 2007, is charged with facilitating agreement on principles for long-term action to reduce GHG emissions, extending beyond the current Kyoto Protocol obligations, which are set to expire in 2012.  This agreement on principles is, under the Bali Action Plan, expected to be reached in time for the December 2009 UNFCCC Copenhagen summit.  In preparation for the fourth session of the AWG-LCA, scheduled to occur in Poznan, Poland during the first two weeks of December 2008, governmental parties to the UNFCCC are currently staking out their negotiating positions in formal submissions to the AWG-LCA.

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After significant delay, the United Nation’s International Transaction Log (ITL) and the EU’s Community International Transaction Log (CITL) were finally connected on October 16.  The ITL tracks and trades the transfer of all Kyoto Protocol units, including Assigned Amount Units (AAUs), Certified Emission Reductions (CERs) and Emission Reduction Units (ERUs), while the CITL, its European counterpart, tracks the trade of European Emission Allowances (EUAs) under the EU ETS. 

The linking was significant not only because of the delay in its implementation, but because it allows Kyoto credits to be transferred directly into EU installation emissions accounts.  The delay caused considerable market shakiness, as, until the link was complete, the key December 2008 CER contract could not be physically delivered and most Member States, most significantly Germany and the UK, refused to issue EUAs by the February 2008 deadline.  As such, the completion of the link eases the collective concern of traders and Member States alike, as it avoids the risk of contract default, a major concern, and encourages Member States to promptly issue EUAs.  It will also simplify contractual negotiations between counterparties, as provisions, which have been included for the lack of a connection, are no longer necessary.  All these factors will encourage a flourishing spot market, which will grow alongside the exchange and OTC markets.  The resulting increased volume and liquidity should smooth out price volatility and increase opportunities for arbitrage.  

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After continued delay and controversy, the European Commission (EC) will not connect the Community International Transaction Log (CITL) to the UN’s International Transaction Log (ITL) until the second half of October. The EC, Member States and the secretariat of the United Nations Framework Convention on Climate Change (UNFCCC) are working on the last stages before establishment of a live connection between the CITL, the ITL and Member State registries. It is expected the final connection process between the ITL and CITL will commence on October 6 and take at least 10 days.

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This is the second in a series of articles discussing significant issues arising under emission reduction purchase agreements (ERPAs). For background information, please see the previous article in this series.

One of the critical issues in drafting an ERPA is defining the concept of delivery of the emission reduction unit. The delivery terms will vary based on the type of credit being traded. For Certified Emission Reduction (CER) credits sold within a compliance regime, the program regulations will generally dictate how to effect delivery. However, for Voluntary Emission Reductions (VERs), which are contractually created as part of a voluntary scheme, the parties will need to negotiate the mechanism by which the credits will be transferred from seller to buyer, bearing in mind the risks associated with transfer of title and any shortfall or delivery failure.

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After significant delay and controversy, the European Commission (“EC”) once again has promised to connect the EU’s Community International Transaction Log (“CITL”) to the United Nation’s International Transaction Log (“ITL”) in the first half of October. The ITL will track the trade and transfer of all Kyoto Protocol units, including European Union Allowances (”EUAs”), which effectively become Kyoto Protocol Assigned Amount Units (“AAUs”) from 2008 to 2012. Until now, there has been no software link between the EU and UN schemes allowing delivery of the cheaper Certified Emission Reductions (”CERs”), a link expected nearly 18 months ago.

Market participants have criticized this failure widely, sparking major jitters, as December 2008 is a key delivery date for the 2008 vintage CER contract. The contract cannot be delivered without the connection, although most contracts allow settlement to roll over until the link is complete. The delay is also considered to have contributed to the volatile EUA and CER price spread, and more generally, reduced liquidity, transparency and confidence in the market.

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