The headlines leading up to the UN-led climate negotiations that began yesterday in Copenhagen provide a nice snapshot of an extraordinary roller-coaster ride:

  • The realization that the United States would not have legislation in place before the conference
  • Declarations that there will not be enough time to negotiate a legally binding treaty
  • The possibility of a strong political agreement followed by a treaty next year
  • The likely attendance of more than 60 heads of state
  • And, of course, the “will they or won’t they” speculation about whether U.S. and Chinese presidents Barack Obama and Hu Jintao would attend and what types of greenhouse gas (GHG) reduction targets their governments might commit to

Despite these ups and downs, the importance of this process to business—through the Copenhagen negotiations to a comprehensive treaty and beyond—has not changed. Nations involved in the negotiations face a choice between taking substantive steps to proactively contain the threats posed by climate change, or to merely react to those threats as they grow. Based on these choices, companies have significant questions about potential physical and regulatory impacts on their global supply chains, owned operations, and customers. These negotiations should begin to create clarity about the world’s choice, the steps involved, and the implications for business.

What follows is BSR’s guide to key issues at Copenhagen (and beyond)—and what these mean for business.

Keys to Copenhagen

In a joint appearance with Hu, Obama said that the two presidents’ aim for a treaty “is not a partial accord or a political declaration, but rather an accord that covers all of the issues in the negotiations, and one that has immediate operational effect.” We can expect such an agreement to cover the specific areas that many have stated will form the core of any comprehensive effort: a commitment to global goals; plans for implementation and funding of technology, adaptation efforts, and forestry efforts; and outlines of international rules and mechanisms.

  1. Global goals—developed country reductions, developing country restraint: The top two GHG-emitting nations, the United States and China, epitomize a great rift that negotiators are trying to bridge: whether and how those countries responsible for historical emissions (such as the United States and other developed nations) or the much larger countries likely to be responsible in the future (China and other fast-growing nations) should control their emissions. The Bush Administration was unwilling to commit to an emissions cap without a similar commitment by major developing countries, particularly China and India. In the lead-up to Copenhagen, this logjam loosened as the United States developed a target of about 17 percent below 2005 emissions levels (still far below commitments of most other developed countries), while several developing countries such as Brazil and South Korea made voluntary commitments to limit the growth of their emissions.

    Implications for business: The negotiations in Copenhagen and a final treaty will form a baseline for regional and national action to reduce GHG emissions. A strong global framework for managing GHG limits will better define the scope of regulatory risks faced by business, allowing companies to make better decisions about energy use, supply chains, product manufacturing, research investments, and more. Progress toward an effective agreement is also likely to defuse calls for border measures like carbon tariffs to pressure laggard nations.

  2. Technology—incentives for innovation and diffusion: Both developed and developing countries must move beyond inefficient, polluting technologies if they are to achieve any stated goals. A Copenhagen agreement and any final treaty will address how to encourage new technology development and catalyze its expansion to developing countries. Significant hurdles in this arena include intellectual property rights and the question of financing for technology development and transfer.

    Implications for business: Technology agreements may influence the attractiveness of R&D investments or the expansion of new technologies, for example by providing additional incentives for clean technology research, by bringing clean tech to international markets, or by modifying international intellectual property regimes for clean tech.

  3. Adaptation: Who is at risk, who pays, and how? Physical climate change is already influencing global temperatures, weather patterns, disease, water supplies, and sea levels. It will exert a growing influence on the Earth for decades, regardless of the outcome of current negotiations. The World Bank reports that the costs of adapting to such changes could be US$75 billion to US$100 billion per year, borne disproportionately by the developing world. The Copenhagen negotiations and any resulting treaty will discuss who should pay for adaptation efforts, and how such funds should be managed.

    Implications for business: These negotiations may develop a funding framework that places surcharges on select high-impact industries or activities. For example, less developed countries have proposed an “International Air Passenger Adaptation Levy” to fund adaptation (a proposal most airlines currently oppose). Such funds may enable economic development that is more resilient to climate impacts over time, potentially making investments in recipient countries less risky.

  4. Forestry—accounting and funding: Deforestation may account for 20 percent or more of GHG emissions from human activity, and expanding forests can play a valuable role in removing carbon from the atmosphere. However, there is uncertainty about how to properly account for such carbon sinks, and who should fund these efforts. Negotiators must address how these issues will be covered in a treaty. A key forestry framework that will be debated and which defines rules for business is “REDD”—Reduced Emissions from Deforestation and Degradation.

    Implications for business: Forests and related land-use issues are likely to be included in international carbon markets and calculations in some fashion, which may influence corporate decisions about land-use change.

  5. Rules and mechanisms—carbon markets and finance: A steadily increasing price of carbon will be a central feature of climate policy. An important practical aspect of this is what (if any) market will exist to buy and sell GHG emissions credits. The potential size of such a market is huge: The carbon market has been projected to grow to upward of US$150 billion, making it possibly the largest commodity market of all. The negotiations will attempt to refine or reorganize the Clean Development Mechanism (CDM, one of the most significant global carbon market mechanisms) to address allegations of corruption and environmental ineffectiveness. Forestry and extra-climate issues like biodiversity may also be included in carbon markets.

    Implications for business: Carbon markets represent enormous new assets and liabilities that have traditionally gone unmeasured, suggesting that carbon finance deserves the attention of CFOs. New industries are forming to meet companies’ needs for carbon credits, and traditional banking and investment institutions are expanding their offerings to include carbon finance. As events develop, impacts on companies will result from a close interplay between the global rule-making frameworks mentioned above and decisions by national governments, which have the prerogative to decide who is considered a carbon “emitter.” Ultimately, this will determine who is responsible (for example, owners of physical smokestacks or the end customers who pay the utilities) to either reduce or pay for emissions.

Beyond Copenhagen

The current process, which we hope will culminate in a binding treaty before the end of next year, is not a finish line. Any agreement is unlikely to deal effectively and fully with climate change, and key issues will have to be addressed later. For example, the most frequently discussed international emissions reduction target—a 50 percent global reduction by 2050—still results in a 50 percent chance of global temperatures increasing by 2.5ºC or more, with corresponding significant risk of catastrophic climate change impacts.

Issues like this will force the international community to come back to the negotiating table repeatedly in future years. Thus, a climate change treaty is an important step in creating a truly global binding framework that addresses climate change issues, but it is likely to be only “the end of the beginning.”