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Outlook on climate change and Kyoto

From November Roundup 2004.

Climate Change

For a primer on climate change go here: http://unfccc.int/cop4/beginner.html

Another report confirming the advance of climate change was released in November. The Arctic Climate Impact Assessment (ACIA) reports on "Impacts of a Warming Arctic" where some of the most rapid and sever climate change occurs and, in recent decades, where temperatures have increased almost twice as fast as in the rest of the world.

The world can ward off a dangerous rise in temperature much more cheaply than many people think according to Professor John Schellnhuber, of the University of East Anglia, believes the cost of averting runaway climate change could be as low as 0.3% of global GDP. He is proposing that the world can avoid a major catastrophe, admitting that there is no simple solution for reducing greenhouse gases, and the world will need a mix of strategies.

Thirty-five of Japanís leading industrial operators have signed up to a $135 million pooled fund to buy carbon emission rights from foreign companies. Among the companies involved are Toyota, Sony, Mitsubishi, Tokyo Electric and the Japan Iron and Steel Federation. It is expected the fund will operate until 2014 and will buy emission rights amounting to up to 20 million tons of greenhouse gases. The fund has been established just three months after the Japanese government hinted that a voluntary carbon-trading scheme would be its preferred option in its approach to Kyoto. The government plan is to subsidise organisations that choose to participate, but to withdraw that subsidy if the signatory fails to meet its reduction targets.

Kyoto

The Kyoto Protocol is to enter into force on 16 February 2005, becoming legally binding on its 128 party countries. The 90-day countdown to the protocolís entry into force was triggered today by the receipt of the Russian Federationís instrument of ratification by the United Nations Secretary-General. The protocol sets a commitment period of 2008 to 2012. The 30 industrialised countries that signed up to reduce their emissions must prove they have done so as an average over the five years. The target for those 30 countries is a cut in greenhouse gas emissions of 5.2 per cent on average, which will become to be seen as insignificant well before the period expires.

Australia, Liechtenstein, Monaco and the United States have not yet ratified the Kyoto Protocol. Australia and the United States have stated that they do not plan to do so; together they account for over one third of the greenhouse gases emitted by the industrialized world.

The most immediate effect of the protocolís entry into force is to legally underpin international emissions trading markets ahead of the commitment period. It also adds political weight to the EUís emissions trading scheme. From wind farms in New Zealand to landfill projects in South Africa, emissions reductions will have financial value. Point Carbon estimates that the global market will be worth Euro 10 billion in 2007. The formalisation of this polluter pays legislation will galvanise investment and opportunities in alternative energy and materials.

The EU scheme is already operating. More than a million tons of CO2 changed hands in September, nearly double the figure for all of 2003.Already over six million tonnes of CO2 have been traded so far in 2004. It remains tiny, though, when compared with 2.2 billion tons annually that can be potentially traded within the EU from January next year when Europe's carbon market will officially be launched. Turnover in the European market could range next year from 125-250 million tons, rising to 400-800 million tons from 2008. This estimates that the total value of the EU emissions trading scheme will reach Euro 8 billion in 2007, before the Kyoto commitment period even starts. The current market price is about Euro 8.75.

The 25-nation EU uses a "cap-and-trade" approach. Governments set individual emissions targets for 12,000 plants that are big CO2 emitters, such as coal, and oil-fired power plants, chemical works, pulp plants and cement and glass factories. For every ton of CO2 that goes over their target, these plants are liable to a fine of 40 euros (48 dollars) during a three-year transitional period. From 2008 to 2012, the punishment zooms up, to 100 euros (120 dollars) per ton of CO2.

Moving first can be risky, but it can also mean gaining trading expertise and the financial clout that makes your region or capital the natural hub of business. The preamble to the launch has been beset by squabbling and lack of experience as players try to get pole position. This will enable them to maintain credibility in the coming years as regulators question audits which will be the basis for fines and payments.

Leading that campaign is the UK, which has been running a pilot scheme of its own to gain skills in how the market will run. The scheme will be subsumed into the EU within a couple of years. London's International Petroleum Exchange is gearing up to allow carbon futures to be traded by the end of the year, in the same way that oil and gas futures are traded now, and spot trading will come next year.

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