Australia's commitment to KP2 sends a signal to Australian business that Australia will continue to address climate change and look to reduce emissions intensity.
The Doha Gateway includes a number of decisions, and at the conclusion of the UNFCCC Conference in Doha, Australia made a number of commitments. We discuss these and the implications that flow from them below.
Second commitment period to the Kyoto Protocol
Australia's commitment for the first period of the Kyoto Protocol was 108% of the base year (1990) emissions. Australia, together with 37 countries has signed up for a second commitment period under the Kyoto Protocol (KP2), and, as we foreshadowed before Doha, has committed to achieving emissions reductions of 5% on 2000 levels. Australia also has indicated that it would be prepared to increase the level of commitment up to a 25% reduction in emissions compared with 2000 emissions levels if other countries increase their commitment levels.
The biggest issue between the parties in the negotiation was around the use of Assigned Unit Amounts (AAUs), and whether these could be carried over to KP2. Parties with commitments under the Kyoto Protocol have targets for limiting or reducing emissions expressed as levels of allowed emissions, or AAUs. Article 17 of the Kyoto Protocol allows countries that have AAUs to spare to sell this excess capacity to countries that are over their targets. A number of Eastern European countries have huge numbers of excess AAUs due to economic factors, not emissions reductions. These excess AAUs have been described as hot air as there is a view that they do not represent real emissions reductions.
Some parties (such as Australia) were concerned to ensure the environmental integrity of emissions reductions while others argued that "overachievement of commitment" should not be punished by not being permitted to use AAUs. An effective compromise position was achieved by Australia and a number of other countries committing to neither carrying over any AAUs nor purchasing those held by other countries.
Negotiating for a global binding agreement
All parties have agreed to continue to negotiate towards a further binding agreement on emissions reductions. No substantive progress was made towards this goal in Doha, however a timetable for the work was agreed to, and the UN Secretary General Ban Ki-moon announced that he would convene a meeting of world leaders in 2014 to ensure the 2015 deadline is met.
A renewed commitment to long-term climate finance
While developed countries restated their promise to provide up to $100bn per annum by 2020 to assist poorer nations with the adaptation to and mitigation of the effects of climate change, Australia has made no additional commitment beyond the previously agreed-to $599m for small Pacific states.
Financial and technological infrastructure agreement
While the conference agreed that the Green Climate Fund would be located in Republic of Korea and launch in 2014, and that a UNEP-led consortium will host the Climate Technology Centre, how the fund would operate and where funds would come from was no clearer at the end of the conference. Australia will chair the Fund.
New market mechanisms
The Durban Platform included agreement to develop new a new market-based mechanism. Parties at Doha agreed to continue this work. Additionally, parties also agreed to a work programme to develop a framework for recognizing mechanisms established outside the UNFCCC process, such as nationally-administered or bilateral offset programmes (for example Japan's bilateral offset program), and to consider their role in helping countries to meet their mitigation targets.
What do these commitments mean to the Australian carbon market and broader business environment?
Australia's commitment to KP2 sends a signal to Australian business that Australia will continue to address climate change and look to reduce emissions intensity. For Australian businesses that are liable entities under the Carbon Price Mechanism (CPM) it also means that they will continue to be able to access eligible Kyoto units to meet a proportion of any liability under the CPM from 2015. The business community can be somewhat assured that irrespective of the domestic policy mix Australia has made an internationally binding commitment and so carbon emission reduction strategies will continue to be part of the political landscape. However, the Doha Climate Gateway is more than anything a number of agreements to continue to work towards real commitments and real outcomes. So, businesses should continue to watch this space.
The carbon price
One vexed issue remains the price of carbon units. Credits produced by emissions reduction projects undertaken under the Clean Development Mechanism and Joint Implementation under the Kyoto Protocol continue to significantly exceed the demand for those credits. Allowances in the EU ETS also remain significantly over-allocated with current proposals to withhold a number from allocation. The commitment to develop new market measures affirmed at Doha may further saturate the market unless the UNFCCC negotiations also address over allocation and supply issues.
Action outside of the UNFCCC
The current level of international commitment is not sufficient to meet the international goal of limiting climate increases to 2ºC. Of concern is the apparent lack of urgency that was displayed by many of the parties in Doha, an exception to this being representatives of developing countries.
Despite the lack of international commitment, many countries are making commitments and more importantly taking steps to reduce emissions at a national and sub-national levels. Developments include the imminent commencement of the Californian cap-and-trade scheme, the establishment of an emissions trading scheme in South Korea, and the various pilot trial emissions trading schemes in China.
The Doha Climate Gateway acknowledged the role these initiatives outside of the UNFCCC process may have by agreeing to establish a work plan for recognizing these mechanisms. This means that, while failing to commit to binding emissions reductions at the international level, countries are taking action. Australian businesses should be looking not only to developments under the UNFCCCC and the commitments of their trading partners' countries, but also to national and sub-national strategies in the countries of their trading partners.
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1 Section 133(7) provides that liable entities may satisfy up to 50% of their liability under the CPM with eligible international units, with a sublimit of 12.5% for units generated through the Clean Development Mechanism.
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.