UK: Climate Change: Slow Progress Is Made In Latest Post-2012 Climate Change Negotiations

Last Updated: 22 September 2009

The existing international agreement on climate change, the Kyoto Protocol, runs out in 2012 and there is as yet no successor regime in place. All hopes are currently pinned on a new international agreement being concluded at the conference and meeting of the nations that are party to the UN Framework Convention on Climate Change (UNFCCC) taking place in Copenhagen this coming December. Unless such an agreement is reached, there is a very real prospect of the international community not being able to conclude and implement a new regime before the international carbon markets are plunged into a legal vacuum come 1 January 2013.

That is why frantic preparatory discussions (they arguably cannot yet truly be called negotiations) are currently being undertaken at an international level to ensure that the Copenhagen talks are a "success." A number of negotiating sessions have already taken place this year, the most recent of which occurred in Bonn between 10 and 14 August 2009. These talks are no small affair. The recent Bonn talks involved some 2,400 delegates from almost every nation.

However, those negotiations ended with little real progress: "If we continue at this rate, we are not going to make it," said UN climate chief Yvo de Boer, at a press conference on the last day. There are now only 15 days of negotiations left before Copenhagen, one meeting in Bangkok in September and another in Barcelona in November. Certainly as Copenhagen approaches with so little consensus having been reached, it seems ever more likely that if a deal is concluded in Copenhagen, it will be very much a framework agreement with much of the detail still unresolved.

The main problem is that the current negotiations are far more ambitious and controversial than Kyoto. By way of comparison, the text being discussed prior to agreement of the existing Kyoto Protocol in 1997 was only 30 pages long. The current negotiating text alone stretches to over 200 pages and contains more than 2,000 sets of square brackets, not to mention all the various tables of position, guides, matrices, "non-papers," "non-non-papers" and other texts accompanying it. At present there is a palpable lack of trust and it seems the delegates cannot even agree on how to organize the talks and manage the texts administratively, with heated arguments about the size and remit of negotiating groups, what languages the texts should be translated into and so forth.

There are, however, understandable reasons why these talks are proving so difficult. Crucially, unlike under Kyoto, developed nations (existing Annex 1 countries) are demanding real emissions reduction commitments for the first time from the world's major developing nations, such as China and India. Those countries in turn are demanding far more stringent emissions reduction commitments by the developed world, as well as commitments by the latter to inject vast amounts of cash and technology to assist the developing world in "doing its bit" to combat climate change.

Against that overall backdrop, the complexity of these negotiations is a severe test of the delegates', physical and mental strength. For example, the commitments being offered by developed nations are all different, and are measured against different baselines based on differing assumptions: comparing them and assessing their real value is a mammoth task in itself. Agreement needs to be reached on whether measures such as switching to nuclear power, or implementing carbon capture and storage should count towards national targets, whether international aviation and shipping should be covered by the new regime, the prioritization of adaptation over mitigatory measures, funding for developing nations: whether efforts should be provided by public or private finance or a combination of the two, how much funding is needed, on what terms it will be given and whether new international institutions should be set up for such purpose, whether, if carbon reduction technology is to be transferred to the world's poorer nations, wholesale reform of intellectual property protection laws is required and so on.

The stakes are high, and countries' willingness to accept the costs of combating global warming are not being helped by the financial impact of global recession. At present it seems, perhaps understandably, a great deal of posturing and little compromise is taking place. The talks resume in Bangkok on 28 September 2009.

Emergency zero-rating for trading in carbon credits

Earlier this month, a number of individuals were arrested in connection with a large scale carbon credit VAT fraud (see The fraudsters are alleged to have purchased credits in VAT free transactions outside the UK and then fraudulently charged VAT on the on-supply of such credits and not accounted to HMRC for the VAT received. In a directly related development, on 31 July 2009 the UK's Value Added Tax (Emissions Allowances) Order 2009 came into force, incorporating changes to existing VAT legislation that mean that the supply of an emissions allowance in the UK is now zero-rated from 31 July 2009.

From that date, no input tax now arises on such a supply; thus significantly reducing the opportunity for what is known as "missing trader fraud." Similar measures have been taken by France and the Netherlands.

In relation to pre-31 July 2009 transactions, the tax authorities in the UK will continue to look into every part of a carbon credit transaction chain to see whether missing trader fraud has occurred and whether other members of the chain could have known that it was occurring. Where it can be objectively shown that a trader knew or ought to have known that, by making his purchase, he was participating in a transaction connected with VAT fraud, the tax authorities can refuse to allow him the right to deduct input tax, unless the trader in question can show that he took every precaution which could reasonably be required of him to ensure that his transactions were not connected with fraud. There was concern that the prospect of being caught up in such an investigation was undermining legitimate carbon trading, particularly with new customers.

The introduction of zero-rating in the UK is intended to be an interim measure pending an EU-wide solution, which is expected to be proposed by the Commission later this year. This may well take the form of a "reverse charge" mechanism (similar to the one already in place in the UK to combat missing trader fraud in relation to mobile phones and computer chips) whereby it is the purchaser, not the seller, who is liable to account to the tax authorities for the VAT.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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