Cancun Agreements

Last week, the international climate negotiations concluded in Cancun, Mexico. The 16th Conference of the Conference of the Parties (COP-16) of the United Nations Framework Convention on Climate Change (UNFCCC) resulted in a series of non-binding agreements that are being viewed as incremental progress on a number of fronts. Given that federal U.S. climate change legislation is unlikely to move forward any time soon, the developments in Cancun largely affect international and voluntary carbon market activities and the new California cap-and-trade program (see story below).

Agreements Beat Expectations, Punts on Difficult Issues

Despite low expectations for consensus, and a repeat of the disarray taking place a year prior in Copenhagen, COP-16 resulted in a suite of agreements (collectively the "Cancun Agreements").1 The package concludes a number of pledges made in the Copenhagen Accord, and set a path forward for a number of important issues, including Reduced Emissions from Avoided Deforestation and Degradation (REDD), multilateral finance, adaptation, technology transfers, and clarifying parameters for Monitoring, Reporting and Verification (MRV) for greenhouse gas (GHG) reductions.

A key issue left unresolved is the future of the Kyoto Protocol post-2012, although there is clear indication that the Clean Development Mechanism (CDM), as reformed, will continue.2 The Cancun Agreements endorse an ongoing role for the CDM and "market-based mechanisms" that, among other things, identify a role for the first time for carbon capture and sequestration (CCS) projects as being eligible to generate carbon offset credits.

For the first time, the Cancun Agreements anchor the 2020 emission mitigation targets and pledged actions set forth in the Copenhagen Accord for approximately 80 countries, including all major economies (e.g., U.S., European Union, China, India and Brazil). Countries also broadly agree to keep global surface temperatures below a global average of 2 degrees Celsius. In addition, the agreements establish a "Green Climate Fund" to finance mitigation and adaptation efforts in developing countries. The World Bank would be the fund's trustee. The agreements also establish a goal for developed nations to $100 billion annually by 2020 from public and private funding sources.

REDD+ Moves Forward

One of the biggest steps forward comes in the area of international forest conservation. Developing countries intending to participate are now on a path to develop national strategies and baseline emissions and forest levels, mobilize funding, and institute forest monitoring systems. Due to political disagreement, the Cancun Agreements leave unresolved whether REDD+ will make private sector finance (e.g., carbon markets) eligible to participate in the developing program.

Climate Policy News

California Approves Largest U.S. Cap-and-Trade Program

On Dec. 16, 2010, California approved rules for its carbon trading program. The California Air Resources Board (CARB), the state agency designing the program, voted 9-1 in favor of putting a price on carbon at a board meeting in Sacramento, Calif. The plan calls for the state to cut its emissions to 1990 levels by 2020, and establishes a GHG cap-and-trade system (including an approximately 214 million metric ton offset credit regime). Andrew Pisano, a manager of product development at the Green Exchange, said the company is already seeing "significant interest in hedging tools as capital begins to flow into the California market."

California emission allowances will trade at $10/ton CO2e initially, and increase over time to $18/ton Co2e in 2016. Point Carbon, a carbon market publication, estimates the California market will be worth $1.7 billion in 2012, and grow to $10 billion by 2016. Other financial analysts estimate the 2.7 billion allowances will be worth $15-$60/ton CO2e by 2020.

Approximately 600 large emission sources (25,000 tons/year threshold) will be subject to the statewide cap, which represents about 85% of the state's total GHG emissions. Avoided deforestation, domestic and internationally, is included as a potential offset source under the program. CARB will take the next several months to adjust its estimates and will issue a report in July 2011.

http://www.pointcarbon.com/news/1.1493351 (subscription req'd)
http://www.eenews.net/climatewire/2010/12/17/1/ (subscription req'd)
http://www.environmentalleader.com/2010/12/17/carb-approves-nations-biggest-cap-and-trade-plan/

REDD+ Agreement in Cancun Paves Way for Forest Carbon

The endorsement of REDD+ in Cancun has large implications for the future of project-based forest carbon development. Under the proposed framework, the mechanism would be implemented in "phases" before countries can begin using carbon markets or other financial mechanisms to finance avoided deforestation efforts. http://www.pointcarbon.com/news/1.1491457 (subscription req'd)

Cancun Agreements – Potential Plus for U.S. Carbon Markets

The Cancun Agreements were cautiously well-received by U.S. industries and carbon market participants. The inclusion of GHG reduction commitments from China, as well as the movement on REDD+, are viewed as beneficial to U.S. interests in the long term.

http://www.pointcarbon.com/news/1.1491787 (subscription req'd)
http://www.eenews.net/climatewire/2010/12/17/10 (subscription req'd)

CCS Newly Eligible to Generate Carbon Offset Credits

The Cancun Agreements have laid the foundation for the inclusion of CCS projects as eligible to generated CDM offset credits going forward. The inclusion is projected to increase post-2012 offset credit supplies by 300 million credits.

http://www.pointcarbon.com/news/1.1491458 (subscription req'd)
http://www.pointcarbon.com/news/1.1493161 (subscription req'd)

Voluntary Carbon Standard Approves Landmark REDD Accounting Methodology

The Voluntary Carbon Standard (VCS), an international carbon standards body for verifying and issuing carbon offset credits, approved a methodology that can be used for projects curbing planned and unplanned deforestation. The methodology was developed by nonprofit group Avoided Deforestation Partners (ADP), and sets the building blocks for investors and developers to pursue large-scale REDD projects.

http://www.pointcarbon.com/news/1.1490603 (subscription req'd)
http://www.ecosystemmarketplace.com/pages/dynamic/article.page.php?page_id=7869§ion=news_articles&eod=1 (subscription req'd)

European Union to Help China Establish Pilot Cap-and-Trade Program

The European Union announced plans to set up a project to help eight cities in China trade GHG emissions. The EU agreed to provide expertise on regulations, markets, and environmental verifications.

http://www.eenews.net/climatewire/2010/12/08/8 (subscription req'd)

World Bank Launches Carbon Fund to Promote Markets

The World Bank, on Dec. 15, 2010, launched a $100 million fund to help emerging economies set up carbon markets.

http://www.pointcarbon.com/news/1.1490858 (subscription req'd)

Senators Call for Stop to U.S. Climate Financing

A number of Republican senators have asked Secretary of State Hillary Clinton to freeze the U.S. $4.8 billion climate finance pledge. In a letter to Secretary Clinton, four Republican senators said the United States should not transfer the money it pledged to help developing countries cope with climate change.

http://www.pointcarbon.com/news/1.1489718 (subscription req'd)

Obama Administration Considers Clean Energy Standard; White House Science Adviser Sees Price on Carbon "Eventually"

In a related story, Secretary of Energy Steven Chu endorsed the idea of a CES that included nuclear energy and CCS last week. In addition, presidential science adviser John Holdren stated that the United States will price carbon eventually. "We will get some legislation, I think, related to energy, and that will have greenhouse gas benefits," Holdren said. "I doubt we will get the kind of comprehensive energy and climate legislation we were striving for with the outgoing Congress. ... But there is enough that we could do without such legislation that we could get on an emissions trajectory that would take us to the president's goal for 2020."

http://www.eenews.net/climatewire/2010/12/08/2 (subscription req'd)
http://www.eenews.net/climatewire/2010/12/14/3 (subscription req'd)

U.S. Federal Court Rejects "Stay Motion" to Delay EPA Implementation of GHG Regulations

A federal court on date Dec. 10, 2010, upheld the EPA's authority to regulate GHGs starting next year. A U.S. Circuit Court of Appeals for the District of Columbia denied a request by the state of Texas and some groups that would have put a halt to EPA GHG rules, many of which go into effect Jan. 2, 2011. This decision does not halt litigation over the rules and is just the beginning of wider prospective challenges to the EPA's authority. The new Republican-controlled House of Representatives is expected to focus on EPA oversight immediately upon taking office in the new year.

http://www.pointcarbon.com/news/1.1491411 (subscription req'd)
http://www.eenews.net/climatewire/2010/12/13/4 (subscription req'd)
http://www.eenews.net/Greenwire/2010/12/14/1 (subscription req'd)

Sen. Graham Prepares New Carbon Agenda

Sen. Lindsey Graham (R-SC) is concerned that the Republican Party faces political dangers by resisting efforts to reduce GHG emissions. He has announced the development of a new agenda for 2011 that includes a clean energy standard (CES) for utilities (including nuclear energy). Graham says it's imperative to begin a quick national transition to clean technology, mainly because of economic factors (i.e., jobs and competing with China). "So the Republican Party has to find out where are we at on carbon? The more, the better, or is it something we should control in a business-friendly manner?" he added. "I'm in the camp that all things being equal, it would be good to clean up the air, carbon being just one pollutant. But I want to do it in a way that creates jobs, not loses jobs."

http://www.eenews.net/climatewire/2010/12/14/2 (subscription req'd)

Regional GHG Programs Discuss Future

Earlier this month, representatives from the Regional Greenhouse Gas Initiative (RGGI), the Western Climate Initiative (WCI), and the Midwest Greenhouse Gas Reduction Accord (MGGRA) discussed future challenges to re-starting regional GHG efforts, but did not address program or market linkage across regions.

http://www.pointcarbon.com/news/1.1489948 (subscription req'd)

Japan Adopts $2.9 Billion Carbon Tax

The Japanese government has adopted an increased "carbon" tax to help achieve the nation's GHG emission reduction target of 25% under 1990 levels by 2020. The Japanese plan calls for an increase in existing oil and coal taxes by 50% (called an "anti-global warming measure tax" surcharge) by 2015.

http://www.pointcarbon.com/news/1.1493154 (subscription req'd)

Footnotes:

1. Copies of the Cancun Agreements can be found at: http://unfccc.int/2860.php, last visited December 17, 2010.

2. Id.; See., e.g., "Further guidance relating to the clean development mechanism," Decision -/CMP.6.

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