Worldwide: New Out Of Africa. The UN Climate Change Conference

Editor: Kerry Liebenberg

The climate change debate moved to Africa both in body and in mind, for two weeks at the beginning of November, as Kenya hosted the latest UN Climate Change Conference, the theme of which was to be "Pulling together for our Planet".

Members of the Linklaters Environmental Group attended the conference with approximately 6,000 other participants, including representatives from Government, UN bodies and agencies, and various non-governmental and inter-governmental organisations. This note sets out a few of the key themes and observations which emerged from COP/MOP2.

COP/MOP2 came in the wake of a flurry of action on climate change at both a national and international level most notably with the recent initiatives of the G8 that led to the Stern Report, and California’s announcement of its Cap and Trade system. Against that background perhaps it was inevitable that the outputs of this conference would be small steps rather than giant strides. But progress, albeit small, was maintained and some ground laid for further movement at the next conference.

COP/MOP2 considered some of the major long term issues, including the degree of progress towards addressing climate change and the nature and size of future targets. However, the big disappointment of Nairobi was that no agreement was reached on a deadline or even a timetable for setting new global targets for the period post 2012. Given that such a review is necessary to ensure there is no gap between Kyoto and any so-called "Son of Kyoto", such a lack of progress is of concern to many parties - in particular the business community which has invested so heavily in the development of the global carbon market, with an estimated value in excess of $10billion a year.

The only agreement that was achievable was that the framework for emissions reductions after 2012 should begin to take shape in mid-2007.

This is too late for some and certainly increases the risk of any growth in the carbon market significantly slowing whilst the post 2012 issue is addressed. Key to the post 2012 period is the need for the developing world to accept a suitable mechanism including adoption of binding commitments by at least some, if not all, developing countries as well as the Annex 1 States. (At present the Kyoto Protocol contains no mechanism to permit this.) The failure to agree a framework is a missed opportunity to assert early pressure on sceptics to take action.

The aim of the Clean Development Mechanism (CDM) established under the Kyoto Protocol, is to enable developed countries to access emission reduction credits, whilst developing countries benefit from investment and clean development in those countries.

Given the emphasis on developing countries at the ‘African COP’, issues relating to the CDM were raised throughout the COP/MOP2 both in the opening sessions on 9 November and in smaller for a. Groups of negotiators focussed on specific issues such as carbon capture and storage (CCS), and particularly the current uneven regional distribution of CDM projects. African Parties and ‘civil society’ observers repeatedly emphasised that the majority of CDM projects approved to date are located in larger countries such as Brazil, India and China, with only a small minority being located on the African continent.

To address this imbalance the "Nairobi Framework" was announced by UN Secretary General Kofi Annan, as a joint initiative of the UN Climate Secretariat, the UN Development Programme, the UN Environment Programme, the World Bank Group and the African Development Bank to help countries, particularly in Africa, participate in the CDM. In addition, developed countries agreed to the inclusion of an explicit reference to "financial resources" to assist lesser developed countries, African countries and Small Island Developing States (SIDs), to gain access to CDM projects. But whether these measures will be sufficient to change the fundamental problems that are associated with investing in African CDM projects approval for CDM projects remains to be seen.

The tension which we have experienced in practice between the CDM Executive Board (CDM EB) and industry was highlighted in a side event hosted by the CDM EB: "An Open Question and Answer Session with the CDM EB". The CDM EB’s apparent attitude to this issue was of concern. The President of the CDM EB was dismissive about questions raised by IETA

regarding the lack of transparency and consistency that has plagued the approval of CDM projects. In view of the considerable experience that project participants have of CDM in practice this reaction may be shortsighted. This is clearly an issue in relation to which industry will need to persist to achieve more engagement by the CDM EB.

The Joint Implementation and Supervisory Committee is some way behind the CDB EB in its evolution, and it is going through some of the financial teething problems that constrained the effectiveness of the CDM EB in the past. With activities only partially funded next year and paired down to fit the limited funds available, it seems likely that Joint Implementation (JI) will not develop as quickly as hoped in those Annex 1 countries which do not instigate their own approval process.

As the deadline for its roll out draws nearer, the important issue of the International Transaction Log ((ITL) - the computerised system which monitors credits under the Protocol and which will link with National Registry Systems) was addressed at the Conference. We sensed a genuine appreciation of the importance of making rapid progress on this front and for ensuring that Registry Systems are fully operational with the ITL by April 2007. Whether this will be achieved remains debatable and the talk around the room on this point was less confident than one might have hoped. No progress was made on the issue of funding shortages for the ITL.

Adaptation was another key theme of the "African COP". In its opening statements to COP/MOP2, we heard the EU and the G-77/China emphasise the need for progress on adaptation, and in improving the capacity of least developed countries (LDCs), to implement CDM projects, thus improving the geographical location of such projects.

A draft COP/MOP decision with regards to the Adaptation Fund was adopted, and this has been hailed by the President of the COP/MOP as one of the achievements of the Conference. Both the EU and the G-77/China (during the preliminary sessions) urged the early functioning of the fund which is expected to become fully operational at the COP/MOP3 through the auspices of a new organisation specifically set up to administer the fund and the Global Environment Facility (GEF).

In the wake of the recent decision under the London Protocol to allow carbon sequestration in sea bed geological formations, the issue of CCS in the CDM was hotly debated. However in essence a decision on this was delayed until 2008, in order for further research to be conducted. We heard some delegates (including South Africa, Japan, China the EU and the Gulf States) express a clear interest in incorporating CCS technology under the CDM. However, others (notably the Latin American delegates) were opposed to this option. They argued against CCS on the basis of the potential impacts of such technology on the current CDM portfolio, raising concerns that, given the scale of CO2 storage under a CCS regime, benefits from other CDM projects could be overshadowed. Nevertheless a favourable decision on CCS in the CDM is essential for the roll out of this technology which is likely to prove key in addressing climate change issues. Russian and Belarus Proposals for Voluntary Targets

Arguably, some of the most contentious issues addressed at the Conference related to voluntary measures under the Kyoto Protocol. These included Russia’s proposal for developing countries to commit to voluntary emissions reduction targets, and Belarus’s proposal to commit itself to such a target. Whilst the Kyoto Protocol sets out procedures for new emission targets for Annex 1 parties, currently there is no mechanism for non-Annex 1 parties to similarly adopt such targets.

No outcome was achieved at the Nairobi Conference on Russia’s proposal, but a workshop is to be organised to take place in May 2007 with the aim of reporting to COP/MOP3 on the "scope and implications" of the proposal.

COP/MOP2 approved Belarus’ proposal to take on an emissions reduction target below 1990 levels, although imposed a reduction target of 8%, which was 3% more than Belarus had argued for. It should come as a relief to the business community that Belarus’s approval is also subject to various limitations, in order to avoid flooding the carbon market with excess credits. The significance of the Belarus target is that it is both the first new target adopted, and the first amendment to the Protocol.

Complaints about the treatment of HFC-23 (a by-product of the refrigeration gas HCFC-22) within CDM did not get the results some environmental campaigners were seeking. Whilst the COP/MOP2 recognised that issuing

CERs for the destruction of HCFC-23 at new HCFC-22 facilities could lead to higher global production of HCFC-22 and/or HCFC-23 and that the CDM should not lead to such increases; no conclusion was reached on this issue. This was notwithstanding numerous Parties’ submissions containing practical solutions to address the situation.

Implications for the business community

Business and economic issues played a prominent role during the Conference, and it was the representatives of business and industry who were pushing most strongly for delegates to achieve robust outcomes capable of supporting long-term investments. The business community repeatedly expressed concern that in the absence of strong signals from Governments for the post 2012 period, the booming carbon market risks being the next "dot com". It was clear to us that there is a genuine recognition of the importance of the role of the private sector, a theme which will be developed further when the World Economic Forum hosts talks with the World Business Council for Sustainable Development in 2007.

However, in spite of all this recognition, the political impasse over reciprocal obligations and the resulting stagnation in the climate change process (as evidenced by Nairobi’s failure to even agree a deadline for negotiations) was a real disappointment. The obvious lack of political will to commit to emission reduction targets will most certainly have a knock on effect, and the potential levels of private investment necessary may not be achieved in the short term because of this demonstrable lack of will.

This said, both the opportunities for CDM projects, and the additional finance that will be made available pursuant to the decisions taken at Nairobi, at least provide an interim buffer.

The Upshot

Whilst the UN has been quick to point out that the decisions taken at COP/MOP2 are essential enabling steps which must necessarily precede decisions on the big ticket items, the feeling we were left with was that at this conference both the realities of climate change and the measures necessary to deal with them were side-stepped. There remains much to do at the next conference and a real need for business and industry to lobby government delegations in all the key jurisdictions to confront the crunch issues and to start to negotiate a path forward.

Linklaters Credentials

Our clients include many of the pioneers in this new market and, as a result, we are a market leader in advising on the global emissions trading market, whether that be under the EU ETS or the Kyoto Protocol and the related jurisprudence of the United Nations Framework Convention on Climate Change. We have also advised on carbon capture and storage, a technology that is likely to be brought within this regime shortly.

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