Climate change is a global challenge and requires a global solution. Through analysis and dialogue, the Center for Climate and Energy Solutions is working with governments and stakeholders to identify practical and effective options for the post-2012 international climate framework. Read more
Eleventh Session of the Conference of the
Parties to the UN Framework Convention on
Climate Change (COP 11)
First Meeting of the Parties to the
Kyoto Protocol (COP/MOP 1)
November 28 - December 10, 2005
In two weeks of talks, delegates to the UN Climate Change Conference in Montreal concluded the decade-long round of negotiations that launched the Kyoto Protocol and opened a new round of talks to begin considering the future of the international climate effort.
The meeting was a historic first – it served both as the 11th Session of the Conference of the Parties to the UN Framework Convention on Climate Change (COP 11), and, following Kyoto’s entry into force in February, as the 1st Meeting of the Parties to the Kyoto Protocol (COP/MOP 1).
Key outcomes of the Montreal conference included decisions by the COP/MOP finalizing the Kyoto “rulebook” and strengthening the Clean Development Mechanism, and a pair of decisions to consider next steps – one under the Protocol, launching negotiations toward new binding commitments for Kyoto’s developed country parties; and another under the Framework Convention, opening a nonbinding “dialogue on long-term cooperative action.”
While the two decisions on next steps are not formally linked, the negotiations around them were closely intertwined. The European Union, Japan and Canada, obligated under Kyoto to begin considering new commitments, strongly favored a parallel process under the Convention as a way to engage both the United States and developing countries in future efforts. Some developing countries also actively supported a new Convention process and others agreed on the condition it would not “open any negotiations leading to new commitments.” The United States, not a party to the Protocol, insisted throughout the negotiations that it opposed any new process under the Convention. But in the final hours, as the major developing countries lined up behind the decision, leaving the United States isolated with Saudi Arabia, U.S. negotiators relented.
One notable shift in Montreal was a greater willingness among developing countries to discuss stronger developing country efforts. Several called for new mechanisms or agreements supporting voluntary developing country actions with market or other incentives. Papua New Guinea and Costa Rica won support for a new process to consider approaches to reduce emissions from deforestation. Brazil called for “positive incentives” for forest conservation and other steps to reduce emissions. South Africa, while rejecting absolute targets for developing countries, advocated a “Kyoto-Plus regime” in which developing countries “do our fair share.” Mexico suggested “voluntary commitments” such as national policies and measures or sectoral emission targets.
For many governments, reengaging the United States remained the higher priority. Canadian Prime Minister Paul Martin, in the midst of a campaign to keep his Liberal government in power, spoke for many when he pointedly criticized the U.S. position to the press, saying “there is such a thing as a global conscience, and now is the time to listen to it.” Former President Bill Clinton, meanwhile, was warmly received when he delivered an unusual surprise address on the final day of negotiations. Clinton, without explicitly addressing the negotiations or the U.S. position, emphasized the economic opportunities in addressing global warming and urged that the same precautionary approach driving the war on terrorism be applied to climate change.
The last-minute shift in the U.S. position may also have reflected mounting pressure from Congress for stronger U.S. engagement in the multilateral climate effort. Two weeks before the conference, Senators Richard Lugar and Joseph Biden, the chairman and ranking minority member of the Senate Foreign Relations Committee, introduced a resolution calling for U.S. participation in negotiations under the Convention to establish mitigation commitments for all major greenhouse gas-emitting countries. As the talks were underway, a bipartisan group of 24 Senators wrote President Bush urging that the United States, “at a minimum, refrain from blocking or obstructing” discussions about next steps under the Convention.
Following are summaries of key decisions. Full text of the COP 11 and COP/MOP 1 decisions is available at the UNFCCC website.
Negotiating New Kyoto Targets
As required under Article 3.9 of the Kyoto Protocol, the COP/MOP initiated a process to “consider further commitments” for Annex I (developed) countries for the period beyond 2012, when the first round of Kyoto emission targets expire.
The decision establishes an ad hoc working group open to all Kyoto parties but sets no specific deadline for completing the negotiations. It calls for the process to begin “without delay” and to conclude “in time to ensure that there is no gap between the first and second commitment periods.” The first meeting of the working group will be in May 2006.
The final negotiations on the decision went through the night as Russia, unhappy with how its views had been received in the informal “contact group,” continued to argue in plenary for a procedure allowing non-Annex I countries to take “voluntary commitments.” As a compromise, Russia accepted text in the COP/MOP conclusions referencing its proposal and inviting the President to undertake consultations and report back at COP/MOP 2.
Dialogue on Long-Term Cooperative Action
The COP, in a separate decision, launched a two-year dialogue “to analyse strategic approaches for long-term cooperative action to address climate change.”
At COP 10 in Buenos Aires, parties agreed to hold a one-time Seminar of Governmental Experts to discuss ongoing implementation and future action. The seminar, convened in May, provided the first space within the Convention process for parties to discuss future steps but made no formal report to the COP. The new dialogue advances the conversation to the next stage. It will be a series of up to four workshops led by two co-facilitators, one from a developed and one from a developing country. The facilitators will report to both COP 12 and COP 13.
The dialogue has four broad areas of focus: sustainable development, adaptation, technology, and market-based opportunities. Its aims are to support implementation of existing commitments under the Convention; support “actions put forward voluntarily by developing countries”; and “enable Parties to continue to develop effective and appropriate national and international responses to climate change.” The dialogue explicitly “will not open any negotiations leading to new commitments.”
The United States did not engage on the text until the final day, then agreed with only minor revisions, such as substituting “market-based opportunities” for “market-based mechanisms” and noting in the preamble that “there is a diversity of approaches to address climate change.”
Adoption of Marrakesh Accords
An essential task of COP/MOP-1 was to formally adopt the detailed rules for the operation of the Kyoto Protocol, which had been provisionally agreed at COP-7 as part of the Marrakesh Accords. Formal adoption of the Kyoto rules completed a cycle of negotiations initiated by the 1995 Berlin Mandate, which called for an agreement establishing quantified emission limits for developed countries.
The COP/MOP adopted all 19 decisions recommended by COP-7, including:
- Operating rules for the Protocol’s three flexibility mechanisms – emissions trading, joint implementation (JI) and the Clean Development Mechanism (CDM).
- Rules for crediting of domestic sink activities, including reforestation, forest management and agricultural management.
- A compliance regime to review countries’ eligibility to use the Protocol’s flexibility mechanisms, and to impose consequences for non-compliance with a party’s emissions target.
- A detailed system for reporting and review of national emissions.
The only element of the Marrakesh Accords revisited by the COP/MOP was the legal means by which to establish the Protocol’s compliance mechanism. Under Article 18 of the Protocol, any compliance procedures entailing binding consequences must be adopted as an amendment to the Protocol. Prior to the meeting, Saudi Arabia proposed such an amendment. After discussion, however, the COP/MOP decided to initially at least establish the compliance mechanism by decision rather than amendment, and referred the Saudi proposal to the Subsidiary Body on Implementation, which is to report back at COP/MOP 3. Parties also elected members of the facilitative and enforcement branches of the newly established Compliance Committee.
Clean Development Mechanism
A major goal in Montreal was strengthening and streamlining the Kyoto Protocol’s Clean Development Mechanism, which allows credits from emission reduction activities in developing countries to be applied toward developed countries’ emission targets.
Responding to concerns from business and from host countries that projects are moving too slowly through the CDM process, the COP/MOP approved steps to clarify rules, speed the development of methodologies, strengthen governance, and provide more funding for the CDM Executive Board. On crediting for early action, the decision allows for projects initiated between 2000 and late 2004 to receive retroactive credits if registered with the Executive Board by the end of 2006. To support the Board’s operation, the decision established a levy on CDM proceeds to cover administrative expenses, and a number of developed countries announced additional voluntary pledges totaling nearly $8.2 million.
The COP/MOP also opened the door for a broader range of potential CDM activities beyond those that are strictly project-based. While specifying that local or national policies or standards do not qualify as CDM projects, the decision allows project activities falling under a “program of activities” to be registered as a single CDM project, provided there are appropriate baseline and monitoring methodologies. This could allow for a so-called programmatic approach, crediting a range of activities such as energy efficiency improvements across a series of entities or an entire sector.
Responding to calls from a number of developing countries, the COP initiated a new process under the Subsidiary Body for Scientific and Technological Advice (SBSTA) to consider possible approaches for reducing GHG emissions from deforestation.
The decision was prompted by a submittal from Papua New Guinea and Costa Rica stressing the importance of the issue and putting two ideas on the table: an “optional protocol” involving a group of developed and developing countries; and expansion of the CDM to permit crediting of activities to reduce deforestation, which is not now allowed. The submittal was supported by Bolivia, the Central African Republic, Chile, Congo, Democratic Republic of the Congo, the Dominican Republic, and Nicaragua.
The COP invited parties to submit views on issues such as additionality, leakage, permanence, and monitoring, and directed SBSTA to report back in two years.
Carbon Capture and Storage
Spurred by a new IPCC Special Report on Carbon Capture and Storage, both the COP and the COP/MOP took steps to consider ways to advance capture-and-storage technologies.
In its guidance to the Global Environment Facility (GEF), which administers assistance to developing countries, the COP asked the GEF to consider and report back on whether and how activities related to capture and storage could be integrated into its funding programs. The COP/MOP asked the CDM Executive Board to consider proposals for new methodologies to allow capture-and-storage projects under the CDM, with a view to presenting recommendations at COP/MOP 2. A workshop will be held at the next SBSTA meeting, in May 2006.
Adaptation Work Program
At COP 10, parties decided to develop a five-year work program on adaptation to be carried out by SBSTA. The five-year program adopted by the COP in Montreal aims to assist parties to improve their understanding of adaptation, impacts, and vulnerability, and to make informed decisions on practical actions and measures. These efforts are to consider not only climate change, but also natural climate variability, a point pressed by the United States.
To help parties better assess their vulnerability, the program is to promote improved vulnerability assessment tools, climate monitoring and projections, and understanding of variability and extreme events. To support adaptation planning and action, the program is to promote analysis and sharing of adaptation measures, research on adaptation technologies, and development of economic diversification strategies. The work will be carried out primarily through workshops, expert groups, and technical papers.
The COP/MOP adopted initial guidance for the new Adaptation Fund established under the Marrakesh Accords, but deferred a decision on who will manage the fund until its next meeting.
Unlike other funds in the climate regime, which are supported solely by developed country contributions, the Adaptation Fund is financed in part by a “share of the proceeds” from the CDM. The issues in Montreal concerned governance – in particular, whether the fund will be managed by the GEF. Developing countries argued that the GEF’s management arrangements reflect its donor basis and therefore are not appropriate for a fund financed through the CDM. The COP/MOP agreed to hold a workshop this spring to consider governance issues and to adopt further guidance at its next session.
Consult additional resources on international climate change policy.
Press Release: Group Urges New Approaches to Engage Major Economies in Stronger International Climate Effort
November 15, 2005
Contact: Katie Mandes, (703) 516-0606
GROUP URGES NEW APPROACHES TO ENGAGE MAJOR ECONOMIES IN STRONGER INTERNATIONAL CLIMATE CHANGE EFFORT
Pew Center Dialogue Includes Participants From 15 Countries, 7 Major Companies
Report to be Released with Senators Lugar and Biden
WASHINGTON, D.C. Senior policymakers and stakeholders from around the world offer options and recommendations for engaging major economies in strengthened international climate change efforts in a report to be released today by the Pew Center on Global Climate Change.
The report outlines the conclusions of the Climate Dialogue at Pocantico, a group of 25 from government, business, and civil society brought together by the Pew Center for a series of discussions exploring options for advancing the international climate effort post-2012. It will be formally released at an event in the U.S. Senate Foreign Relations hearing room hosted by Senator Richard G. Lugar (R-Indiana) and Senator Joseph R. Biden Jr. (D-Delaware), the committee Chairman and Ranking Minority Member.
In their report, dialogue participants call for a more flexible international framework allowing countries to take on different types of climate commitments. As a step toward that, the report urges the convening of a high-level political dialogue among major economies to begin scoping out post-2012 strategies. The report comes two weeks before the start of climate negotiations in Montreal where governments will consider launching a new process to consider next steps in the international climate effort.
"The clear message from this very diverse group is that we need to move urgently and we need all the major economies engaged," said Eileen Claussen, President of the Pew Center and co-chair of the Pocantico dialogue. "We must broaden the international effort with new approaches that give countries more flexibility and produce real results. The place to start is Montreal."
Dialogue members convened four times from July 2004 to September 2005. The participants, who took part in their personal capacities, included policymakers from Argentina, Australia, Brazil, Canada, China, Germany, Japan, Malta, Mexico, Tuvalu, the United Kingdom, and the United States; senior executives from Alcoa, BP, DuPont, Eskom (South Africa), Exelon, Rio Tinto, and Toyota; and experts from the Pew Center, The Energy and Resources Institute (India), and the World Economic Forum.
The Pocantico dialogue brought committed companies together with seasoned climate negotiators to look for solutions that are practical, politically viable, and effective, said dialogue co-chair Ged Davis, a Managing Director at the World Economic Forum, the Geneva-based organization that sponsors the annual Davos economic summit. It is critical that business stakeholders be closely engaged as governments move forward and consider next steps in the international effort.
Other speakers at today's event will include Michael J. Flannigan, Vice President, Government Affairs, at Rio Tinto Services, Inc.; Elizabeth Anne Moler, Executive Vice President, Government and Environmental Affairs and Public Policy, at the Exelon Corporation; and Jake Siewert, Vice President, Environment, Health, and Safety, at Alcoa.
The report, International Climate Efforts Beyond 2012 » Report of the Climate Dialogue at Pocantico, describes several elements or policy approaches and ways they could be linked to one another under the 1992 Framework Convention on Climate Change. The elements include:
- Emission targets and trading, with targets varying in form, stringency, and timing;
- Agreements negotiated across the power, automotive, or other key sectors;
- Policy-based approaches committing countries to steps advancing both climate and development objectives without binding them to fixed emission limits;
- Stronger cooperation to develop long-term 'breakthrough' technologies and to deploy existing and new technologies in developing countries; and
- New assistance to help highly vulnerable countries cope with urgent adaptation needs and support the development of comprehensive national adaptation strategies.
While multiple approaches could be pursued in parallel, the report says, a stronger overall effort may be possible only if they are linked in an integrated framework, giving countries the opportunity to negotiate across tracks and take on different types of commitments.
The report says that a high-level dialogue among major economies seeking broader political consensus on future multilateral efforts may be most productive if convened outside the formal negotiating process, but that any formal agreements should be negotiated under the Framework Convention.
"We won't make real progress in the negotiations until we have a stronger political consensus among the major players, including the United States and key developing countries," said Claussen. That requires work on many fronts. But it also requires a genuine dialogue among leaders on how to take this effort forward beyond 2012.
Governments will gather in Montreal on November 28-December 9 for the Eleventh Conference of the Parties to the Framework Convention and the First Meeting of the Parties to the Kyoto Protocol (COP 11-MOP 1). Under Kyoto, parties to the Protocol must initiate consideration this year of commitments for the period beyond 2012, when the existing Kyoto commitments will expire. Some governments favor a parallel process to consider new steps under the Convention.
Meetings of the Climate Dialogue at Pocantico were held at the Pocantico Conference Center of the Rockefeller Brothers Fund in Tarrytown, New York. The dialogue was supported by the Pew Charitable Trusts, the U.N. Foundation, the Wallace Global Fund, and the Rockefeller Brothers Fund.
The full text of this and other Pew Center reports is available at http://www.c2es.org.
The Pew Center was established in May 1998 by The Pew Charitable Trusts, one of the United States' largest philanthropies and an influential voice in efforts to improve the quality of the environment. The Pew Center is an independent, nonprofit, and non-partisan organization dedicated to providing credible information, straight answers, and innovative solutions in the effort to address global climate change. The Pew Center is led by Eileen Claussen, the former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs.
International Climate Efforts Beyond 2012:
Report of the Climate Dialogue at Pocantico
November 15, 2005
This major report outlines options and recommendations for advancing the international climate change effort post-2012. The report is from the Climate Dialogue at Pocantico, a group of 25 senior policymakers and stakeholders from 15 countries convened by the Pew Center.
Background on the Climate Dialogue at Pocantico.
The Climate Dialogue at Pocantico was convened by the Pew Center on Global Climate Change with the generous support of The Pew Charitable Trusts, the United Nations Foundation, the Wallace Global Fund, and the Rockefeller Brothers Fund.
From the Chairs
Some eighteen months ago, the Pew Center on Global Climate Change brought together a select group of policymakers and stakeholders from around the world in the Climate Dialogue at Pocantico, a series of discussions exploring options for advancing the international climate change effort. It was our privilege to chair this group, and it now is our pleasure to present this report of our deliberations.
We do so with a deepened sense of the global challenges we face-and with renewed hope for shared solutions. In our four dialogue sessions, discussion ranged from the intricacies of policy design to more fundamental issues of political and social change. The aim was not a definitive blueprint for action, but rather consensus around a set of approaches that the group as a whole believed worthy of consideration by the broader community. This report, we believe, fulfills that aim.
Of the many valuable ideas in the pages that follow, two, we believe, are paramount:
- First, there is ample scientific justification for much stronger action now, and in coming decades, to stem the causes and prepare for the consequences of global climate change.
- Second, this requires that the world's major economies accept their responsibility to agree and act on fair and effective approaches to curb global greenhouse gas emissions.
Our dialogue concludes at a critical moment. The Kyoto Protocol's recent entry into force is an historic achievement-finally setting governments and markets to the task of addressing climate change. Yet the continued divide over Kyoto bespeaks the extraordinary challenges ahead. Broadening and strengthening the international effort beyond 2012 will require creative new policy approaches building on efforts already underway. It will call as well for far greater resolve from all in protecting the global climate. There is no better time or place to begin than next month in MontrTal, where governments have a crucial opportunity to launch a process toward a new multilateral agreement.
We take heart from the spirit and success of our informal exchange. Participants brought to the dialogue a diverse range of experience and expertise spanning diplomacy, business, policymaking, and analysis. They brought as well a sincere interest in discovering common ground and possible paths forward. By speaking openly and listening, we all learned a great deal from one another, and collectively, our views were broadened and enriched.
As co-chairs of this rich discourse, we are grateful to the participants for their time and for their insights. We also would like to thank JosT Marfa Figueres for his early contributions to this effort. On the group's behalf and ours, we commend this report to you in the hope that it contributes now and in the years ahead to a vigorous and sustained multilateral climate effort.
Pew Center on Global Climate Change
World Economic Forum
Global climate change represents a profound long-term challenge for governments, business, and society at large. The onset of global warming has made the dangers ever more apparent, and the need for action all the more urgent. There is clear scientific justification for stronger action now, and over coming decades, both to avert the gravest potential consequences of climate change and to prepare for adverse effects that cannot be avoided. The critical question is how best to engage nations and their peoples in a long-term effort that fairly and effectively mobilizes technology and resources to protect the global climate and sustain economic growth.
FRAMING THE FUTURE EFFORT
Climate change is inherently a global challenge and should be met with a global response. The UN Framework Convention on Climate Change (UNFCCC) establishes a foundation, and fundamental guiding principles, for such a global approach. To effectively advance the climate effort beyond 2012, the international framework must:
Engage major economies—The immediate imperative is successfully engaging the world’s major economies. Twenty-five countries account for 83 percent of global greenhouse gas emissions, 71 percent of global population, and 86 percent of global income. There is tremendous diversity within this group. While all should be prepared to commit to stronger action, an equitable approach must be consistent with the principle of “common but differentiated responsibilities.”
Provide Flexibility—To broaden participation, the multilateral framework must be flexible enough to accommodate different types of national strategies by allowing different types of commitments. Each country must be able to choose a pathway that best aligns its national interests with the global interest in climate action.
Couple near-term action with a long-term focus—Near-term action is urgently needed on three fronts: achieving immediate, cost-effective emission reductions; fostering the development of breakthrough technologies to achieve deeper reductions in the future; and strengthening resilience to the adverse effects of a changing climate. These efforts should be guided to the degree possible by a common view of the long-term objectives.
Integrate climate and development—Countries can contribute to the international effort through actions that serve their development goals while simultaneously delivering climate benefits. In developing countries, efforts will be most successful if complemented by assistance, investment, and access to clean technologies.
Address adaptation—The impacts of climate change are being felt already and are certain to intensify, even if immediate steps are taken to dramatically reduce emissions. These impacts fall disproportionately on the poor, particularly in developing countries. Fairness demands that they be assisted.
Be viewed as fair—A new global bargain on climate change will be possible only if each participating country perceives it to be reasonably fair. This assessment is ultimately a political one. Each country will judge fairness in terms it believes it can defend both to its own citizens and to the global community.
OPTIONS FOR STRENGTHENING MULTILATERAL ACTION
Approaches that might serve as elements of the future international effort include:
Aspirational Long-Term Goal—Rather than attempt to negotiate a quantified long-term target, governments and others should continue to articulate their own visions of a long-term objective. In time, these may coalesce into a more concrete common view informally guiding the international effort.
Adaptation—New assistance could support the development of national adaptation strategies and help highly vulnerable countries cope with urgent adaptation needs. Further steps are needed to discourage investments increasing climate vulnerability and promote those strengthening climate resilience.
Targets and Trading—Emission targets coupled with international emissions trading should remain a core element of the multilateral effort. Future targets could vary in time, form, and stringency. In addition to binding absolute targets, other types could include intensity, “no-lose,” or conditional targets. Other market-based approaches could include a mechanism crediting policy-driven emission reductions in developing countries.
Sectoral Approaches—Commitments structured around key sectors such as power, transportation, or land use could take a variety of forms: emission targets, performance- or technology-based standards, or “best practice” agreements.
Policy-based Approaches—Countries could commit to broad goals integrating climate and development objectives, then pledge national measures to achieve them and report periodically on implementation and results.
Technology Cooperation—Governments could coordinate and increase support for research and development of long-term technologies. Stronger cooperation also is needed to facilitate the deployment of clean technologies in developing countries.
FORGING NEW APPROACHES that draw on these elements will pose extraordinary political, design, and negotiating challenges. Meeting them may require new forms—and new forums—of engagement:
A Dialogue Among Major Economies—On the political front, leaders of the major economies should convene an informal dialogue to seek consensus on the general nature and scope of multilateral efforts post-2012. While this dialogue could be convened within the UNFCCC process, it may be more practical and productive to convene it outside the process, with the understanding that formal agreements would be negotiated under the Framework Convention.
Linking Approaches—Multiple approaches could be pursued in parallel as different groups of countries engage with one another along different tracks. Such efforts could launch action on multiple fronts and yield valuable lessons to guide future steps. But an ad hoc assemblage of initiatives may not produce an overall effort that is sufficiently timely or robust. A more integrated approach could produce a stronger outcome. By linking and negotiating across tracks, governments may arrive at an arrangement flexible enough to accommodate different approaches and reciprocal enough to achieve higher levels of effort. It may help to agree at the outset that certain countries will negotiate within designated tracks appropriate to their circumstances.
International Climate Efforts Beyond 2012
Report of the
Climate Dialogue at Pocantico
On November 15, 2005, the Pew Center on Global Climate Change announced the release of a major new report outlining options and recommendations for advancing the international climate change effort post-2012. The report is from the Climate Dialogue at Pocantico, a group of 25 senior policymakers and stakeholders from 15 countries convened by the Pew Center.
The report was formally released at an event in the US Senate Foreign Relations hearing room, hosted by Senator Richard G. Lugar (R-Indiana) and Senator Joseph R. Biden, Jr. (D-Delaware), the committee's Chairman and Ranking Minority Member.
At the event, Senators Lugar and Biden announced the introduction of a joint Sense of the Senate resolution, S. Res. 312, calling for the United States to participate in negotiations under the Framework Convention on Climate Change to establish mitigation commitments by all major GHG-emitting countries.
- Download the full report:
International Climate Efforts Beyond 2012 – Report of the Climate Dialogue at Pocantico (English, Chinese, French or Spanish).
- Pew Center press release on new report.
- Download the Lugar-Biden Climate Change Resolution (pdf).
- Senator Richard G. Lugar's press release on S. Res. 312 (pdf).
- Senator Joseph R. Biden, Jr.'s press release on S. Res. 312 (pdf).
- Eileen Claussen's statement on S. Res. 312 (pdf).
Senator Richard Lugar's praise for the Dialogue before the U.N. Security Council (February 6, 2006).
Climate Dialogue at Pocantico: Supporting Statements (all pdf format)
- Margaret Beckett, Secretary of State for Environment, Food and Rural Affairs, United Kingdom
- Alain J.P. Belda, Chairman and CEO, Alcoa Inc.
- R. Leigh Clifford, Chief Executive, Rio Tinto plc
- Thulani Gcabashe, Chief Executive, Eskom
- Connie Hedegaard, Minister for the Environment, Denmark
- Charles O. Holliday, Jr., Chairman and CEO, Dupont
- Jonathan Lash, President, World Resources Institute
- Mutsuyoshi Nishimura, Ambassador for the Global Environment, Ministry of Foreign Affairs, Japan
- William K. Reilly, Administrator, U.S. EPA (1989-93)
- John W. Rowe, Chairman, President and CEO, Exelon Corporation
- Klaus Schwab, Executive Chairman, World Economic Forum
- Phillip Sharp, President, Resources for the Future
- Klaus Toepfer, Executive Director, United Nations Environment Programme
Background on The Climate Dialogue at Pocantico
Statement of Eileen Claussen, President
Pew Center on Global Climate Change
November 15, 2005
The Pew Center enthusiastically welcomes the climate change resolution introduced by Senator Lugar and Senator Biden calling for the United States to participate in negotiations under the Framework Convention on Climate Change to establish mitigation commitments by all major greenhouse gas-emitting countries.
The timing of such a clear message from the leadership of the Senate Foreign Relations Committee is especially important coming on the eve of the Montreal climate negotiations, where governments will decide on launching a process to consider next steps in the international effort. Parties to the Kyoto Protocol are obligated to begin considering post-2012 commitments for those developed countries with commitments under the Protocol. It is critical that a parallel process be launched under the Framework Convention, which includes the United States, to consider a broader range of possibilities that can engage all major economies. We urge the Administration to support such a process as a step toward a more inclusive and effective international climate effort.
The current U.S. policy on climate change, both domestically and internationally, is wholly inadequate. The Lugar-Biden resolution is an important complement to the Bingaman resolution passed earlier this year by the Senate calling for mandatory market-based limits on U.S. greenhouse gas emissions. It is critical that as we move forward to establish a meaningful domestic effort, we also work with other nations to strengthen the international framework and ensure that all other major emitting countries also contribute their fair share to this global effort.
Exchange Between Senator Chuck Hagel (R-NE) and Eileen Claussen Regarding: U.S.-International Climate Change Approach: A Clean Technology Solution
Hearing of the Subcommittee on International Economic Policy, Export and Trade Promotion of the Senate Foreign Relations Committee, Panel II
November 14, 2005
Adopted from transcript by the Federal News Service
SEN. HAGEL: Secretary Claussen, welcome. We are glad you're here. When I say Secretary Claussen, those who are observing this hearing should note that you are not a secretary in the current government, but in a past government you were assistant secretary of State. And we're once again very grateful for your willingness to come before the Senate Foreign Relations Committee and offer some important thoughts. Your present capacity is president of the Pew Center on Global Climate Change. You have been a leader on this issue for many years. You know exactly what you're talking about and have very definite opinions and perspectives. We are always grateful to receive those.
And I'm pleased again that you'd take time to come before the committee. So please provide your testimony, and if you'd care to abbreviate it or read it all, either way. And then, we'll have an opportunity to exchange some thoughts.
President Claussen, thank you.
MS. CLAUSSEN: Thank you very much, Mr. Chairman. If I may, I would just like to summarize a few key points from my written statement.
The Hagel climate provisions of the energy bill go to a very important issue: how best to develop and deploy climate-friendly technologies urgently and on a global scale. Standards of living and energy demand are expected to rise dramatically in the developing world over the next few decades. China expects to build 544 gigawatts of new coal capacity over the next 25 years, and the city of Shanghai -- and these are just examples -- predicts a quadrupling of cars and trucks by 2020.
If we are going to address the climate change problem, the huge growth in energy demand in developing countries must be as climate- friendly as possible. We believe the Hagel provisions, if implemented properly, can help achieve that outcome. First, we would urge that assistance provided to developing countries be tailored to their specific needs. Rather than seeing climate-friendly technology deployment as an exercise in funding demonstration projects or increasing technology exports, our goal should be to integrate climate-friendly activities into national strategies for economic growth, poverty reduction and sustainable development.
This is the only way that it will make a lasting difference – that is, by becoming a part of the recipient country's own economic plans and programs.
Second, the Hagel provisions, like the many technology initiatives launched before it, can only be effective to the extent that they are adequately funded and managed. Time and again in the past, we have launched initiatives to much fanfare, but then provided inadequate funding and failed to manage them as a coherent whole. It would be a shame if the same happened to the Hagel program.
More important than any of this, though, is the need to establish a fair and effective international framework to engage all major emitting countries in the effort against climate change. We do not believe that technology initiatives in and of themselves will make a significant difference, and we do not believe that an international framework necessarily means putting countries on an energy diet -- a greenhouse gas emissions diet, yes; an energy diet, no.
But in order for countries to undertake and sustain ambitious efforts to limit or reduce greenhouse gas emissions, they need to be confident that other countries, and in particular their major trading partners, are also contributing their fair share to the overall effort. We need, therefore, some form of mutual assurance and some certainty. This is best accomplished in a common framework within which countries can take on commitments commensurate with their responsibilities and capabilities and appropriate to their national circumstances. Technology cooperation should be a part, but only one part, of such a global framework.
Through an initiative called the Climate Dialogue at Pocantico, the Pew Center has engaged with policymakers and stakeholders from around the world to look at options for creating such a framework. Dialogue members who participated in their personal capacities included policymakers from Australia, Brazil, Canada, China, Germany, Japan, Mexico, the United Kingdom and the U.S. Senate; senior executives from Alcoa, BP, DuPont, Eskom of South Africa, Exelon, Rio Tinto and Toyota; and experts from the Pew Center, India's Energy and Resources Institute, and the World Economic Forum. The final report of the dialogue will be released tomorrow, actually, in this room with Senators Lugar and Biden, and will be presented to government ministers at the upcoming climate change negotiations in Montreal.
We believe we've come up with some ideas for a path forward. Now what we need is for the United States to be constructively engaged in negotiating a framework, based perhaps on some of the ideas we will be suggesting. The climate negotiations taking place next month in Montreal would be an excellent place to start that engagement, and we know that nearly every country there would welcome U.S. leadership.
Unfortunately, we understand that the Administration is opposing efforts by other countries to initiate a process to begin considering next steps under the Framework Convention. We believe it is essential that such a process go forward.
So my final recommendation would be for the Senate to revisit and update the 1997 Byrd-Hagel resolution, advise the executive branch to work with other nations, both under the Framework Convention and in other international fora, with the aim of securing U.S. participation in agreements consistent with the following four objectives:
- First, to advance and protect the economic and national security interests of the United States.
- Second, to establish mitigation commitments by all countries that are major emitters of greenhouse gases.
- Third, to establish flexible international mechanisms to minimize the cost of efforts by participating countries.
- And fourth, to achieve a significant long-term reduction in global greenhouse gas emissions.
Doing that, if it leads to constructive U.S. engagement in the development of an international climate policy framework, is far and away the most important thing the Senate could do to create a positive context for implementation of the Hagel provisions.
Thank you very much.
SEN. HAGEL: President Claussen, thank you, as always, for your comments. And your entire statement will be included in the record.
I'm going to bounce around a little bit on some questions based on your testimony and some things that you did not specifically mention, but are in your statement, and then also based on some of the things that the previous witnesses mentioned.
First, Kyoto's cap and trade system – in your opinion, is it working for the European countries?
MS. CLAUSSEN: Let me put it this way. I think it is much harder than most of them thought it would be to actually implement the targets they negotiated. But I do think it has spurred a lot of activity, a lot of which is really positive in terms of reducing greenhouse gas emissions.
So, has it been helpful in educating people and getting them on the right path? I think the answer is yes. Is it going to fulfill the dreams of many of those that signed? Probably not.
SEN. HAGEL: Meaning that many will not meet their targets?
MS. CLAUSSEN: I think many will not meet their targets -- not all, but many.
SEN. HAGEL: Do you believe a cap and trade system is necessary to force new technologies onto the market?
MS. CLAUSSEN: No. I think a cap and trade system is one approach that can work quite effectively, but it is not the only approach.
It is certainly my vision that we need some different paths forward, of which that could be one. It could be chosen by some countries, but I think we need others as well.
SEN. HAGEL: You sat and carefully listened, as I noted, to the testimony of the first panel, and they referenced some of these areas, in particular Secretary Garman. How do you respond to what you heard? Do you think that's too far out? Is it too much on the periphery? Were you encouraged by what you heard? Give me your thoughts on that.
MS. CLAUSSEN: This is something that Jim Connaughton said at the end: I think we are at a point where many in the private sector are starting to think very seriously about long-term strategies that move us toward climate-friendly greenhouse gas technology. I think that's right. I think, though, that what he thinks spurred that development was maybe helpful, but not what actually did it.
If I look at what has changed in the world that would result in that kind of activity, it is much more likely to be implementation of Kyoto, warts and all; the efforts in California and along the West Coast of the United States; the efforts in the Northeast and the Mid-Atlantic, where they are developing and will soon announce a cap-and-trade system; lots of other activities at the state level – 21 states with renewable requirements. That activity is really what is spurring the change in the private sector, more investment in climate-friendly technologies.
But I do think it's happening. I do agree with that. I just see different reasons for it.
SEN. HAGEL: Would you generally say you agree with what you heard as the objectives of this administration from the three representatives of the administration?
MS. CLAUSSEN: On the assumption that what we're all after is a world where emissions are reduced pretty substantially in the next 50 or so years, I think the answer is yes. I just don't think you can get there only by a “push.” I think you need a “pull” to get the technologies into the market as well, and some kind of certainty and some kind of policy that's more than the current administration seems to be interested in.
SEN. HAGEL: If we are seeing significant increase in the potential and the technologies coming on line, then what additionally would mandates, caps or government regulation do?
MS. CLAUSSEN: What would they do? I think they would move the technologies much faster in the development stage, and much, much faster in the deployment and diffusion stage, which is what we need to do. We need to get moving faster than just a little bit of push.
Again, I think your provisions will be very helpful. They just need to be complemented with something that helps get those technologies into the marketplace.
SEN. HAGEL: You mentioned international dialogue and how you think maybe something can come out of that. Would you expand on that a little bit?
MS. CLAUSSEN: Well, I don't want to expand too much, because I don't want to talk about what we're going to announce tomorrow. But I'll give you a little flavor.
The fact that we had such a diverse group of people around the table and that they actually reached a consensus was pretty good. We agreed on a set of elements we think are really important. We talked about adaptation, and we talked about long-term targets.
But when we started to focus on mitigation, we thought that there were four elements that were really important. One of them was technology, one of them was targets-and-trading, one of them was sectoral approaches, and one of them was what we called policy-based approaches.
We looked at that range of elements because we thought some may be more appealing to some countries than others, and what we were really interested in, in the long term, was getting everybody on the right path.
So we are looking at something that provides maximum flexibility with real results. When you asked me about targets and trading, yes, it's important, and I think it's a path that many will want to go down. But there are other ones as well.
SEN. HAGEL: Let me ask you a question I asked Secretary Dobriansky about. What are some of the regions in the world where you think we have the most significant opportunity for cost- effective development of these technologies?
MS. CLAUSSEN: Let me put it a slightly different way. Twenty- five countries are responsible for 83 percent of global greenhouse gas emissions. These countries are also among the most populous, and they're also the countries with the largest GDPs.
But on the other hand, per capita emissions range by a factor of 14 and per capita incomes within that group by a factor of 18. So while they are the countries that absolutely have to be at the table -- and we feel very strongly that all of that group needs to be at the table -- we do need to have some kind of a flexible approach that allows each of those countries to do what is in their national interest, but that is also moving us on the right path on greenhouse gas emissions.
So I would look at it in terms of sort of major emitters, major economies, the people who have to be at the table.
SEN. HAGEL: You mentioned your idea about revisiting the Byrd- Hagel amendment, if I understood your point, to essentially update it.
MS. CLAUSSEN: Yes.
SEN. HAGEL: And you mentioned, I think, four specific areas. Would you care to expand on that point?
MS. CLAUSSEN: Our interest is in doing some of the things that you have in the Byrd-Hagel resolution, but instead of putting them in a negative context – what you shouldn't do – we think they should be put in a positive context of what the U.S. government should do. It is really important for the U.S. government to be engaged in this, and it's important for our private sector, too, to see the U.S. at the table shaping the solutions. Many in the private sector would feel that our views, our analysis, the way we look at these things is really important and should be a part of the process if we're going to have an outcome with which we can live.
So it's really important to urge engagement. I understand the context for the Byrd-Hagel resolution, but I think the context is different now, and it is really important for the U.S. to be at the table – at the table with ideas and at the table with solutions.
SEN. HAGEL: You do not think what you heard in the last hour and a half from three senior administration officials, talking about at the technologies, engagement, not only some of the legislation I sponsored that's now law, but even beyond that R11; you do not feel that's enough?
MS. CLAUSSEN: I don't, because I think most other countries, while they will participate in all of these initiatives that the last three witnesses talked about – and many of them have the potential to be effective, so I'm not trying to denigrate what contribution they can make – most countries are interested in a policy framework, not just a technology framework. As far as I understand it -- I may be wrong here, but I don't think so -- the U.S. has essentially said they don't want to participate in discussions about the future in a policy sense. And I think that's a mistake because the world needs both mutual assurance and certainty, you have to do that in some kind of a policy framework, and I think the U.S. should participate.
SEN. HAGEL: Thank you. Staying with your three colleagues here for a moment, let me give you an opportunity to respond to anything that you care to respond to that you heard while they were at the table.
MS. CLAUSSEN: Well, I talk to them all all the time, and we agree on a fair number of things. I just think the vision doesn't go where it needs to go if we're really going to address this. We have to start with a much greater sense of urgency, but not to do things that are bad for economic growth. I think that we can do things that are good for economic growth, that result much sooner in reductions in greenhouse gas emissions.
It's interesting when you look at the companies that have taken on targets, and there are probably 35 or 38 of them. Many of them have targets that are much more stringent than, say, the U.S.-Kyoto target. Thirteen of them have already met their targets, and not one of them on net has spent money doing it because they've found efficiency opportunities that would result in reductions in greenhouse gas emissions. I don't want not to take those while we can take them, while we're developing the technologies that would be good in a decade or two decades. We need some long-term technologies, but why wouldn't we take opportunities that exist right now to put us on the right path? And I just don't see the Administration moving in that direction. I seem them focused on the long-term. I don't want to see us miss opportunities in the short-term.
SEN. HAGEL: You were here for the question that Senator Alexander asked the panel about why we shall invest in the Australian project with the timeline as it is, versus the timeline here. Do you know anything about that?
MS. CLAUSSEN: I don't know any of the specifics about that, but I do know that the private sector is really interested in advancing the technology, and I see them marketing a lot of technologies abroad because they feel that the policy climate is more certain abroad, whether it's in a Kyoto country or a country that's more committed to long-term emission reductions.
If you talk to the CEO of General Electric, for example, who's just started to really focus in a major way on greenhouse gas reducing technology, he views a lot of his markets abroad rather than here, because he doesn't think we're at the same stage in our policy development and implementation. He's very much focused on abroad, and of course he wants to sell his technology, but it's interesting that he sees the markets there, not here. Well, I think he should be seeing them here as well.
SEN. HAGEL: But you don't know anything about why they would make that decision.
MS. CLAUSSEN: No, I don't. But I'm happy to try to find out and answer it for you.
SEN. HAGEL: Well, I'll tell Senator Alexander that you will take that assignment on. He'll be very pleased about that. As you know, he is very engaged in this overall issue and very knowledgeable.
MS. CLAUSSEN: Yes. Well, coal and transportation are the two things we really need to focus on, because we're going to burn a lot of coal, and China and India and Australia are going to burn a lot of coal, and we have to find a way to do it with capture and sequestration.
SEN. HAGEL: Yes, for a long time to come.
MS. CLAUSSEN: For a long time to come.
SEN. HAGEL: Well, we are going to vote shortly, so I will adjourn our committee hearing. But let me also say, as I did to the first panel, that we may have additional questions if that is acceptable to you.
MS. CLAUSSEN: Absolutely.
SEN. HAGEL: We'll get those to you in the next two days if we have some members that would require that. Your full testimony, of course, will be included in the record.
Again, I personally appreciate all of the time that we've had over the years to exchange views on this issue, and your continued leadership. Thank you very, very much.
MS. CLAUSSEN: Thank you very much.
SEN. HAGEL: The committee's adjourned.
POLITICS AND BUSINESS: CLIMATE CHANGE POLICY APPROACHES A TURNING POINT
SPEECH BY EILEEN CLAUSSEN
PRESIDENT, PEW CENTER ON GLOBAL CLIMATE CHANGE
DAVID BRADFORD SEMINARS ON SCIENCE, TECHNOLOGY, AND ENVIRONMENTAL POLICY
WOODROW WILSON SCHOOL OF PUBLIC AND INTERNATIONAL AFFAIRS
November 7, 2005
Thank you very much. It is a pleasure to be here at the Woodrow Wilson School and an honor to be delivering the David Bradford Seminar this week. I knew David when he was at the Council of Economic Advisors, and found him to be honest, thoughtful and engaged, so it is a double honor for me to be giving this seminar.
I am here today to talk about climate change policy. And I must admit that in the current political environment, with White House investigations and Supreme Court nominations dominating the agenda, it is a challenge to break through the noise and get people to pay attention to this issue. But never fear. In preparing my remarks, I had a couple of ideas for how to get action on climate change in the current political environment:
One is to start naming hurricanes after members of Congress who still say we don’t know enough about this issue to act. Or telling the White House that if they think they’re in hot water now, just wait. It’s only going to get hotter.
In all seriousness, the title of my remarks today is Politics and Business: Climate Change Policy Approaches a Turning Point. And I want to revise that, given the attention that’s gone to the recent bestselling book by the New Yorker writer Malcolm Gladwell. Rather than saying climate change policy is approaching a turning point, I want to say it is approaching a tipping point.
Gladwell defines a tipping point as “that one dramatic moment when everything can change all at once.” Granted, we are not there yet on climate policy, but we are certainly getting close. And I think there are two reasons for that: One is that the science of climate change has reached a point where it simply cannot be ignored or pushed aside. And the second reason is the growing number of financial and business leaders that are saying it is time to take this issue seriously – indeed, many are saying that it would be irresponsible not to take it seriously. As the private sector becomes increasingly vocal and active on this issue, particularly here in the United States, there is no doubt in my mind that our nation’s elected leaders will finally reach their tipping point – and step up and act.
Why are corporate leaders putting climate change on the agenda? The answer is simple: this is an issue that poses very real risks for business – and opportunities as well. And to ignore it is like ignoring those radar pictures we became so accustomed to this fall – those images of huge storms barreling toward our coastline. You can turn off the TV if you want, but that will not change the fact that we are all in the projected storm track for climate change. A business or an investor who is not thinking long and hard about how to respond is going to be like all those wrecked homes and boats we saw in the after-storm coverage. The boats all beaten and washed up on shore, the homes a shell of their former selves.
It is a tribute to the foresight of many in the private sector that they understand this and are beginning to plan for doing business in a world where climate change is a dominant concern. And today I want to talk about what investors and companies around the world are saying and doing about this issue.
Climate Change Science: An Open-and-Shut Case
But first I want to talk very briefly about the hurricanes we have seen this fall – and I will remind you the season’s not over yet. The U.S. Gulf Coast, as all of you know, was hit hard by hurricanes this year. Katrina alone killed more than 1,200 people, and we all know about the enormous destruction it left behind – an entire city decimated; 1 million displaced from their homes in coastal areas of Louisiana and Mississippi alone.
At the Pew Center, we have been quite busy answering questions about whether Katrina and these other storms were the product of global warming. And the honest answer is we don’t know for sure – no one does. But what we do know is that hurricanes draw their strength from the heat of the surface waters in the ocean. And as those waters get warmer, they are more likely to produce stronger storms. While Katrina was moving across the Gulf, the surface waters were unusually warm, about 2 degrees above normal for that time of year. Around the world, sea surface temperatures are more than 1 degree warmer on average than they were a century ago. So, whether or not Katrina and company were directly influenced by climate change, and there is certainly a case to be made that they were, they nevertheless are a sign of things to come.
Scientists have established beyond any reasonable doubt that the climate is changing, that these changes are the result of human activities, and that these changes are likely to become more pronounced – and more dangerous – in the decades to come. Instead of detailing all the various studies, I will refer you to the Pew Center website, www.c2es.org, for an overview of what we know.
An Economic Toll As Well
But it is not only the science of climate change that should cause us to stand up and take notice; it is also the economics of climate change. Katrina alone is projected to cost U.S. taxpayers as much as $200 billion. We saw disruption in our energy supplies, higher fuel prices, losses of farmland and crops, destruction of countless businesses large and small, effects on ports and shipping, and much more.
Consider the economic impact on the energy sector alone. Because of Katrina and Rita, 90 percent of crude oil production in the Gulf of Mexico was still “shut in” as of mid-October, meaning companies had made little progress in restoring output. Seventy-two percent of offshore natural gas production was still offline. And we’ve all heard what that is going to do to home heating bills this winter.
This is happening, I remind you, in an area that is responsible for 30 percent of U.S. oil production and about a quarter of our natural gas output. And that’s not even the whole story of how these storms damaged our energy infrastructure – because they also hit a region that boasts nearly half of the nation’s refining capacity. At its peak, Rita closed 16 refineries in Texas and Louisiana that together account for more than 5 percent of refining capacity. Some of these suffered significant damage and are likely to remain closed for months.
And the energy industry wasn’t alone in suffering these direct economic losses. Insurers took a big hit as well. Overall insured losses from Katrina and Rita are estimated at between fifty and seventy-five billion dollars. That’s not even counting the losses Wilma incurred in Florida, at this point estimated at between 8 and 12 Billion.
It is no wonder that the insurance industry has been out in front on the climate issue and making the case for action. Here is a statement from Munich Re Group, one of the world’s largest reinsurers. “The increasing weather extremes linked to impending climate change are already causing weather catastrophes of a new dimension.” End quote. According to another insurance giant, Allianz, climate change is increasing the potential for property damage at a rate of between 2 and 4 percent every year.
Allianz and Munich Re are not the only insurance companies that believe climate change is a risk. In the United States, AIG had this to say: “On the risk side, especially in the longer term of several decades and more, the potential impacts of climate change such as temperature rise, increased weather disturbance activity and sea level rise pose risks of widespread and possibly devastating damage to infrastructure in low-lying coastal areas, to forests and other ecosystems, to food production, to water resources and to human health. In turn, these potential consequences could result in far-reaching negative impacts on economies and societies worldwide.” End quote.
I believe the leadership of these insurance companies and their industry is emblematic of a broader shift in the private sector. You could say that insurers are the tip of the iceberg – and this one’s not melting.
The Investment Community Takes Note
Another segment of the private sector that is increasingly willing to raise this issue as a real concern is the investment community. Last May, there was a gathering at the United Nations titled the 2005 Investor Summit on Climate Risk. Participants included representatives of U.S. and international pension funds with collective assets of $5 trillion. CalPERS and CalSTERS, the pension funds for the state of California, were there, as were many other institutional investors from around the world. And the reason they were there was to talk about both the risks and the opportunities that climate change poses for investors.
Risks and opportunities. When you are entrusted with investing billions or trillions of dollars, you had better know a fair amount about both of these eventualities. What risks does climate change pose for investors? How can they know that the companies they invest in are positioned to manage those risks? And, in a similar sense, how can they gauge whether companies are prepared to take advantage of new opportunities presented by the growing movement toward regulation and carbon constraints?
The risks of climate change for the business sector can be broken out in three key ways. First, there is litigation risk – companies could face lawsuits. Some of these may be frivolous, while others may have merit. Either way, business needs to factor the risk of litigation into their planning.
The second category of risk facing the business sector is physical risk. Some sectors and businesses will face direct consequences from the physical impacts of climate change, including not just hurricanes, but also drought, sea level rise and flooding. I already talked about insurance companies. But what about agriculture, forestry, real estate and other industries that hinge on the physical environment?
In addition to litigation risk and physical risk, there is also regulatory risk – the risk of government taking action on this issue in a way that affects corporate profits. And this is the risk area that is likely to have the most immediate and substantial impact on businesses and investors.
I know what you are probably thinking. You are thinking that the chance of any meaningful regulation coming out of Washington on this issue any time in the near future is pretty dim. Of course it all depends on your definition of how near “near” is. And you are probably right. But the fact is that many companies, including U.S.-based multinationals, already are experiencing climate-related regulation in their operations in the EU, Canada and other countries working to implement the Kyoto Protocol. And, even here in the United States, most of the CEOs I talk to tell me they view regulation as an inevitability. Maybe not tomorrow or the next day, but sometime soon.
In fact, some of these CEO’s seem to prefer the certainty that comes with regulation to the no-man’s land they are operating in today. Consider what Jeff Immelt, CEO of GE had to say: “Long-term certainty would help us all make smart decisions,” he said. He continued: “We believe that the government can provide leadership by clarifying policy, by committing to market mechanisms [and] by promoting diverse energy sources.”
Jim Rogers, the CEO of Cinergy Corp., said it a little more succinctly: “One day, we will live in a carbon-constrained world.” End quote.
These are the CEO’s of major, major industry, and in the case of Cinergy, a major coal-burning energy company. And the air of inevitability in Jim Rogers’ statement should certainly be a wake-up call for investors that regulatory risk is real.
But of course, it is not just the risks associated with climate change that are attracting the attention of the investment community. It is also, as I said, the opportunities. Those companies that lead the way in low-emission vehicles, clean coal technologies, clean energy, and technologies for slashing emissions are going to be the winners in the 21st-century economy.
Right now, California’s massiveenvironmental risk management into the due diligence process of its private equity divisions.
What’s more, as part of the policy, JP Morgan Chase said it supports reductions in greenhouse gas emissions through market-based, national policies. This is a leading global financial services firm – $1.1 trillion in assets. And now it is leading in another way as well.
The actions of JP Morgan Chase and together with the United Nations Investor Summit on Climate Risk, are clear signs that investors are beginning to take this issue seriously.
And they are not the only signs. A couple of years ago, we saw the launch of The Ca state pension system is investing significant amounts in alternative energy businesses. GE plans to spend an additional $1.5 billion on research on clean technology. And every month, it seems there is another story of a major venture capital or private equity firm – I am talking about the big names like the Carlyle Group – investing in clean energy deals. So while there are many risks, there are also many opportunities out there because of climate change, and savvy investors know it.
Is everyone seeing this as an investment opportunity? Of course not. Just last month, Exxon Mobil announced nearly $10 billion in third-quarter profits but said it has no plans to put any of those earnings toward the development of alternative energy sources. “We’d rather re-invest in what we know,” said the company’s spokesman.
So it may not be for everyone. But you can’t deny that the investment community is beginning to factor climate change into their strategies and research. Last April, for example, JP Morgan Chase announced a set of environmental principles to guide the firm’s global investments and business efforts. Among the highlights: JP Morgan Chase will incorporate rbon Disclosure Project, or CDP. This is an initiative that enables a large number of institutional investors to collectively sign a request to companies for disclosure of their greenhouse gas emissions and climate strategies. When this project was launched in 2003, 35 investors totaling $4.5 trillion in assets signed on. Then in 2004, 95 investors accounting for $10 trillion became signatories. This year, the request to companies went out under the signatures of 155 institutional investors with combined assets of $21 trillion.
CDP then sends this request to the 500 largest companies in the world. Currently, more than 350 of these companies currently report their emissions and climate strategies through the CDP website.
What is happening here, I believe, is a reflection of the post-Enron, post-World Com environment. Investors are asking companies for an even higher level of transparency and information, not just in their accounting but in other risk areas as well. California’s massive pension funds and many others are actually pressuring the SEC to enact separate disclosure rules specific to greenhouse gas emissions.
A related factor in the movement toward greater disclosure is Sarbanes-Oxley. Because of this law, growing numbers of U.S. companies are weighing whether climate change may create a material impact on future earnings. And, as the number of companies disclosing emissions and exposure to climate-related risk increases, Sarbanes-Oxley actually strengthens the hand of activist shareholders who are pressing companies that have not yet addressed the issue.
A study by CERES last year found that oil and gas companies faced a record total of 31 shareholder resolutions on the climate issue in 2004. The filers of these resolutions included state and city pension funds, a foundation, socially responsible investment firms, and religious pension funds. And an important focus of the resolutions was risk disclosure – in other words, to what extent are these companies preparing for looming constraints on their carbon emissions?
So the bottom line, if you will excuse the pun, is that investors are flexing their muscle on this issue – these investors do not want to see corporate boards and CEOs with their heads buried in the sand. They want to see an acknowledgment of the problem, an understanding of its potential impact on business performance, and concrete strategies for staying ahead of the problem and even turning it into a platform for new products and increased profitability.
Business Steps Up to the Plate
And the good news is that those investors who are concerned about this issue are beginning to get what they want from the companies they invest in. At the Pew Center, we work with 41 leading companies to promote action on climate change. These are mostly Fortune 500 companies with a combined market capitalization of over $2 trillion and 3 million employees. They represent most industrial sectors and many of the largest emitters of greenhouse gases, including coal-burning utilities, mining companies, aluminum producers, automobile manufacturers, pulp and paper manufacturers, chemical companies, oil and gas businesses, and the cement industry. Council members include BP, Shell, General Electric, American Electric Power, DuPont, Toyota, Whirlpool, Intel, and more.
In joining the Council, these companies are united with the Pew Center in several beliefs, including this one – and I quote:
“We accept the views of most scientists that enough is known about the science and environmental impacts of climate change for us to take actions to address its consequences.”
To date, 30 of the 41 companies that work with the Pew Center have set targets to reduce their emissions, many of them more stringent than those in the Kyoto Protocol. And 13 of these companies already have met or exceeded at least one of their targets. And not a single one of these companies has found that it cost them money or market share. Of course, no one is under the impression that long-term efforts to address climate change will be cost-free. But the sooner we begin and the more we do to help companies manage these costs through market-based and flexible strategies, the more we will realize that we can reduce emissions without causing real and lasting damage to the economy or our competitiveness.
Let me talk briefly about what three of the companies we work with are doing – and I will start with one of the world’s largest companies, GE. GE just joined the Pew Center in July. It has committed to reduce its greenhouse gas emissions by 1 percent by 2012, relative to 2004 levels, and it will increase energy efficiency by 30 percent. Based on the company’s projected growth, GE’s emissions would have risen 40 percent by 2012 without further action.
But this is really not what is significant about GE. Much more important is that GE is committed to doubling its investment in environmental technologies to $1.5 billion by 2010. Think about that for a moment: $1.5 BILLION by 2010 – that is basically the equivalent of starting a new Fortune 250 company – focused exclusively on clean technology. These efforts are part of GE’s “Ecomagination” initiative to aggressively bring to market new technologies that will help customers meet pressing environmental challenges. In one instance here, you have a company addressing both the risks and the opportunities of climate change.
I also want to tell you about the work of Cinergy. I quoted Cinergy’s CEO, Jim Rogers, at the start of my remarks. This is a company that burns more than 30 million tons of coal each year, and it devoted its entire 2004 annual report to climate change – not to debunk the issue or attack the science, but to acknowledge that climate change is a problem, and that Cinergy should be a part of the solution. Cinergy’s goal is to reduce greenhouse gas emissions to an average of 5 percent below 2000 levels during the period from 2010-2012.
Cinergy recently announced plans to merge with Duke Energy, and Jim Rogers said that one rationale for the merger is the imminent arrival of carbon constraints. Duke Energy, he says, has a significant number of clean-burning natural gas plants, which will allow Cinergy to retire some of its coal-burning facilities more quickly.
The third company I want to talk briefly about today is Alcoa. Alcoa already has met its 2010 goal of reducing companywide emissions of greenhouse gases by 25 percent from 1990 levels. And in June, Alcoa issued a forecast that the aluminum industry could be greenhouse-gas neutral by 2017. Among the reasons: the increased use of aluminum in cars and trucks, which will reduce emissions from that sector. While this is an ambitious goal, there will likely be some lively debate about which industry – aluminum or autos – gets credit for this reduction.
GE, Cinergy, Alcoa and the other companies we work with at the Pew Center aren’t just looking internally at what can be done to address the climate problem. They are also looking beyond their own operations at public policies. For many years, there was a real hesitancy among business leaders to speak out on this issue, but that is changing. Why are the companies and the CEOs I have mentioned stepping out from behind the shadows now? Because they see that regulation is inevitable, and they want to make sure it is regulation they can live with. They see the states stepping into the void and adopting state and regional policies that seek to curb emissions. They see other countries putting together their own policies, some of them quite ambitious. They see that these actions are having a real effect – or soon will – on significant portions of their operations around the world. They get the picture. It’s inevitable to them that regulation is coming down the pike. In many cases, it is already here.
In addition to their interest in staying a step ahead of the regulations, these companies also want a higher level of certainty – they’re frankly tired of not knowing what’s going to be expected of them in the years ahead. It gets back to the issue of regulatory risk – they need to know what kind of risk they face.
Here is Wayne H. Brunetti, CEO and Chairman of Xcel Energy, as quoted in Business Week: “Give us a date, tell us how much we need to cut, give us the flexibility to meet the goals, and we’ll get it done.”
Four of the companies we work with at the Pew Center testified in front of the House Science Committee this year. The companies included Cinergy, DuPont, Baxter and United Technologies. Another company on the Council, Whirlpool, submitted written testimony. Their message: they are already living with greenhouse gas regulations in Europe and they are thriving in those places. These companies also told the committee that a lot of what they’re doing to cut emissions has bottom-line benefits. Efficiency pays. It’s smart business.
These companies are demonstrating a real boldness in entering the policy debate on this issue. They see it as absolutely essential to couple the work they are doing to reduce their emissions with a more active policy stance. The policy decisions that are made on this issue will have important implications for their future profits and performance, and these companies feel they have a responsibility to their shareholders to be involved.
Policies for Moving Forward
These companies also see a pressing need for U.S. leadership in the international arena. Remember: many of these firms are multinationals – they have operations around the world. So, in the same way that they want certainty here at home, they also want to know that policies around the world will be as predictable and as integrated and as consistent as possible.
At the G-8 meeting this past June in Gleneagles, Scotland, 20 business leaders were part of a special Climate Change Roundtable that identified a set of key principles for climate change policy. Included in those principles are the following:
- “Policy frameworks that use market-based mechanisms to set clear, transparent and consistent price signals over the long term offer the best hope for unleashing needed innovation and competition.”
- “Solutions must be global – participation of all major emitters is essential.”
The fact that these corporate leaders, including some from the United States, were able to agree to these and other principles shows how important they perceive this issue is for the future of their businesses. Business is in many respects leading the way, and it is time for policy makers, particularly those in Washington, DC, to get the message and act on their behalf.
What should policymakers do? Over the past year, the Pew Center brought together a group of policymakers and stakeholders from around the world to consider that question. We just recently held our last meeting and we’ll be releasing our final report, International Climate Efforts – Beyond 2012 next week. So without giving away too much, let me share with you a couple of key points.
First, while ultimately we need a fully global approach, what’s absolutely imperative at this stage is engaging the major economies. That includes the United States and the major developing countries. Twenty-five countries account for 83 percent of global emissions. They also account for 71 percent of global population and 86 percent global GDP. This is the core group that needs to act. It’s important, at the same time, that we recognize the tremendous diversity within this group. Their per capita emissions range by a factor of 14; their per capita income by a factor of 18.
So while all the major economies must commit to stronger action, we need to recognize and respect those differences, and allow different countries to take different kinds of approaches best suited to their needs and circumstances.
This leads to a second point: We need a more flexible framework, one that can accommodate different approaches by allowing for different kinds of commitments. Emission targets may work for some countries; but not for others. Maybe the best approach is some type of policy commitment that doesn’t entail a binding emissions limit. In the dialogue, we looked at a whole range of options, and the final report identifies those that seem most promising, and looks at ways they can be combined into a comprehensive framework. But for those details, I’ll have to ask you to stay tuned. The report will be out in just a few days, and we’ll have lots more to say about these ideas in the months ahead.
For now, suffice it to say that a tipping point is almost upon us. The combination of growing scientific certainty, growing concern – and growing action – among businesses and investors has brought us to a place where the kinds of international policies I am talking about are no longer a pipe dream. Even the U.S. Senate has shown support for real action, with a majority of senators supporting a resolution this summer that called for a mandatory national program to slow and eventually reverse U.S. emissions. The resolution was nonbinding, but it is yet another sign of change.
Thanks in large part to the leadership of the financial and business communities; climate change policy is approaching “that one dramatic moment when everything can change all at once.” My only fear is that this tipping point in policy arrives too late to keep another tipping point at bay – the point at which catastrophic climate change becomes inevitable, a force too strong to stop.
That is one case when tipping will not be appreciated. Thank you very much.
Climate Data: A Sectoral Perspective
Prepared for the Pew Center on Global Climate Change
Kevin Baumert, Jonathan Pershing, Timothy Herzog
World Resources Institute
Download entire report (pdf)
At the G8 Summit held on July 6-8, 2005, in Gleneagles, Scotland, leaders of the Group of 8 countries issued a joint communiqué and a “plan of action” on Climate Change, Clean Energy, and Sustainable Development.