Tuesday, December 29, 2009

Deal-making at Copenhagen: Five Nations, the Battle to Maintain the Earth’s Fragile Atmosphere, and the Emerging Carbon Trading Market


The two-week United Nations Climate Change Conference held in Copenhagen, Denmark, concluded with the leaders of the world’s five largest economies executing an accord of intent to act rather than a requirement to act. The signatories to the Copenhagen Accord are the United States, China, India, Brazil, and South Africa. In relevant part, the Copenhagen Accord establishes a global commitment to limit global warming by 2 degrees Celsius or 3.6 Fahrenheit, and to provide $100 billion in periodic payments to developing nations. The European Union has already volunteered to decrease its carbon gas emissions by 30 percent of the 1990 levels by 2020.

Many consider the Copenhagen Accord a failure because it does not bind either developed or developing nations to utilize energy efficient power sources or to lower carbon dioxide gas emissions, which create atmospheric concentrations of the greenhouse gases linked to global warming. In particular, the European Union considers the Copenhagen Accord a failure because it expected the United States and China to provide more concessions towards establishing global emission target decreases by 2020 that would have placed pressure on other developed nations to decrease their global emissions. A number of developing nations including Venezuela, Cuba, Saudi Arabia, Bolivia and Pakistan consider the Accord a failure because it does not provide a fixed payout schedule that specifies when developing nations can expect to receive financial assistance. However, as President Obama, a principal force behind the final deal noted, “the agreement is only a modest step toward healing the Earth’s fragile atmosphere.”

Approximately 193 nations were represented at Copenhagen, and many of the delegates believe that the agreement is a failure. The Copenhagen Accord is a mere 12-paragraph (not page) document, which provides as many forwarding looking statements as a dot.com investment prospectus. In truth, many argue that the Copenhagen Accord is more a political agreement than a mandate of conduct, because it lacks firm targets for mid-term and long-term reductions of greenhouse gas emissions, and a deadline for finalizing a global treaty. This tangible impasse, settled over the course of the conference, and evidences what some participants refer to as a “fundamental breakdown of order and defiance of a broad consensus.” Many are concerned that the impasse may undermine the consensus amongst various nations that was established after the climate summit in Rio de Janeiro in 1992, which in part, resulted in the United Nations Framework Convention on Climate Change and a series of 15 conventions to better achieve a global consensus to decrease global warming. Many delegates believe the “process has become unworkable,” because it is impossible to create consensus when countries are fighting over who bears the blame for climate change, the cost of climate change, and who should monitor a nation’s reported decrease in carbon dioxide gas emissions. Perhaps the critics are correct, self monitoring may not be the best methodology. We need only look to the America investment securities industry for confirmation.

The impasse at Copenhagen has not derailed efforts to reach a global warming accord. As Michael Levi from the Council of Foreign Relations stated, “the climate treaty process isn’t going to die, but the real work of coordinating international efforts to reduce emissions will primarily occur elsewhere.” As a result, the number of nations participating in the continuing global warming debate will decrease from 193 nations to approximately 30 nations. These 30 nations have been dubbed (behind closed doors) the Dirty Thirty because a significant portion of these 30 countries are responsible for 90 percent of global warming emissions. It was the Dirty Thirty whose consent was critical for the Copenhagen Accord to be achieved, because it is ultimately the decreased carbon dioxide gas emissions from the Dirty Thirty that will have the greatest overall impact on the Earth’s atmosphere. In October 2009, the International Energy Agency published the latest information on the level and growth of CO2 emissions, their source and geographic distribution will be essential to lay the foundation for a global agreement. A copy of the report is available for download here.


The Copenhagen Accord anticipates several inter-linked initiatives. In addition, to the global consensus to decrease carbon dioxide gas emissions, the accord promises billions of dollars of financing for developing economies such as Ayiti (Haiti) to develop clean-energy economies and to cushion the effects of climate change on their vulnerable economies. The accord also provides for the establishment of an international system for major economies to monitor and report their greenhouse carbon dioxide gas emissions. The accord further provides for the sharing of technology, and the merging of national carbon trading markets into a transnational carbon market. The Kyoto Protocol established carbon offset trading as part of the Clean Development Mechanism and Joint Implementation designed to reduce global carbon dioxide emissions. The mechanism encourages self-interested private sector investment in developing countries' carbon abatement projects, translating those emissions reductions into allowances.

Despite the pledges from developed nations to decrease their carbon dioxide gas emission, some scientists are doubtful that the changes will be sufficient to alter the course of what they perceive as the inevitable destruction of the Earth’s ecosystem. For example, changes in intense rainfall and drought have already occurred, ecosystem sustainability of the oceans and polar ice coverage are approaching critical levels. The probability of success, to alter the course of history to a substantial extent rests on the shoulders of one man’s ability to fulfill the promises that he made in Copenhagen. President Obama’s promises to reduce America’s greenhouse gas emissions, and to raise billions to assist developing and other developed countries create and share energy efficient technology may well be the codex that saves the “Earth’s fragile atmosphere.”

President Obama met the Copenhagen challenge and based on his diplomacy and genteelness emerged with an Accord that many believed could not be done. President Obama recognizes that the Copenhagen Accord is a modest victory as he solemnly stated, “[T]this progress did not come easily, and we know that this progress alone is not enough. We’ve come a long way, but we have much further to go.” However, President Obama cannot fulfill the promise that he made in Copenhagen without Congress’ commitment. Congress must adopt the environmental bill that is currently pending before the Senate, which will place a price on carbon and earmark a substantial part of carbon trading proceeds as foreign aid to assist developing and other developed countries to adopt energy efficient power sources.

The United Kingdom will also play a major role in the United States’ ability to fulfill President Obama’s promises in Copenhagen. London is the principle carbon trading market in the world. It is also a heavily regulated industry in the European Union. In 2005, the E.U. Emissions Trading System required limitations on emissions from heavy industry, and obligated companies that exceed the limit to purchase additional carbon emission permits to continue polluting the atmosphere. This is the quintessential environmentalist meets arbitrager paradigm, and in the process creates an entirely new financial product poignantly analogous to the era of Michael Milken and the creation of junk bonds into an investment grade security. The Emissions Trading System is the principle regulatory (dare I say, capitalist) “enhancement” that the European Union utilizes to achieve its 2020 carbon gas emission reductions target by 20 percent. Of course, this has become a very attractive (lucrative) business sector for carbon traders who are primarily located in London. This also creates an excellent opportunity for the United States, Wall Street in particular, to develop and expand the carbon trading market. Philippe de Buck, the director general of BusinessEurope, a lobby group in Europe, stated it is likely that “industries based in Europe would increasingly move their operations to less regulated parts of the world as a result of the weak accord struck in Copenhagen.” This may be a corporate opportunity for the United States with its weak carbon market regulation to attract the European carbon trading market. I am not sure that we would wish to attract the industries themselves to American shores, to continue their excessive carbon emission operations.

Although there was little assurance at Copenhagen, that carbon markets were poised to expand, the environmental bill pending in Congress may usher in a new market as Wall Street begins to calculate the potential money to be made in carbon trading, especially on a transnational level. After all there is nothing that American speculators adore more than unregulated markets, especially the utilities sectors. We need only look at the historical evidence regarding electricity, gas, and oil to find confirmation of American investors’ panache for trading in unregulated markets. The carbon market may well be the next global bubble.

Lydie Nadia Cabrera Pierre-Louis
Assistant Professor of Law

4 comments:

  1. great post. terrific insights.

    how long before u.s. traders begin wildly speculating on the carbon trading market? how long before u.s. regulators recongize that unregulated trading will lead to speculative and ultra risky trading vehicles (like credit default swaps)?

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  2. Lydie Nadia Cabrera Pierre-LouisJanuary 4, 2010 at 5:07 PM

    Not long at all, if the environmental bill pending in Congress is adopted.

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  3. Although many people had high hopes for the conference and consider it unsuccessful, I think it is a positive step forward. The fact that this conference even occurred is an accomplishment and at least an acknowledgement from the global community that there is an environmental problem that each industrialized nation is partially responsible for. Although no mandatory standards were put in place, there was a dialogue as to what can be done, and it opens the door for future discussions and negotiations. I am hopeful that in the near future more progress will be made, and that at least the U.S. will pass appropriate legislation.

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  4. I believe that the Copenhagen Accord is a good thing and is definitely a step in the right direction. It seems that the focus on financial assistance for these countries is what many consider to be the main failure of the accord along with the fact that certain countries are not bound to utilize their energy efficient power sources or to lower carbon dioxide gas emissions. However, it is possible that many countries, out of sheer self interest will seek to lower costs on their own by reducing their own emissions. Perhaps this will be a positive adjustment that countries like the U.S. will consider until a more permanent solution becomes available.

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