Heated debate

Time is short for international negotiators and political leaders to establish a meaningful agreement to ‘replace’ the Kyoto Protocol (KP) after 2012. The next conference of the parties to the
So what are the key issues for lawyers assisting clients to benefit from what is both an enormous opportunity and an equally significant challenge?

Rolling stock?

Lawyers are being asked by clients to advise on what happens to unused allowances (EUAs) issued under the EU Emissions Trading Scheme (EU ETS) and Certified Emission Reductions (CERs) and other ‘Kyoto units’ after the expiry of Kyoto’s first commitment period (2008-12). Can they be rolled over?

While the EU ETS and Kyoto Protocol’s implementing regulations address these issues in detail, a number of important uncertainties remain. For example, certain rules regarding carryover may be impacted by the outcome of the international ­negotiations, both within the EU ETS and within the international rules embedded in the Marrakech Accords that now address the carryover of CERs. Lawyers will need to keep on top of these issues.

The post-2012 market

Another key issue for lawyers is advising on the implications of any new mechanisms for reducing emissions created under a ‘post-Kyoto’ agreement, or series of ­agreements. It is broadly recognised that the current Clean Development Mechanism (CDM) rules, without modification to scale the CDM up, are unable to provide the level of emission reductions in developing countries needed to tackle climate change adequately. There is currently much discussion about the development of a ‘sectoral’ mechanism ­within which developing countries could take on ‘no lose’ emissions targets within a defined sector to implement much larger-scale emission mitigation actions with support from the developed world.

But how might investors manage the new risks presented, whereby an entire sector within a given country may need to achieve a particular ‘target’ before a return on ­investments may be realised? What ­structures can be implemented to facilitate cost-effective management of this risk to ensure that the carbon market remains able to incentivise investment? Will emission reduction credits continue to be issued directly to investors through a treaty body, such as the CDM Executive Board? If not, investors will want to ensure that they hold security over future returns in other ways. How might this be done? Finally, what is the role of project-based emission reductions in relation to any new mechanisms, particularly where the same sectors are involved?

A detailed sense of the political dynamics behind the development of these ­mechanisms, and familiarity with the ­practical challenges faced in working with the existing mechanisms, will be important for advisers of first movers in this area.

Ready for REDD

New approaches to reducing emissions from deforestation and forest degradation (REDD) have been proposed in the climate negotiations.

Many of the suggestions made to date for harnessing the power of the markets in this area, if adopted, would provide a wealth of new challenges for lawyers, although the role of the markets and of private financing remains unclear. However, a number of voluntary schemes provide important lessons. Clients are keen to seize on opportunities presented by REDD, as well as opportunities created through the future US and Australian domestic emissions trading schemes - hence this is a key area on which lawyers will wish to remain up to date.

Progress to date

In June of this year negotiating texts finally made it onto the table. Negotiations are still ‘split’ between the Long-Term Co-operative Aciton (LCA) track and the KP track. The LCA track is open to all parties to the UNFCCC and which focuses on the four key elements of long-term cooperation ­identified in the Bali Action Plan (mitigation, ­adaptation, finance and technology). The ‘KP’ track is only open to KP parties (and so excludes the US) and is the forum for ­negotiation of, among other matters, existing parties’ emissions caps under the KP.

The LCA track, which leads on the ­proposed new sectoral mechanism and REDD, is struggling to rationalise a vast amount of text. The KP track remains bogged down in questions about the breadth of its mandate. Emission caps are a highly contentious issue and are unlikely to be agreed until late in the day.

Parties made little progress at August’s informal negotiating session in Bonn in ­cutting down the length of negotiating texts. Much shorter texts will be required, and the LCA and KP negotiations will need to be merged, or at least reconciled. For this job only two weeks in Bangkok, a week in Barcelona and two weeks in Copenhagen remain.

What is increasingly certain is that hopes of a fully fleshed-out agreement in ­Copenhagen are all but gone. The next ­couple of years may well be spent negotiating a ‘next generation’ of the Marrakesh Accords in order to implement fully any agreement reached in December.

Tim Baines is a senior adviser on climate and clean energy and Anthony Hobley is a partner and head of global climate change and carbon finance at Norton Rose