Reach a decision, please

Javier Carrillo. Professor. IE Business School

2 February 2010

The inability to reach an international agreement which would bring continuity to the current Kyoto Protocol is incomprehensible, from both an environmental and business perspective.

After 12 days of intense work, last weekend saw the closure of the 15th Conference of the Parties (COP 15) of the United Nations Framework Convention on Climate Change (UNFCCC), which took place in Copenhagen. Thousands of delegates from 193 countries again tried to reach, again unsuccessfully, an international commitment to the continuity of the current Kyoto protocol when it expires in 2012. Once again, the commitments were postponed and hopes transferred to later negotiations, which will take place later in the year, before the next summit in Mexico in December.

The importance of clearing up the uncertainty concerning the post-Kyoto regime as quickly as possible is of great importance not only for the environment, but also for business. The lack of sufficiently clear price indications for reducing emissions after 2012 is having a negative effect on current business decisions concerning investments in mitigation measures, increasing risk premiums and the cost of finance. The continued postponement of national commitments and the resulting lack of decisive action by companies have particularly negative effects on capital-intensive sectors, such as electricity, in which investments must be made over a timeline of between 25 and 30 years. In this context of relative uncertainty, the predominant attitude among businesses will continue to be that of diversifying their activities for controlling emissions, including the purchase of emission rights and involvement in the clean development mechanism, where applicable, depending on the costs of the various options.

There will also be greater emphasis on the lines of business that are profitable regardless of whether or not emissions are reduced, but may as well reduce the emissions anyway.

The uncertainty is also causing a delay in more important investments, which, paradoxically, will prevent the assumption of more demanding commitments to reducing emissions in the future. Alternatively, if the tighter restrictions are adopted later, the time lost will mean greater investment efforts, which will undoubtedly imply higher costs for reducing emissions than if the reduction process had been more gradual.

It is necessary to make urgent and significant progress in the definition of a post-Kyoto system in at least two directions. There is an urgent need to define and agree on emission reduction targets on an international scale, as well as the mitigation instruments designed to ensure said targets are met. In particular, there is a need to guarantee continuity and extend the scope of the international emissions trade system provided in the protocol itself, in order to meet global reduction targets at a cost lower than that of other direct regulation instruments.

Accordingly, in environmental but also in business terms, it is appropriate for the European Union, and Spain as a member state, to continue to lead the negotiation process to reach an international post-Kyoto mitigation agreement within the framework of the UNFCCC that provides those two basic elements: targets and instruments.

In short, generic, non-binding commitments are not suitable for guaranteeing an attractive context for investment in new technologies and mitigation projects. Establishing targets and instruments sufficiently in advance plays a key role in providing a long-term indication of the price of carbon. If the aim is to meet the targets set in the current system, it is both urgent and essential to convince investors these targets will be maintained.

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