Carbon leakage looms following Copenhagen…

Posted on 9 Feb 2010 by The Manufacturer

Stephen Radley from EEF says with promises of a strengthened commitment to climate change summarily broken, Copenhagen 2010 was, by all accounts, a colossal letdown.

Dawn on Saturday 20 December did not bring the hope and optimism that so many had anticipated, or indeed expected from the Copenhagen summit. Instead, the world’s governments simply “noted” a 12 paragraph document named the “Copenhagen Accord”. The culmination of two years of technical and political negotiation, it was signed by merely 30 governments and, while the dust has settled, leaves the impact on British manufacturing no little clearer for it.

The Copenhagen Accord is the vaguest of documents. It establishes a commitment to attempt to restrict temperature increases to 2°C, sets monitoring and reporting requirements for all countries, and provides initial funding of $30bn over a three year period to assist developing countries in mitigating and adapting to climate change.

It is, however, the final two pages of the document which hold the most interest. They contain two empty annexes — one will record the emission reduction commitments of developed countries and the other will list the actions pledged by developing countries. The deadline for completing these tables is 31 January 2010.

On present intelligence, at least 50 countries are expected to state some sort of commitment in the Accord, and these are not to be sniffed at. The US, China, India and Brazil will, for the first time, internationalise pledges to tackle the causes of manmade climate change. Pundits predict that the Accord’s annexes will ultimately contain pledges to address 85% of the world’s greenhouse gas emissions, something inconceivable a year ago.

Yet it must not be forgotten that this document has no legal recognition. There is talk of this document being developed into a full international treaty, possibly at the next big global gathering in Mexico in October but, until then, pledges will remain just pledges. Unless they are enshrined in national law, we have only the promises of politicians.

In Europe, the debate is centred around its entry into the Accord. At the moment it has a target to cut greenhouse gases by 20% by 2020, with a promise to lift this to 30% in the event of “comparable” efforts by other developed countries. It seems likely that this will remain its position for the time being, and it is vital that it does.

A stricter target will impose even stricter targets and constraints on European industry, yet there is clearly no evidence of comparable effort.

We had hoped that a sectoral approach would be considered in Copenhagen. By targeting key sectors on a global basis, competitive concerns could have been addressed in a rational way and underpinning an effective agreement by helping to broaden participation in global emission reductions. But governments failed to agree even a general statement on these approaches.

Therefore, as it stands, the Accord still leaves British industry exposed to the risk of “carbon leakage”, where investment, market share or production is driven into other economies to avoid the costs and limits to growth imposed by the regulation of greenhouse gases. This is not industry crying wolf; European governments, research institutions and credible academics recognise this threat. It is vital that the EU recognises that the risk of carbon leakage has not diminished following Copenhagen.

We believe the EU should now focus its efforts to further encourage policies which place industries in the US and the so called BASIC countries (Brazil, South Africa, India and China) to adopt comparable targets before any unilateral commitment takes place.

This more hard-headed approach will deliver greater action globally than the previous approach of leading by example, which clearly has failed.

Rather than policies that reduce industrial output, the UK government and the European Commission must strengthen industry by increasing financial support for Research Development and Demonstration (RD&D) projects to develop crucial breakthrough technologies which can be adopted worldwide. These will provide new jobs in Europe and yield substantial reductions in global emissions.

Sectors at risk from carbon leakage must also be given free allocations of emission allowances under the EU Emissions Trading Scheme. While it is inevitable that protectionist measures, such as border adjustment measures, will be increasingly under the spotlight we urge for caution.

In the UK, it is vital that the government does not place additional burdens on industry. The domestic ‘interim’ target — 34% reduction in carbon emissions by 2020 — already risks being meaningless in light of the lack of comparable effort being adopted elsewhere in the world, let alone the ‘intended’ target of 42%. The UK government must be alert to the fact that further burdens placed on industry now risks irreparable damage.

By Stephen Radley, chief economist at EEF