Liebreich: Copenhagen Is Dead – Long Live Copenhagen

By Michael Liebreich
Chairman and CEO
New Energy Finance

Last month, speaking of December’s COP 15 negotiations in Copenhagen, UK Prime Minister Gordon Brown said we had 50 days to save the world and “no Plan B”. At the recent UN Climate Summit in New York, the talk was of urging politicians to Seal the Deal. But now it is official – there is no Deal to Seal. Although there may be a “politically binding” deal, the world will have to stay legally unsaved – at least for the time being.

Here at New Energy Finance we are not too surprised at the difficulties in reaching a definitive agreement in Copenhagen. Shifting the world from a high-carbon to a low-carbon economy was always going to be the work of more than one generation. It will involve multiple technologies, multiple countries, and multiple policy interventions. It will require behavioural change, and cost trillions of dollars. The reality is that we are going to be negotiating on climate change for decades, perhaps forever.

The attempt to shoehorn all this complexity into a one-off, big bang negotiation, followed by 50 years of implementation, was misguided from the start. It was always a mistake to have 180 non-emitters present in the room as the 20 countries that matter from an emissions perspective hammer out a deal. It was always a mistake to confuse the issues of emissions and adaptation; to expect one carbon price to encourage multiple solutions with different costs; to allow deforestation to crash the party, with all its desperate complexity around sovereignty and social development; to expect activists, lawyers and politicians to develop large-scale financial instruments. The list goes on.

The correct institutional framework for a robust deal on climate change is one that takes into account the continuous nature of the problem. One that allows issues to be dealt with in order of priority, with the focus on what scientists, not politicians or activists, say is most important. One that rewards countries that move at their own maximum speed, given their specific economic and political realities, and penalises those that don’t; one that does not create false deadlines or encourage absurd millennial rhetoric.

Back in 2005 we published a White Paper recommending that any successor to Kyoto should be an accession-based system, similar to the World Trade Organisation. You would start with a core of countries prepared to commit to firm targets, bringing in others as they become ready. And the targets would be expressed not as absolute numbers, but relative to economic growth. So fast-growth countries could grow their footprints, while slow-growth countries would have to make real cuts; common but differentiated targets if you like, but within a single institutional framework, not an apartheid system based on distinctions between developing and developed countries that are increasingly irrelevant in a flattening world. The world’s economy would continue to grow – essential if we are to achieve the Millennium Goals – but overall we would inexorably suck energy out of the economy and carbon out of our energy system, by one or two percent per annum, forever.

In 2007 we published a second White Paper, pointing out that thinking about climate negotiations as a one-time, big bang event turns it into a “Prisoner’s Dilemma”, encouraging countries to resist commitments and engage in brinkmanship, while structuring it as a progressive process would encourage the “evolution of cooperation”, to use the term coined by game theorist Robert Axelrod.

Well, in the immortal words of Don Mclean, “They would not listen, they did not know how, perhaps they’ll listen now.” But I doubt it. It looks like what we’ll get from Copenhagen is a “politically binding” deal, whatever that means (outside the bedroom, we all know politicians are as hard to bind as a greased weasel).

Then perhaps the world will be saved properly when the international climate caravan docks mid-year in Bonn, or maybe Mexico in December. I fancy Mexico myself – the weather is better, and ever since Rio, Latin America seems to have missed out on that good carbon gravy that gets spread around by the world’s world-saving circus on its never-ending round of long-haul flights and five-star hotels.

If I sound cynical, it is because there is much to be cynical about. But here’s the funny thing: despite all this, I remain optimistic about the whole world-saving thing. Just as the politicians were finally admitting what we have all known for ages – that Copenhagen was in trouble – we were adjusting our figures for total expected investment in clean energy worldwide in 2009 upwards, for the second time since the late summer. We now think the figure will come in at $120-$130bn, down only around 20% on last year’s record $155bn.

And that is even though we expect only $24bn of the total $177bn of clean energy stimulus promised to the sector to have hit the front line by year end. Even with no growth in underlying activity, as the trickle of stimulus turns into a flood, we should see record years for clean energy investment in 2010 and 2011. If the capital markets do recover and debt spreads come down, we will most likely see an asset bubble form (in any case we are already seeing our prediction that the stimulus will prove pro-cyclical for the clean energy sector coming true).

So what you have is a stalled process at the big-picture, cocktail party level, but a gathering storm of activity on – dare I call it this – the coal face.

There are many reasons for this. One is the improving economics of clean energy. The combination of five years of record investment with a credit crunch and a sudden and brutal recession meant that the balance switched overnight from excess demand to excess supply. Selling prices were unsustainable as were profit margins. Many firms cut back their plans and some trimmed their workforces. However one man’s pain is another’s gain, and lower prices for wind turbines, PV panels and other equipment now mean better deals for project developers and, overall, improving economics for renewable generation.

Each quarter, New Energy Finance provides its clients with detailed analysis of the levelised – or unsubsidised – cost of energy for 16 renewable energy technologies from waste-to-energy to onshore wind and parabolic trough solar, in comparison to fossil-based power. This takes into account up-front capital costs, financing costs, maintenance and feedstock costs during the life of a project, and many other factors. Our most recent analysis estimates that the cost of electricity from most renewable power technologies will have fallen by 10% or more during 2009, with solar power costs down by an astonishing 50%.

So, renewable energy is getting more competitive. The second big gain during the latter part of this year has been in the availability of capital for clean energy projects. This was the sector’s biggest headache earlier this year, and was the main reason for a 60% slump in clean energy investment between the middle of 2008 and the beginning of 2009.

Now, however, the picture is showing signs of improving. For a while it was the development banks –BNDES of Brazil, the European Investment Bank, IFC, the Asia Development Bank and so on – that kept the flame of clean energy project debt alive, but now bank debt is reappearing, as lenders recover their confidence after the shocks of autumn 2008, and government-rescued banks return to lending. In the US, the long-awaited arrival of the US Department of Energy’s loan guarantees will help this process, although low natural gas prices and the impact of recession on demand, are still acting as powerful dampeners.

Governments are also showing more sensitivity to the problems of firms with earlier-stage technologies in finding venture capital money during the economic downturn. Earlier this month, for instance, the Australian government announced the equivalent of $219m in grants for four promising renewable energy projects – including one in wave power and two in enhanced geothermal, or “hot rocks”.

But the final reason why we are seeing robust levels of activity in clean energy investment is my favourite: it is – if not Copenhagen – then the Copenhagen process.

After all, it was in preparation for Copenhagen that the European Union signed up to a 20% reduction in carbon emissions by 2020 from 1990 levels, and put on the table a 30% reduction by 2030 – contingent on similar moves from other economic blocs and countries. Copenhagen caused Japan’s new government to pledge a 25% cut in emissions by 2020 from 1990 levels.

Even more significantly, it was the Copenhagen process which elicited a commitment from emerging economic giants such as China and India that they too must play a key role in efforts to combat global warming by limiting their future growth in emissions, even though they are not yet ready to sign up to formal targets.

The latest country to pledge deep cuts in the run-up to Copenhagen was South Korea, fastest-growing emitter in the OECD and Asia’s fourth-largest economy (although still considered a developing country under Kyoto) which committed last week to the toughest of all options it was considering, a 4% cut in emissions from 2005 baseline by 2020, replacing its earlier target of limiting emissions growth to 8%.

The exception, as ever is the US. Draft energy and climate legislation moving through US Congress would commit the world’s biggest economy to a reduction in emissions of 17% to 20% by 2020 from 2005 levels, and while its proponents have certainly been informed by the international process, it is clear that when the US does eventually move in the same direction as the rest of the world it will be mainly for internal – one might even say isolationist – reasons.

So there you have it. As a one-off, big bang effort to force the world to be saved, Copenhagen is likely to go down in history as a failure. However, as part of an ongoing process of education, encouragement and solicitation of commitments, and as a driver of investment in clean energy – at least in those parts of the world where sufficient capital exists – it has already been a huge success.

Copenhagen is dead. Long live Copenhagen!

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