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the davos climate / energy brief :

business leaders difference

How can make a

Authors: Måns Lönnroth and Allan Larsson in co-operation with the members of Global Utmaning’s Advisory Board on Climate Change.

january 2011


the davos climate / energy brief

january 2011

Global Utmaning's Advisory Board on Climate Change

Gun-Britt Andersson previously worked as secretary of state at both the Ministry of Social Affairs and the Foreign Office with responsibility for social issues, migration and development. She has been Director of UNRWA in Jerusalem and served as Ambassador to the OECD and UNESCO in Paris. Lennart Båge was, between 2001 and 2009, President of the International Fund for Agricultural Development (IFAD) and member of the UN Chief Executives Board (CEB), chaired by the Secretary General and chairman of the UN High Level Committee on Programmes (HLCP). He is now a member of the Boards of Sida and the Swedish University of Agricultural Sciences and a senior advisor to the UN. Jan Cedergren has been chairman of the board of Adaptation Fund (UN-Climate) and chairman in the Working Party on Aid Effectiveness (Paris- Accra Agenda OECD / DAC). He also worked for OHCHR (Human Rights-Geneva); was head of the bilateral assistance at the Swedish Foreign Ministry and Deputy Director General of Sida. Stefan Edman, MA in Biology and Chemistry, Honorary Doctor of Technology, lecturer, columnist, author of several books on ecology, environment and global warming. Adviser to Sweden´s former Prime Minister and to the Minister for the Environment. Secretary General for the Commission on Oil Independence (2006). Karl Hallding heads the China programme of the Stockholm Environment Institute (SEI). Was formerly with the Swedish Embassy in Beijing 199899 with responsibility for environmental political relations. His current work addresses the role of the BASIC alliance in global climate mitigation, and China’s role in global climate and energy securities. Niclas Ihrén, MSc, Lic. Eng., is a business leader and consultant in sustainable energy systems and radical innovation. He is senior climate change advisor to Global Utmaning, a senior advisor to the World Ecological Forum, and a senior advisor to World Climate Solutions. He is former CEO of Globe Forum, director of the Tällberg Foundation and CEO of Infinity Learning. Peter Kleen is a trade policy consultant with experience of trade policy-related issues from over 30 years in public service. In 1992-2004 he was Director General of the National Board of Trade. He has published articles and reports on multilateral trade, globalisation and trade-related climate issues. Bo Kjellén is former chief negotiator on climate issues in the Swedish Ministry of the Environment and a researcher at the Stockholm Environment Institute, SEI. Håkan Jonsson is a European Affairs Expert at the Hallvarsson & Halvarsson Communications Consultancy, with a previous carreer in politics and diplomacy. He has inter alia served as State Secretary for European Affairs. Inger Jägerhorn is an economist and journalist. She has worked for Sweden’s largest morning newspaper Dagens Nyheter (Foreign Editor). She has also been assistant managing editor at Hufvudstadsbladet in Helsinki. She is now senior freelance.

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Anders Karlqvist is senior advisor at Global Utmaning, previously executive director for Swedish Polar Research (25 years). He has a professional background in mathematics and systems analysis. Staffan Laestadius, PhD, is a professor of industrial dynamics and Vice Dean for Research at the School of Industrial Engineering and Management of the Royal Institute of Technology, Stockholm. He is a senior advisor at Global Utmaning with focus on the implications of climate change to industrial and technical re-orientation. He has held expert positions at the Swedish Government Offices and at the Institute for Futures Studies. Allan Larsson is Chairman of the Board of the University of Lund, senior advisor at Global Utmaning, Stockholm and member of Conseil europeén d’orientation of Jacques Delors’ Notre Europe. He has been the Swedish finance minister, a Member of Parliament, Director General for Employment and Social Affairs in the European Commission, member of President Barroso’s High Level Group on Energy and Climate Change. Lars-Erik Liljelund is Chief Executive of the Foundation for Strategic Research – Mistra – Stockholm. Former DG of the Swedish Environment Protection Agency and the Swedish Prime Minister’s special envoy on climate change. Member of the China Council – CCICED – and board member of the International Committee for Mountain Development – ICIMOD. Former chair of the board of the European Environment Agency. Måns Lönnroth is senior advisor at Global Utmaning. He has been managing director of Mistra, the Swedish Foundation for Strategic Environment Research, international vice chair of the China Council for International Cooperation and Development and State Secretary in the Swedish Ministry of the Environment. Richard Murray has a PhD in Economics, University of Stockholm, retired from Swedish Agency for Public Management where he served as Chief economist for 21 years, representative of green party in the city council of Stockholm for ten years, at present chairman of Ekoparken Association and partner in MAPSEC consultancy. Catharina Ringborg is a board member and advisor to a number of internationally active power and energy companies. She has worked with sales of environmental technology and energy systems in Europe, Asia and Africa, and was previously senior Vice President in Asea Brown Boveri and CEO of Swedish Water. Anders Wijkman is senior advisor to the Stockholm Environment Institute, vice chair of the Tällberg Foundation and vice president of the Club of Rome. He has been a Member of the European Parliament, assistant Secretary General of the United Nations and Secretary General of the Swedish Red Cross. He is also a member of the Swedish Royal Academy of Sciences. Rutger Öijerholm, judge at the court of appeal in Stockholm; legal expert at the ministry for agriculture, the ministry for housing and planning and the ministry for environment and energy; member of the Swedish delegation at the UNEP- process negotiating the Vienna Convention and the Montreal Protocol.


january 2011

the davos climate / energy brief

executive summary Efforts to mitigate climate change and improve energy security need new momentum. The same goes for “the green race“, which offers great opportunities for those countries and businesses that are ready to make long term commitments to clean technologies. Forward-looking business leaders and forward-looking governments should now take the lead. The comment made a year ago – “Copenhagen left the business community confused“1 – still holds. Although agreements on several issues were formally reached at the Cancún Climate Conference, they did not address the fundamental issue of long term conditions for business investments in low-carbon technologies. The next global meeting in South Africa 2011 is not likely to change this. According to the International Energy Agency, this deadlock on investment conditions carries a clear long term risk of a severe delay in the structural transformation of the world’s energy systems2. Too many countries and too many businesses are tied up in the “brown race“ of high-carbon technologies, rather than entering into the “green race“ of low-carbon technologies. This Davos Climate/Energy Brief presents three distinct suggestions that together could break the deadlock and serve as a bottom-up pro-business complement to the present UN approach: • Concentrate on the opportunities that investments in new technologies will bring • Initiate an open International Climate Investment Community comprising countries willing to take the lead • Establish the principle of a technology neutral CO 2 price as the basic element of such a community, including mechanisms to uphold the price. The purpose of a technology neutral carbon price is to create a level playing field, internalizing the cost of climate change, and making high-carbon emission technologies unprofitable and low-carbon emission technologies economically viable. The aim is to give momentum to the needed massive investments in sustainable technologies. A pricing strategy is the preferred way to stimulate business investment since it is directly compatible with the way business operates. A number of issues will have to be resolved when designing an investment community of lead countries. Key among these is a mechanism for upholding a technology neutral 1 McKinsey: Jeremy Oppenheim, McKinsey Quarterly, February 2010. 2 IEA: According to the IEA, global energy demand will grow by 55 per cent by 2030, and in the period up to 2030 the energy supply infrastructure worldwide will require a total investment of USD 26 trillion, about half of that in developing countries. If industry and governments do not manage to green these investments by channelling them into climate-friendly technologies, emissions will go up by 50 per cent by 2050, instead of down by 50 per cent.

CO 2 price – a price at which high-carbon emitting technologies become unprofitable and low CO 2 emitting technologies become economically viable. Calculations suggest that this price is in the order of 40 euros/ton CO 2 to be reached over a transition period. The mechanisms to reach this price level are the present Emission Trading System of the EU and national CO 2 taxation. Government revenues accruing from the CO 2 taxes could be off-set against other taxes in such a way that investments and economic development are further stimulated (“more taxes on what we burn, less taxes on what we earn“). Or the revenues could be used for fiscal consolidation. A Climate Investment Community should contribute not only to climate mitigation, but also to energy security. It can do so, as the signals sent by a long term CO 2 pricing strategy will have a dampening effect on plans for future use of oil. Furthermore, expectations of future oil price hikes should be reduced and the economics of long term investments by business and households should likewise become more predictable. When established, and as experience accumulates, other governments – and industries – should see the advantages of joining the International Climate Investment Community. Other governments – or groups of governments – could establish their own investment communities: there is no need for an all-encompassing organization. Such communities could well exist in parallel, each reflecting a particular set of conditions and practicable choices of instrument – as long as they are based on a common principle of technology neutrality as a driver for the transformation of the energy systems. Perhaps these communities taken together can evolve into a global treaty under the UNFCCC, much in the same way as the WTO evolved out of GATT which initially consisted of only 23 “contracting parties“. Or in the same way as Jean Monnet built the European Coal and Steel Community, initially with six countries that shared interests and visions, which evolved into the EEC and today’s EU consisting of 27 states. Business leaders can bring new momentum to the political process within national governments, and thus also to the UN negotiations, by promoting the need for a bottom-up approach, perhaps in the form of an International Climate Investment Community. We suggest that an Independent Commission on Climate Investments be established to discuss and further develop these and other ideas and key issues. Focus should be on dispelling uncertainty and bringing predictability to the massive investments needed for the structural transformation ahead of us. The agenda should also address possible concerns over short term competitiveness with respect to countries and industries outside the community.

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the davos climate / energy brief

january 2011

1. The New Reality: Energy Security, Climate Change and “the Green Race“

• it made progress on market-based mechanisms to enhance the cost-effectiveness of mitigation actions

The World Economic Forum Annual Meeting 2011 in Davos takes place at a crucial moment in world affairs, a time when – perhaps more than ever before – leadership is needed. The Forum will focus on “shared norms for the new reality“3 . The theme rests on four interconnected pillars: • Responding to the New Reality • The Economic Outlook and Defining Policies for Inclusive Growth • Supporting the G 20 Agenda • Building a Global Risk Response Mechanism

The World Resources Institute for one describes the Cancún Agreements as a turning point for international climate negotiation: “the Agreements solidify the role of the United Nations Framework Convention on Climate Change (UNFCCC) at the center of international climate policy and cooperation moving forward.” However, there were shortcomings and issues that will need to be sorted out in the lead-up to the next round of climate talks in Durban, South Africa in 2011. The reality is that even with the decisions in Cancún, countries will fall short of what science says is needed to prevent the worst impacts of climate change and to sufficiently support countries in coping with the impacts“5. Comments from European experts concur, welcoming the fact that trust in the negotiation process has been rebuilt, but pointing out that all substantial issues have been postponed until 20116.

Underpinning each of these pillars is the question of the proper use of natural resources against the background of production limitations to these resources. Energy security and climate change will become a growing risk factor in this New Reality for Governments and business in both the short and the longer term. At the same time, “green race“ investments in new low-carbon technologies will offer great opportunities for those countries and businesses that are prepared to make long term commitments to sustainable and inclusive development. Political leaders have a duty and the power to create institutional and regulatory frameworks providing incentives and predictability for low-carbon technologies. Business leaders play a key role too. When business leaders support new ideas on how to break the deadlock, new political momentum will be brought to the UN negotiations.

2. Breaking the deadlock – and modernizing the economies 2.1 the importance of the cancún Agreement On the whole, the UN Climate Conference in Cancún in December 2010 was seen by many as a success. The Conference formalized the Copenhagen Accord and by reaching agreements on several issues4: • it confirmed the need to reduce emissions “so as to hold the increase in global temperature below 2 degrees C above pre industrial level“ • it decided to establish a Green Climate Fund and that a significant share of new multilateral funding for adaptation should flow through the fund • it adopted a framework agreement on measures against deforestation (REDD+) • it decided to establish a technology mechanism to promote and enhance the development and transfer of environmentally sound technologies to developing countries

3 World Economic Forum: Shared Norms for the New Reality, 2010 4 UNFCCC: Outcome of the work of the Ad Hoc Working Group on long-term Cooperative Action under the Convention, 2010

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2.2 commitments to emission reductions: only 60 per cent of what needs to be done by 2020 The World Bank notes that for the first time governments have formally committed themselves to a maximum global temperature increase of 2 degrees, to review the adequacy of this target as new scientific evidence on impacts becomes available, with the possibility of reducing it to 1.5 degrees and to formalize the commitments made after Copenhagen, including those made voluntarily by developing countries. However, there were no commitments to greater reductions in emissions. The informal pledges to date are at best only 60 per cent of what needs to be done by 2020 to keep global temperature rises to less than 2 degrees7.

2.3 the stumbling block remains to a global deal on emission reductions In our view, the success of Cancún Climate Conference was partly due to the excellent work of the Mexican Government and partly due to the low expectations. For the next meeting in Durban 2011, expectations are equally low; no one expects that the main goal of the negotiations – a global, legally binding agreement on emission reductions – will be reached at the conference. At the present state of political commitments it will take many years before business will see the main actors signing the kind of agreement that would give the needed momentum for investments. The stumbling block for such an agreement on emission reductions is obvious. It is the fear among governments that emission reductions would constrain their short term national economic strategies. This is an 5 World Resources Institute: http://www.wri.org/stories/2010/12/reflectionscancun-agreements 6 Tubiana, IDDRI, Schellnhuber, PIK, Grubb, Climate Strategies, Cambridge. 7 World Bank, Andrew Steer, 23 December 2010.


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understandable response, given that commitments to address climate change are presented as “burden sharing“. This situ­ation is likely to remain for years, given the complex set of conditions that a global treaty has to meet, and the precarious state in which most governments currently find their economies. This failure in turn has resulted in a severely weakened momentum for the investments needed to realign our energy systems towards a low-carbon economy.

2.4 “an energy revolution is needed“ However, the process of global warming cannot be halted until all 192 UN member states have agreed. Therefore, it is more urgent than ever to break the deadlock by re-focusing from “sharing burdens“ to “sharing opportunities“. Investing in energy efficiency and low-carbon technologies should be seen as a major driver for a necessary economic modernization and transformation to sustainable development. This is not news. These perspectives on climate change have been the subject of in-depth studies by all the leading global institutions in the fields of econo­my, technology, energy and climate. The consensus among different institutions is striking. Taken together8, the reports carry two powerful messages: • an energy revolution is needed to tackle the cli­mate challenge, based on widespread deployment of low-carbon technologies. • a low-carbon future is also a powerful tool for promot­ing economic development and enhancing energy secu­rity – it is within our reach and will help modernize our economies. These studies also show that massive investments will be needed to meet the world’s growing energy needs. The investments will need to be considerably higher in the lowcarbon sce­nario than in the high-carbon (business-as-usual) scenario. According to the International Energy Agency, global energy demand will grow by 55 per cent by 2030. In the period up to 2030, the energy supply infrastructure worldwide will require a total investment of USD 26 trillion, with about half of that in developing countries. If the world does not manage to green these investments by directing them into climate-friendly technologies, emissions will go up by 50 per cent by 2050, instead of down by 50 per cent. The low-carbon scenario holds significant potential for excel­lent returns on investment and lower energy costs com­pared with the high-carbon scenario (business-asusual). The European Climate Foundation’s Roadmap 2050 shows that by 2050, Europe can achieve an economy-wide 8 Stern, N. “Stern Review on The Economics of Climate Change”. HM Treasury, London, 2006, International Energy Agency: ETP 2010, EU Commission: Analysis of options to move beyond 20 per cent greenhouse gas emission re­ductions and assessing the risk of carbon leakage, 2010, World Bank: World Development Report 2010, MEF Global Partnership: Global Gaps in Clean Energy Research, Development and Demonstration, World Business Council for Sustainable Development: Vision 2050, European Climate Foundation: Road Map 2050.

the davos climate / energy brief

reduction of greenhouse emission by at least 80 per cent compared to 1990 levels9. This requires a transformation of both how energy is used and how it is produced across all energy related sectors. Capital will have to move into new sectors such as low-carbon energy generation, battery technologies, smart grids, electric vehicles and the like. The higher capital costs will be offset by lower operating costs compared to the high-carbon scenario. The changes required to implement this new energy system include shifts in regulation, in funding mechanisms and in public support. The transformation of the European power sector would yield economic and sustainability benefits as well as securing and stabilizing Europe’s energy supply. A political commitment now to a low-carbon transformation of the energy sector is ultimately the winning economic strategy for competitiveness, jobs and low-carbon prosperity. This transformation will only come about through active support and commitments by the global business community. As the global political scene looks now, it is absolutely crucial that business leaders engage more heavily in the energy and climate debate. Business leaders have to contribute to breaking the present political deadlock on lowcarbon investments.

3. Three steps that make a difference: a bottom-up process, focus on technology and investment, introducing a pricing strategy Today, there is an emerging discussion on the need to test ideas on a complementary process to the UNFCCC negotiations. Several think tanks in Europe and in the US have floated such ideas. We, representing a Stockholm-based think tank named Global Challenge, have launched such an idea in our report “An International Climate Investment Community“10. In this Davos Climate Brief we highlight three distinct suggestions intended as a contribution to the efforts to break the deadlock: • Concentrate on the opportunities that investments in new technologies will bring • Initiate an open International Climate Investment Community comprising countries willing to take the lead • Establish the principle of a technology neutral CO 2 price as the basic element of such a community, including mechanisms to uphold the price.

3.1 a technology neutral carbon price We suggest a shift from sharing burdens to sharing opportunities. We suggest focusing on technology and investment, as proposed by the IEA, World Bank and others. The linchpin in our initiative is a technology neutral CO 2 price – a CO 2 price high enough to make the necessary low-carbon 9 The European Climate Foundation: http://www.roadmap2050.eu/ 10 Global Utmaning (Global Challenge), Proposals in the Davos Climate Brief are based on the report “An International Climate Investment Community”, 2010.

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the davos climate / energy brief

emission technologies economically viable and thus the high-carbon emission technologies unprofitable. Such a level playing field is created by letting all energy sources cover their full costs, ie including environmental costs which are currently externalized in the economic models. The costs of climate change are very difficult – if not impossible – to estimate, but there is a clear risk that they could be very high. The present CO 2 price level, around €15 per ton in the European Emission Trading System, is not technology neutral. The existing high-carbon emission technologies do not pay their real costs – there is a “subsidy“ of at least €25 per ton emission in favour of fossil technologies. This per­verse situation has to be reversed. Analysis made of costs and revenues of different technologies suggests that a technology neutral price will have to be at least 40 euros/ton CO 2 in order to create a level playing field for all low-carbon technologies11. A key factor in these analyses is the role of carbon capture and storage technologies, CCS. These hold the promise of transforming technologies for burning fossil fuels in general and coal in particular into such low-carbon emission technologies. They are seen as “bridging technologies“ until renewable energies in the future can replace coal and oil. The long term costs of these technologies have been estimated by McKinsey and others to be € 40-50 per ton CO 2 emission. Thus, to include these “bridging technologies“ a technology neutral CO 2 price has to be at least € 40 ton in the long term. This price should be reached over a transition period, but no later than 2020, in order to give business guid­ance and predictability for the planning of long term investments. A technology neutral price should be established and maintained through a combination of the reformed ETS and complementary national CO 2 taxes and other measures. The revenues could then be used for lowering other taxes within the existing taxation systems for example on labour. Thus, taxes on “what we earn“ should be lowered and taxes on “what we burn“ should be increased. The total level of taxation could then remain unchanged. Or the revenues could be used for shorter term fiscal consolidation as an alternative for cuts in e.g, education, infrastructure, or research and development. Our proposal is structural in character and not dependent on variations in market prices on fossil fuels; it could in fact be a tool also for reducing the future demand for oil and thus also oil prices in a world facing an oil peak. The technology neutral CO2 price should also make the technological transformation of the present high-carbon emission coal industry into a low-carbon emission industry profitable. This would benefit the many regions in many countries that are heavily dependent on coal. The price level will, in fact, also make alternative energy technologies potentially profitable. 11 McKinsey economy.asp

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http://www.mckinsey.com/clientservice/ccsi/pathways_low_carbon_

january 2011

3.2 a european initiative, other regions can build their own communities • We suggest that the EU takes the initiative to build an International Climate Investment Community. Our inspiration is Jean Monnet, who suggested that a small group of European countries, sharing interests and vision, should establish a community for economic cooperation. The community then grew as additional countries saw the benefit of cooperation – from six to 27 members based on a set of jointly agreed rules and principles. • An International Climate Investment Community should invite other countries outside the EU to join and should thus be able to grow step-by-step. Countries that would not like to join an EU initiative could build their own communities; there is no need for an all-encompassing system. One community could rely solely on CO 2 taxes; another on a combination of emission trading and taxes and a third on subsidizing new low-carbon technologies. The key requirement is the political will to establish the technology neutral carbon price as the guiding principle for low-carbon investment and a modernization of the world’s energy systems. The great advantage for a country participating in such a community is that it will give businesses a strong signal to shift investment from fossil, high-carbon technology to lowcarbon technology, offering predictability for investment and new business opportunities and making the climate strategy a growth and employment strategy. Energy efficiency is the quickest and most cost effective way of reducing emissions. The potential to re­duce CO 2 emissions through efficiency improvements at present rep­ resents roughly half the abatement potential. Many oppor­ tunities in this field are already profitable, but are not fully leveraged due to conservative practices, lack of information, non-functioning markets etc. This is a field were a Climate Investment Community can play a role by promoting high energy standards. Finally, our proposal for such an International Climate Investment Community is not a longer term alternative to a global trea­ty. It is a medium-term approach for giving new momentum to the massive investments needed and thereby to the UNFCCC negotiations. With grow­ing experience of the impact of investments, the global trea­ty should become less threatening to governments wary of constraints on national development.

4. A basis for discussion, not a blueprint The ideas put forward in this Davos Climate Brief are not unique. There are now a number of ideas and initiatives that point in the same direc­tion. Our proposal addresses some key issues. It is a concept, not a blueprint. During the last few months these ideas have been discussed with government officials, researchers and scientists in academia


january 2011

the davos climate / energy brief

and experts in think tanks in Europe, USA and China. We have found support for • a process that can help create better predictability for business investment • a pricing strategy as a driver for low-carbon investment, ie a technology neutral CO 2 price • the basic idea of a complementary process to the UNFCCC-negotiations. We have encountered questions mainly on the issue of “carbon leakage“. We have replied that we have focused on the basic design of an International Climate Investment Community and that we need to find out whether there is sufficient support for such an idea before we take the next steps. If there is enough support for this bottom-up approach, then “carbon leakage“ is one of the issues that will have to be addressed in designing a community. We have also found an interest in bringing together these and other ideas than can help break the political deadlock over investment conditions. One way of doing this could be, as discussed during the consultation process, to establish an Independent Commission on Climate Investments to contribute to finding a way forward.

5. A call to business to adopt a Davos initiative on energy and climate This Davos Climate Brief is a call to the global business community to engage in the energy and climate debate and to take action to help break the present political deadlock. Global business leaders are invited to • support the main ideas presented in this brief: the bottom-up approach, focus on low-carbon technologies and investment, carbon pricing to create a level playing field between different technologies • support the setting up of an Independent Commission on Climate Investments to further develop these ideas and the key issues that will have to be resolved in order to substantially reduce the uncertainty and unpredictability that energy related investments by business and households now face.

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The Davos Climate Brief builds upon the, by Global Utmaning published report, "An International Climate Investment Community – breaking the deadlock" published in October 2010.

Global Utmaning (Global Challenge) is an independent Swedish think tank. It is a network of people from business, politics and academia focusing on the challenges posed by a new world order regarding economics, environment and democracy.

Birger Jarlsgatan 27 111 45 Stockholm Sweden +46-8-787 21 50

www.globalutmaning.se


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