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February 2010

Impact Climate Change What next after Copenhagen? In light of the environmental challenges the world is facing, Natixis Asset Management has set up the Climate Change Scientific Committee(1). Pierre Radanne, a member of this committee and a negotiator(2) at Copenhagen, had the opportunity to present his analysis of the summit to some major investors(3) at an event organized by Natixis Asset Management on January 21. Despite the impression of failure there were some promising advances, though these remain to be confirmed over the next few months. Pierre Radanne, an adviser to the French-speaking African countries(2), provided this summary: “The Copenhagen Accord consists of 250 pages of text and 2,500 points of discord!” At the close of the conference, the feelings of failure and frustration were shared by most of the 47,000 participants. After five changes at the helm, the negotiations were subsequently conducted behind closed doors by government leaders and heads of state. "The successive transfers of responsibility for the negotiations, added to very strict time constraints, hampered progress, muddling the options and affecting the quality of the final agreement", said Pierre Radanne, regretfully. Nonetheless, the Copenhagen summit was a historic event. In particular, this conference brought together the largest ever number of people in authority and other interested parties from a vast array of organizations: heads of state and governments, ministers, negotiators, representatives from national, regional and local government, business leaders, trade unions, NGOs of all kinds, Pierre Radanne, member of and lastly, most of the media. The size of the gathering was unprecedented, and proved to be an the Climate Change Scientific obstacle to the efficient functioning of the negotiations. Committee Copenhagen also made history because the summit made possible two major advances in the fight against global warming: the mobilization of all countries, whether industrialized or emerging, and the establishment of a multiyear financing commitment to developing countries.

FOCUS The Copenhagen summit was the culmination of more than 15 years of climate negotiations. For more information on this subject, consult the “Background to the negotiations” section in the appendix.

n A long way from meeting the expectations of scientists… The Copenhagen summit was meant to provide a response to the warnings from scientists. In its fourth report (2007), the IPCC(4), a scientific body of climate specialists, stated the necessity of limiting global warming to below 2°C compared with average pre-industrial temperatures. To reach this objective, emissions of greenhouse gases must

be halved by 2050. While all countries represented at Copenhagen recognized the need to stay below the 2°C limit, they did not reach agreement on their commitments to reduce CO2 emissions. “The negotiations were weighed down by the lack of credibility of the industrialized countries that were signatories of the Kyoto Protocol” said Pierre Radanne. “Since most of these countries probably won’t manage to keep their Kyoto commitments by the 2012 deadline, it was difficult for them to persuade a country like China to make a commitment for the next 10 and 40 years".

(1) N  atixis Asset Management established its Climate Change Scientific Committee to deepen the knowledge of its investment teams in relation to the issues and challenges of climate change. Chaired by Carlos Joly, the committee comprises recognized experts in complementary fields, such as climatology, economics and geography. (2) S  ince 2006, Pierre Radanne has worked with the IEPF (Environmental Institute for the French-speaking World) to advise and train African negotiators to participate at UN conferences on climate change. (3) N  atixis Asset Management has recently launched an equity fund focusing on the issue of climate change: Impact Funds Climate Change. This sub-fund of the Luxembourg ICVC Impact Funds seeks to generate long-term capital growth by investing in companies contributing to the fight against climate change or exploring ways to adapt to its consequences, so as to combine responsibility with the pursuit of performance. (4) Intergovernmental Panel on Climate Change. CORPORATE & INVESTMENT BANKING / SAVINGS SOLUTIONS / SPECIALIZED FINANCIAL SERVICES

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Impact Climate Change / What next after Copenhagen? / February 2010

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Projection, in a voluntary scenario, of developed country emissions in 2020 and 2030, assuming a net reduction of 3 % per year. 140

These projections refer to emissions of the six greenhouse gases covered by the Kyoto Protocol excluding LULUCF (Land Use, Land Use Change, and Forestry) emissions.

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USA

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Canada

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Australia

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New Zealand

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Russia

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Source: based on FCCC/SBI 2009 figures

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n …because of the lack of credibility of the industrialized countries Only the European Union (EU) 15 countries are set to meet the commitments made at Kyoto, cutting emissions by 8% compared with 1990. Thus, even though Spain, Portugal, Greece, Ireland and Italy have fallen behind, the target will be reached thanks to the exemplary efforts of countries such as Germany and the UK. The former Soviet countries have fulfilled their obligations owing to the reduction in industrial production that followed the fall of communism. These countries, including Russia, Ukraine, Belarus and the region’s new EU members have cut their emissions by between 20% and 50%. However, some countries have not made any significant political commitment to combat climate change, and have seen their emissions rise exponentially. This is the case of Canada, Australia and the USA. “Countries in this category generally have low population density, abundant natural resources and lifestyles that are very wasteful in energy terms", points out Pierre Radanne. The results expected for 2012 will therefore not meet the somewhat modest target of an average 5.2% reduction in emissions for developed countries that was set at Kyoto. As for global emissions, these have risen by a third since 1990. This situation is especially worrying given that scientists are calling for industrialized countries to cut their emissions by between 25% and 40% by 2020. In Copenhagen, the EU made a commitment to reduce its emissions by 20-30%, depending on the efforts made by other countries. “The USA has adopted targets that seem unlikely to be achieved. A 17% reduction in its emissions by 2020, and 42% by 2030, would imply a radical change in the American way of life. And a similar change in mentality

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would be required in countries like Russia and Canada", in the opinion of Pierre Radanne, for whom another source of regret was that the issue of commitment for the USA came down to a stand-off with China. “US diplomats feared that this issue would help China gain further ground from an economic viewpoint", he adds. The discussions on commitments to reduce CO2 emissions will probably carry on until February, but these are unlikely to fall within the range set by the scientists (25-40%).

n The first issue of "compulsory solidarity" The nature of climate change means that it cannot be reduced to bilateral conflicts. “Climate change is the first global issue of «compulsory solidarity»", underlines Pierre Radanne. Many other issues with global reach have existed in the past, such as famine and epidemics, and countries have often tried to resolve such issues within their borders, in the absence of any real international solidarity. But climate change is an entirely different matter. Before the gradual accumulation of greenhouse gases in the atmosphere from the mid-19th century, the climate was stable, and regulated by natural cycles. Now it is changing as the result of human activity, and these changes cannot be addressed by the actions of a single country. It is the result of the choices and practices employed by all the countries in the world. “Halving global emissions of greenhouse gases by 2050 would require all of humanity to make a contribution. This can only be achieved by guaranteeing the development of all countries, especially the poorest", points out Pierre Radanne. But this development would have to follow a different path to that of countries whose industrialization

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Impact Climate Change / What next after Copenhagen? / February 2010

was based on fossil fuels. This debate took place at the Bali (2007) and Poznan (2008) conferences. The formulation of a “shared vision” of climate change objectives foundered in the absence of a development plan proposed to developing countries in the “G77 + China”. The climate negotiations turned out to be the first real north-south negotiations since the post-colonial period. In effect, while the south needs the north’s help for its development, the north needs the south just as much to stabilize the climate. “In Copenhagen, the issue of development was at the heart of the negotiations. Over the last few years, there hasn’t been much of an effort to make development accessible to all, and compatible with the urgent necessity to stabilize the climate", underlines Pierre Radanne.

n North-south negotiations essential A good starting point for the negotiations would have been fairness, based on criteria setting the level and nature of commitments, as well as the support for developing countries. One of the main errors in the current negotiations is the inability to seriously tackle fairness criteria, because of delays in developed countries meeting their commitments. “The consequence is that the former tend to make the implementation of any action towards development that entails lowering emissions conditional on financial reward. Negotiations thus take the form of “action for money”. In more positive terms, work has advanced significantly on the plan for different types of action", says Pierre Radanne.

n First advance: formulating types of action for all Countries present at Copenhagen acknowledged the importance of a bottom-up process when putting together projects and programs. The proposal introduced two years ago by China and South Korea, whereby emissions-reducing action would be implemented based on national processes represented significant progress. Thus, “nationally appropriate mitigation actions", or NAMAs, opened the way to action being taken by developing countries through the least advanced and most vulnerable countries receiving financial contributions from developed countries. NAMAs will take the form of national plans that may be presented for financing according to a mechanism to be established under the UNFCCC(3), and then be implemented in conjunction with development banks. “All the dynamism around the Copenhagen conference shown by regional and local governments should be added to this initiative", comments Pierre Radanne. This advance is essential, as

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real emissions reductions and further adaptation measures follow on from grassroots initiatives with the involvement of local government, firms and residents.

n Second advance: the principle of an international financing system The other advance arising out of the summit was the decision to create an international financing system that would no longer be based on voluntary action. “The agreement of the USA to a multi-year financing process for developing countries constitutes an important turning point”, adds a delighted Pierre Radanne. But this agreement is still to be confirmed by the various countries in future negotiations: this highly significant and positive aspect of the Copenhagen Accord could be weakened if the countries reduce their contributions or simply divert development aid, rather than adding to it. It will be necessary to specify the proportion of public contributions coming from the Kyoto mechanisms, new resources and private finance. “The idea, supported by France, of a tax on financial transactions (Tobin tax), would first have to be decided on in the context of the G20(4). The definitive procedures have not yet been specified in terms of finance management, governance methods and allocation systems”, notes Pierre Radanne. This financial commitment followed the “fast start” funding agreement, which was reached at the start of the conference to provide USD 30 billion for the three-year period 2010-2012, to enable projects to be prepared and pilot operations to be implemented without delay in the least developed countries. These contributions should total around USD 500 billion over the 2010-2020 period.

n And now? “The climate is global and indivisible. Action on climate change must therefore be global and taken by all. Only the United Nations can have sovereignty over the climate", insists Pierre Radanne.

The need to strengthen the role of the United Nations The Copenhagen conference highlighted the need to strengthen the role of the United Nations, both at the level of policy making and in terms of the governance framework and compliance with commitments. “Essentially, only the UN can create climate change regulations, something the G20 or any similar institution cannot do", says Pierre Radanne.

(3) United Nations Framework Convention on Climate Change (4) However, it was rejected by both the European Council and the European Parliament.

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Impact Climate Change / What next after Copenhagen? / February 2010

Adding the power to impose sanctions, i.e. financial penalties, to the climate change convention, would require two reforms: the inclusion in a climate treaty of such powers, and harmonization with the WTO (i.e. transforming it into an international trade organization attached to the United Nations), establishing a process of settling differences of opinion on economic, social and environmental matters. “However, while the creation of a world environment organization would make the institutions stronger, it would not solve the underlying problem, that of imposing financial penalties if the agreements signed are not respected", notes Pierre Radanne. Working methods would also have to be reformed. “While it is obviously out of the question to move towards a treaty that does not bring together all of humanity, the consensus decision-making currently in force at the United Nations gives countries an inordinate amount of power, which often leads to time-consuming blockages", adds Pierre Radanne.

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We will have to create some rules that allow for a balance between the essential aims of transparency, democracy and fairness, and the obligation to achieve results quickly.

The absolute necessity for a new treaty The outcome of the conference pointed up the importance of inserting any treaty in a solid framework. “In pragmatic fashion, it will be necessary to increase the pressure on countries to meet their commitments to an extent that restores confidence and allows ambitious plans for collective emissions reductions to be pursued, so that the climate can be stabilized according to scientists’ recommendations", emphasized Pierre Radanne. Thus, the announcement by Yvo de Boer(5) after the summit reiterated the need to prepare a treaty with binding commitments for the next summit in Mexico(6).

FOCUS 2010 will be a crucial year, full of challenges. For more information on this subject, consult the “Challenges for 2010” article in the appendix.

Disclaimer This document is destined for professional clients. None of the information contained in this document should be interpreted as having any contractual value. Natixis Asset Management will not be held responsible for any decision taken or not taken on the basis of information contained in this document, nor in the use that a third-party may make of it. The opinions expressed in the research and analyses are the sole responsibility of their authors and are not necessarily shared by Natixis Asset Management. Natixis Asset Management shall not be held liable for the accuracy and exclusivity of the information provided.

(5) Executive Secretary of the United Nations Framework Convention on Climate Change. (6) The next “conference of the parties” to the climate change convention or COP 16, the annual climate change summit, will take place in Mexico from November 29 to December 10, 2010.

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Impact Climate Change / What next after Copenhagen? / February 2010

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Meeting with investors What role did NGOs play in the negotiations? Pierre Radanne: Progress was made in the negotiations thanks, above all, to the mobilization of public opinion via the media, but also because of the pressure brought to bear by NGOs and the scientific community. This pressure, although it might sometimes appear to have little effect, is absolutely necessary. ONGs played an important role in Copenhagen, although they were excluded from the final negotiations.

During the meeting organized by Natixis Asset Management on January 21, some major investors had the opportunity to put questions to Pierre Radanne. Their main concerns related to the role of public opinion and of the banks. Here is an extract from the Q&A. Public opinion was not always fully mobilized during the Copenhagen summit; how do you explain that? Pierre Radanne: The public is aware of the challenges of climate change and is sensitive to the issues. The climate was not a subject for debate at Copenhagen: the scientific analysis of global warming has already been done, and served as a basis for the discussions in Copenhagen. The aim of the summit was for all countries to make a commitment to reducing their environmental impact. As a result, the negotiations covered legal aspects and financing issues, and these subjects are of less interest to the general public. Furthermore, for public opinion to be engaged, the event needed to be understood and have visibility, whereas the media had some difficulty in perceiving the importance of this historic event while it was taking place.

What role can the banks play? Pierre Radanne: The banks have to take climate change issues into account by integrating them into their financial analysis. They have to make the link between finance and economics. By equipping themselves with a highly detailed and technical economics analysis, they can limit the financial risks. They will find, for example, that funding the construction of photovoltaic farms is not attractive financially. The Stern Review on the Economics of Climate Change(7) is still the key work that has been produced in this field. It would be good if the banks invested more widely in this type of research.

Pierre Radanne and Carlos Joly, member and Chairman of the Climate Change Scientific Committee respectively

(7) The Stern Review is a report on the effects of climate change and global warming, which was written by the economist Nicholas Stern for the UK government in 2006.

BIOGRAPHY Pierre Radanne is Chairman of the 4D association (Dossiers et Débats pour le Développement Durable) and a founder of the company “Futur Facteur 4”, which he formed in 2004 and which combines activities of consulting, research, training and communication on energy management, combating climate change and sustainable development. He has served as Chairman of the ADEME (the French Environment and Energy Management Agency). In 2003, he participed in a long-term study in the Interministerial Mission on the Greenhouse Effect for the Prime Minister’s office. He is currently an independent consultant and an expert for various institutions and a speaker at numerous public meetings. He has published many works, in particular “Energies de ton siècle” in 2005. Since 2006, he has worked with the IEPF (Institute of Energy and the Environment for the French-speaking Countries) and the French Ministry of Foreign Affairs to support and train African negotiators for United Nations conferences on climate change.

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Impact Climate Change / What next after Copenhagen? / February 2010

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APPENDICES n Focus: Background to the negotiations The Rio Convention The Rio Convention, an international treaty, was signed just seven years after the link between greenhouse gas emissions, the composition of the atmosphere and fluctuations in climate was understood. This convention made three advances possible: • recognition by the community of nations of the reality of climate change and its anthropogenic causes • recognition that countries had to act according to their historical responsibilities and capacities • countries were motivated to act to stabilize the climate, but without setting precise methods for taking action The Rio conference did not lead to many measures being adopted by industrialized countries that were effective in reducing greenhouse gas emissions. These measures were therefore insufficient. The Kyoto Protocol In 1995, the Berlin mandate set a new framework based on two key principles: • setting binding obligations for developed countries to reduce their emissions • making the achievement of results binding in terms of reducing emissions over the period 1990-2012, due to the inability to reach agreement on common methods of implementation In 1997, the Kyoto Protocol was therefore drafted on the basis of these principles. It includes: • targets for developed countries to reduce their emissions in the period 1990-2012 (- 8% for the EU, - 7% for the USA, - 6% for Japan and stabilization for Russia) • the creation of flexible mechanisms: negotiable permits (between developed countries), a development mechanism for developing countries and joint implementation for transition countries • the request to industrialized countries to transfer technologies and provide financial support for developing countries, in order to strengthen their institutions and help them adapt to climate change The implementation of the Kyoto Protocol was delayed by the refusal of the USA and Australia to ratify it in early 2001, and the late ratification by Russia. As a result, the agreement finalized at the Marrakech conference at the end of 2001 did not come into force until February 2005. The start of negotiations The approach of the expiry of the commitments of the developed countries that signed the Kyoto Protocol led to the opening of a new phase of international negotiations, with the aim of these countries agreeing commitments for the post-2012 period. These new negotiations have progressed slowly. In Montreal, in 2005, the need to reduce deforestation was recognized, followed in 2006 by recognition of the need to support the adaptation of developing countries, in Nairobi. Subsequently, a consensus emerged around the need to strengthen the Rio Convention in relation to reductions in the emissions of developing countries, technology transfer and the inclusion of international air and maritime transport. However, in practice, these negotiations could only enter an active phase after the US presidential election in 2008, to enable the USA to return to the process. Bali Action Plan The 2007 Bali Conference was to set a negotiating mandate equivalent to that of Berlin in 1995. This was a failure: all that was achieved, via the Bali Action Plan, was the preparation a list of subjects to be tackled (long-term climate objectives, adaptation and emissions reduction measures, finance and technology transfer). 2009 therefore began without a real political mandate and with the new US position still awaited. This information is taken from a report entitled Négociations internationales sur le climat pour le régime post 2012 (International Negotiations on Climate Change for the post-2012 period) by Pierre Radanne, Alix Mazounie, Emeline Diaz, Emmanuel Goetz and Emilie Briquet. It can be consulted in full at www.am.natixis.com/climatechange in the Publications section.

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Impact Climate Change / What next after Copenhagen? / February 2010

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APPENDICES n Focus: Challenges for 2010 This year is set to be marked by four parallel processes: • Finalization of the US legislative process that will determine, in 2010 even more than in 2009, the general timetable for negotiations. After the Senate vote, it will be necessary to combine the Waxman-Markey and Kerry-Boxer bills in a joint committee with equal representation from each chamber and then present the harmonized text to the two chambers. • The formal adoption of the Copenhagen Accord by heads of state and governments at a United Nations plenary assembly. • The implementation of the financial aspect of the Accord for the benefit of developing countries. This process will be relatively separate from the other measures, with a greater role being played by countries and multilateral and bilateral development banks. • The continuation of the debate on the next stage of the climate negotiations through an in-depth examination of the legal and economic issues. A new treaty may be drafted for the next summit in Mexico at the end of the year(1) or for next year. This could also become part of the preparations for a new summit in Rio in 2012, 20 years after the Earth Summit. It is to be hoped that the negotiations will reach a successful conclusion, with the Copenhagen Accord being implemented as soon as possible, and that subsequently discussions will be pursued within a broader framework, based this time on solid foundations: • forward-looking and sustainable work on emissions reduction targets for different countries • in-depth consideration of the paths to development and economic analysis of these • the building of a reliable compliance framework for commitments made, including a system of penalties

(1) The next “conference of the parties to the climate change convention” or COP 16, the annual climate change summit, will take place in Mexico from November 29 to December 10, 2010.

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Newsletter What next after Copenhagen.P.Radanne.02.2010