A standing ovation concluded the climate change summit in Cancun at the end of last year. After the disappointment of COP 15 in Copenhagen, many policymakers were relieved that the UN climate negotiations were back on track – or at least had not collapsed altogether. The Cancun Agreements provided frameworks for financing (the Green Climate Fund), technology transfer, tackling deforestation (REDD+) and adaptation. They also noted the importance of the market mechanisms and proposed reforms to the Clean Development Mechanism. But they ducked the fundamental issues of the future of the Kyoto Protocol, and long-term commitments by developed and developing countries to cut emissions.  This week governments meet in Panama for the final round of formal discussions before the climate summit in Durban; there seems to be little prospect that they will be able to resolve these issues this year.

Since Cancun, the negotiations have continued along two tracks (Long-term Cooperative Action and Kyoto Protocol), though it is clear that no substantial progress can be made on Kyoto unless broader commitments are made under the LCA track. At the UNFCCC meeting in June, Russia, Canada and Japan all stated that they would not sign up to a second commitment period under the Kyoto Protocol. With the US out of the picture, having never ratified the protocol during the first commitment period, this leaves the EU as the only substantial negotiating bloc likely to consider adopting emissions targets under Kyoto beyond 2012, provided other major emitters make comparable targets. Elsewhere, the interlinked arguments about emissions targets, financing and performance monitoring continue.  Progress is only likely if particular countries move beyond professed outrage over historical responsibility, the role of the market or compensation, and consider what is politically feasible at a time when economic recovery and jobs are the priority.

The committee set up to design the Green Climate Fund  has met three times this year. While the discussions have been constructive, progress has been slow, and talks have focused more on institutional arrangements than operational issues. The committee will present options at Durban on the legal status of the Fund, its relationship with the COP, the proposed financing windows, institutional design and the role of the private sector. Discussion of the actual financing mechanisms will stretch into next year, and are expected to address how the funds will be raised, disbursement to mitigation and adaptation projects, and the process to monitor and evaluate spending.

Many in the business community are focused on the future of the Clean Development Mechanism. Recently, fewer project developers have been searching for and developing contracts to create carbon projects. This is in response to carbon prices which are approaching two-year lows, and restrictions on the use of CDM credits introduced by the European Commission. The World Bank’s annual report on the carbon market showed that primary CDM transactions fell from $2.7bn in 2009 to $1.5bn in 2010.  Business groups have highlighted the irony that governments are suffocating the CDM at the same time as discussing new mechanisms for scaling up finance to developing countries. A significant theme this year has been the view among developing countries, including Brazil, China and India, of ‘no CDM, if no second commitment period under Kyoto’.  This indicates that these countries believe that developed economies need the CDM credits more than developing countries need financial flows and technology transfer from CDM projects. This will be an important discussion to watch in Panama and subsequently in Durban.

The lack of agreement at the UN level does not seem to have made national legislation to tackle carbon emissions less likely, but it may have made it less predictable. The Australian government has recently proposed a new carbon tax (which will evolve into an emissions trading scheme with a floor price several years after its introduction). In Europe the debate continues about whether to ratchet down the emissions caps to at least keep them in line with falling emissions. In California, there is progress towards introducing Assembly Bill 32  that will regulate emissions from heavy industry and power generation. And in the UK, government proposals for reforming the electricity market are taking shape, and have the potential to significantly scale up low-carbon generation. With the lack of a coherent deal at the global level, business will continue to operate under a complex patchwork of carbon regulations in different territories.

By Jonathan Grant, PwC

This blog is based on PwC’s experience in advising policy-makers and business on climate change over the last 15 years. Read about the full range of work here.

Image: Panama Climate Change Conference, courtesy of adopt a negotiator