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End Of The Road For Kyoto

Politics / Climate Change Nov 25, 2011 - 06:52 AM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleThe Kyoto Treaty is threatened by an ever rising groundswell of outright rejection. Limits on CO2 and other greenhouse gas emissions may lapse before end-2012. This will above signal the end to the easy money for emission permit traders, brokers and investment bankers playing a small but profitable market in a huge range of complex "carbon related and derived products". Estimated at around $142 billion a year, the market designed to cap CO2 and other GHG emissions, linked to burning fossil fuels, producing cement, deforestation, urbanization and other land use changing activities is still defended by some, as able to "mitigate global warming".

Above all any further loss of credibility for, or the simple abandonment of carbon trading can only further stunt spending in renewable energy and "cleantech", estimated as having recovered from the 2009-2010 downturn, with a growth of about 30% in the last 12 months to a total of more than $210 billion per year. This amount of course includes all purely financial-related turnover, such as IPOs, mergers and acquisitions, debt repurchase. Actual hardware investment in new energy-producing renewable source equipment and energy saving technologies was well below $100 billion, in the range of $75 - $85 billion, depending on estimates, and well below recent previous years.

Kyoto Treaty provisions run to end-2012, but among its ironies the nation in which it was first signed - Japan - has joined with Canada and Russia in refusing any extension of the treaty. At the same time China, India, Brazil and a large number of emerging and developing countries are pushing for an extension of the Protocol's emissions-limiting provisions - inside the industrialized nations - as a bargaining chip for their own adhesion to a reworked Kyoto Treaty, binding emerging and industrialized nations "to fight climate change". The USA, which has never ratified the treaty, could then possibly join, the optimists claim.

The most likely, or near certain result will be the extension of a "dead letter treaty" with no targets or goals, decorated by bilateral agreements setting short-term and shifting goals. By December 2012 it is highly possible the Kyoto Treaty will be left to simply expire.
In particular this will heavily impact the European Union and its Commission's plans to marshall almost open-ended spending in its 27 member countries, to achieve the goals of the 2008 "Climate-Energy package". These spending plans, featuring the development of offshore windfarms, solar power plants, smart metering and smart grids, perhaps total as much as 1500 billion euro in the 8 years to 2020, but in fact are both unquantifiable - and impossible given Europe's massive sovereign debt crises and its economy teetering on the brink of sharp recession.
Brave hopes however subsist among those who directly profit from the crippled treaty: these hopes depend on bolstering credibility for the climate crisis thesis - "saving" the Kyoto Treaty, and enabling an extension of speculative-based electricity and gas trading across Europe and the world.

European Union carbon permits, like those in the USA's voluntary-only CO2 trading market, which collapsed and closed Dec 31, 2010 are however and already rapidly losing out to reality. Soon, the downward steps in daily market price will be massive. One-day losses in the nominal or theoretical "value" of the right to emit 1 ton of CO2 are already as high as 11%, in week ending November 25, hitting a new low of 4.6 euros per ton as Europe's ETS market operators begin to understand the market is probably doomed to collapse.

In the midst of a storm of financial crises, the worst since World War II, with a large number of the  politicians who signed up to Kyoto facing elections, or simple overnight replacement by unelected national unity coalitions run by "technocrats", as in Greece and Italy, global warming mitigation has lost an awful lot of its political platform value. The Brave Quest to run the world with windmills no longer thrills the crowds. Global warming is now a back-burner issue.

Neither Asia, the USA or Europe have the spare cash to play the carbon emissions trading and carbon finance game anymore.

The coming November 28-December 9 Durban climate conference, bringing together 190 national delegations to talk treaty already has the signs of another 2009 Copenhagen "summit". This decided nothing, dealt a heavy blow to the credibility of politicians who played the climate crisis thesis, and dashed hopes inside the carbon finance fraternity that their gravy train was set to move into high gear. At the time the most shameless carbon boomers, like the IMF's Dominique Strauss Kahn allowed themselves to imagine out loud that carbon finance could be "levered" to an annual turnover value as high as $10 trillion-a-year

Talks under the UN Framework Convention on Climate Change, since the 2009 Copenhagen farce,  now focus hopes of implementing a fund with a total value of $100 billion. This would nominally provide "climate aid" to low income developing nations, mostly African, but in particular would extend market-based mechanisms including carbon trading, to the near-exclusive benefit of the carbon finance fraternity. The chances of this fund coming about are close to absolute zero - but investment bankers and traders are an optimistic crowd - when they sniff easy money.

Last year’s climate talks in Cancun, Mexico decided not to make a decision on the issue of whether, and if so how to extend emissions limits and "marketize" them - or start afresh with a new treaty with much simpler and clearer energy taxes. The two-largest emerging nations, China and India, were not covered by the initial Kyoto Treaty, and their negotiating stance is simple: we will cut emissions only on the completely transparent basis of emissions-per-capita. If this basis was applied, the USA, Europe, Japan, South Korea and other OECD countries would have to massively intensify their cuts before any cuts became mandatory in either China or India.

Kyoto extension to China and India, under anything like the present framework and protocol is almost totally impossible. This being the clear and simple case, claims that today is “The last moment to save the treaty", are correct - and the treaty is lost.
Formal and outright failure to extend Kyoto will cast a new and intense spotlight on the subject of global warming, which persons of only average IQ can accept as possibly, or even probably not being the exact same thing as climate change - and nothing at all to do with why taxpayer and consumers must subsidise nuclear power, solar power plants and offshore windfarms. Signs of impending doom for "Kyoto-2" after December 2012, followed by non-renewal of current and complex, ineffective and expensive provisions of "Kyoto-1", are multiplying. President Barack Obama is not scheduled to attend the talks in Durban, ensuring that he will not be subjected to the humiliation he received at the Copenhagen "summit". Obama has also stepped back from pushing climate measures through US Congress after the Senate rejected carbon cap-and-trade.

As in the US Congress, political opposition to Kyoto is coming out more openly and strongly. In Japan and Canada it has spiralled to the extent of global warming becoming almost unmentionable words. In Europe, which has gone furthest, wasted more time, and more money on the global warming gravy train for financial market operators and traders than any other region on earth, the collapse of support for extending and renewing "Kyoto-1" is aleady being used to map a way out. The EU stance is to ask the Durban talks to first agree, and then set timelines for global adoption of a new treaty to replace Kyoto. The EU27 will sign up for a new commitment period under Kyoto - only if other countries agree to adopt a legally binding global deal. If not, the EU's Climate Commissioner, Connie Hedegaard has already ruled out on the EU moving further with the world's only set of forced and mandatory emissions trading, and the climate-energy package's illusory hopes of extending that into electricity and gas trading across Europe, needing a pan-European electricity transporting super grid.

Europe knows that times have changed since the heady days when Al Gore could demand $100 000 for a 45-minute climate crisis talk and an all-paid Gulfstream jet to transport himself and his clique. At best the EU's 27 member states, plus oil and gas-producing Norway, and maybe two or three other countries would sign up for a second Kyoto period. The impact of this on worlwide emissions and their rate of growth would be so small it would be laughable - and this is now openly admitted by the Commission.

Inside Europe iself, political opposition is growing. This is signalled by the growing dispute between Poland and France on allowing and encouraging shale gas and coalseam gas production, or like France banning it to preserve the value of LNG supply contracts signed by France's Total Oil with LNG exporters like Qatar demanding three times the price of natural gas supplied inside the USA - because of growing US shale gas production. To be sure, French media presents the decision to ban as "climate friendly". Elsewhere in Europe, including the Baltic States and Hungary, opposition to a renewal of Kyoto, and the extension of its provisions inside Europe is deepening, as national economic survival takes a much higher place in politics than concerns about polar bears' wellbeing and the livelihood of Al Gore.

China says goals for developing countries should be voluntary, and India urges industrialized nations to take account of their historical responsibility to clean up the emissions they created in past decades.
South Africa, which is hosting the climate talks, wants to avoid the embarassment of a Copenhagen-2  on its soil. In the words of Cedric Frolick, house chair in the South African Parliament: "We simply cannot afford for Durban to become the graveyard of the Kyoto Protocol”, clearly implying the probable or likely result.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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