...though the expectations were so low

Expectations could not have been lower for the annual round of UN-sponsored negotiations on climate change in Cancún, Mexico.  In Canada, media tried to create artificial drama by suggesting they would determine whether the much maligned Kyoto Protocol would live or die.  That it hardly matters is the real story of global climate change policy:  the serious work on transforming economic and energy systems continues apace independently of progress toward a new multilateral climate agreement.  Much of that work is going on in the proliferation of “carbon markets” such as the European Trading System and large number of regional, sub-state, and voluntary initiatives around the world.

So why was Cancun important? Because lack of agreement on the “building blocks” of a future agreement – the focus in Cancun – risked reversing that wider progress.  More than anything else, carbon markets require certainty in the wider policy environment to create a robust price for carbon on which they depend.

To recap how we got here, last year’s international negotiations produced the Copenhagen Accord.  This 3-page political document affirmed a goal of limiting warming to 2°C above pre-industrial levels; established a bottom-up process for industrialized countries to set their own, non-binding, emissions reduction targets and developing countries to list proposed emissions reduction activities; and called for a US$100 bn/year fund by 2020 to support adaptation and mitigation measures in developing countries. While the accord appeared to break through political stalemates that dogged the Kyoto Protocol – most notably the North-South divide on emission reductions that had apparently blocked US ratification – it came with significant political costs.

The consequence of bypassing the relatively transparent and inclusive negotiating processes of the UN Framework Convention (UNFCCC) and the Kyoto Protocol was that state parties only “took note” of the Accord.  Many governments not only found the Copenhagen process illegitimate, they have complained about the Accord’s lack of binding commitments for developed countries and retreat from “common but differentiated responsibilities” for developed and developing countries.  Now negotiations consist of a new “track” superimposed on the UNFCCC and Kyoto tracks, complicating an already fraught and complex negotiating agenda.

The irony of the media focus on the “death” of Kyoto is that despite all the smoke and heat if its critics, the overall shape and effect of any ultimate “Copenhagen Accord” agreement will be virtually identical to a second phase of Kyoto.  While developing countries are expected to make pledges to slow or reduce emissions, they will be differentiated from those of developed countries.  How could it be otherwise?

The focus on building blocks in Cancun markeda welcome turn to pragmatism after the mess made of attempts to create a new treaty in toto in Copenhagen. The modest agreements on how best to facilitate the flow of green technology, support for reduced emissions from deforestation and forest degradation in developing countries, support for adaptation to climate change, and the creation of a multilateral Green Climate Fund to help implement and disburse financial pledges made in Copenhagen are modest, but important steps forward.

These modest agreements notwithstanding, the challenge now is to maintain the spirit of compromise necessary for progress on the tougher issues of emission targets or sectorial agreements needed for longer term planning and certainty for industry.   This brings us back to carbon markets.

Those who do the buying, selling, and trading of permits to emit carbon or to offset emissions through investment in clean energy projects or planting forests displayed the highest levels of anxiety in Cancun.  Uncertainty has contributed to an estimated halving of the expected 1.952 billion tonnes of carbon offsets available under Kyoto’s Clean Development Mechanism from projections just three years ago.  Similarly, national and regional carbon market initiatives are facing uncertain futures: cap-and-trade legislation died in the US even before the mid-term elections, Australia’s is on hold and the Western climate Initiative in the US and Canada face threatened pull-outs.  In the absence of a robust ongoing multilateral progress, further development of carbon markets will be increasingly fragmented and unlikely to have a major global impact.  (Ironically, the stalling of markets in the North is matched by strong interest in developing domestic carbon markets from China India, Mexico, South Korean and Kazakhstan, in part this is driven by a desire to keep the financial transactions internal).

Thus, in contrast to the generally subdued atmosphere among negotiators – at least until the extension of negotiations into the wee hours on the final day – urgency, frustration and uncertainty characterized the mood among the investors, traders, brokers, lenders and verifiers who make up the infrastructure of carbon markets around the world.  On the eve of Cancun, 250 key players called on negotiators to create “clear, credible, and long-term policy frameworks that shift the risk-reward balance in favour of less carbon-intensive investment.” While the talk in the corridors is whether they should put their efforts elsewhere – such as the G20 or Major Economies Meeting/Forum process – the one consistent conclusion of meetings in those forums that ultimate agreement requires the legitimacy of the wider UN processes only reinforced the stakes in Cancun.

As one Norwegian delegate put it in Cancun: “no family, no community and no international community can survive without a compromise.”  The good news is that small compromises prevailed.  The question is, can that spirit be maintained to create the certainty needed for the broader transformations that are the real goal of global climate policy.