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Prospects for a global deal on climate change: Three European views

Will governments negotiate an agreement on reducing carbon emissions at the December 2009 UN Climate Change Conference?

In this video interactive, economists Nicholas Stern and Michael Grubb, along with European Commissioner Janez Potočnik, discuss their views on prospects for a global climate deal at the United Nations Climate Change Conference, to be held in Copenhagen in December 2009.

These interviews were conducted by McKinsey’s Matt Hirschland in Brussels on January 26, 2009. Watch the video, or read the transcript below.

Nicholas Stern: We have to make the agreement, which will guide the world economy after Kyoto, guide the international understandings on climate change after Kyoto. If we miss it, we will undermine confidence in the carbon markets, which will be of vital importance in getting this whole set of investments—which are necessary—going. So, 2009 is a vital year. What we see is the biggest technological opportunity that we’ve had for a very long time—as big as the railways, as big as electricity, as big as the motorcar, and most recently, information technology.

It’s the opportunity to go for low-carbon growth. And we understand, roughly speaking, what technologies are needed. Some of them will be very quick, like insulating houses, promoting energy efficiency, and that will put unemployed construction workers back into work now, this year. Others, like bringing forward infrastructure investment, take a little longer. Others like R&D have a still further lead time.

But we have to put these kinds of packages together. To take the opportunities of the kind I described, there are a number of things that we have to overcome. One is the idea that the economic crisis takes precedence over the climate crisis. That’s just confusion. That just misses the point about how we can put our policies on these two things together in a very constructive way.

So we can be much more energy efficient. We can insulate our homes and get unemployed construction workers back into work. Those are the kinds of ways in which we can put things together. So to say that first one and then the other is just analytical confusion. We have to look at what’s involved in doing both and see and recognize how one can support the other. So that’s one kind of objection that has to be overcome.

A second one is that there are always collections of vested interests, people who have a vested interest in the high-carbon economy. And that’s not just the oil producers. It’s also the people who make the cars, the people who are driving the coal industry, and so on. And they will understandably ask, “Well, what does all this mean for me?”

Well, it means reallocation. It means that we’ll be shifting away from those heavily polluting kinds of activities. That’s the point. There would be resistance from those who are benefiting from deforestation. We have to stop it. So there are bound to be people whose activities are threatened by these kinds of policies.

Now, the answer to that is to be constructive, to help with carbon capture and storage through markets for carbon; to promote development activities which do not put such pressure on the forests; to promote the retooling of the car industry so that the less-polluting cars become cheaper to produce and the demand for those cars starts to appear.

Thirdly, we really have to show developing countries—those of us who live in the rich world—that we ourselves mean business, that we’re not just asking them to do things and not doing things ourselves. In that discussion, we have to ask how we can support them in moving to a path of low-carbon growth. They recognize that that’s essential, but there’s nothing that they can see as a model. So we have to, indeed, provide examples as fast as we can but also help them through finance, for example, from trading schemes, through sharing of technology, through supporting the fight against deforestation.

So those are the three areas, I think, where I would place the strongest emphasis in overcoming what are genuine concerns by people who recognize the need for change but ask about the implications of change for them. And good policy helps to deal with those kinds of issues in a collaborative and supportive way.

It’s not there’s an opportunity to do it now. It’s that there are actual, real dangers in not doing it now—huge dangers in delay. [President] Obama is very clear on the challenges that we have. He’s been talking very clearly about the need for a green stimulus. He’s been talking very clearly about the scale of cuts which the US should commit to: 80 percent reductions between 1990 and 2050. Europe continues to move forward. China is now discussing its 12th five-year plan, starting in January 2011. And President Hu Jintao has argued that low-carbon growth must be a key theme, the key theme, in that plan.

We are seeing change in the world. The challenge is to move that change fast enough. I don’t know if we’ll move it fast enough, but at least the understanding of the hurry and the pressure, I think, is increasing in the political leadership around the world.

Michael Grubb: I think there’s quite a few big steps that need to be taken between now and Copenhagen. And that is still against a backdrop of my expectations being, say, a bit lower than some of the commentators out there. I mean, I think that there’s no question the US election has changed the atmosphere. It’s raised tremendous hopes—arguably, tremendous hopes lying on the shoulders of one certain new president. And the problem is this is actually a very complicated issue as well as a really tough politically one. And he has an awful lot of other things to worry about.

The US system overall is going to be stretched. So, I think the idea that the US will ride in like a sort of white knight and save the situation is kind of a bit far-fetched. What it has done is it’s reinvigorated the sense that at least the world’s talking—that everybody’s talking to each other—and, by in large, that all the major countries want to find solutions.

In terms of critical stakes, I think I would put two big ones before any others; one of which is that currently we’ve got the really odd situation where we’ve got an ongoing political process to try to set emission targets for most of the industrialized world and a separate political process with the US sort of indicating it’s probably willing to negotiate a target, but it’s not clear what that could be or remotely how it could get it through the political system in time for Copenhagen. There’s huge reluctance to set a target globally and then try to tell the US Congress, because it doesn’t work that way around terribly well.

So, I think the biggest thing is for the US to officially say it will rejoin the global group of industrialized countries that set quantified caps post-2012; and that it will sign up to the majority of the architecture involved in that and to some of the mechanisms behind that, including some of the flexibility.

And that last bit's also important because that’s where you get the international investment flows to help some of the poorer countries, you know, avoid some of the carbon lock-in. So, that’s a very big one. The other big one, intimately bound up with that, is: where’s China going? What will China really put on the table? Clearly, it cannot stay in the same position as the whole of the rest of G77. There’s got to be more differentiation. And what are different parts of the world going to sign up to here? And that’s, politically, a much bigger hurdle than most people realize. So, you know, those are the two big steps that I would say first.

A lot of people are wondering how the financial crisis is going to hit the climate change agenda. To be honest, I still find it very hard to read. You know, the easy thing to say is, “Well, it will distract everyone’s attention—much less willingness to spend money, et cetera.” Those are all true. Those are all very important. They’re going to make life more difficult. And I think particularly, just this distraction of senior-level political capital away from the climate issue onto other things.

But it is a lot more complex than that. I mean, first of all, don’t underestimate the power of institutional processes. There are already some in train that will require governments to send top diplomats, top officials to a crazy agenda of meetings this year—and to come back at the end of the year with a deal signed off by heads of state. You know, those processes had their momentum. They’ll continue. There’s a lot of work already—ground work—that’s been done.

And I think the joker in the pack is how the argument plays out about public expenditure as a way out of the recession—because we are unquestionably seeing politicians making the link, feeling under pressure to spend public money. How do they justify spending public money? Well, on something that’s good that the public wants, the world wants: green expenditure, jobs in the construction industry. You know, there is a genuine story to be told there.

And, like it or not, the climate issue does require a mix of public and private investment. And I think governments are going to find it easier to justify some of the public expenditure required, ironically, if it’s tagged with a green label. That said, overall willingness to spend government capital is going to be very constrained. So, it’s actually a matter of dovetailing. Can governments stitch these two big stories together so the solutions basically overlap a lot?

I think the question of how business is looking at the climate change agenda is quite hard to read because it’s quite schizophrenic in itself. I think what we see is a lot of companies—and not just recently, but for many years—who have been saying that this is a big, strategic challenge. But there’s going to be winners as well as losers. We want to be amongst the winners. That requires, you know, stepping ahead of the game.

We’ve seen constituents of business leaders emerge calling for stronger government action as well. Because, you know, actually, the kind of industries who quite like for other reasons to be stepping ahead realize there’s not very far they can go unless there are regulations which impose similar costs on others. But there’s definitely a lot of progressive force in industries.

On the other hand, what you also see is a time of retrenchment because of the credit crunch. And obviously, when rubber hits the road in terms of specific legislative proposals like the EU package, well, industries are going to lobby for what they can get. And they’re going to get as many free allowances as they can get. And that’s, kind of, what we’re there for. At the end of the day, businesses are there to make money. And they’ll be very constrained of how much they’re going to step outside that. So, you get this really schizophrenic attitude—including amongst companies within themselves. But, certainly, between companies in the same sector will come out and say different things. Or they’ll say one thing, and then you look at their investment portfolio and it doesn’t tally at all.

So, I think business is schizophrenic about this. I think it will remain schizophrenic. I think there’s probably quite a few business leaders who, in private, would be urging a new US administration—and other administrations—to get much tougher than they would really admit in public.

Janez Potočnik: The success is obviously getting a global agreement. I think it is obviously clear to everybody that this is a global challenge and we are breathing the same air and we don’t have any other choice than to deal with that together. But it’s also obvious that some of us are more responsible for this situation than the others. But that does not change the fact that, if we don’t work together—developed and developing [countries]—if we don’t commit to the same goal, then we will certainly not change the reality in which we are stuck.

So that’s broadly what we would like. We would like that, in Copenhagen, we would get a global agreement, in which major things would be agreed about how we deal with the questions of the future. I think it’s from everything: from understanding it, mitigating it, accommodating it, technologies, and so on. These are many of the issues. But certainly, there will be the issue of developing countries and developing technology for them. And I think many of these are commonly known.

So, I do believe that climate change, that this crisis, is certainly more of an opportunity for the changes which we try to do. But we have to be aware that we have systematically and consistently worked on the issues, some of which are certainly on our agenda for years—which are global climate change, energy, security. And though the financial crisis and economic crisis arrived, nothing has changed. None of these issues disappeared. They are still there on our plate. And when we do the measures, which are inside the short- or midterm addressing of the economic crisis—like stimulating investment or our consumption—we have to be careful that this is done in a way that, when we come out of the crisis, we are actually up to the challenges which we have consistently and systematically discussed before. There is no single way through that. So, you have to take care of the market mechanisms: cost, price; then you have to take care of regulation; then, for example, public procurement. It’s an important part of the deal. All the while you have to keep an eye also on the areas for which I’m responsible: technology, development, research. They are an important part of the answer.

So, all of that has to be dealt with in a consistent way under somebody who is in a policy-creation position. All of these issues have to be very clearly also in our focus when we try to prepare ourselves for the future, for the discussion in Copenhagen. Of course, we need international cooperation and, of course, relations between developed and developing countries if you want a kind of climate change diplomacy which is behind everything. It’s part of the thinking and the comprehensive approach which one would need to do.

In the technology area, there are just as many questions. I think energy efficiency is of course one of the utmost short-term focuses because it is obvious that it is the cheapest way and the fastest way to get some of the solutions which we would like. It is obvious that in the short run, we have to focus also on regulation and market conditions—and, of course, on the technologies which today are already developed, but some of them can’t reach the market, because they are simply too costly.

It’s also a question of energy prices. My personal belief is that all these changes which we talk about are hard to be done in a low-energy price kind of a system. But we can more boldly think of what technologies can help us bridging some of the troubles which we have today; from CCS [(carbon, capture, and storage)]—which is a bit closer, I would say, in time span—to fusion, which is probably the most distant. But there are many things in between, connected to various renewable solutions or questions which are related to the hydrogen fuel cell center, all that.

We work on all that because we simply believe that there is no magical solution at this very point. You can’t put, as people used to say, all your eggs in one basket. So, we simply spread them out. We believe that we have to work practically in all these directions with enough attention.

Getting an agreement is a win, not getting an agreement is a loss. Meaning that, everybody around the table has to understand that these negotiations will be difficult; that they will have to step into each other’s shoes and try to understand what are their problems. But I hope that the understanding from all is that we are actually living in the same world and have no choice, so we have to deal with climate change—and we have to deal with it now. It’s a one-shot chance. If we miss this chance, we really don’t know when there will be a second one with that level of opportunity. So, Copenhagen should be a success.

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