Time to shift to more pragmatic climate change policies?

One week into the Cancun climate talks and the prospects for progress look slim. But you cannot criticise the approach of our Mexican hosts, who have been focused throughout the year on delivering an outcome guided by pragmatism, including the contribution that the business world can make in that process. On Sunday we presented a paper with ProMexico, the Mexican Government's trade and foreign investment body, which goes to the heart of the challenge ahead: how to encourage the biggest emitting sectors to act and how to do so in a way that minimises distortions to trade.

This approach is crucial given that I am quite pessimistic about the outcome of the climate talks. The outcome of last month's midterm elections quite certainly means that the US will be unable to subscribe to any legally binding commitment at the UN negotiations over the next couple of years, never mind the next few days. Europe's domestic debt troubles will buffer its appetite for climate leadership. Japan will remain stubborn in its intention to replace the Kyoto framework with one that encompasses all major emitters. And key emitters from emerging markets will be keen to perpetuate the current framework while avoiding any measures that inhibit their ability to grow.

Our paper with ProMexico aims to make progress against this backdrop. Our view is that, without a global climate agreement, it is quite likely that a patchwork of carbon regulations will continue to develop across the globe. The first elements of that tapestry are the EU's Emissions Trading Scheme (ETS) and the Western Climate Initiative's cap-and trade scheme for seven western U.S. states (due to start in 2012). Other carbon regulations are in the pipeline in countries such as Japan, South Korea, China, Mexico and Australia.

Such unilateral carbon policies raise the potential for carbon leakage, as companies could have incentives to relocate emissions-intensive operations to regions with lighter or non-existent carbon constraints. To discourage leakage, governments will be forced to complement their carbon policies with interventions such as subsidies and border adjustments which, in turn, will tend to weaken the environmental performance of the initial carbon regulation. Europe has already moved in this direction with the free allocation of carbon allowances to energy intensive industries in the ETS. While this protects their trade competitiveness to some degree and reduces the incentive to relocate, it simply means that the signal they receive to reduce emissions and invest in cleaner technology is much weaker than would otherwise have been the case.

Recent research we have conducted by interviewing leading executives from steel and cement companies around the world shows that businesses look at this world of multiple carbon policies with concern. They are preoccupied that this outcome could tilt the competitive playing field and distort trade. The executives we spoke to were in broad agreement that the best solution is one that covers each major emitting sector as a whole, guaranteeing a level playing field across the world in terms of carbon related costs.

Policy makers should consider the following: steel and cement represent a significant chunk of global emissions, around 15 per cent, and are relatively concentrated in a few companies and geographies. The sectors have good potential for delivering reductions with technologies available today. Striking a deal is likely to be simpler among the smaller group of stakeholders of a particular industrial sector. And in so doing, you'd jointly deliver a workable carbon policy with one that overcomes the thorny issues of trade that can come with multiple national regulations. And we can draw on the experience of existing incentive mechanisms for energy efficiency, such as Japan's Top Runner programme. A framework for researching, developing and deploying the next wave of low carbon technologies for the sector could also be woven in.

Crucially, every year that passes without policies that stimulate efforts to reduce greenhouse gases, is adding to the likelihood of greater future costs. The recent announcement by the World Meteorological Organization, that 2010 is on track to be one of the three warmest years since the beginning of instrumental climate records in 1850, should be a call to arms. The world needs action on emissions, fast. If Cancun results in a non-outcome, policy makers should shift gears towards a more pragmatic roadmap and refocus towards mechanisms that can start to deliver reductions quickly.

Mauricio Bermudez-Neubauer is carbon markets lead in Accenture's Sustainability Services Group