CARBONfirst December 2009

CARBONfirst - December 2009
CARBONfirst
Executive editor: Shandi J Modi,

Founder & CEO, IDEAglobal Group
Climate policy and market insights
In this issue:
IDEAcarbon house view: outlook for Copenhagen
Ambitious political agreement scenario 1
Modest political agreement scenario 2
11
Weak political declaration scenario 3
16
Country commitment tables
20
Architecture of a post-2012 carbon market
21
Carbon CalendarTM: key events in the carbon market
24
www.ideacarbon.com
Commitment Monitor: national climate commitments 25
Last Minute Effort towards a Global Deal: Discussions in Copenhagen

In this issue, IDEAcarbon takes a close look at the likely geopolitical, economic and scientific factors
that have a bearing on the various stakeholders' strategic and tactical plans for the Copenhagen
discussions.
As a navigational map, we have structured three scenarios, with attached terms and points at issue,
to help clients monitor the evolution of debate and announcements, which will come thick and fast
over the two weeks of negotiations. IDEAcarbons own core scenario is also presented, based on our
views as of the end of November 2009.
Clearly, the final outcome is still open and last minute, determined activity is underway. The final
outcome will not be exactly represented by any of the three scenarios we present, but it will be
closer to one or the other, most likely between scenarios 1 and 2.
If one aggregates the intentions of the developed and developing countries to date, at their most
ambitious levels, we are very close to the recommended 2020 targets, which would enable a peak
and downward trajectory in emissions, reducing the probability of global temperature increases in
excess of 2C.
IDEAcarbon would note that all major players (especially the USA and China) still have some room
for manoeuvre. For example, it is suggested by some analysts that China's voluntary goal of cutting
output of CO2e per unit of GDP by 40-45% from 2005 levels by 2020 can be exceeded based on 2020
projections of energy efficiency measures already announced.
So one practical scenario is as follows. China is now leading what we can call a "G4" initiative (India,
Brazil and South Africa included). China could consider raising its commitment on carbon intensity
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from the 40-45% band to, say, 55%, which IDEAcarbon feels is potentially achievable given its very
fast growth and energy efficiency initiatives. This would amount to a further 3 billion tonnes per
annum of emissions reductions by 2020. Clearly, this would raise the bar significantly and potentially
open the way for other action on finance, especially from the USA.
The USA, whilst fixed in terms of a quantified reduction target, might be inspired by an increased
Chinese commitment as above, to consider putting forward a number for finance for developing
countries and especially Africa, of as high as $50 billion (roughly double the EUs commitment).
But to be sure, without the USA being able to commit finance on this sort of scale, the Africa Group's
likelihood of accepting a deal is slim. The Africa Group, one presumes, supports mechanisms for
adaptation funding such as maritime taxes, transaction taxes, etc, and IDEAcarbon would suspect
that Africa would like to see this kind of detail in any US finance package.
Market Outlook
Most significantly for the private sector and the carbon markets, we have a more definitive sketch of
the "map of the markets" on page 21. This, we feel very confidently, will be the type of mosaic of
trading regimes in place soon. In short, this is both very bullish for both the development and
maturity of global and regional carbon markets, nationally and internationally driven. In time (and
driven in part by some of the work IDEAcarbon itself is undertaking) these trading regimes will
become largely cross-tradable, with defined relative risk and deliverable standards, and with a
sustainability measure or index, which will help liquidity.
IDEAcarbon is part of the IDEAglobal group. It is served by active advisors comprising the following individuals and executives.
Shandi J. Modi
Ng Kok Song
Helmut Schesinger
Lord Nicholas Stern
Founder & CEO,

IDEAcarbon
Advisor, IDEAglobal;
MD, Singapore Govt.
Investment Corp.
form. Pres., Deutsche
Bundesbank
I.G. Patel Prof. of
Econ. & Govt, LSE

I DE A c ar b on H ou s e V i ew
Outlook for Copenhagen
We believe Copenhagen will produce a modest COP decision, covering the
main bases of a climate treaty, to be concluded at COP16 in December 2010
The COP decision will contain the architecture of agreement on mitigation
and finance, while individual commitments may need to be agreed in 2010
As ever, much depends on the USA; the 17% target is a strong step forward,
but is unlikely to be enough to instigate a full agreement
With the start of the 15th Conference of the Parties (COP15) in Copenhagen rapidly
approaching, carbon market participants are asking, with ever greater intensity,
important questions about the future of the global climate architecture. What form
of agreement will Copenhagen produce? How ambitious will leading developed and
developing countries be? Can Parties overcome their differences in position in time?
What will Copenhagen mean for the carbon market?
In this issue IDEAcarbon attempts to answer these questions. IDEAcarbon executives,
advisors and the in-house team have come together to shape three potential
scenarios as to the outcome of Copenhagen. Based upon their intimate knowledge
and understanding of country positions and the negotiating process, these scenarios
offer valuable insight into what are the key areas of agreement and compromise, the
obstacles and negotiating impasses. They give the conditions under which an
ambitious, weak or modest outcome would emerge from Copenhagen, and explain
what the future would hold in each case.
The scenarios range from an ambitious political agreement a strong COP decision
that paves the way for the conclusion of a final, binding treaty by June 2010, to a
weak political declaration analogous to past declarations by the G8 and an
agreement to simply carrying on negotiating, with no end in sight.
In the first scenario, developed and developing countries compromise and are
successful in bridging their differences on key aspects of mitigations and finance; in
effect, all that is missing is the full participation of the USA. In the third scenario,
developed and developing countries remain in opposition and an atmosphere of
mistrust pervades the process.
IDEAcarbon is part of the IDEAglobal group. It is served by active advisors comprising the following individuals and executives.
Ian Johnson
Christiana Figueres
Nitin Desai
Sam Fankhauser
Chair, IDEAcarbon;
former VP of Sust.
Dev. at World Bank
Vice Chair, CRA;

leading UN Climate
negotiator
Advisor, IDEAcarbon;
Member, India PM
Climate Council
Advisor, IDEAcarbon;
Member, UK Climate
Change Committee

In the middle scenario lies the possibility of a modest political agreement a COP
decision that leads to the conclusion of a final treaty in December 2010. Developed
and developing countries cooperate and resolve many of their differences, but there
still remains more to be done before a final agreement is reached.
A combination between the middle and optimistic scenario forms IDEAcarbons
house view. We believe that Copenhagen will succeed in overcoming the majority of
divergences in national positions that currently exist, especially on mitigation and
finance, and that trust between developed and developing countries will grow. The
recent proposals from the USA, China and Brazil (and soon perhaps India) will
certainly help matters. Some Parties may ready to make final commitments; but
others may still be reluctant to come forward until they are fully satisfied with the
comparability and equity of the commitments of others.
The outcome, we expect, will therefore be a COP decision that covers the main bases
of the climate agreement, and will contain the key elements and the architecture of
a final treaty. This treaty will be finalised at COP16 in Mexico in December 2010. In
the Copenhagen COP decision, developed and developing countries alike will commit
to undertake ambitious actions: developed countries to binding, quantified emission
reduction targets and the provision of finance, and developing countries to voluntary
Nationally Appropriate Mitigation Actions (NAMAs). Significantly, some individual
country commitments may appear, while others will not, depending on the ambition
and confidence of the country in question. We think it unlikely that all individual
commitments will be specified.
There are several reasons why we expect this relatively, but not overly, ambitious
level of outcome. After negotiating sessions in Bangkok and Barcelona, during which
little material progress was made, there remained significant issues to resolve, and it
may take more than two negotiating weeks to build the kind of consensus necessary
for definite commitments to be made. The aggregate developed country reduction
target, according to IDEAcarbon, amounts to 14-18% below 1990 levels by 2020
(albeit 19-26% without the USA), which is a fair way off the 25-40% demanded by
developing countries (see table on page 20). Equally, no developed country, save the
EU, has placed financial contributions on the table, which are a prerequisite for
developing countries to agree to a deal.
Recent announcements have certainly upped the ante. The proposal of a provisional,
conditional US target of 17% below 2005 levels by 2020 is a firm step forward. A firm
US commitment on finance would be another. The proposals by Brazil and China,
respectively to curb business-as-usual emissions by 38-42% from current levels by
2020 and to cut carbon intensity by 40-45% by 2020, also send strong positive
messages, especially if combined with a commitment from India. They signal
developing countries growing openness to cooperation.
On the other hand, the US target and position are dependent on the US domestic
legislative process. A US climate bill is currently stuck in the US Senate, and there is
unlikely to be much progress until next spring. The USA also remains wary of the
integrity of developing country commitments. Developed countries are, accordingly,
likely to wait for confirmed US commitments before taking any further steps. For
developing countries too the full participation of the USA will be essential to the
conclusion of a treaty.
www.ideacarbon.com

The gaps in positions on mitigation and finance suggest that, even if the USA were
fully involved, consensus would be beyond reach. Developing countries, especially
the likes of the Africa Group and Least Developed Countries, still want greater
ambition and clarity from developed countries before coming on board. Major
developing countries, who are under more pressure to commit, may agree to
undertake NAMAs in principle, but without all developed country numbers they are
unlikely to specify actions at an international level.
We therefore believe that the recent commitments are likely to both improve the
mood of negotiations and to some extent to alter the actual substance of what
Parties agree to. They thus increase the probability that a more ambitious outcome
may be achieved in Copenhagen, akin to our first scenario. But they are unlikely to
precipitate a full scale coming together of countries that would leave negotiations on
the brink of concluding a treaty.
The final question is what effects all the above will have on the carbon market (see
article on page 21 of this edition). IDEAcarbon believes that, notwithstanding the
outcome of Copenhagen, in the short and medium term the primary driver of carbon
market creation and development will continue to be at a national level. National or
regional emissions trading schemes (ETSs) will be then linked by whatever
international offset mechanisms are in operation under the Kyoto Protocol and
UNFCCC. They will also link to each other.
The upshot of Copenhagen, and the message therein, will determine the global
framework of the carbon market. In our first two scenarios, the CDM and JI will in
the short term be the main providers of offsets, and Copenhagen will signal a delay
to the creation of scaled-up market mechanisms such as NAMA crediting or an
expanded CDM. Rising CDM demand from emerging ETSs, in the USA and Japan for
example, will increase the price of offsets, which policymakers agree is a necessary
step. Over the medium term, as new market mechanisms enter operation and
enlarge the size of the offset market, they will eclipse the Kyoto mechanisms to
become the main linkage between developed world ETSs and developing country
market-based reduction efforts.
It is needless to say that a huge amount hinges on Copenhagen. IDEAcarbon and its
advisors will continue to provide insight and analysis throughout the two weeks of
negotiations via our Copenhagen website. We will also be providing an immediate
Copenhagen review webinar on Monday 21st December at 3pm GMT, where we will
discuss the negotiating outcome and its implications.
For further information please contact carbonfirst@ideacarbon.com.
www.ideacarbon.com

S c en ar i o 1
Ambitious political agreement 40% probability
In scenario 1 countries would agree to an ambitious COP decision in
Copenhagen, leading to the conclusion of a final treaty in June 2010
The COP decision would contain the architecture of a final agreement, as well
as individual country commitments on mitigation and finance
There would be a compromising atmosphere in Copenhagen, with a
committed US Congress, and developing countries ready to cooperate
In an optimistic scenario Copenhagen would see developed and developing nations

come together to forge an ambitious political climate change agreement, with a firm
deadline to conclude a legally binding treaty by June 2010. The political agreement,
albeit a non-binding one, would be more ambitious than most observers expect,
given the gloomy sentiment pervading the preceding weeks. It would come in the
form of a decision by the Conference of the Parties (COP), complemented by a series
of more detailed annexes, and a schedule of meetings to culminate in COP15 bis in
June.
Key elements of a deal
In the ambitious COP decision developed countries would commit to commit to
binding quantified mid-term emission reduction targets, and all of them including
the USA would feel confident enough to put these conditional targets formally on
the table. Reduction targets (bar that of the USA) may be under the Kyoto Protocol,
linked to commitments under UNFCCC-track negotiations. According to IDEAcarbon,
developed country numbers amount to an aggregate cut in emissions of 14-18%
from 1990 levels by 2020, or 19-26% without the USA, which is approaching the
IPCCs 25-40% range (see table on page 20).
Developed countries would also commit to contribute to an aspirational 100
billion in funding for mitigation and adaptation in developing countries, including upfront financing for early action in the most vulnerable countries (see table on page
19),
These commitments, a prerequisite for reaching a deal, would in this scenario be
enough to fix the attention of developing countries and to bring them on board with
their own commitments, in the form of conditional, non-binding but quantified
Nationally Appropriate Mitigations Actions (NAMAs) and reductions from businessas-usual (BAU) emissions. They would list specific actions to be taken, including the
quantified effect they would have on BAU emissions (in the case of Brazil, India,
Mexico and South Korea), on carbon intensity (in the case of China) and on rates of
deforestation (in the case of Brazil) (see table on page 19).
In terms of the market the COP decision would contain several positive messages.
There would be an enabling provision for the creation of new market mechanisms
www.ideacarbon.com

(such as NAMA crediting), as well as a statement of support for the existing Kyoto
mechanisms, and a provision to expand their scope post-2012. Recognition and
support would be given to efforts to address forestry, and to a market for reduced
emissions from deforestation and forest degradation (REDD).
This would, we expect, give a boost to the existing CDM, which has been floundering
under the uncertainty surrounding Copenhagen. It would also provide a signal that
the market for offset credits is to expand significantly in the future. The next step in
the process would be to work out the rules and regulations for new crediting
mechanisms and an expanded CDM, in a similar way to the Marrakesh Accords postKyoto, over succeeding months and years. A second boost to the CDM would come
from successful CDM reform in the current commitment period, designed to
streamline and improve various processes related to project approval and credit
issuance.
A compromising atmosphere
If Parties are to reach such an ambitious agreement they will need to bridge the
significant differences between their positions that exist today. Trust between
developed and developing countries would need to have been rebuilt, and there will
need to be a feeling of mutual negotiating goodwill. Buoyed by the proposed US
reduction target of 17% below 2005 levels by 2020, there would be a sense that full
US participation and confirmed US commitments are all that are needed to reach a
final deal. This would bode well for the conclusion of negotiations in six months
time.
Whether or not this scenario plays out will depend in large part on whether or not
the USA on the one hand and the G77 and China on the other can adopt proactive
and compromising attitudes. For the USA this would mean the backing of a willing
Obama administration and an active US Congress. Building on its proposed target, if
the US delegation can give strong messages pointing towards the conclusion of a
deal then real progress can be made. An aspirational commitment to provide
substantial funding would serve well, as it would be seen to make up in part for the
relative weakness of the US position.
For the G77 and China the situation is slightly more complicated, containing as it
does several country blocs, amongst them the G5 (Brazil, China, India, Mexico and
South Africa), the Least Developed Countries (LDCs), the Africa Group and the
Association of Small Island States (AOSIS). These blocs have divergent circumstances
and interests and are subject to different pressures. The G5 in particular are under
more pressure to act than other developing countries.
In order to reach agreement, the G77 and China would need to be of the same mind.
They would need to respond to the overtures of the USA and other developed
countries, recognizing in particular the domestic constraint on US ambition, and be
willing to slice and dice their all or nothing position. For the G5 this would mean
accepting developed country targets and a number around 100 billion in finance as
sufficient to commit to voluntary actions, as well as submitting to pressure to act
from the LDCs, the Africa Group and AOSIS. For these latter groups it would mean an
acceptance of developed country commitments as just about satisfactory, so as to
come on board themselves.
www.ideacarbon.com

The future the USA
Assuming all the above to have occurred, the single most important, outstanding
piece of the puzzle would be the USA, and specifically confirmed US quantified
commitments backed up by domestic law. The USAs position is dependent on the
US Congress finalising climate legislation. Only once the Senate, the upper house of
Congress, has passed a bill will the USA be finally able to put confirmed numbers on
the international table.
In an optimistic scenario the outlook for the quick passage of a climate bill would be
positive. The healthcare debate would move ahead faster than expected, freeing up
more time for the Senate to tackle climate change, and there would be a real chance
that the Senate will deal with climate change before the conclusion of healthcare.
At the same time the Senate would take the climate debate increasingly seriously.
President Obama would use the threat of regulating emissions via the Environmental
Protection Agency to spur the Senate into action. Developing world commitments in
Copenhagen and a willingness to submit supported actions to measurement,
reporting and verification (MRV) would increase the Senates trust in developing
countries. Progress on NAMAs and MRV in bilateral talks with China and India would
have a similar effect.
The US climate bill would therefore be likely to pass out of Congress by March 2010,
allowing three months of negotiating time before COP15 bis in June. Despite the
relatively small amount of time between now and then, a legally binding Protocol
would stand a good chance of becoming a reality at that session.
www.ideacarbon.com

A m b i ti o u s sc en a r i o - a t a g l an c e
Ambitious COP decision
Shared vision and
long-term goal
Global average temperature rise will be limited to 2C;

Developed countries will cut emissions by 80% by 2050;
Countries will halve global emissions by 2050.
Developed country
mitigation
commitments
Developed countries will commit to quantified mid-term emission reduction targets, conditional on fair and equitable
agreement and comparable developed country actions.
Commitments could be under the Kyoto Protocol, linked to commitments under UNFCCC-track negotiations
Developing country
mitigation
commitments
Finance
Mechanisms
Developing countries will commit to voluntary, non-binding but quantified NAMAs and BAU curbs, conditional on confirmed
financial and technology support;
Supported actions will be subject to MRV;
Best faith efforts of developing countries will be acknowledged by developed countries.
Developed countries will commit an aspirational 100 billion in total for mitigation and adaptation, conditional on a fair and
equitable burden-sharing agreement;
Developed countries will provide up-front finance to allow a prompt start to adaptation and mitigation efforts
It includes public and private sector participation;
It includes fair and equitable financial architecture.
There is an enabling provision for the creation of new market mechanisms, to act as providers of finance, technology and
offset credits;
There is an expression of support for the Kyoto Mechanisms (CDM and JI) post-2012.
Forestry
There is recognition of and support for forestry and REDD.
Adaptation
There is firm support for adaptation.
Technology transfer
There is recognition of technology transfer.
www.ideacarbon.com

A m b i ti o u s sc en a r i o - a t a g l an c e ( 2 )
Annexes (ambitious COP decision)
Developed country mid-term quantified emission reduction targets, possibly under the Kyoto Protocol (see table on page 19)
Developing country voluntary, non-binding but quantified NAMAs and BAU curbs (see table on page 19)
Developed country financial contributions (see table on page 19)
Developed country up-front finance for mitigation and adaptation efforts, in particular in LDCs, Africa and island states
Possibilities for financial architecture, including governance of funding and institutions
Possibilities for post-2012 CDM reform (e.g. land use, land use change and forestry, nuclear energy, carbon capture and storage)
Details of forestry and REDD, including early actions and next steps
Possibilities for a technology transfer mechanism, including centres of excellence
Details of adaptation measures
Decision by the CDM EB and COP/MOP

Pre-2013 CDM reform
Streamlining of the accreditation of DOEs;

Creation of an appeals mechanism against DOEs and the CDM EB;
Improvement of the review process;
Creation of a positive list of some project types;
Streamlining of methodology approval;
Improvement project registration and CER issuance processes.
www.ideacarbon.com
10

S c en ar i o 2
Modest political agreement 50% probability
In scenario 2 countries would agree to a modest COP decision in Copenhagen,
leading to the conclusion of a final treaty at COP16 in December 2010
The COP decision would contain the architecture of a final agreement, leaving
individual country commitments on mitigation and finance until next year
There would be a rebuilding of trust between countries, but full agreement is
still beyond reach, notwithstanding the commitment of the USA
In a middle scenario Copenhagen would result in a modest political climate change

agreement between developed and developing nations, with a firm deadline to
conclude a legally binding treaty by December 2010. The political agreement, which
forms IDEAcarbons central scenario, would go some way towards bridging the
differences in position between developed and developing countries, without
resolving them all. It would, however, contain the key elements and architecture of a
final treaty. The agreement would take the form of a decision by the Conference of
the Parties (COP), complemented by some more detailed annexes and a schedule of
meetings that will culminate at COP16 in Mexico in December 2010.
In this modest COP decision developed countries would commit to commit to
binding quantified mid-term emission reduction targets, though individual country
targets would not actually be specified. Whenever they did appear, targets might be
under the Kyoto Protocol, but linked to US commitments under the UNFCCC-track
negotiations. According to IDEAcarbon, with existing numbers, the aggregate
developed world reduction would come to 14-18% below 1990 levels by 2020, or 1926% excluding the USA (see table on page 20), below the IPCCs 25-40%.
Developed countries would also commit to provide finance for mitigation and
adaptation, conditional on a fair and equitable burden-sharing agreement, though
again no figures would be brought forward.
These commitments would, we estimate, be sufficient for developing countries to
commit to undertake their own measures, in the form of non-binding, nonquantified Nationally Appropriate Mitigation Actions (NAMAs). However, developing
countries would not specify what their NAMAs would be until developed countries
themselves place their targets on the table. Actions would therefore be conditional
on confirmed financial and technology support from developed countries, and,
crucially, on seeing final developed county actions.
On the market front, the COP decision would contain a statement of support for the
continuation of the Kyoto mechanisms post-2012, but would remain silent on the
expansion of the CDM or the creation of new market mechanisms. Recognition and
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11

support would be given to efforts to address forestry and to the creation of a market
for reduced emissions from deforestation and forest degradation (REDD)
The statement of support for the Kyoto mechanisms should provide certainty for the
CDM, which has been suffering from the perceived uncertainty of the Copenhagen
outcome, and would, we expect, give the market a lift. The successful reform of the
CDM within the current commitment period, designed to streamline and improve
various processes related to project approval and credit issuance, would also give
the market a boost. However, the lack of reference to plans for new market
mechanisms or an expanded CDM would signal a significant delay to the scale-up of
the offset market.
A rebuilding of trust
In order to achieve this level of agreement Parties will need to overcome many of
the differences that currently exist between them, and it is important that
developed and developing countries can begin the process of rebuilding mutual
trust. Inevitably, however, some goodwill may be lacking, and there would be a
sense that full agreement is beyond reach, notwithstanding greater US participation
and commitments. If countries can continue to increase mutual trust over
subsequent months it would bode well for the progression of negotiations in 2010.
Whether or not this scenario plays out will depend in large part on how proactive
and compromising the USA on the one hand, and the G77 and China on the other,
can be. The US position would need to be backed up by a willing Obama
administration and active, albeit slow, US Congress. Building on its announcement of
a conditional 17% reduction target from 2005 levels by 2020, this would allow the US
delegation to make strong commitments as to its intentions and the conclusion of a
deal.
The situation is somewhat different for the G77 and China, containing as it does
several country blocs, including the G5 (Brazil, China, India, Mexico and South
Africa), the Least Developed Countries (LDCs), the Africa Group and the Association
of Small Island States (AOSIS). These blocs have divergent circumstances and
interests, and are subject to different demands. The G5 are notably under more
pressure to act than other developing countries.
In general, in this scenario the G77 and China would, we think, be reluctant to
compromise too much on the major issues of mitigation and finance, in anticipation
of greater commitments from developed countries, the USA in particular. But they
might be willing to agree in other areas (e.g. forestry). Some countries will be more
open to cooperation than others. The G5, fairly satisfied by developed country
commitments and under pressure from the LDCs, the Africa Group and AOSIS, would
commit to their own actions but would require greater clarity on developed county
actions before providing any more detail. The LDCs, the Africa Group and AOSIS may
well be less flexible, and could continue to demand more ambitious and more
concrete developed country commitments.
The future increased ambition
The progression from this modest level of agreement towards a final treaty will be
dependent on increased ambition and movement from all sides. In a middle
scenario, the USA may be the single biggest sticking point, but there will remain
www.ideacarbon.com
12

other areas of disagreement to resolve between Parties. Other developed and
developing countries may also need to come forward with revised commitments if
final agreement is to be reached.
As a starting point, confirmed and quantified US positions and commitments could
help free up the impasse. Developed countries would in turn feel more able to put
their own more ambitious numbers forward. These numbers, combined with those
of the USA, would incentivise some developing countries to specify NAMAs and
would serve to bring other developing countries on board.
Of course, the US position is dependent on the US Congress approving climate
legislation. Only after a bill has been passed by the Senate, the upper house of
Congress, will US negotiators finally be able to propose definite numbers at an
international level. The middle outlook is for the passage of a US climate bill by mid2010, but not before. A healthcare bill may pass by March 2010, which would enable
the Senate to focus all its efforts on climate change. At the same time, developing
country commitments in Copenhagen would help ease Senate economic concerns,
and progress in bilateral talks with China and India on NAMAs and measurement,
reporting and verification, would also increase the Senates trust in developing
countries.
The US climate bill would therefore be likely to pass out of Congress by May 2010,
allowing six months of negotiating time before COP16 in Mexico in December. Given
the status and tenor of negotiations, a legally binding agreement would stand a good
chance of being born at that session.
www.ideacarbon.com
13

M od e st p ol i ti c al ag r e em en t - at a g l a n c e
Modest COP decision
Shared vision and
long-term goal

Developed countries will cut emissions by 80% by 2050;
Countries will halve global emissions by 2050.
Developed country
mitigation
commitments
Developed countries will commit to quantified mid-term emission reduction targets, conditional on fair and equitable
agreement and comparable developed country actions;
Commitments could be under the Kyoto Protocol, linked to commitments under UNFCCC-track negotiations.
Developing country
mitigation
commitments
Finance
Developing countries will commit to voluntary, non-binding NAMAs and BAU curbs, conditional on confirmed financial and
technology support and on seeing final developed country targets;
Best faith efforts of developing countries will be acknowledged by developed countries.
Developed countries will commit to funding for mitigation and adaptation, conditional on a fair and equitable burden-sharing
agreement;
Developed countries will provide up-front finance to allow a prompt start to adaptation and mitigation efforts;
It includes public and private sector participation;
It includes fair and equitable financial architecture.
Mechanisms
Forestry
Adaptation
Technology transfer
www.ideacarbon.com
14

M od e st p ol i ti c al ag r e em en t - at a g l a n c e ( 2 )
Annexes (Modest COP decision)

Developed country up-front finance for mitigation and adaptation efforts, in particular in LDCs, Africa and island states
Possibilities for financial architecture, including governance of funding and institutions
Details of forestry and REDD, including early actions and next steps
Possibilities for a technology transfer mechanism, including centres of excellence
Details of adaptation measures

Pre-2013 CDM reform

www.ideacarbon.com
15

S c en ar i o 3
Weak political declaration 10% probability
In scenario 3 Copenhagen would result in a weak political declaration (a
summary of the chairs), with no deadline for the conclusion of negotiations
Countries would be unable to bridge differences on mitigation and finance,
leaving broad and individual country commitments largely beyond reach
Developed and developing countries would be polarised; the USA would be
the largest obstacle to progress, and the G77 and China united in opposition
In our pessimistic scenario Copenhagen would result in a weak political declaration

by developed and developing countries, with no deadline set for the conclusion of
negotiations. Countries would largely be unable to bridge the major differences in
position that currently exist, and would simply agree to carry on negotiating. The
declaration would therefore represent a minimal level of agreement on basic
principles, analogous to declarations that have been made by the G8 or the Major
Economies Forum, but little more. It would most likely come in the form of a
summary by the chairs of the negotiations, as there would be insufficient consensus
to produce a decision by the Conference of the Parties (COP).
In the political declaration, countries would agree on a long-term goal of keeping
global average temperature rise to no more than 2C. To this end developed
countries would agree to an aspirational 80% reduction in emissions by 2050. They
would also agree to commit to ambitious, quantified mid-term emission reduction
targets, conditional on a fair and equitable final agreement, but without specifying
any numbers. According to IDEAcarbon, existing developed country numbers would
come to a reduction of 14-18% from 1990 levels by 2020, or 19-26% without the USA
(see table on page 20).
In terms of finance, developed countries would agree to provide funding to
developing countries for purposes of mitigation and adaptation, conditional on a fair
and equitable burden-sharing agreement, but again, no numbers would be specified.
Developing countries would not be satisfied with these commitments; they would
demand more ambition and more clarity from developed countries before
committing to anything themselves. The commitments would be characterised as
too vague; an aggregate reduction of 14-18% is too far off the IPCCs 25-40% range;
and there would be too little progress on finance.
The declaration would contain a statement of support for the Kyoto mechanisms
post-2012, but would make little or no mention of the creation of new market
mechanisms or the expansion of the CDM post-2012. It would give support to efforts
to address forestry and to create a market for reduced emissions for deforestation
and forest degradation.
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16

The only concrete outcome of COP15 in this scenario we believe would be the
successful reform of the CDM in the current commitment period, designed to
streamline and improve various processes related to project approval and credit
issuance. This, combined with the support given to the CDM post-2012, might
provide some sort of boost to the market, but it would be modest consolation. The
uncertainty caused by the lack of progress on post-2012 climate architecture, both in
general and in relation to scaled-up market mechanisms, would still send negative
signals to the market.
Continuing mistrust
In this pessimistic scenario Parties remain polarised over the main issues of
mitigation and finance, with little sign of compromise. Negotiators are at
loggerheads, and mistrust between developed and developing countries pervades
the process. There is a sense that even with more forthcoming developed country
positions and the USA on board, negotiations would remain far from agreement.
Whether countries end up such a situation depends mainly on all Parties inability to
take what are perceived to be common steps forward. In the case of the USA, the
combination of a reluctant and slow Congress with an active Obama administration
would prevent the US delegation coming up with anything more than their
conditional proposal to cut emissions by 17% from 2005 levels and highly conditional
words on finance. The delegation would be unable to give indications as to its
intentions for the conclusion of an agreement.
Other developed countries would maintain their positions on the importance of
developing country actions and on the merger of the Kyoto Protocol with actions
under the UNFCCC-track negotiations. They would hold these as prerequisites for
making any further commitments.
These positions would serve to antagonise the G77 and China, and unite the
otherwise separate country blocs (e.g. the G5 (Brazil, China, India, Mexico and South
Africa), the Least Developed Countries (LDCs), the Africa Group and the Association
of Small Island States (AOSIS)) in the face of weak developed country actions (in
particular from the USA), of the threat to the Kyoto Protocol and of there being
undue burdens and commitments placed upon them. Developing countries would
continue to emphasise the principle of common but differentiated responsibilities,
and would be unwilling to negotiate or to make any compromises themselves until
developed countries showed a greater level of ambition.
The future more negotiations
If this is the outcome of Copenhagen, and Parties simply agree to carry on
negotiating, the completion of a final agreement will require a lot more time and
effort. It would also require a significant rebuilding of trust and a renewed
willingness to compromise from all Parties. The USA would remain the largest
obstacle to progress, but all other developed and developing countries would have
to work hard as well to commit to more.
The US position is dependent on the US Congress approving climate legislation. In a
pessimistic scenario the outlook for the passage of a US climate bill in 2010 is low.
The healthcare debate is fraught and time-consuming, and the Senate, the upper
house of Congress, is unable to pass a healthcare bill before summer 2010.
www.ideacarbon.com
17

At the same time, the Senate proves lukewarm at best to passing climate legislation.
The lack of developing country commitments in Copenhagen and subsequently, and
the lack of meaningful progress on actions in bilateral talks with China and India do
not help matters. In addition, mid-term elections loom in November 2010. A climate
bill will therefore come up against significant Senate opposition as moderate
Democrats begin to feel pressure from Republican challengers against cap-and-trade
legislation. Despite any desire to proceed on the part of the Obama administration
and the Democratic leadership, a US climate bill would be unlikely to pass until 2011.
The result would be that negotiations would remain inconclusive until some point in
2011. Countries can continue to meet for negotiating sessions as they have done in
2009, with the intention of rebuilding trust and achieving as much as they can under
the circumstances. They can, in effect, prepare the ground, so that when the USA is
finally ready to commit, negotiations can enter the home strait to a final treaty.
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18

Weak political declaration at a glance
Summary of the Chairman (weak political declaration)
Shared vision and long-term goal

Developed countries will cut emissions by 80% by 2050.
Developed country mitigation

commitments
Developed countries will commit to quantified mid-term emission reduction targets, conditional on fair and
equitable agreement and comparable developed country actions.
Developing country mitigation

commitments
No developing country commitments until developed countries commit to more on emission reduction targets
and finance.
Finance
Developed countries will commit funding for mitigation and adaptation, conditional on a fair and equitable
burden-sharing agreement;
It includes public and private sector participation.
Mechanisms
Forestry
Adaptation
Technology transfer

Pre-2013 CDM reform

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19

C o un tr y c om m i t m en t ta b l e s
Developed country mid-term mitigation commitments
Country
2020 reduction target
Country
2020 reduction target
Australia
5-25% below 2000
Norway
40% below 1990
Belarus
5-10% below 1990
Russia
22-25% below 1990
Canada
20% below 2006
Switzerland
20-30% below 1990
Croatia
6% above 1990
Ukraine
20% below 1990
20-30% below 1990
USA
17% below 2005
25% below 1990
Total
14-18% below 1990
Total w/o USA
19-26% below 1990
EU
Japan
New Zealand
10-20% below 1990
Developing country mid-term mitigation commitments

Country
BAU curbs and NAMAs
Brazil
38-42% reduction from BAU emissions by 2020

50% reduction in deforestation from current levels by 2020
Measures in National Plan on Climate Change
China
40-45% reduction in carbon intensity from 2005 levels by 2020

Measures in Climate Change White Paper and 12th Five Year Plan
India
Reduction from BAU emissions by 2020

Measures in National Action Plan on Climate Change
Mexico
50 MtCO2e emissions reduction from current levels by 2012

5%+ reduction from BAU emissions by 2020
Measures in Special Program on Climate Change
South Africa
Emissions stabilisation by 2020-25, level until 2030-35, then reduction

Potential to reduce emissions by 100 MtCO2e from BAU by 2020-25
Measures in Long-term Mitigation Scenario
South Korea
4% reduction from 2005 level by 2020, equal 30% reduction BAU

emissions
Measures in National Action Plan on Climate Change
Developed country financial contributions

Country
EU
Financial contribution
5-15 billion
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20

F e a tur e
The architecture of a post-2012 carbon market
Whatever happens in Copenhagen, national and regional ETSs will continue
to be the main driver of carbon market development in the future
ETSs will link to each other, and have access to global offset mechanisms,
such as the CDM, JI, NAMA crediting and REDD, that exist under the UNFCCC
The CDM and JI will remain the main offset mechanisms in the short term, to
be replaced in the medium term by scaled up and new market mechanisms
Whatever form of agreement and market structure is reached in Copenhagen or

afterwards, the fact remains that there are already a number of efforts underway at
a national level to craft emissions trading schemes (ETSs) in the USA, Australia, New
Zealand, Japan and South Korea. At the same time the EU ETS currently represents
the most advanced iteration of a market-based response.
The clear preference among these various national proposals is for domestic
schemes that can eventually link to other systems around the world, rather than a
single, centrally-administered global market. These markets will continue to exist
and develop in spite of what happens in Copenhagen.
At the same time, there will be certain elements of a post-2012 framework that will
be more centrally-run, such as financing mechanisms or flexible mechanisms that
link developed and developing countries. But these elements will feed into, and be
fed by, sovereign activities among developed countries.
We therefore take the view that a post-2012 global carbon market will look
something like this:
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21

Developed country ETSs will gradually link bilaterally as they mature and as they
seek out additional sources of fungibility. A larger overall market may also promise
lower costs of compliance and trading. Any market based on such agreements will of
course depend on bilateral agreements at first. Nations will want to be sure that one
tonne of CO2e is the same the world over. They will want to be sure that efforts are
comparable, and for that, they will want to inspect each others schemes. Eventually,
though, allowances from different ETSs will become fungible and installations will
be allowed to surrender allowances from a variety of schemes for their compliance.
Clearly, an international agreement might avoid much of this bilateral linking work,
and perhaps some of the meetings to come after Copenhagen might establish global
standards for elements such as monitoring, verification and reporting.
Each scheme will also incorporate in its rules links to the flexible mechanisms of the
Kyoto Protocol (the CDM and JI) and eventually to the new mechanisms that are
contemplated by the current negotiations: Reduced Emissions from Deforestation
and Degradation (REDD) and Nationally Appropriate Mitigation Actions (NAMAs),
and elements such as sectoral crediting and trading.
What is already clear is that developed countries do agree that the current flexible
mechanisms represent a trusted standard for carbon offsets, despite the fact that
they differ in the quota of offsets allowed in each scheme. For example, the EU ETS
and Australia will both allow the use of Kyoto offsets for compliance. But the EU
places restrictions on the number of offsets that installations may use, while
Australia is likely to have no limits at all. While the total demand may be of interest
to the market, the fact that two separate national or regional schemes accept the
same quality and standard of offset from the same mechanism is more significant
and offers an insight into how a global market will develop.
For the USA, access to the CDM poses a unique challenge. The country is not a Party
to the Kyoto Protocol, but has expressed its desire to access the mechanism in a
post-2012 framework agreement. In order to create the legal basis for Kyoto offsets
to flow to the USA, we anticipate that some intricate legal manoeuvring will create a
bridge between the Kyoto Protocol and the agreement under the UNFCCC that will
cover all nations including the United States (see below).
How will a Copenhagen agreement establish the basis for this post-2012 market?
In order to create the framework for the development of a global market, decisions
at Copenhagen and afterwards will need to offer some leeway for developed
countries to tailor their plans according to their own requirements. Countries will
want to choose which and how many offsets they allow in their ETSs.
We take the view that, in the short term, the Kyoto Protocol will remain the main
framework for offset mechanisms but in the medium term that it will need to take a
back seat to the development of a new set of mechanisms under the Ad Hoc
Working Group on Long-term Cooperative Action Under the Convention (AWG-LCA),
as this group includes the USA.
While the Kyoto Protocol may well continue to contain the commitments of
developed countries for a second compliance period from 2013 to 2020, it may well
be superseded by the AWG-LCAs agreements, which are likely to also contain the
commitments of developed countries in terms of mitigation and financial
www.ideacarbon.com
22

contributions. However, the legal structure of the current flexible mechanisms and
elements of international emissions trading are contained within the Kyoto Protocol,
and as such we believe it will have to continue to exist, albeit in a somewhat
shrunken form.
Our view of the legal outcome of the negotiating process is best encapsulated in the
diagram below:
The Kyoto Protocol, represented here by the AWG-KP oval at the top, will contain, as
it does today, Annex I parties and a new and improved CDM. The wider agreement
under the UNFCCC that is to include the USA will be created by the AWG-LCA. But in
order to engage the USA in the CER market, the AWG-LCA agreement will have to
have access to at least parts of the Kyoto Protocol, most particularly the CDM. We
expect to see some clever legal wording to develop a pipeline that will allow CERs to
flow into the non-Kyoto part of a new global agreement.
At the same time, new mechanisms will likely be created under the AWG-LCA,
namely, a market for reduced emissions from deforestation and forest degradation,
and NAMA crediting by developing countries. These mechanisms may take time to
get up-and-running, but they will eventually generate credits that we believe will
flow to developed countries.
NAMA crediting could, for example, convert non-emission reduction targets, such as
the energy efficiency or carbon intensity targets that are being planned in India and
China, into carbon instruments that could be used for compliance in ETSs around
the world. This will leave us with one remaining obstacle: to be able to work with the
USA, Kyoto Annex I parties will also have to be part of the AWG-LCA agreement. So
we expect to see some sort of migration of Annex I parties into the new AWG-LCA
agreement, while retaining their historical membership of the Kyoto Protocol.
The result will be a Kyoto Protocol that effectively enters suspended animation. It
needs to continue to exist for legal reasons, particularly the CDM, but will no longer
be the focus of any international effort. Instead, the AWG-LCA, or Copenhagen,
Agreement, will be the new centrepiece of collective action on climate change.
www.ideacarbon.com
23

C ar b on C al en d a r T M
Notes: Policy events of particular significance are highlighted in bold.
7-18 December
2009
15th Conference of the Parties to the UNFCCC and

5th Meeting of the Parties to the Kyoto Protocol
COP15/MOP5: deadline for formal negotiations on post-2012

climate change policy to reach conclusion
Copenhagen,
Denmark
10-11
December 2009
EU Environment Council meeting
This meeting is scheduled to take place half-way through the

UNFCCC talks in order to adjust EU positions if necessary in light
of the progress of the talks.
Brussels, Belgium
22 December
2009
EU Environment Council meeting.
The Environment Council of the EU will meet to discuss the

outcomes of the UNFCCC negotiations in Copenhagen.
Luxembourg
31 December
2009
EC publishes list of those sectors deemed

vulnerable to carbon leakage.
Phase III of the EU ETS will give partial or full free allocation of
EUAs to industry sectors deemed vulnerable to carbon leakage.
The European Commission is due to issue its list of those sectors
by the end of 2009.
Brussels, Belgium
1 January 2010
Commencement of Spanish EU Presidency
Spain occupies the EU Presidency until the 30th June 2009
Brussels, Belgium
1 January 2010
EU ETS aviation operators begin to monitor

emissions and collect data.
Aviation emissions data must be reported for the "pre-trading"

period of 2010-2011. Aviation officially joins the EU ETS on January
1 2012.
EU
January 2010
US Democratic leaders desired time to begin

climate debate in Senate
Leaders of the US Democratic Party wish to begin debating a US

climate bill in the Senate as soon as possible in 2010.
Washington, DC, USA
January 2010
Fourth Global Environment Facility Assembly
The Assembly is the governing body of the Global Environment

Facility (GEF) in which representatives of 177 member countries
participate.
Punta Del Este,

Uruguay
31 May - 11
June 2010
2010 Meeting of the UNFCCC Subsidiary Bodies
Further work in the implementation of a post-2012 agreement

may continue at these sessions.
TBC (likely to be in
Bonn, Germany)
December 2010
16th Conference of the Parties to the UNFCCC and

6th Meeting of the Parties to the Kyoto Protocol
COP16/COP6: Annual meeting of the Parties to the UNFCCC.

Depending on the outcome of COP15 in Copenhagen, this
meeting may see a final agreement on a binding international
climate treaty.
Mexico City, Mexico
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24

Commitment Monitor Emission reduction targets of developed countries
USA
Ukraine
Switzerland
Russia
Norway
New Zealand
Japan
EU
Croatia
Canada
Belarus
Australia
2020 (min)
2020 (max)
2050 (min)
2050 (max)
Note: country targets are shown relative to 1990 greenhouse gas levels
www.ideacarbon.com
25
www.ideacarbon.com
26

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CARBONfirst - December 2009

Executive editor: Shandi J Modi,

Climate policy and market insights

Ambitious political agreement scenario 1

Modest political agreement scenario 2

Weak political declaration scenario 3

Country commitment tables

Architecture of a post-2012 carbon market

Carbon CalendarTM: key events in the carbon market

Commitment Monitor: national climate commitments 25

Last Minute Effort towards a Global Deal: Discussions in Copenhagen