How should the international community manage the risks of global climate change? Diplomats from 187 nations faced this question in December at the United Nations' climate conference in Bali, Indonesia.
Their answer was a two-year plan for negotiating a new global climate policy that would start in 2013 - the year the Kyoto Protocol ends.
The "Bali Road Map" is intended to lead to an agreement on a global climate strategy. Key elements include a long-term goal for global greenhouse gas (GHG) emissions, commitments to reduce emissions by both developed and developing countries, programs to help countries cope with the effects of climate change, and incentives to accelerate the use of climate-friendly technologies.
Any agreements that emerge will affect all parts of society, but they will have an immediate impact on the energy industry. Most of the world's energy still comes from carbon-based fuels. Policies designed to reduce emissions will fundamentally alter how the global economy is fueled in the future.
Global carbon dioxide (CO2) emission trends demonstrate the challenge ahead. Emissions have increased by almost 50 percent over the past 25 years, and Cambridge Energy Research Associates (CERA) projects that current energy investment patterns will lead to another 50 percent increase over the next quarter century.
This trend is a stark contrast to the recommendations of the Nobel Prize-winning Intergovernmental Panel on Climate Change that global emissions should be reduced by at least half by 2050 to avoid significant impacts from climate change.
A variety of clean energy technologies provide a pathway to a low carbon energy future. But the challenges associated with moving these technologies into the mainstream are great. The ultimate emissions goals set for mid-century and beyond will be crucial for charting the world's overall course on climate policy.
But the near-term commitments coming out of the Bali process will affect today's investment decisions and the immediate path forward. CERA anticipates that future policies will be more evolutionary than revolutionary, building on experiments unfolding already across the globe. The wide range of approaches underway today offers a view of the future.
The European Union's CO2 cap-and-trade program is the cornerstone of its climate policy. The E.U. policy places a ceiling - and cost - on CO2 emissions from the power and industrial sectors. The European Commission is now proposing to tighten the CO2 cap while also setting new targets for renewables and energy efficiency.
Overall, the E.U. has committed to reducing its emissions 20 percent below 1990 levels by 2020, with the target for reductions upped to 30 percent if other developed countries support similar goals.
One approach that can help to integrate different national policies is international GHG emissions trading.
In the United States, a variety of policies are under development at the state, regional and federal levels. A bill sponsored by Senators Joe Lieberman and John Warner would create a cap-and-trade program for the majority of U.S. emissions, including the power and transportation sectors. This measure, set for a vote in the Senate this year, proposes reducing emissions 20 percent below 2005 levels - which would bring them roughly to 1990 levels - by 2020.
China has established its first national climate strategy, including targets for renewables and energy efficiency, and agriculture and forestry programs.
The adoption of a national strategy highlights China's increasing engagement around climate change. At the same time, China's policy makers do not view near-term emissions caps as feasible, given their country's increasing appetite for energy to fuel its growing economy.
A successfully negotiated global agreement must find a way to embrace these different approaches and starting points, while also narrowing differences over time. This will not be an easy task. One approach that can help to integrate different national policies is international GHG emissions trading.
Many forms of GHG markets are emerging across the globe. All are guided by the overarching principle of trading a "ton for a ton" - one ton of emissions reductions by one party is traded and used to offset one ton of emissions by another.
The basis of trading is that the cost of reducing emissions varies greatly across industries and regions. By finding and exploiting differences in costs, international GHG markets can integrate different climate policies and lower overall costs.
The existing Kyoto Protocol set up a number of markets to encourage investors to fund projects to reduce emissions. The most active such market is the Clean Development Mechanism, which applies to projects in developing countries. A whole new industry has emerged to develop and trade emissions credits under the Mechanism.
About 2.4 billion tons of reductions are currently under development, roughly equal to the annual emissions of the U.S. power sector. And the market is growing quickly, with 40 percent of these reductions proposed in 2007. China is the largest source, accounting for over 50 percent of these reductions, followed by India with 15 percent and Brazil with seven percent.
The outlook for this, and other, international GHG markets is uncertain after the Kyoto treaty expires in 2012. The future value of international credits hangs on the Bali process.
Will negotiators expand these markets? How will future commitments affect China's role as a primary source for credits? And will future U.S. policy be compatible with existing international markets? Given the stakes, the international GHG markets will be watching the Bali process closely.
Carbon markets and emissions limits can direct investment toward currently available technologies, but they cannot ensure that new technologies will be adopted. Many of the technologies required for a low carbon energy future are not commercially viable today.
Sustained government support - ranging from the funding of research and demonstration projects to tax incentives and subsidies - will enable the long-term development of clean energy technology and provide important confidence for private investments. Government support also extends to addressing political, regulatory and legal hurdles that can slow the adoption of technologies.
The energy industry has many of the tools necessary for building a more sustainable global climate. The engagement and effectiveness of these tools will be shaped by how a global climate consensus guides national policies, international emissions trading and programs to advance low carbon technologies.
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