The Business Case for a Strong Global Deal

Prepared for the World Business Summit on Climate Change by the ClimateWorks Foundation

Foreword

The Business Case for a Strong Global Deal is a recipe for sucess: a model for how global society in the next few years could turn the greatest threat to civilization into a unique opportunity for new growth and quality of life.

But it is not a success which comes easily. It calls for difficult choices and sharp prioritizations. Yet we find ourselves at a point in history where we actually have the power to make those choices. We can implement policies and take actions that will place humanity on a sustainable path towards future development.

This paper, written especially for the business community, provides the blueprint to achieve a sustainable economy. It is based on the extensive research that the ClimateWorks Foundation has initiated through Project Catalyst and which draws on input from 150 climate change experts from over 30 countries and analytical support by McKinsey & Company.

The results are thought-provoking, challenging and inspiring. It illustrates that the world's climate problems are manageable. Nearly all the required technologies and competencies are at our disposal, including the necessary financial resources. We have the choice to embark on a pathway that stabilizes the concentration of greenhouse gases in the atmosphere and steers us towards economic and environmental prosperity – and this choice is an affordable one.

Although these choices are far from simple, they cannot be postponed indefinitely. They demand a close partnership between politicians and business leaders: a framework for a green, sustainable economy is required and the business world must use it to its full potential.

That is why The Business Case for a Strong Global Deal is a perfect discussion paper for the World Business Summit on Climate Change, taking place from May 24-26 in Copenhagen. Therefore it is with pleasure that the Copenhagen Climate Council presents this paper in cooperation with the ClimateWorks Foundation.

The Council's mission statement sets an objective of no more than 450ppm for carbon dioxide in the atmosphere in an effort to prevent dangerous changes to the global climate. It is exactly the numbers and facts behind this target that Project Catalyst reveals – with the conclusion that it is tough but doable.

For the Copenhagen Climate Council it is of utmost importance to move the focus in the climate debate from risks to opportunities – and establish who will solve what tasks and on what terms. Project Catalyst's analyses demonstrate that with a timely and focused effort and the correct political incentives and conditions, climate action can be good for the planet as well as the bottom line.

Advancing this interaction is the purpose of the World Business Summit on Climate Change. We look forward to presenting and debating the discussion paper – and look forward to the results of the negotiations at COP15 in December in Copenhagen.

Erik Rasmussen
CEO, Monday Morning;
Founder, Copenhagen Climate Council

The Bottom Line – the Business Case for a Strong Global Deal

Climate change requires us to act quickly to contain potential risks from global warming and adapt in ways that are consistent with economic growth and development goals. The problem is solvable – many of the technologies required are available today, the policies needed are relatively clear, and the costs of transition appear manageable, even in the current economic climate.

A strong deal in Copenhagen will unlock the potential of business to do what it does best: to profitably invest, innovate and make affordable low-carbon products and services to billions of consumers around the world. A strong deal is essential to create the rules, price signals and risk-return incentives that business needs to:

• Scale-up new low-carbon markets, for example in forest-based carbon sequestration (up to 80 billion global value chain by 2020);
• Create a step-change in energy productivity, driving out the next 20% of energy costs in the energy-intensive industries;
• Accelerate the shift in consumer demand to products with much lower life-cycle carbon (and environmental) footprints;
• Meet the energy and transport needs of the 1-2 billion people at the bottom of the global pyramid with new low-carbon solutions;
• Drive technological innovation, creating the scale effects needed in, for example solar, to achieve grid parity over the next 10-20 years.

From a broader perspective, a strong and equitable deal would need to set the world onto a 450 ppm CO₂e¹ stabilization pathway by:

• Creating the commitments and incentives needed for a peaking of global carbon dioxide emissions between 2015-2020, followed by rapid further cuts in emissions;
• Scaling up the deployment of key low-carbon technologies globally and supporting the expansion of low-carbon trade opportunities;
• Delivering an effective mechanism to save the rainforests and provide better economic opportunities for the billion plus people who depend on the forests for their livelihood;
• Funding adaptation investments to prevent catastrophic impacts of climate change on the most vulnerable communities and nations;
• Accelerating the transition to a prosperous, low-carbon economy in which all nations, developed and developing, can participate.

A strong deal will usher in a transformative period for business. Inevitably, the transition to a low-carbon economy will be a period of creative destruction. A strong deal will need to provide unambiguous future direction to the markets, tipping expectations sufficiently to create a competitive race to the low-carbon economy. It will also need to be sufficiently flexible to minimize the economic damage created by the accelerated write-down of legacy (high-carbon) assets or the environmental damage created by regulatory asymmetries and cross-border carbon leakage.

Of course, the alternative to a strong deal is a weaker, less ambitious one – one that in the short run might require less political and business leadership. Such a deal would not only significantly increase climate risk, but it would extend the period of transitional uncertainty, and lead business – understandably – to treat the low-carbon agenda as a portfilio option rather than as a strategic imperative.

The Case for Global Action

A scientific consensus has emerged on the risks from climate change – without timely action the world appears likely to lose its ability to contain warming to 2°C, a level beyond which irreversible changes to natural and socio-economic systems become much more likely.

The 2007 assessment by the Intergovernmental Panel on Climate Change (IPCC) was clear that climate change is caused by human activity, that it is already occurring, and that warming greater than 2°C presents a severe danger to human society. Many, especially developing countries, are already facing significant adaptation challenges such as agricultural loss, water shortages, flooding, severe weather, and the spread of disease vectors. At the bottom of the pyramid, the poorest 1-2 billion people on the planet are, as ever, the most exposed to climate risk.

The economic crisis is temporarily slowing the growth of greenhouse gas (GHG) emissions but not fundamentally changing their trajectory – we estimate only a 1% to 3% cumulative reduction by 2020. Furthermore, despite the economic slowdown, the developing world will add massive amounts of infrastructure during the next two decades and the developed world will replace a large share of its physical assets – more than 75% of the world's power supply for 2030 has yet to be built. Right now, we have an opportunity to ensure that today's business investments put the world on a low-carbon, energy efficient path.

If we miss this opportunity, we risk locking in high-carbon infrastructure for decades to come. Failure to act decisively now means that, within the next two decades, CO₂e concentrations in the atmosphere will almost certainly exceed 450 ppm – the threshold at which the IPCC estimates only a 50% probability that global warming can be limited to 2°C.

The effects of climate change on business are real, and already occurring. This is not tomorrow's problem or a complex inter-generational game. Individual catastrophic events can have a major impact in terms of asset destruction and business interruption (e.g., 130,000 claims and €5.5 billion in insured flooding losses in the U.K. in the summer of 2007) and the effects of climate change in combination with an increasing concentration of assets, exacerbating the losses associated with such events. Affected business assets include not only production facilities and retail spaces, but also commercially-managed forest and agricultural supply chains.

Given the many decades required to scale up low-carbon infrastructure and restructure high-carbon value chains, smart policies and large-scale investment are needed now to mitigate the risk of increasingly severe damage. We believe they can be achieved with net economic benefits to both society and business.

The Business Case for a Low-Carbon Economy

While the scientific consensus points to increasing climate change risk, the evidence on the feasibility and economic benefits of addressing it grows more positive.

First, the costs of transition to a low-carbon economy are potentially less than 1% of GDP per year – provided that the right policies are put in place. Second, there is a good case, across economies at different stages of development, that reducing carbon emissions does not necessarily translate into lower growth since in many cases these "costs" are investments in new, lower-carbon, more efficient infrastructure and value chains. Moreover, like any other investment-led stimulus, carbon-reducing measures can actually promote growth if they are financed over time. Third, there are clear societal benefits in terms of increased energy security.

For businesses, the transition to a low-carbon economy will be challenging – and there will be winners and losers. Profits will be allocated in a different way than in the high-carbon economy, and safety nets may be needed. But we have seen no compelling evidence that the transition must be lower-growth or employment-reducing for society as a whole, and we can point to many attractive opportunities for which businesses can compete with the right policies in place. Strong adaptive companies typically show their class in response to stretching, measurable targets – whether these targets are market-driven, operational, or environmental.

Low-carbon growth economies can thrive

There could be a big prize from building a low-carbon economy: increased overall resource productivity, new high-value-add jobs, and faster technology development. As happened during the Industrial Revolution or the high-tech boom, a global shift to improved carbon productivity will coincide with a period of high-risk, high-return business opportunities.

Much of the public focus has been on renewable power technologies and large industrial emitters (such as steel or cement), but these value chains are not the only ones that will be fundamentally restructured. Greater energy efficiency in commercial and residential buildings, cleaner transport, shifts in agricultural and forestry activity, and many other changes will create new markets. To cite two examples out of many:

• The opportunities in energy efficient transport and buildings are equivalent to approximately 10% of global energy demand.² This is economically comparable to a € 0.7 trillion market, with hundreds of business opportunities at every stage in manufacturing, maintenance, and servicing value chains. Leading retailers are already going after the opportunity to reduce their end to – end carbon footprint – generating significant efficiency and profit improvements for all participants in their global supply chains.
• Reducing emissions from deforestation and forest degradation (REDD) and afforestation/reforestation (A/R) in developing countries presents ample opportunity for the private sector to engage all along a €50-100 billion value chain. Provided adequate land rights governance structures are put in place, investors from developed nations could provide funding and play an important role in actually delivering the carbon abatement. Companies in forest management, pulp and paper, or construction could build new businesses around carbon abatement and "enabler" services such as satellite support for forestry-specific measurement, reporting, and verification.

Today's evidence shows that while no developed countries nor even many developing countries have achieved greenhouse gas emissions at a long term, sustainable 2 tonnes per capita, economies are able to dramatically increase carbon productivity as they grow.³ For example, California, with per capita emissions of 13.7 tonnes of CO₂e in 2004 has stabilized energy consumption over the past 30 years while nearly doubling its GDP.

By contrast, the U.S. as a whole, which grew less quickly, increased its energy consumption more than 40% over the same period and emitted in 2005 on average 23.9 tonnes of CO₂e per capita. Denmark offers another example of low-carbon prosperity (12.7 tonnes of CO₂e per capita in 2005). Its economic activity increased by more than 45% between 1990 and 2007, while its CO₂ emissions fell by more than 13%.⁴

Mexico's "low-carbon growth pathway" also illustrates the potential for low-carbon growth to create jobs – an extra 500,000 by 2030 compared with business as usual.⁵ First, new, green industries add new activities to the economy, such as retrofitting building insulation, and with them new jobs. Even after adjusting for employees who move out of an eliminated position into a new, green job, the net effect of such green industries is still positive. Second, some existing sectors of the economy will become more labour-intensive when they switch to a low-carbon path. Clean power technologies will have other benefits such as making distributed power available in rural areas that are currently uneconomic to connect to the grid.

The cost of these technologies does not need to be an insuperable barrier, especially if actions to increase energy efficiency are taken in parallel. New clean energy technologies have made tremendous gains despite limited incentives and relatively modest levels of investment compared with investments in fossil fuels. The costs of photovoltaic solar for example have declined 20% with every doubling of installed capacity.⁶ Wind power capacity has grown 30% a year for a decade.⁷ Each of these technologies – and others somewhat further out such as carbon capture and storage (CCS) – has the potential to reach a tipping point in productivity and cost, accelerating growth and creating new industries and jobs.

Project Catalyst has developed a set of global scenarios focused on accelerated clean-tech deployment in the power sector over the next 20 years. What these scenarios show is striking: that even countries with fossil-intensive power sectors could supply more than half their energy from renewables by 2030 at moderate cost if the right supporting policies were in place.

For example, the U.S. could decarbonize 50% of its power sector by 2030 for an average cost of less than €30 per tonne. This would require significant – but feasible – changes, which include establishing a more effective national grid, implementing measures to handle intermittency (e.g., aggressive demand response coupled with use of available hydro resources for storage), and providing financial incentives to owners of combined cycle gas turbine (CCGT) plants to leave them online as low-utilization backing capacity.

Achieving greater energy security

The major energy-consuming economies have the potential to benefit massively from a shift towards a low-carbon economy. Over the past decade, energy prices have become more volatile. This is largely due to sharply rising global demand as a result of much faster GDP growth in the major emerging markets. Overall energy demand is increasing by 2% per year – and expanding the reliable supply of energy will be essential to lift the next 1-2 billion people out of (energy) poverty.

The shift to a low-carbon economy could significantly increase energy security. First, it could lead to much greater energy conservation. Estimates of the potential to reduce energy consumption suggest that it would be possible to cut demand by over 20% without any loss of economic utility. Second, it could lead to a diversification of energy sources, including more nuclear, more renewables, and much more bioenergy (in both power and transport sectors). Third, the development of clean energy distributed- and offgrid technologies could lead to a massive expansion of rural electrification, creating greater energy security for those at the bottom of the global pyramid.

Increased energy security – like increased climate security – requires collective action. If all major economies increased their fuel economy standards, they would benefit from lower, more stable energy prices as well as from lower carbon emissions. If all major economies were to introduce similar policies around fuel economy – or around standards for biofuels or batteries – they could create a globally scalable market for transport fuel substitutes in years rather than decades.

All countries potentially stand to benefit from better energy demand management and more diversified supply. Because of the long lead time required to increase production, sudden increases in energy demand can translate into high prices in a non-linear way. In 2008 for example, spiking oil prices were the result not so much of the rising marginal cost of supply as of the demand reduction required to bring demand back in line with currently available production.

For oil-consuming countries, an oil price that ranged between $60 and $80 per barrel (€47-63) would keep international transfers lower than a world in which prices spike up to $150 (€118). It would also create a much more stable macro-economy, with less risk of current account deficits or inflationary pressures from rapid energy price increases. Oil-producing countries might also benefit from more stable demand, which would allow them to plan fiscal expenditures and avoid swinging from massive macro-economic surpluses into deficits every 3-7 years.

The technologies are known, the incremental costs manageable

Making the change to a low-carbon economy is a huge shift, given the high-carbon infrastructure in place in developed countries and the lifestyle it provides them with – a lifestyle to which developing countries legitimately aspire. If we hope to contain warming to 2°C, the world will need to limit its emissions to 44 Gt CO₂e in 2020 and 35 Gt CO₂e in 2030; a reduction of 17 Gt or 28% over our business-as-usual projections in 2020 and 35 Gt or 49% in 2030. This is a robust challenge, for certain, but one that we know how to meet.

Ninety percent of all mitigation actions – 17 Gt – are technically possible for under €60 per tonne of CO₂e abated. Existing technologies can supply over 70% of the global emissions reductions needed by 2020; technology costs are already rapidly declining, and new technologies will further reduce costs and increase effectiveness.

Work by Lord Stern, the IPCC, the Organisation for Economic Co-operation and Development (OECD), the International Energy Agency (IEA), McKinsey & Company, and numerous academics and private sector firms consistently shows that the upfront incremental capital investment of shifting to a low-carbon society are clearly manageable within the context of the global economy – generally less than 1% to 3% percent of GDP. This includes, for example, additional costs over and above business-as-usual activity in power generation, heavy-emitting industries, forestry, transport, and the built environment. At those relative levels, the immediate incremental costs will impact consumers less than pre-existing fluctuations in prices for goods such as food, fuel, and electricity.

The overall costs are lower than might be expected because: (a) there are large real savings to be captured through energy efficiency; (b) many strategies for reducing emissions through avoided deforestation centre on increasing agricultural productivity; and (c) some key technologies, such as solar power, have dramatic learning curves.

The path to a low-carbon economy will differ by country, but detailed bottom-up analyses are consistent. McKinsey & Company has assessed over 200 specific abatement actions across 21 world regions and 10 major industry sectors to create a global "cost curve" for carbon abatement (Exhibit 2). It shows that a 450 ppm path is achievable with current and near-commercial technologies for an incremental cost of €75 billion per year – less than 1% of global GDP.⁸,⁹

With the right policies and incentives, most of the capital investment needed would be made by the private sector against profitable opportunities. As these investments are in long-life assets, they would generally be financed through the capital markets. McKinsey & Company estimates that the total incremental capital investment required to transition to a 450 ppm path is equivalent to a 3% increase on business-as-usual capital flows.¹⁰ Even in the context of the current crisis, the right policy incentives would put this well within the financing ability of capital markets.

While individual companies can be heavily affected by a transition to a low-carbon economy, the impact of low-carbon investments on national competitiveness appears to be less than feared. Carbon intensive industry sectors that are directly exposed to international trade are a relatively small share of the economy of most countries. For example, in the U.S., directly exposed sectors make up only 1.6% of GDP, and just one sector, chemicals, accounts for more than two-thirds of this share.¹¹

While the effects for these sectors will be very real, most studies estimating the impact of carbon regulation on these sectors show effects that are smaller than energy price or currency fluctuations that companies are exposed to today.¹² All that said, for affected sectors in developed countries, the competitiveness and carbon leakage concerns are real – and targeted policy interventions may be needed to level the playing field.

Business opportunity in the transition Already we have seen an initial wave of investment in new business opportunities as companies and investors compete to provide capital and meet new forms of demand. Business formation and creative destruction associated with the shift to a low-carbon economy is taking place at the level of entrepreneurial ventures and large public companies today.

Venture capital investment in clean technology has been among the fastest growing sectors of alternative investing over the past 5 years, with cleantech VC investments growing at 46% CAGR from €0.7 billion in 2002 to €6.6 billion in 2008. Private equity activity in emerging companies contributed a further €4.7 billion in investments in 2008. In 2008 total investments in clean energy reached €112 billion. While investment in cleantech has slowed down in 2009 because of the economic crisis, major banks project it will pick up again with general economic growth, and accelerate further if the risks of regulatory unpredictability are reduced by coherent, long-term policy action.

In industrial sectors we can also see profitable opportunities emerging. DuPont and Dow for example, which started their lean energy efforts in the early 1990s, have already saved over €1.5 billion and €3 billion respectively. The economics of energy efficiency are particularly attractive in developing countries, which are building up capital stock and can more cheaply adopt high efficiency solutions in new buildings and equipment.

According to IEA estimates, each additional €1 spent on more efficient electrical equipment, appliances, and buildings avoids more than €2 in investment in electricity supply – so these regions can both reduce their overall investments needed for growth, and lay a more sustainable growth path that will create a myriad of profitable business opportunities.

The shift to low-carbon growth has begun. It will be accelerated further by a global deal and subsequent national policies, and begin to impact existing and new value chains at a scale much larger than experienced to date. The low-carbon economy will be a different economy – with a different set of value chains, different regulatory systems, and different behaviour. It will inherently create new sets of business winners and losers – like any multi-decade transition.

In response to the prospect of a very challenging transition period, some businesses argue that there is unmanageable disruption ahead: an uneven playing field, job losses, massive new regulation and policy distortions, and higher costs (especially in energy) than described. It is not possible to dismiss these concerns out of hand.

Poor policies, in the name of climate change, have at times generated a new set of profits for specific vested interests (and costs for society), with very few climate benefits. A policy regime that fails to grasp the energy efficiency nettle will result in a much more costly transition to a low-carbon economy. There are also genuinely problematic international trade issues, especially for carbon-intensive manufacturing. However, constructive responses to each of these areas of concern are being developed:

• On trade, in the short term the uneven application of emissions limits or costs on different countries is likely to cause competitive issues, but mainly for those industries that are both energy intense and have strong trade exposure. Because the issue is largely limited to 6 sectors – iron and steel, nonferrous metals, nonmetallic mineral products (cement and glass), basic chemicals, and paper – sector-specific solutions, albeit with trade-offs, can be found. These include transition adjustment assistance for affected industries, free permit allocations in cap and trade systems (monitored so as not to inflate the number of permits and reduce reduction incentives), and global sector energy/carbon-intensity standards.¹³
• On transition costs, there is high potential for global action to cost much more than the most efficient path, and for local policy action to be inefficient, layering new distortions on top of existing ones especially in the energy, transport, industrial, and land-use sectors. Well-coordinated national plans that address the lowest-cost actions first,and create effective policy, are critical. Aggressive action on energy efficiency, including global standards for internationally traded products, such as consumer appliances and computing equipment, is essential. A strong global deal enabling massive international investment in lowestcost carbon abatement, much of which is located in developing countries, will be equally important.
• On excess regulation, a strong global deal will help create a bias towards smart, output-specified regulation (e.g., sector intensity targets) and towards much greater transparency around the costs of different policy regimes. It could also generate productive "policy competition" where the world learns, through diverse national approaches, about the varying costs and benefits of different low-carbon growth strategies.

A badly designed set of policies – ones that pander to green-washed, local political interests – is always a real risk and has the potential to raise the costs of transition massively. To invest with confidence in these new opportunities, business will need stable, predictable policy regimes in place for long timeframes in order to allay both the regulatory risk of the first investment and "refinancing risk" connected to later stage investors' regulatory uncertainty in future years. International and national policy action will incentivise, and in many cases co-fund, lower carbon activity within many sectors across developing and developed economies.

A strong global deal at Copenhagen could create the most effective transition possible from a business point of view. It should create a race for leadership in new opportunities (as already seen in China's investments in electric vehicles and wind), and accelerate the transition to a period when business competes in a low-carbon economy with less policy intervention.

A Strong Global Deal – What it Means

Over the past year, Project Catalyst has analysed two core questions – what will it really take to get onto a 450 ppm climate stabilization pathway, and what will it cost? Here are the ten hard, unsentimental facts it has learnt:

1. To get onto the 450 ppm pathway, global emissions will need to be reduced by 17 Gt relative to the 61 Gt business-as-usual case by 2020 and by 35 Gt relative to the 70 Gt business-asusual in 2030.
2. For under €60 per tonne, about one-third of this emission reduction would most efficiently take place in developed economies – and ironically two-thirds in developing economies that bear only limited historical responsibility for the CO₂e stock but are where emissions growth will be fastest going forward. To solve the problem, all countries need to play, starting now.
3. Global emissions need to peak between 2015-2020 to achieve the 450 ppm stabilization pathway. Developed economies need to get onto sharply declining emissions trajectories immediately. Middle-income countries would need to peak between 2020 and 2025.
4. Forestry and agriculture – mainly in developing countries – account for over 50 percent (9 Gt) of the 2020 abatement challenge.
5. Energy efficiency is critical. It delivers 4 Gt in 2020 – and is central to keeping the transition costs low. Absent a step-change in energy efficiency, the costs of getting onto the pathway increase by up to 30%.
6. Clean technology deployment has the potential to deliver over 10 Gt in the power sector by 2030 at less than €20 per tonne. In 2020 we can already achieve 3.4 Gt, but at a price of €37 per tonne. The real key to getting the cost down is accelerated deployment – given intellectual property costs are less than €1-2 per tonne.
7. A relatively small number of policies – focused on increased energy efficiency and lower-carbon power – can help deliver up to 6 Gt of the required carbon abatement by 2020.
8. The incremental costs of financing low-carbon growth in developing countries are approximately €55-80 billion a year between 2010 and 2020, including transaction and financing costs.
9. The costs of financing adaptation are (at least) an additional €10-20 billion a year from now to 2020 – and are likely to rise sharply from 2020 onwards under any scenario, but more acutely if the world does not make the transition to low-carbon growth.
10. Neither public finances nor carbon markets can deliver all the required international funding. Both are needed to raise the necessary resources and to support major sectoral programmes for low-carbon growth. And carbon markets will need to work as a heterogeneous system for some time – without one global carbon price – as they scale up.

Countries, both developed and developing, are of course all starting at different points. Hence, a global deal cannot have a "one size fits all" architecture. It actually can take advantage of the diversity of different countries' endowments to lower the overall global cost of transitioning to a low-carbon economy and to conduct different experiments around optimal lowcarbon growth pathways. The deal needs to create a system dynamic in which countries – and companies – have a positive motivation to compete for the economic and societal gains of low-carbon economies.

While all countries have a stake in a successful global agreement, any deal must address inequities in the global climate-economic system: developing countries bear a relatively small historical responsibility for the problem while being the most vulnerable to climate change. Addressing climate change must not limit development prospects for developing country citizens.

To address these inequities and enable developing countries to participate fully, an agreement must mobilize substantial financial and technical resources to support developing country actions and mobilize resources for their adaptation efforts. An agreement must also formalize institutional structures that create accountability, transparency, and trust; these structures will allow the agreement to evolve over time, while continuing to mobilize the needed resources.

There are five key building blocks that a strong global deal would need to put in place to create the appropriate, coordinated incentives for domestic policy and business action: (1) developed country targets; (2) developing country climate-compatible growth plans; (3) appropriate treatment of forestry and land-use; (4) funding for climate-compatible growth plans, including forestry; and (5) accelerated low-carbon technology development and deployment. All of these elements could create strong incentives for the private sector to participate in an emerging low-carbon economy.

1. Developed country targets

In order to limit global warming to less than 2 °C, developed countries will need to meet the following targets:

• At least 5 Gt of domestic carbon abatement through legally binding caps by 2020 and 12 Gt by 2030;
• A further 2-4 Gt of abatement in 2020 through purchases of international carbon offsets;
• Additional funding, beyond offsets, of about €35-70 billion to support developing countries in their transition to climate-compatible economies through mitigation and adaptation investments;
• A commitment to triple low-carbon R&D spend over the next 5 years

Clearly, there will be differences between what individual countries can do by 2020. But any shortfall up to 2020 would need to be addressed through credible catch-up commitments in 2020-2030.

2. Developing country climatecompatible growth plans

Developing countries are even more diverse than developed countries. On the assumption that few, if any, developing countries would be willing to take immediate national caps, the central question is how they could strengthen delivery of their own development goals through a low-carbon, adaptive growth strategy. An increasing number of developing countries are proposing a "climate-compatible growth plan" (CCGP), containing measures to accelerate low-carbon growth and to increase climate-resilience (through investments in adaptation).

These plans would articulate long-term sustainable, climate-resilient development strategies, specify near-term policies and measures, and commit to specific targets and outcomes. They would describe a country's own contribution to the overall global abatement challenge (we estimate up to 4 Gt across all developing countries). As this consists largely of energy efficiency improvements and therefore contributes to the country's financial and energy security, the developing country might be willing to finance these efforts itself.

The plans would also propose international support, whether financing, access to technology, or capacity building. Entering such CCGPs in a UNFCCC registry would allow for measurement, reporting, and verification procedures, which could facilitate competition for funding. South Africa, South Korea, Mexico, and other countries have piloted the CCGP approach; their experience shows that it is possible to shape a CCGP process which generates both domestic political commitment and access to international resources.

Beyond covering the country's low-carbon growth opportunities, each CCGP should identify and substantiate the need for adaptation measures such as knowledge-building (little data is available on adaptation challenges for many countries), planning and preparation, disaster management and insurance, and investments in climate-resilient infrastructure and technology. Specific funding – and support for publicprivate partnerships – would need to be mobilised in pursuit of this adaptation agenda.

3. Forestry and land use

There is one sector, concentrated in developing countries, which would require special treatment in any global deal: forestry. By 2020, forestry and agriculture could generate around half of the global abatement potential, and by 2030 would still be one-third of the total. They are therefore an especially critical element in the early phase of the low-carbon path, when low-carbon energy supplies have yet to be built. The current deforestation rate of over 13 million hectares per year underlines the need for action.

Plenty of non-carbon benefits can be reaped from changes in these sectors. Re- and afforested areas could provide ecosystem services such as reduced flood risk, cleaner and more stable water supplies, and beneficial local climatic effects. Many of the health and safety issues associated with the extensive use of wood as cooking fuel would be addressed by better stoves and local bio-energy plantations. And it has long been recognized that dramatically raising agricultural productivity is critical to improving food security and accelerating economic development in Africa and other developing regions.

For these reasons, the global community needs to give a strong signal of support to those countries – many of which are among the poorest, lowest per capita emitters on the planet – that want to take real action to protect their forests and make better land use choices. While ultimately it may be possible to incorporate forestry into the general funding regime based on developing country growth plans, transitional or emergency funding based on "pay for policy" principles is needed. This could help build capacity for identifying REDD and A/R opportunities and building strategies around those possibilities, and could help create the institutions that can run the required programmes (e.g., forest protection regions).

Once these capabilities have been built, an intermediate, proxy-based form of "pay for performance" could be applied. Here, funding is tied to on-theground action (e.g., number of hectares reforested) but without a verifiable carbon performance metric, which is required for participation in a carbon market.

4. Funding

Developing countries' promise in Bali to contribute "nationally appropriate abatement actions" was in effect contingent on financial, technological, and other forms of support, and developed countries pledged to provide it as well as assistance for adaptation. Arguments in favour of providing this support are that developed countries can make far greater contributions, and providing support is ultimately cheaper for developed countries than trying to achieve globally required levels of abatement on their own (which is probably impossible anyway), or living with the impacts of climate change.

We estimate an "incremental cost" of developing country abatement actions of €55-80 billion per year on average from 2010 to 2020 (of which €20-40 billion is for forestry and the remainder for industry and the power sector, including €5 billion in developing country- specific R&D and pilots for new, not yet commercial technologies). With €10-20 billion for adaptation, just for the most vulnerable developing countries, this makes a total of €65-100 billion per year.

The format of this funding largely depends on the nature of the need. Energy efficiency improvements in buildings, for example, are NPV-positive¹⁴ and concessional loans could help to overcome the hurdle of high upfront investments. The development and/or purchase of technologies for clean power generation, however, might require grants to cover the incremental cost, especially in developing countries.

Forestry-related abatement, as discussed above, needs to be incentivized through immediate sources of funding, largely outside the carbon market. Providing debt guarantees is another way in which funds can be used to encourage private sector participation in countries and situations that are otherwise perceived as too risky. In addition to these annual needs, the private sector will have to provide significant capital investment.

Meeting the 17 Gt target and staying on a 450 ppm path requires developed countries to play a multifaceted role: achieving 5 Gt domestically,and 2-4 Gt through flexible mechanisms; providing support for the incremental cost of 5 Gt of NPV-negative abatement potential in developing countries, for example through concessional loans, grants, or payments; and complementing the self-financed 4 Gt of NPV-positive opportunities in developing countries with assistance for capacity building and loans for capital investment.

It is possible, but not easy, to get this arithmetic to add up. It depends on each part of the equation working "perfectly":

• Tough targets – developed country targets would need to be stretching enough to require the full 5 Gt of domestic abatement plus an additional 2-4 Gt of offset purchases, i.e., producing emissions 25% below 1990 by 2020.
• Public funding – developed countries also need to be able to mobilise predictable public funding for abatement and adaptation finance. Estimates of potential public funding sources (i.e., ones in which national treasuries would have clear jurisdiction) include: AAU auctions,¹⁵ 5-30 billion per year; ETS auctions, 5-50 billion; and incremental government funding, 20-40-40 billion.¹⁶ These sources are probably not additional. International levies beyond national sources, such as an international aviation/bunker fuel tax, could raise 10–20 billion.
• Sectoral programs – there would need to be an agreement about how sectoral programmes could work and could access funding, financed in part through reformed offset markets. Given that public funding will not be sufficient to cover the financing needs of developing countries, the mechanics of any future "offset" regime are critical. In 2008, this regime generated approximately 140 million tonnes of carbon abatement annually. By 2020, it would need to be generating up to 4 billion tonnes of carbon abatement to meet the overall 17 Gt target.¹⁷ One relatively straight-forward approach would be to make eligibility for offset financing at market prices (rather than public funding at incremental costs) depend on the introduction of sector caps, creating strong positive incentives for developing countries to transition from more open-ended carbon intensity regimes.
• Self-financing – developing countries would need to believe in the case for self-financing, potentially with concessional debt support, those measures that are already in their economic self-interest.

While all of the actions above are feasible, agreement on them and implementation would of course be extremely difficult. They would require a system of transparent, performance-oriented, equitable rules that can still respond flexibly to individual country circumstances.

5. Technology Technology

will be critical to achieving 35 Gt in avoided emissions in 2030. A strong deal would generate incentives for technologies to be deployed at scale early on, particularly in the power and industry sectors. Although nations are increasingly recognizing that deploying clean technologies is in their self-interest, the COP15 negotiations in Copenhagen could accelerate their rollout by providing for:

• Stretching targets – developed nations to take on the tough emissions targets necessary to catalyse an incremental 106 billion of clean power investment relative to business-as-usual over the next 10 years. These targets may be supplemented with in-country actions such as renewable generation targets, feed-in tariffs, or other financing mechanisms. This will drive wind, solar, and geothermal generation from 3% in 2005 to 13% in 2020 and could help advance CCS along the path to commercialization.
• Financial and technical support – developing nations to receive the financial and technical support required to achieve a similar level of deployment, with fossil-fuel construction (absent CCS) largely phased out by 2015-2020 and the penetration of solar, wind, and geothermal power generation increasing from 1% in 2005 to 12% in 2020. This will require incremental investment of up to €101 billion over the next 10 years, with financing from developed countries.
• Global standards – a commitment to create global standards around an expanding portfolio of lowcarbon technologies (from energy storage through stand-by devices) to accelerate the development of global markets and lower manufacturing costs.

Under a strong global deal, this combination of stretching developed country caps, global standards, the self-interest of developing countries to create low-carbon, super-competitive economies, and financing mechanisms would support most of the required technology development and deployment. In a few cases an additional, dedicated intervention would be necessary. A global CCS programme, for example, would encourage public and private sector investments in research, development & demonstration.

Another such intervention would be needed to resolve IP bottlenecks, e.g., when IP costs exceed 5% to 6% of total costs. There is also a strong case to consider a special funding/support mechanism for those technologies that will particularly support low-carbon growth and increased climate resilience (e.g., rural solar, hyper-efficient cookstoves, drought-resistant seeds) for the poorest 1-2 billion people.

A strong deal is better for business

While many view the Kyoto Protocol as a valuable step on the road to more comprehensive action, it has not yet led to consistent and predictable policy that creates business incentives to curb emissions in developed countries at the scale needed, nor to sufficient investment in low-carbon development and adaptation in developing countries. A weak (i.e., fragmented and under-powered) global deal creates uncertainty, politically driven policies, and a patchwork of different regulations.

These will add to the cost, under-deliver against the required climate outcome, and not capture the economic prize of low-carbon growth. Business and society cannot afford another "learning experience"; the Copenhagen agreement must lead to real action on the ground that changes policies, investments, and incentives more predictably on a global scale.

A strong deal, on the other hand, will create an environment in which business leadership becomes the engine driving the transition to a low-carbon economy and reaps the rewards of new opportunities. Low-carbon development plans, whether in developing or developed nations, will lay out a clear and integrated economic path that businesses too can use for their own planning purposes.

Business planning and investment will also greatly benefit from more consistent funding, co-investment and policy regimes. Beyond the current dispersed and small-scale initiatives, funding will become available on a large scale, in essence providing co-investment opportunities in both abatement and adaptation measures.

Because public funding and guarantees will be in many cases incentivising private capital, public-private partnerships (PPPs) will be important vehicles during the transition: PPPs can allocate risk efficiently between public and private participants, especially around infrastructure programmes, where the costs are still very uncertain, the upfront capex costs are high, and the return profile (given uncertain carbon prices) is still hard to invest against.

For example, the creation of several dozen CCS pilot sites (costing up to €0.8 billion each) and the further ramp-up needed could well be conducted through PPPs that mobilise public and private sharing of risk and returns. In many instances, solving adaptation and abatement questions will require drawing not only on the investment strength of companies but also on their knowhow – another reason why public-private partnership opportunities may thrive.

Overall, a strong deal will accelerate change. This is not without very real challenges for the business community. The alternative of a weak deal, however, could result in a much rougher, more protracted and disruptive transition.

Business Leadership in a Challenging Transition

A strong global agreement at the international level should create policy action and financing mechanisms that are more predictable for longer periods, enabling profitable business investment and planning.

The financing described above in this memo will help cover the incremental costs of abatement and adaptation, creating a reliable incentive for much greater private sector capital investment and business activity. Take electric vehicles for example: despite their high upfront costs, some nations may decide to introduce policies that incentivise consumers to use electric vehicles rather than alternatives, and help fund R&D and networks of charging stations.

The vast majority of capital investment, however, will come from private capital incentivised by the expectation of good returns over many years. The result could be a profitable new value chain for car companies, battery manufacturers, software companies, distributors, and charging station providers.

Despite the multitude of business opportunities, the transition period will be very challenging for individual business leaders. Change for business will not be linear. As international and national policies create incentives towards lower-carbon products and services, risks and returns to players in industry value chains will change, and old business models will be threatened. Higher risk and return will create dramatic, not incremental, changes in the economics of many industries, and shifts in demand.

A recent report by the Carbon Trust, for example, highlighted how the potential physical and regulatory effects of climate change might impact larger companies in different industries.¹⁸ Their research indicated that up to 65% of the value of companies in the aluminium and automobile sectors could be at stake in the coming years if they do not prepare for the transition to a low-carbon economy.

Conversely, companies in other sectors such as construction could boost valuations by up to 80% by taking a more proactive approach. Clearly this has implications for how companies will invest in new infrastructure and other forms of capital expenditure.¹⁹ Changes willcome rapidly, driven by step changes in regulation and very fast learning curves for technology.

For example, the incremental costs of certain power generation technologies will change markedly over the course of just a decade: electric vehicles will incur less than €100 per tonne of CO₂e abated in 2030, versus €257 in 2020; in another example, abatement through second generation biofuels will drop from around €13 to €6 per tonne over the same period.²⁰ Scarce assets vital to the lower carbon economy (such as land where wind power will be permitted) can change in value dramatically. Such rapid change will create great uncertainty for business leaders.

At the same time as opportunities present themselves in the transition, many business leaders will be fully absorbed managing the threats to the returns on capital embedded in their existing, high-carbon business models and assets. They will be grappling with a multitude of regulatory uncertainties. Executives will be busy addressing potential competitive asymmetries, not just between countries, but also domestically, within their industry. In this environment of high uncertainty, risk and return, some business leaders will seek to survive, to protect the value of their existing business models, by trying to slow the impact of changing public policy.

Chief executives, especially of large companies with legacy high-carbon assets, face complex choices through the transition on how and when to act boldly so as not to miss out on the low-carbon boom – and also when to move more cautiously. Transitioning successfully requires ongoing leadership investment in influencing national policy development, building new partnerships (including public-private partnerships) to supply new forms of demand, accelerating technological development and scale-up, and building investor understanding of actions to exit old value chains and shape new ones. Especially for large incumbents, the biggest challenge will be how to move at speed to shape and take leadership positions in new markets, while competing with focused new competitors, and progressively scaling back high-carbon legacy assets.

The transition to a low-carbon economy will be challenging for many companies. A strong global deal, however, will whet the appetite of businesses to compete for first-mover, low-carbon advantage and will unleash the innovative resources of the private sector on a new set of opportunities. It will also cut the cost business must pay to make that move by increasing predictability and accelerating returns to low-carbon scale. A strong global deal, accompanied by the right local policies, should be in the interest of both business and society at large.

About the Copenhagen Climate Council

Established in May 2007 by Erik Rasmussen, Chief Executive Officer of Monday Morning, Scandinavia's leading think tank, and scientist and author Tim Flannery, the Copenhagen Climate Council comprises 30 world-renowned business leaders, policymakers, and scientists who have come together to create global awareness of the importance of the U.N. Climate Change Conference (COP15) in Copenhagen in December 2009.

The Council's objective is to establish clear recommendations from the private sector on the elements needed for a successful new international climate treaty – one that will reduce emissions and safeguard the planet, while promoting economic growth. It seeks to demonstrate that low-carbon businesses can help drive innovation and a transformation of the global economy if government, business, and individuals work together.

The World Business Summit on Climate Change is convened by the Copenhagen Climate Council in collaboration with the U.N. Global Compact, 3C – Combat Climate Change, the World Business Council for Sustainable Development, The Climate Group, and the World Economic Forum Climate Change Initiative.

About Project Catalyst

Project Catalyst is an initiative of the ClimateWorks Foundation. ClimateWorks is a global, non-profit philanthropic foundation headquartered in San Francisco, California with a network of affiliated foundations in China, India, and the European Union. The ClimateWorks family of organizations focus on enacting policies that reduce greenhouse gas emissions through three general policy areas: energy efficiency standards, low-carbon energy supply, and forest conservation/agriculture.

Project Catalyst was launched in May 2008 to provide analytical and policy support for the United Nations Framework Convention on Climate Change (UNFCCC) negotiations on a post-Kyoto international climate agreement, and related stakeholders. Project Catalyst members have been organized in working groups: abatement, adaptation, technology, forestry, climate-compatible growth plans, and finance. Each working group has received analytical support from the international consulting firm, McKinsey & Company. Working group members include a total of about 150 climate negotiators, senior government officials, representatives of multilateral institutions, business executives, and leading experts from over 30 countries.

Project Catalyst and its working groups provide a forum where key participants in the global discussions can informally interact, conduct analyses, jointly problem solve, and contribute ideas and proposals to the formal UNFCCC process. This paper summarizes output from Project Catalyst, but the views expressed in this paper have not necessarily been endorsed by all of the members of Project Catalyst nor their governments or organizations. The ClimateWorks Foundation takes sole responsibility for the content of this paper.

Sources

1. CO₂e is "carbon dioxide equivalent," a standardized measure of GHGs such as methane. Emissions are measured in tonnes of CO₂e per year.

2. McKinsey Quarterly, "How the world should invest in energy efficiency," July 2008.

3. McKinsey Global Institute, "The carbon productivity challenge: Curbing climate change and sustaining economic growth," June 2008.

4. Energistyrelsen, "The Danish example – the way to an energy efficient and energy friendly economy," February 2009.

5. Centro Mario Molina, "Low-carbon growth – a potential path for Mexico," December 2008.

6. McKinsey Quarterly, "The economics of solar power," June 2008.

7. EnergyWatch Group, "Wind Power in Context: A Clean Revolution in the Energy Sector," December 2008.

8. Seventy-five billion is the annual average financing cost for mitigation, from a societal perspective (4% interest rate). It excludes transaction costs. Including transaction costs for all countries, and reflecting the higher financing costs and additional high tech investment costs for developing countries, would increase this number to €95-130 billion per year on average between 2010-20. Additional funding requirements for adaptation in developing countries are not included and would amount to about €10-20 billion per year.

9. McKinsey's assessment of less than 1% of global GDP is within and part of the 1% to 3% range indicated earlier for other research and assessments.

10. McKinsey Global GHG Abatement Curve, v2.0, February 2009.

11. Relative to fixed capital formation (Global Insight).

12. McKinsey on Finance, "How climate change could affect corporate valuations," Autumn 2008.

13. Houser, Bradley, Childs, Werksman, Heilmayr, "Leveling the carbon playing field: international competition and U.S. climate policy design," Peterson Institute for International Economics, July 2008.

14. Net Present Value is the value of the net profit of an investment taking into account all investment costs and future cash flows made during the lifetime of the project, discounted at year zero.

15. Under the Kyoto Protocol participating Annex B Parties are allocated Assigned Amount Units (each equivalent to 1 tonne of CO₂e), in an amount equal to the assigned emissions obligation and they must surrender AAUs in an amount equal to their actual covered emissions over the period.

16. Under the Kyoto Protocol participating Annex B Parties are allocated Assigned Amount Units (each equivalent to 1 tonne of CO₂e), in an amount equal to the assigned emissions obligation and they must surrender AAUs in an amount equal to their actual covered emissions over the period.

17. Under a developed country commitment of 25%.

18. Carbon Trust, "Climate change – a business revolution? How tackling climate change coul