Copenhagen: Business Wants Clarity

What business leaders want most is clear carbon emission rules. Midway through the U.N.'s Climate Change summit, that looks unlikely

Business leaders piled into a conference hall in central Copenhagen early on Dec. 11 to talk climate change. A lot of big hitters were there. Coca-Cola (KO) Chief Executive Muhtar Kent, Duke Energy (DUK) Chairman James Rogers, and Unilever (UN) CEO Paul Polman were just a few to lay out the role of businesses in tackling global warming. Others, including trade associations, consultants, and industry analysts, were on hand to weigh in.

"Business will have to innovate, become more efficient, and create better products," says Mark Spelman, global head of strategy at consultants Accenture (ACN), who spoke at the one-day event that took place on the sidelines of the U.N.Climate Change Conference. "But that can only be based on a political framework [to stop global warming]."

Unfortunately, the chances of world leaders agreeing to binding wholesale cuts in carbon dioxide are still as dim as expected before the summit began. Negotiations in Copenhagen to create a new climate change treaty have entered their second week, but politicians from Western countries and emerging economies have yet to find a compromise. The deadlock isn't good news for business. An agreement on climate change would give companies crucial clarity and provide additional incentive to fund multibillion-dollar projects, such as wind farms and energy efficiency programs. Without that certainty, execs will face added risk as they look to make eco-friendly investments.

Wealthy vs. Emerging Economies

The stalemate over climate change isn't a surprise. Since the Kyoto Protocol was first negotiated in 1997, Western politicians and their counterparts from emerging economies have butted heads over who should shoulder the burden of slowing global warming. As the U.S. and Europe have historically represented the bulk of CO2 output, developing countries say the wealthier nations should make major unilateral carbon emission reductions. Western politicians counter that emerging economies, which are quickly becoming major global polluters, also must rein in their pollution.

With less than a week to go before global leaders, including U.S. President Barack Obama and Chinese President Hu Jintao, arrive in Copenhagen, a lot of questions still need to be answered. Under the current draft treaty being negotiated by dignitaries from 192 countries, developed countries may have to reduce their CO2 emissions by at least 25% by 2020. That's a significantly bigger cut than many in the West, particularly in the U.S. Congress, are prepared to make. The draft also says emerging economies may have to agree to binding cuts. Further issues, including aid for developing countries to fund environmental projects and cash to protect the world's rainforests, also haven't been resolved.

With politicians squabbling over carbon reductions, where does that leave business? Jonathan Grant, director in the sustainability and climate change team at PricewaterhouseCoopers (PwC), says companies, particularly in energy-intensive industries such as cement and chemicals, are dragging their feet until policymakers reach an agreement on global warming.

Companies are investing in short-term projects, such as improving a manufacturing plant's energy efficiency, but they're holding off on bigger outlays.

Postponing the Big Costs

Executives across industries are wary of forking out billions on long-term carbon-reduction investments without political assurances. Before building a new coal power plant, for instance, an energy utility might want to know whether it will have to buy costly carbon credits (financial instruments based on how much carbon individual power plants emit) under a global climate change treaty. Carbon credits, which allow companies to offset their total CO2 output, could potentially add millions to the cost of a single plant and make it uneconomic compared with plants using other fuel sources such as natural gas or nuclear energy.

"The simple, relatively inexpensive investments are just good housekeeping," says PwC's Grant. "But decisions on costly spending are being postponed."

The political inertia surrounding the Copenhagen summit isn't helping business, but many businesses are pushing ahead despite the uncertainty. The renewable energy industry, which includes the likes of General Electric (GE) and Tempe (Ariz.)-based First Solar (FSLR), is already benefiting from national governments' stimulus money targeted at green investment. And countries from China to Canada are looking to upgrade their domestic infrastructures—including cities and electricity networks—with eco-projects.

All of that will continue with or without an agreement in Copenhagen, but business will remain on shaky ground over capital-intensive projects until politicians hammer out a binding climate change treaty, potentially in late 2010. Says Accenture's Spelman: "For this to work, we need to create the right decision-making mechanism."

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