BRUSSELS—The European Union’s flagship climate change project, the Emissions Trading System (EU ETS), is in a slow-motion crisis that threatens the EU’s ambitions for a green economy. The original purpose of the EU ETS was not just to reduce emissions from factories and power stations — which it has done very successfully — but also to send a signal to the market that carbon emissions would come at a price, preferably of about €30 per tonne of carbon. The magic of the market would then encourage companies to slash their emissions and to invest in innovative, low-carbon technologies like solar power without the heavy hand of government direction.

But the recession has conspired against this outcome. Over the past three years, the price of carbon allowances has been steadily dropping, descending last week to just €6 per tonne of carbon dioxide from an average of over €20 per tonne during the whole of 2008. Even though emissions from the power sector are limited under a cap that is lowered every year, the demand for carbon allowances has been so weak that the vital price signal to spur clean-technology innovation is absent. The excess supply of emissions should not matter because companies are allowed to “bank” their allowances for use in future years, but at the moment there is simply an oversupply of carbon allowances to sustain a high-enough price.

If the unthinkable were to happen and the collapse in carbon prices in the EU ETS were to become permanent, what would become of EU climate policy? Europe would have an impossible time meeting the target of reducing its greenhouse gas emissions from 1990 levels by 20 percent by 2020 and 80-95 percent by 2050. Individual EU countries would have to set diverse regulations and standards that would be vastly more complex and expensive for industry than the current EU-wide ETS. A carbon tax on fossil fuel energy could send a similar price signal — possibly with more certainty for industry — but new EU-wide taxes are not easy to introduce. A collapse would also destroy hopes that the EU ETS could eventually form the basis of an international market, linked to imitator trading programs from California to Australia to China.

Last week, EU energy and environment ministers met informally to discuss ways to tackle the oversupply of carbon allowances, either by setting a minimum price for allowances or removing surplus allowances from the market. After Connie Hedegaard, the EU Commissioner for Climate Action, brought forward a review of the EU ETS to later this year and signalled her openness to delaying the supply of new allowances, their price jumped to above €7 per tonne for the first time in months.

This fix will not come easily. EU policymakers are reluctant to send a signal to the private sector that the carbon price is subject to arbitrary change, although many market participants are calling for intervention precisely to ensure that the price will not collapse. But the biggest obstacle comes from divisions between the EU member states. Poland, which depends on coal for about 90 percent of its electricity, is quite happy with the current low price of carbon allowances and is reluctant to see measures that could drive it up again. In the end, Poland’s agreement is not essential — changes to the EU ETS require the support of a majority of EU member states, not unanimity — but EU leaders are keen to avoid a rift on this signature policy.

The Commission’s review of the EU ETS will inevitably evolve into a larger debate about the future of the program and its effectiveness. This will be closely watched abroad, including in the United States where, despite presidential elections in November, there is an outside chance that legislators could turn to a carbon tax as a way of raising new revenues to reduce the federal deficit. If there is one message that U.S. policymakers should take from the EU experience, it is that putting a price on carbon — whether by a trading scheme or a tax — works, but it must be set at the right level if it is to drive the innovation necessary to transform energy systems and lower emissions.

Thomas Legge is Senior Program Officer with the Climate & Energy Program of the German Marshall Fund of the United States in Brussels.

EU Climate Action Commissioner Connie Hedegaard and Indian environment minister Jayanthi Natarajan at the center of the “huddle” on the last night of the COP17 negotiations in Durban, South Africa; Todd Stern, US Special Envoy for Climate Change, looks on. Photo: IISD

The enduring image from last week’s UN conference on climate change in Durban, South Africa, was of negotiators “huddling” in full view on the plenary floor to come up with the form of words that allowed the final deal to be reached. The negotiators are in shirtsleeves, visibly tied at the end of talks that had run 36 hours past the deadline, and surrounded by hundreds of observers straining to hear the back-and-forth. At the center are the two protagonists (obscured in this picture): Connie Hedegaard, the EU Commissioner for Climate Action, and Jayanthi Natarajan, the Indian Environment Minister. Todd Stern, the U.S. Special Envoy for Climate Change, is offering suggestions and Maite Nkoana-Mashabane, South Africa’s foreign minister and host-president of the conference, is looking on. She made the extraordinary decision to interrupt the plenary negotiations and invite the main players to take ten minutes to come up with an acceptable wording on the legal form of a new treaty, to be negotiated by 2015. The ten minutes stretched to almost an hour but resulted in the breakthrough that carried the conference to a conclusion.

The picture stands in contrast to the iconic photograph from the talks in Copenhagen two years ago. Those negotiations took place in an even brighter glare of international attention because an unprecedented number of heads of state and government attended. The main outcome of the Copenhagen conference was hammered out in an impromptu summit of the leaders of the United States, Brazil, South Africa, India, and China; the EU was not in the room and was acutely embarrassed by its absence and by its failure to achieve a deal on emission reductions that was sufficiently ambitious.

United States President Barack Obama sits with South Africa’s President Jacob Zuma, Brazil's President Luiz Inacio Lula da Silva, Chinese Premier Wen Jiabao, Indian Prime Minister Manmohan Singh, and other world leaders during a multilateral meeting at the Bella Center in Copenhagen, Denmark, on 18 December 2009. The European Union was not in the room. Photo: Jewel Samad

These pictures present contrasting images that are both informative and incomplete. In fact, Europe had much greater influence in Copenhagen than many of the media appreciated at the time – the final outcome of the Copenhagen conference contained much of what the EU had been pushing for. Its exclusion from the room was not deliberate but due to happenstance in the chaos of that final evening. Nevertheless, the denting of Europe’s pride was real, and EU negotiators, led by Hedegaard, invested every ounce of diplomatic capital they possessed to position themselves for a stronger, EU-led outcome in Durban. And the strategy paid off: The agreement in Durban marks the EU’s return to its accustomed place at the front of international leadership on climate diplomacy. It is also a welcome rapprochement between Europe and the United States on climate change.

At the outset of the talks there was a fear that divisions between Europe and the United States on climate policy could sour transatlantic relations. The EU combines ambitious domestic targets with calls for strong international cooperation and has made no secret of its frustration with the lack of U.S. reciprocal action. The 2001 withdrawal of the United States under President George W. Bush from the Kyoto Protocol (which the United States never ratified) was one of the low points of transatlantic relations last decade. The Obama administration is more favorably disposed toward action on climate change but it is constrained by the lack of domestic political support for strong measures to reduce greenhouse gas emissions.

The EU and the United States went into the talks with different agendas and expectations. Europe wanted to win agreement on a new international treaty to replace the Kyoto Protocol, the only international agreement with teeth, whose provisions only run until the end of 2012. The United States approached this issue from what it regarded as a pragmatic position, which is that international treaties are really only a reflection of what countries are doing anyway and the emphasis should be on encouraging national policies. Nevertheless, the United States was not opposed to talking about future commitments, as long as big emerging economies like China and India were included. But the U.S. priority was to focus agreement on the creation of a Green Climate Fund and the other issues on the agenda since the Copenhagen conference in 2009.

At the beginning of the conference there were some predictions that China could seek to isolate the United States by keeping the conversation on the future of the Kyoto Protocol. But the U.S. delegation surprised many observers by lending its support, in the Thursday of the second week of talks, to the EU demand for a “roadmap” that would lead to a new international treaty. For all the expectations that these talks would not bring any progress on a central EU demand, the United States decided that it was not, this time, going to be the country seen as blocking progress. That role fell instead to India, which (with some historical justice) complained bitterly that it was being bound to constrain its emissions thanks to the profligacy of the developed countries. But India eventually acquiesced to a form of words (“a protocol, legal instrument, or an agreed outcome with legal force applicable to all Parties”) suggested by Stern in the late-night huddle.

Even if the “Durban Platform” is not as ambitious as it would have liked or as the science of climate change requires, the EU successfully pressed the need for some kind of continuing international legal process that applies to all countries. This is the most important long-term result of the Durban outcome: the fracturing of the long-standing and artificial divide between “developed” and “developing” nations that obliges only the developed countries to reduce their emissions.

But the United States helped effect this outcome. By ceding to the EU the role of climate champion, the United States allowed this outcome to happen simply by not standing in its way. By the same token, however, the United States insisted on, and won, the point that developing countries must be included in any global approach. On both tracks, the Obama administration managed to avoid drawing fire from the conservative opposition back home, which sees political opportunity in anything that implies constraining U.S. economic growth or diminishing its competiveness with China. The EU negotiators know the Obama administration’s political constraints well and are sympathetic to them.

The result was a victory for the EU in its insistence for a renewed international recognition of the urgency of climate change. It is probably correct to say that a “legally binding” treaty on climate change is never more than a reflection of what is happening anyway. But the EU feared, rightly, that a commitment to do nothing before 2020 – which was the effective Indian and Chinese position – would have sent a disastrous signal to the world. In the mere fact of forcing an international recognition of a new regime by 2015 (which is tomorrow by the glacial pace of international talks), the EU vindicated its position on the talks in opposition to those who thought that such gestures were irrelevant.

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BRUSSELS — Expectations are low at the beginning of the 17th annual United Nations conference on climate change that began this week in Durban, South Africa. The European Union and the United States have assumed contrary positions and even disagree over what would constitute a successful outcome. But, behind the talks, and despite that standoff, the threat of global warming continues to cry out for transatlantic leadership.

The talks themselves – which will culminate next week in three days of ministerial talks – are intended to add definition to the political agreements that were reached at last year’s talks in Cancun, Mexico, such as on a new fund to help developing countries reduce their greenhouse gas emissions. But what will attract the biggest attention in Durban is the Kyoto Protocol, the 1997 treaty that binds industrialized countries to reduce their emissions by a certain amount by 2012. There is no provision for a second “commitment period” beyond next year, so the EU is calling for a sequence of actions to lead to a new treaty by 2015. The United States rules out a new treaty before 2020 and only if large emerging economies like China are similarly bound; Japan, Canada, and Russia have aligned themselves with this view. There seems to be no way to reconcile these two positions.

But Europe and the United States are divided even on the significance of this divide. Among the U.S. negotiators, and echoed in many Washington, DC, think tanks, the Kyoto Protocol (or any successor treaty) is seen as irrelevant to the climate talks. Instead, an effective response to climate change lies in vigorous domestic action by the big emitters. Many U.S. commentators consider the Kyoto Protocol an obstacle to progress because of its outmoded distinction between developed and developing countries and its zero-sum emphasis on legally binding emission caps. The EU counters that a legally binding treaty is the only way to bring clarity and to drive domestic action, and points to a growing chorus of international bodies – from the UN to the Organisation for Economic Co-operation and Development – that warn that we have no more time to delay action to reduce global emissions if the Earth is to have a hope of avoiding temperature increases that would change the face of the planet.

While the United States may think that the EU has tied itself to a sinking ship, Europeans visiting the United States express exasperation at the U.S. failure to grapple with climate change and at the prominence afforded to pundits who dispute the scientific consensus on climate change. It is common to hear European officials suggest that it is time for Europe to look elsewhere and focus on building cooperation with developing countries. But it would be a grave mistake to give up on the United States. The two continents, working together, have the political and financial capacity to drive global change through policy leadership and the market effect of their domestic policies. Disagreement threatens to hinder international action when there is no time left for delay, and to sour transatlantic relations, as seen in the brewing dispute over the inclusion of U.S. airlines in the EU Emissions Trading System beginning in 2012.

In Durban, the EU and the United States will probably manage to avoid an acrimonious falling-out. Memories of the rift in transatlantic relations following George W. Bush’s decision to withdraw from the Kyoto Protocol in early 2001 are still raw. The EU is sympathetic to the domestic political constraints that U.S. President Barack Obama faces and the real actions that his administration is advancing, such as new regulations to control pollution from power stations and to improve efficiency standards in automobiles. Whatever deal is struck in Durban, it will probably be enough to allow the Kyoto Protocol to continue in some form without forcing the United States to denounce the agreement.

But outside the negotiations, Europe has a good story to tell about its response to climate change, and it needs to do a better job at persuading the United States to partner with it on this enterprise. In European capitals, policymakers are busy with plans to build new renewable electricity generating capacity, transform the electricity grid to carry the power, and train a whole generation of new engineers who can operate it all. The European Commission is preparing to publish a new “roadmap” for a low-carbon energy system by 2050, the latest in a series of policy statements and regulations since 2008 that are slowly accumulating momentum that could take the EU on a low-carbon trajectory. No conversation on anything like this scale is happening in the United States, nor is one expected until at least after next year’s presidential election.

The United States holds that international treaties like the Kyoto Protocol are less relevant than action on the ground. The EU thinks that such action on the ground is a result of the downward pressure of international commitments. Surely there is room to agree here on the outcomes, if not the cause? If the United States were to embark on an ambitious plan of reducing its emissions, and to lead international efforts to imitate it, the EU would be quick to agree that a treaty would be superfluous to this end.

Thomas Legge, based in Brussels, is a senior program officer for the German Marshall Fund’s Climate & Energy Program.

Image by Meraj Chhaya

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WASHINGTON—Beltway insiders always love a scandal, and the bankruptcy of solar power cell manufacturer Solyndra Inc. makes for a good one. Solyndra received over $500 million in loan guarantees from the U.S. Department of Energy under a scheme to provide financing to promising companies in the renewable energy sector, before going bankrupt last month. President Obama, visiting Solyndra’s factory floor in 2010, had pointed to the company as an example of how the renewable energy sector could provide the next wave of innovation and economic growth in the United States. But Solyndra was already in financial difficulties. Its business model depended on an experimental and ultimately uncompetitive technology. The company nevertheless supplied upbeat assurances to the White House and members of Congress.

Republicans, smelling blood, have published a 15-page report linking Solyndra’s success in gaining federal backing to its political campaign contributions and lobbying efforts, and have used the episode to make a case against efforts to promote renewable energy in general. This line of argument is opportunistic — Republican members of Congress have been just as energetic in requesting government support for renewable energy companies in their own districts — but it is true that governments are not very good at picking winners. They risk embarrassment when they tie their fortunes to the success of any particular company. The problem is that the Obama administration is running out of tools to promote renewable energy.

The surest way to send a signal to the market to invest in renewable energy is to impose a price on carbon emissions through taxation or a cap-and-trade system, both distant prospects since the U.S. Congress failed to adopt a comprehensive climate bill last year. The administration has therefore relied on narrower or indirect mechanisms at its disposal to put a price on carbon, such as regulating greenhouse gases through the Clean Air Act. This approach is now under threat as the administration, vulnerable on the economy, softens or postpones measures that may be seen as hurting business

The other way to promote renewable energy is to support innovation directly, such as through the loan guarantee program that benefited Solyndra. There are good reasons why governments support innovation in the renewable energy sector. The private sector tends to under-invest in research and design because firms do not capture all of the profits that their innovations (quickly imitated by competitors) generate. It is also reasonable to expect some failures. Public subsidies for innovation are a kind of venture capital and the chance of developing breakthrough technologies is worth the risk of some duds. Subsidizing innovation and predictable policies like renewable energy targets could have a net effect of reducing risk in the renewable energy sector for private investment. In the European Union, legislation from 2008 requires one-fifth of energy to come from renewable sources by 2020, and complementary measures like the “feed-in tariff” (which guarantees a minimum price for electricity produced by certain technologies) reassure companies that they will achieve a return on their investment. The United States lacks such overall measures but its direct support for research and design — analogous to EU instruments like the Intelligent Energy – Europe Program and the Strategic Energy Technology Plan — provide a minimum level of certainty to companies.

The problem is that poorly designed policies on both sides of the Atlantic engender a different, political, risk. The Spanish government set an over-generous feed-in tariff for solar power in 2008, which caused a boom and bust in the sector and damaged investor confidence in feed-in tariffs as a policy. In fact, by temporarily driving up the price of silicon, the Spanish boom may have indirectly contributed to the demise of Solyndra, which depended on high prices of silicon to be competitive because its unique technology did not use silicon. The U.S. loan guarantee program required government officials to evaluate project proposals and determine which ones would work in the market. This may have made the process vulnerable to lobbying: Solyndra, unlike some other successful applicants for loan guarantees, spent heavily to petition support in Washington

Bad investments like Solyndra do not alter the need for governments to promote green innovation. Climate change is too urgent a problem to wait for innovation to happen on its own, and the hidden subsidies for fossil fuels and inertia of the existing energy system mean that green technologies will always be at an inherent disadvantage. But it is exactly this urgency that imposes a higher standard of performance on the renewable energy sector. Renewable energy will — and must — displace fossil energy, so criticism from powerful incumbents is inevitable. But at the same time, renewable energy company executives have an obligation to be cleaner than most because the perception of impropriety is so potentially damaging and government programs that support them must be seen to be beyond reproach.

Thomas Legge is a Senior Program Officer with the German Marshall Fund of the United States in Washington DC.

Photo by jurvetson

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WASHINGTON — Germany’s decision last week to phase out nuclear power has sharpened the differences between Europe and the United States on energy policy. Democratic Senator Jeff Bingaman, a senior voice on energy policy in the U.S. Congress, led the chorus decrying that removing nuclear power from the energy mix would undermine global efforts to combat climate change because the technology emits much fewer greenhouse gases than coal or natural gas, the other main fuels used to generate electricity. The decision highlights an apparent contradiction: Europe is committing itself to a low-carbon future while it moves away from nuclear power, whereas the United States, a laggard on climate action, insists that nuclear power is essential to avoid climate change.

German Chancellor Angela Merkel reacted to the crippling of the Fukushima nuclear reactor in Japan by immediately ordering the temporary closure of seven older nuclear power plants. She has since expanded what appeared to be a panicky sop to public opinion into a revised energy policy that will see all nuclear power stations in Germany closed by 2022.

In reality, the decision is a return to the status quo ante — a decision to phase out nuclear power by 2021 was adopted in 2001 by the then-coalition government of the Green Party and the Social Democrats. Merkel’s government went against the grain of public opinion (and the well-known views of her own environment minister, Norbert Röttgen) last September by prolonging the life of many of Germany’s existing nuclear power stations for up to 14 years. What many forget is that her about-turn brings her, and her Christian Democratic Union, into Europe’s political mainstream on this issue. The German public has largely opposed nuclear power since fallout from Chernobyl reached the country in 1986. And the trend across Europe is against nuclear power, notwithstanding official support in a minority of countries (France and the United Kingdom being foremost among them). At the same time, the EU is solidifying its plans to reduce its greenhouse gas emissions by 80-95 percent by 2050.

So if Senator Bingaman is right, and nuclear power is an essential part of the low-carbon future, why is one of the most pro-climate action countries in the world, one with a big industrial sector and heavy energy needs, ready to foresake it? The short-term answer is that it will make no difference. Germany’s emissions may rise as the country turns to power generated from burning fossil fuels, some of it imported from other EU countries. But greenhouse gas emissions from the EU’s power sector as a whole will not rise because they are limited by the EU Emissions Trading System, which sets a declining annual cap. The flexibility that allows one country’s emissions to rise while reducing the emissions of the EU region as a whole is one of the clever design features of the EU’s flagship climate policy. Germany’s decision could drive up the price of emission permits, but there is so much oversupply in the market already (the 2009 recession has meant that EU emissions are still down more than projected) that the impact on prices will be modest.

The longer-term answer highlights the differences between EU and U.S. ambitions and constraints on energy policy. Merkel’s justification — that the decision would make Germany “the first major industrialized country that achieves the transition to renewable energy” — is a bet on the ability of governments to force technological change. Germany hopes that the decision will send a market signal sufficiently strong to attract enough investments to make renewable energy technologies competitive. This might make sense. Innovation is essential to drive down costs, but it is often forgotten that costs begin to fall only when technologies are deployed at scale. The German feed-in tariff provides a recent example. It removed the risk of investing in renewable energy technologies like wind turbines by offering a minimum price for the power they generated; investors rushed to deploy more generating units than expected, and costs fell quickly, although they are still higher than fossil-fuel energy in most cases. The promise of the big German market for renewable energy could help new technologies pass from the design phase to market acceptance. Removing nuclear power from the options further strengthens the signal to the private sector to invest in renewables.

The United States is much less likely to forsake nuclear power. Nuclear power will be an essential part of any political deal on climate and energy policy in the United States. Unlike in Europe, there is still generally strong support among the American public for nuclear power. This fact, coupled with the strength of the nuclear lobby and the precariousness of any political coalition that could muster the votes to pass a climate bill, means that nuclear power will be part of that coalition.

Europe, led by Germany, seems to be choosing a political future around the promise of renewable energy and hopes to push innovation in that direction; it sees nuclear power as a distraction from that goal. The United States, for reasons of domestic political economy as much as faith in the technology, will not make a similar choice.

Thomas Legge is Senior Program Officer in the German Marshall Fund’s Climate & Energy Program.

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BRUSSELS — Leading up to the crucial European Union Council summit of March 24-25, Europe’s leaders are figuratively flipping a coin, specifically a Greek 2€ piece that portrays Europa being abducted — or seduced — by Zeus in the form of a bull. At this summit, EU governments will negotiate over the future of European economic governance and mechanisms to rescue heavily indebted member states. But between now and then, in several European capitals, the debate over what to do about the sovereign debt crisis is shifting from economics to politics.

Today (Friday), the leaders of European center-right governments meet in Helsinki to discuss political strategies for upcoming eurozone negotiations. Left-led governments meet in Athens. Helsinki features the debut of the incoming Irish Prime Minister, Enda Kenny, to make the case for renegotiating the terms of Ireland’s €85 billion bailout. Kenny arrives flush from a stunning victory in the general election in Ireland on February 25 that saw his Fine Gael party trounce the ruling Fianna Fáil party, which lost 57 out of its 77 seats. The near-annihilation of what had been one of Europe’s most successful political parties—it has been in government for 61 out of the past 79 years—is directly attributable to the financial crisis, as the Irish electorate blamed Fianna Fáil for the policies that destroyed Ireland’s once-booming “Celtic Tiger” economy. Both Kenny and the Labour Party (which finished second in the election and will most likely align with Fine Gael in the new government) campaigned on a commitment to renegotiate the terms of the rescue plan that Ireland received from the International Monetary Fund and EU last November.

But the intent to renegotiate should not be mistaken for Euro-skepticism. Fine Gael is the most explicitly pro-European party in Ireland. The election and the new government’s strong mandate present an opportunity for the EU to repair its reputation in Ireland and Europe more widely. By agreeing to discuss Ireland’s request to lower its bailout interest rate (which is currently 5.8%), the Commission and member states could demonstrate Europe’s ability to adapt to national particularities and boost ongoing negotiations on strengthened surveillance of budgets, macroeconomic imbalances, and structural reforms. But while the Commission has already expressed readiness to be flexible on the pricing of aid to ensure the fiscal sustainability of all member states, Angela Merkel has signaled her opposition to a renegotiation with Dublin that would artificially lower the interest rate and no longer reflect refinancing costs. Admitting Ireland’s inability to meet the terms of its bailout agreement could also further increase uncertainties in the eurozone and create adverse reactions from the bond markets.

Indeed, what is a discussion on Ireland is also a discussion on Europe itself. While Ireland and Greece are trying to renegotiate their bailout agreements, other member states are establishing their own positions on the various proposals that will be discussed at a special summit of eurozone leaders scheduled for March 11, to be followed by more meetings among finance ministers. Under discussion will be the shape of a permanent rescue mechanism, ideas to strengthen global European competitiveness, and ways of calculating debt and reviewing national budgets. As usual, member states’ positions diverge along national as well as ideological and economic lines. The specter of a two-speed Europe looms and the closed-door eurozone summit bears the risk of being perceived as an intentional division of the Union.

But there is room for compromise. The blueprint on competitiveness developed by Commission president Jose Manuel Barroso and Council president Herman Van Rompuy may prove to be a better alternative than the controversial proposed French-German Pact for Competitiveness that would require sensitive constitutional changes in most member states. The Irish bailout interest rate could be lowered in exchange for an increase in Dublin’s low corporate tax rate. And Germany could agree to an extension of the terms of Greece’s bailout loan in exchange for Athens’ support for a comprehensive package of measures to deal with the debt crisis. The meetings in Helsinki and Brussels offer time and space to decide on the politics of Europe’s future economic structure.

The prospects for a powerful economic deal at the March 24-25 summit are slim. Markets and investors might not be reassured and confidence in the European economy may not be fully restored, requiring heads of government to meet again. But if a pro-European party is elected to power in a severely crisis-hit country on a promise of cutting a reasonable deal with its European partners to revive its growth, it would be a failure and a mistake to dismiss such an opportunity. With further elections to take place across Europe in 2011 and 2012, the EU’s reaction to the Irish “vote of trust” could set a welcome precedent. At the series of critical meetings this month leading up to the summit, Europe’s leaders should not be afraid to take the bull by its horns.

Guillaume Xavier-Bender is Program Associate with the Economic Policy Program of the German Marshall Fund of the United States (GMF) in Brussels. Thomas Legge is Program Officer with GMF’s Climate and Energy Program in Washington DC.

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CANCUN — It is hardly news anymore when international talks on climate change fail to produce a breakthrough agreement. But the real story of the annual UN climate conference, which concludes Friday in Cancun, Mexico, is what was happening on the sidelines of the conference.

Last year’s summit on climate change in Copenhagen was ruined by the weight of excessive expectations and unbridgeable gaps between developed and developing countries. The talks did not quite break down — the Copenhagen Accord was a face-saving agreement that allowed the talks to reconvene this year — but they were traumatic for all involved. The global media saw, in the failure and fallout of Copenhagen, not just a setback for the climate negotiations but a deep crisis in multilateral cooperation.

This year, the Cancun meeting has benefited from exceedingly low expectations about prospects for progress in negotiations toward a new climate treaty. Anything short of a blow-up of the conference Friday evening will be seen as a success. Cancun should manage to exceed that low bar, and that has led to a lighter tone to the whole conference. Officials have been largely upbeat, and certainly polite. There have been no dramatic walkouts and few angry denunciations of proposed texts.

Yet the conference will not bring the world any closer to an ambitious climate agreement. In some respects, the talks have left the world further from that goal. Japan created waves on the first day of the meeting by announcing that it would not agree to emissions targets for a second commitment period for the Kyoto Protocol (the first commitment period expires at the end of 2012). This may be a case of being chastised for admitting the obvious: There is no appetite among industrialized countries for legally binding targets while big developing countries like China and India are not bound to them, but Japan has broken ranks with Europe by saying so aloud.

Connie Hedegaard, the EU Commissioner for Climate Action and a champion of ambitious measures on climate change, acknowledged that talking about a legally binding and controversial climate treaty was not helpful because it would block progress on slowing deforestation and financing to help countries adapt to climate change, areas where agreements at Cancun might be possible.

And developing countries remain deeply suspicious of the intentions of the rich world. As the deadline for the conclusion of the talks approaches, the number of issues that divide countries remains hopelessly large. The negotiations could well conclude with vague language to delay decisions until next year’s climate conference in Durban, South Africa, because the alternative — acknowledgement that countries had failed to find a deal — would be even more embarrassing for negotiators anxious to avoid a replay of Copenhagen.

But to concentrate on the thin legal outcome of the negotiations is to miss the larger significance of the UN climate talks. Much has been written about the inability of the United Nations to deliver an adequate international response to the threat of climate change. On the surface, this is true. The talks seem to struggle from conference to annual conference, endlessly returning to the same issues—how to share the burden of actions across rich and poor countries to tackle climate change—and creating an ever-more complex yet ineffective legal framework. Even if there is agreement in Cancun, it will take a decade or more for the talks to produce a new international treaty with commitments and targets to match the challenge of catastrophic climate change. In frustration, many observers have called for negotiations to move to some other, smaller grouping of nations where unanimity between 184 countries is not required.

It would be wrong to suggest that the UN negotiations don’t matter, however. The real action is taking place on the sidelines of the climate talks. Cancun is like a huge trade fair where entrepreneurs and government officials present their latest initiatives and ideas to promote renewable energy, integrate “green growth” into national economic strategies, and set up emissions-trading programs at the local, national, or regional level. A recurring theme is how these initiatives could be connected to each other in an expanding worldwide network of actions to tackle climate change.

All this is happening — climate change has not gone away as a political priority for many local and national actors — largely because of the UN process. The annual UN conferences, supported by an international network of scientists and amplified by media attention when the ministers arrive for the high-level segment of the negotiations, provide recurring reminders of the wide gap between countries’ official pledges and the measures that will be necessary to reduce greenhouse gases to a reasonably safe level.

Finally, the conferences are a kind of peer community and capacity-building network where ideas are born and reviewed. The legal framework of the UN climate convention has the potential to provide a set of minimum standards that could help knit disparate initiatives together into something that could, in time, approximate a global effort to tackle climate change. A weak deal between ministers in Cancun will not save the climate, but this headline should not detract from the progress that is the real relevance of climate diplomacy.

Thomas Legge is a Program Officer for the Climate & Energy Program at the German Marshall Fund.

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Cancun, December 4, 2010–The mood at Cancun could not be more different from last year’s annual conference on climate change, which took place in Copenhagen. Even the setting of the Cancun conference—a beach resort in tropical weather—conveys a more mellow kind of international climate conference than Copenhagen’s freezing temperatures and hot tempers last December. Getting through the formality of accreditation is fast and efficient. Queues are nowhere to be seen. In fact, the most striking thing is how few people have come to Cancun – about 5.000 so far, compared to almost ten times that number last December. More delegates and observers are expected next week when the ministers arrive, but the lower level of participation reflects lower expectations about what this conference can achieve.

Surprisingly, this might actually help the conference. The Copenhagen talks were ruined by a combination of too-high expectations and insuperable gaps between developed and developing countries over the major issues that will forever define the problem of climate change: who should take on the burden of avoiding climate change and who should pay for this effort. The talks almost broke up in total disagreement before a group of heads of state—from the United States, Brazil, South Africa, India, and China—cobbled together a face-saving agreement. The so-called Copenhagen Accord is unloved and, to many, lacking in ambition, but it has allowed discussions to continue over the core issues that must be part of any new global agreement on climate change. They include: targets for developed countries, measures that developing countries should take, a goal to limit global temperature rises as a result of climate change, protection of forests, adaptation to the effects of climate change, money to pay for these measures, and standards to hold everyone to account.

The Mexican hosts are setting a tone conspicuously different from Copenhagen’s. Last year, some delegates walked out in protest at a “secret” text that was drafted by the Danish hosts. There was some posturing here: at almost every negotiation a roughly representative group of delegates draft a text at around this point for ministers to consider when they arrive for the second week of talks. But there was a real feeling among some delegates, especially from smaller developing countries, that they were locked out of critical talks contributed to the fallout of talks. This year, the hosts have repeated a mantra of inclusiveness, active participation by all, and—above all—there is no secret text!

The question is, is the atmosphere positive, or just polite? There was no lack of graciousness today at the end-of-week plenary session to take stock of the talks. Speaker after speaker thanked the Mexican chairwoman for her skilful facilitation and opined that the prospects were good for significant advances in Cancun. But issues may boil up again next week. There are fundamental gaps between the developed and developing countries. And the statements of Bolivia and Venezuela that justice was missing from the talks got scattered rounds of applause. In the end, any deal will have to be teased out by closed-door negotiations among a small group of countries: The United States said as much when its representative said that countries “direct discussions” with each other in order to bring talks to a fruitful conclusion.

Finally, there’s another reason why the conference seems so quiet. Observers usually mingle with official negotiators, but this year the two groups are kept far apart. Observers are not officially excluded from the halls of negotiations, but there is a long and cumbersome bus ride in between. The UN climate talks have traditionally offered a remarkable level of access to observers. It would be a real shame if one of the legacies of Copenhagen’s unhappy conference was a decline in the openness of the process.

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WASHINGTON — Fintan O’Toole, Ireland’s most articulate left-leaning commentator, wrote in the Irish Times that “[t]here are two international options for dealing with broken and delinquent states: the Versailles option and the Marshall Plan option. … [The] bailout of broken and delinquent Ireland is much more Versailles than Marshall.” His words deliberately tread on two of Europe’s most sensitive historical images: the punitive settlement that humiliated Germany after the First World War, and the grand gesture of transatlantic solidarity that rebuilt Europe after the Second World War. Although the emergency measures passed on Sunday are intended to save the euro, they carry the grave political risk that the dose of discipline they contain could create serious, long-term public hostility to the European project.

Few people, not even among the crowds demonstrating in Dublin last Saturday, would deny that the Irish crisis is home-grown. Lehman Brothers notwithstanding, Ireland exposed itself to unacceptable risk by allowing its banks to feed a monstrous property bubble while using once-off property transactions to finance unsustainable tax cuts and public-sector wage increases that eroded its international economic competitiveness; the state then turned a banking crisis into a sovereign-debt crisis by taking on the debts of the banks in order to save the banking system. Austerity is necessary to undo some of this damage and bring public spending closer into line with tax revenues, as it is in Greece, Portugal, and many other EU member states. Providing assurance to bondholders that their investments will be safe seems to be essential to preventing a destructive run on the common currency throughout the eurozone.

In the abstract, large parts of the public in Europe’s distressed periphery can accept the need to do whatever it takes to prevent contagion across the continent. However, it may be only a matter of time until they begin to lose faith in the official explanations for the specific measures that are being imposed from without. Take the case of Ireland, where there is widespread resentment to the terms of the bailout package, and punishing public sector cuts. National crises in Ireland can bring political unity around a common solution (as evidenced by the all-party agreements on deal that brought peace to Northern Ireland), but in the past week, thousands protested in Dublin — a rarity in Ireland — and outraged opposition politicians condemned the package. Those opposed to the bailout do not accept that the cuts in public services are fair, they abhor the higher interest rate (5.8 percent over seven years) applied to Ireland compared to the terms Greece got (an average of 5.2 percent) last May, and they do not see why the bankers who, at the height of the boom, put up capital they did not own are now being guaranteed the repayment of the entirety of their risky loans by the Irish government. Worse, the direct consequence of these austerity measures will be reduced economic growth, making it ever more difficult for Ireland to pay back its loans.

Many Irish people seemed to welcome the intervention of the International Monetary Fund (IMF) and the EU as a relief from the incumbent politicians who are so closely associated with the crisis. But this window of goodwill is rapidly closing. The main parties in the Irish parliament are likely to lose many seats in the elections in early 2011 to independent MPs. There is no threshold for party representation in the Irish parliament, so the number of single-issue, free-radical members not belonging to any party is likely to increase. Many of whom will undoubtedly run on an anti-foreigner, anti-EU, anti-IMF platform. Anti-IMF graffiti is already appearing on Dublin streets, and it is doubtful that any revision to the EU treaties could pass a referendum in Ireland at the moment, even if such a revision were specifically intended to repair the flaws that caused the crisis.

The danger is that the current economic crisis will both obscure and exacerbate a broader political crisis, which is the erosion of the political legitimacy of the same European project that the emergency measures are attempting to defend. To avoid this outcome, the EU must quash the perception that it would be worth crippling Ireland to provide a lesson to other prodigal states about the unattractiveness of choosing the bailout option. It may be too early, given the state of the bond markets, for the European Central Bank to speak openly about debt restructuring, but this must be reserved as a medium-term option. In the meantime, the EU needs to generate goodwill in Ireland and the other peripheral states. It must demonstrate that the emergency measures are intended not to send a warning signal to other vulnerable member states, nor to postpone the collapse of a failing system, but as a precursor to far-reaching financial reform after which the general public will never again be forced to pay for a run of bad bets by out-of-control banks and financial institutions. Starting with Ireland, the EU should articulate anew how the European project is one of solidarity, not punishment.

Thomas Legge, an Irish citizen, is a Program Officer in the Climate & Energy Program at the German Marshall Fund.

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WASHINGTON — The November U.S. midterm elections could shift control of the House of Representatives and possibly the Senate to the opposition Republicans, moves that would have widespread implications for U.S. policy on all fronts. But an obscure-sounding referendum in the state of California, if passed by a plurality of California voters on November 2, could have a greater impact on the U.S. energy and climate debate than any shakeup in Congress.

In California, about 430,000 signatures are enough to trigger a statewide referendum to overturn existing laws or to mandate new ones. In past elections, this populism has created no end of trouble for California’s leaders. A 1978 referendum mandated a two-thirds majority vote both to pass the state budget and to raise taxes, one of the reasons why California has had such difficulty passing a state budget recently. Voters decided in a 2003 referendum to recall from office Democratic Governor Gray Davis, which eventually led to Republican Arnold Schwarzenegger becoming governor. So it is ironic that the most keenly watched California ballot initiative this year, Proposition 23, threatens to abolish what is perhaps Schwarzenegger’s proudest achievement—a law to reduce California’s greenhouse gas emissions to 1990 levels by 2020 and by an additional 80 percent by 2050.

Technically, Proposition 23 would, if passed, suspend Schwarzenegger’s climate-change law until California’s unemployment falls below 5.5 percent for at least a year. This is a politically smart, if disingenuous, effort to portray the ballot initiative as a job-saving measure. California’s unemployment is currently over 12 percent and is not expected to decrease to 5.5 percent for years, so Proposition 23 would effectively kill the law and overturn many already enacted measures to reduce emissions, from vehicle technology standards to building codes to regional planning targets. The contest has attracted much interest from outside the state—a large chunk of the $8.2 million raised to support it comes from two Texas-based oil and gas companies.

So why is this one-state exercise in direct democracy so important to those not living in the state? On environmental policy, where California goes, so goes the United States and, at times, the world. If U.S. states are the laboratories of democracy, as President Thomas Jefferson said two centuries ago, then California is the most enthusiastic experimenter in environmental policy. The state’s regulations on pesticides, air pollution, and auto fuel-efficiency have all been the precursors to national legislation. California’s market is America’s largest, and regulations adopted there often set a de-facto national standard. Opponents of action on climate change have good reason to fear that California’s climate legislation could lead to wider action, both in the United States and abroad.

Passage of Proposition 23 is not assured. In addition to opposition from California’s famously eco-aware population, the state’s expanding renewable energy sector has created a business constituency in favor of retaining California’s climate and energy laws. Silicon Valley investors see clean-energy technologies as the next big thing in innovation. They and other business groups have matched the out-of-state funds backing Proposition 23.

But the race remains finely balanced, and the level of interest within and from outside California attests to the wider importance of this contest. Passage of Proposition 23 would negatively affect the state’s renewable energy sector. One immediate casualty would be the recently passed requirement that utilities produce a third of their power from renewable sources such as wind, solar, and biomass. Similar laws in Europe have provided regulatory certainty to stimulate a rapidly growing renewable energy sector. To date, California’s clean-energy regulations have helped the state attract 40 percent of all U.S. venture capital for clean technology since 2006.

Passage of Proposition 23 would also undermine similar legislation currently being considered at the federal level and in other states. European companies, among the largest investors in the U.S. renewable energy market, are worried about the potential signal that passage of Proposition 23 could send. If renewable energy regulations are only supported by the public during times of economic prosperity, that will not provide an adequate investment climate to spur development of renewable energy technologies over the long term.

Finally, passage of Proposition 23 could dampen the Obama administration’s efforts to bring the United States back into a leadership position in the international climate negotiations. At last December’s Copenhagen climate conference, the United States committed to reducing its emissions by 17 percent by 2020. The federal government will have great difficulty achieving that target without action at the state level, particularly while Congress is unwilling to pass a comprehensive climate and energy bill. Conversely, however, defeat of Passage 23 could reinforce California’s pioneering role as a climate and energy leader and help to repair U.S. credibility in the global struggle against climate change.

Thomas Legge is a Program Officer with GMF’s Climate & Energy Program.

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