1.1.1.

The Kyoto Protocol

1.1.1.1. Key Aspects of the Kyoto Protocol: - A set of binding emissions targets for developed nations. The specific limits vary from country to country. Examples of specific limits: 8% below 1990 emission levels for the European Union countries, 7% for the United States and 6% for Japan. - Emission targets are to be reached over a five-year budget period, the first budget period being 2008-2012. - The emission targets include of major greenhouse gases: carbon dioxide, methane, nitrous oxide, and synthetic substitutes for ozonedepleting CFCs. - Activities that absorb carbon (sinks), such as planting trees, will be offset against emissions targets. - International emission trading will be allowed. Countries that have met their targets for emission reduction and have room to spare can sell emission permits to companies or countries. Emissions trading can provide a powerful economic incentive to cut emissions while also allowing important flexibility for taking cost-effective actions. - Countries with emission targets may get credit towards their targets through project-based emission reductions in other such countries. The private sector may participate in these activities. - Through the Clean Development Mechanism (CDM) developed countries will be able to use certified emissions reductions from project activities in developing countries to contribute to their compliance with greenhouse gas reduction targets. Certified emissions reductions

achieved starting in the year 2000 can count toward compliance with the first budget period. - The Protocol identifies various sectors (including transport, energy, agriculture, forestry and waste management) in which actions should be considered in developing countries to combat climate change and provides for more specific reporting on actions taken. - The protocol contains several provisions intended to promote compliance. 1.1.1.2. Flexibility Mechanisms Under the Protocol
Another important element of the Kyoto Protocol is its flexibility mechanisms. These enable participating nations to achieve their emission targets by means other than simply reducing their own national emissions of greenhouse gases hence, the term flexibility mechanisms. The Protocol provides for three such mechanisms:

Clean Development: This mechanism allows developed (or Annex 1) nations to receive emission credits towards their own emission targets by participating in certain projects in developing (or Non-annex 1) countries. These Clean Development projects must be approved by members of the Protocol and must contribute to sustainable development and greenhouse gas emission reductions in the host developing country. Joint Implementation: This mechanism allows Annex 1 nations to receive emission credits towards their own emission targets by participating in certain projects with other Annex 1 nations. These Joint Implementation projects must be approved by all nations participating in the project, and must either reduce greenhouse gas emissions or contribute to enhanced greenhouse gas removal through emission sinks (i.e. reforestation). Emissions Trading: This mechanism allows Annex 1 nations to purchase emission credits from other Annex 1 countries. Some countries will be below the emission targets assigned to them under the Protocol and, as such, will have spare emission credits. Under the emissions trading system, other nations may purchase these spare credits and use them towards their own emission targets.

These mechanisms are meant to provide individual countries some flexibility in meeting their particular emission targets, while still ensuring an overall reduction in greenhouse gas emissions. Under the Clean Development Mechanism, for example, the Annex 1 nation receives emission credits for reducing greenhouse gas emission in a developing nation. Hence, while emissions in the Annex 1 nation have in actuality remained the same, overall global emissions have been reduced.

RECENT BUSINESS ACTIVITY The corporate sector now routinely addresses climate change issues. Heightened awareness is evident in recent media reports which feature an array of initiatives including: a) New Zealand tourism transport operator Intercity pledged to make its operations carbon neutral by 2010, as did media giant News Corporation of its businesses worldwide; b) The Australasian businesses of ABN Amro announced plans to go carbon neutral by the end of 2007; c) Contact Energy challenged the electricity generation sector to target a 40% reduction in greenhouse gas emissions from electricity generation within seven years, adopting the target as a company goal and also pledging to assist customers to reduce their emissions by a million tonnes by 2014; d) Australian energy company AGL said it would join the Chicago Climate Exchange in order to profit from cuts to its greenhouse gas emissions in Australia and fellow Australian corporate Origin Energy launched a carbon reduction scheme to allow companies and their customers to reduce their environmental footprint; and e) National Australia Bank and Bank of New Zealand announced plans to reduce their greenhouse gas impact to zero by 2010. Many more leading businesses have considered the implications of climate change and begun implementing policies. At a national level, as a signatory to the Kyoto Protocol, New Zealand faces legally binding commitments to reduce greenhouse gas emissions to 1990 levels, from 1 January 2008 to 31 December 2012. With that looking unachievable, Treasury has estimated New Zealands financial liability at NZ$567 million. The National Party claims that significantly underestimates the true liability, which it believes could be as high as NZ$1.7 billion. The most common objection to New Zealands participation in the Kyoto Protocol is that Australia did not ratify the agreement, resulting in concerns that adopting measures to meet Kyoto obligations will reduce our relative competitiveness. 1.1.1.3. Post Kyoto protocol Whether one thinks the Kyoto Protocol was a good first step or a bad fir st step, everyone agrees that a second step is required. A way forward is needed for the postKyoto period. Climate Change is seen by many Governments as one of the key issues of environmental protection. Many Governments support the adoption

of a long-term binding agreement to reduce greenhouse gas emissions. The first commitment period of the current agreement, the Kyoto Protocol concludes end-2012 and, at present, an extension of the reductions in emissions for developed countries, mandated under the Kyoto Protocol, has not been agreed. This is primarily as a number of developed countries believe that rapidly emerging economies must also make reductions in their greenhouse gas emissions if the atmospheric concentrations of these gases are to be stabilised at a level that will not lead to large global temperature rises. The emissions of HFCs are included in basket of gases in the Kyoto Protocol. It is estimated that the overall global warming impact of HFC emissions worldwide currently represents less than 2% of the total global greenhouse gases emissions. While HFCs are the preferred solution for many societal needs because of their safety and performance advantages, without action the demand for HFCs will grow due to the replacement of HCFCs as well as the increasing demand for refrigeration and air conditioning, especially in developing countries. Such growth would result in HFCs becoming a more significant source of emissions in the future. Negotiations on establishing a new international agreement to tackle climate change continue under the auspices of the United Nations Framework on Climate Change (UNFCCC) which holds annual formal meetings as well as a number of working group meetings throughout each year. The 16th Conference of Parties (COP-16) to the United Nations Convention on Climate Change met in Cancun, Mexico from December 7 to 18, 2010. The Cancun Agreements were the key outcomes of the meeting from COP-16. Two groups, the Ad-hoc Working Group on Long-term Cooperative Action (AWG-LCA) and the Ad-hoc Working Group on the Kyoto Protocol (AWG-KP) were instrumental in carrying out the negotiations and providing the texts that form the Cancun Agreements. The outcome of work by the AWG-LCA and the main elements of the Bali Action Plan covers: a shared vision for long-term cooperative action; adaptation; mitigation; finance; technology; and capacity building. This decision also extends the mandate of the AWG-LCA to 2011 to carry out the undertakings contained in the decision. It also continues the discussions of legal options to complete an agreed outcome based on the Bali Action Plan. The AWG-LCA has been requested to present the results for adoption at COP-17 in Durban.

The outcome of the work of the AWG-KP mandates work to continue with the results adopted as early as possible to avoid a gap between the first and second commitment periods. Annex I Parties pledges for economy-wide emission reduction targets are noted and they are urged to increase the level of ambition. The decision further indicates that emissions trading and the project-based mechanisms under the Kyoto Protocol shall continue to be available, together with measures related to LULUCF.

1.2.

Effects of Climate Change on Business

Initially big business has been extremely hostile to action on climate change. However, some businesses are thinking differently. The Kyoto Protocol has been corrupted in order to give TNCs (the main culprits behind accelerating climate change) a privileged status as implementers of the market-based solutions. The business description, risk factors, legal proceedings, and management discussion and analysis will be effected by the climatic change. The factors that could have material effects on the profitability of the corporate stocks affected by the new regulations are as follows: 1. Capital Expenditures Required for Emission Control Systems: Some companies may have to invest considerable funds into upgrading polluting facilities and installing emission control systems in order to comply with increasingly stringent regulations on the emission of greenhouse gases into the atmosphere. This would largely come into play for energy and utility companies operating heavy polluting facilities like refineries and power plants. 2. Potential Domestic Cap and Trade Legislation: Under this pollution reduction legislation being considered by Congress, companies would be allotted a certain amount of emissions credits, allowing them to legally release only a certain quantity of greenhouse gases into the air. Companies that emit more than their credits allow would be required to buy additional credits, hurting profitability. On the other hand, companies with excess credits could sell them for additional cash. 3. Changing Prices for Goods and Services: Even companies that do not produce much pollution may be indirectly affected by climate change laws since their suppliers and/or customers may be affected. It is quite possible that there could be wide-ranging changes in prices caused by things like increased transportation costs or higher electric rates.

4. Changing Weather Patterns According to the SEC's report, climate change is expected to change weather patterns throughout the world. Storms are expected to become more severe leading to a variety of negative consequences. This would likely cause greater losses for insurance companies, and could make oceanic shipping more dangerous in addition to damaging marine life. Established farming areas could become less fertile or lack sufficient rainfall causing losses for agriculture firms. 5. Changing Demand for Goods The combination of changing prices and changing weather patterns would likely cause changing demand for goods. If global temperatures rise, for instance, demand for cold weather products such as heating oil might decline. Obligations under the Kyoto Protocol, the European Union Emission Trading Scheme and Other Foreign Regulations It is important to remember that many public companies have foreign operations, and may fall under the jurisdiction of a variety of different climate change laws and regulations. For instance, while many nations, such as the United States, did not sign the Kyoto treaty, they have operations in nations that are officially attempting to adhere to the protocol mandates. The European Union has an emission credit system which applies to large polluters. It is hard to gauge what might be the potential effects of all of this diverse regulation. Some envision a global cap and trade system as a successor to the Kyoto Treaty, which expires in 2012. Changing Public Perceptions of Firms Reputation is supremely important to many businesses. More and more public opinion seems to be turning against firms who are perceived to be over-polluting. Many firms today are working hard to promote a green image. BP is one company that has invested heavily in this trend with its "Beyond Petroleum" campaign. The company has also invested billions in renewable energy projects to prove its sincerity. It will be interesting to see if this new SEC guidance will lead to significant new items being disclosed to investors over the next few quarters. However, I suspect that the potential long-run effects of climate change would likely be so broad and far reaching that even the most competent executives will have trouble anticipating them. At this point though, it appears that heavily-polluting firms are the most likely to be significantly affected in the near term.