For the past year, policy-makers around the world have been preoccupied with salvaging the global financial system and righting the economy. But they haven’t completely forgotten the other intractable international dilemma — climate change.

Before the unprecedented financial crisis took over as public enemy No. 1, governments were grappling with climate change — a policy problem that shares complications with the financial crisis. Both issues require governments to tackle a global problem through mechanisms of national policy. That necessitates some degree of co-ordination, so that local firms don’t face dramatically different treatment than their global competitors. It also means that policy-makers must reach agreements among themselves before they can sell it to their voters and political allies at home.

Such complications can conspire to undermine decisive, effective policy action. And, indeed, to date, neither problem has been adequately addressed.

The health of the financial system remains in the balance. Govern-ments are struggling with how best to shore up the system — be it “bad” banks, toxic asset purchases, capital injections, guarantees or some combination of these measures. The U.S. has pushed for further fiscal stimulus, while much of Europe has resisted.

Similarly, progress in combating climate change by reducing global greenhouse-gas emissions has been spotty at best, with Europe leading the way, the U.S. refusing to do much (until recently) and Canada signing the global treaty, then doing little to meet its commitments.

Arguably, the climate-change quandary should remain on the back burner while the global economy remains in turmoil. After all, the chief strategies for cutting GHG emissions involve establishing a price for them through carbon taxes or the creation of a cap-and-trade market. Either way, the result is a new cost for businesses and consumers at a time when many are having a hard time meeting existing obligations. As well, dramatically lower commodity prices are dissipating the sense of urgency. And the economic decline should curtail production and consumption, theoretically reducing the pressure to curb emissions.

The data, however, doesn’t support the assumption that a dramatic economic slowdown will produce a similar decline in pollution. According to the U.S. National Oceanic and Atmospheric Admin-istration’s latest survey of data from 60 locations around the world, GHG levels increased in 2008 despite the economic slump. The survey found an additional 16.2 billion tons of carbon dioxide and 12.2 million tons of methane in the atmosphere at the end of the year. “This increase is despite the global economic downturn,” the survey observed, “with its decrease in a wide range of activities that depend on fossil fuel use.”

Recession alone isn’t going to be enough to relieve the pressure on the planet’s resources. “Only by reducing our dependence on fossil fuels and increasing energy production from renewable resources,” says Pieter Tans, a NOAA scientist, “will we start to see improvements and begin to lessen the effects of climate change.”

The global credit crisis may have supplanted the global climate crisis on policy-makers’ radar, but the issue clearly isn’t going away and governments aren’t giving up on it. Later this year, they will meet in Copenhagen to forge a new treaty to replace the Kyoto Protocol, which expires in 2012. And, ahead of that milestone event, they are crafting national strategies.

“Far from slowing momentum for environmental renewal,” notes a recent report from UBS AG, “governments see this [financial and economic] crisis as an opportunity to promote the development of clean and efficient energy.”

In fact, the UBS report suggests that the failure of financial markets may strengthen the case for emission curbs: “Before the financial crisis, governments were already on a path to ramp up regulation of greenhouse gases. The increased skepticism over free market outcomes, justified or not, could facilitate efforts to increase the pace of implementation and the stringency of new regulatory measures.”

Indeed, the most important holdout from the original Kyoto treaty, the U.S., has finally pledged to confront its role as a major source of GHG pollution. U.S. president Barack Obama has made the environment a top priority. “No issue deserves more immediate attention than global warming,” he has said, adding that his administration intends to “achieve a comprehensive energy and climate policy, one that will lessen our dependence on foreign oil, make the U.S. the global leader in clean energy technology, and prevent the worst impacts of climate change.”

@page_break@To that end, in early April, the U.S. Committee on Energy and Commerce introduced draft legislation that promises sweeping environmental reform. The centrepiece of the bill is a plan for a cap-and-trade system that would aim to cut GHG pollution by more than 80% by 2050. It is expected that legislation will be proposed by the summer and adopted by the end of the year.

The draft bill is being studied and important details have yet to be worked out. For example, a preliminary analysis of the bill suggests that its targeted emission reductions could be achieved with minimal impact on future household consumption if the value of the allowances that must be purchased by major polluters is returned to households.

“Returning the auction revenue to households enables consumers to decide how best to use the value created in the program,” says the U.S. Environmental Protection Agency’s analysis, “for example, to buy more energy-efficient light bulbs, to pay for electricity bills or to use on the consumption of other goods and services.”

The EPA estimates a price for carbon emission allowances of US$13-US$17 a tonne in 2015, rising by about 5% annually after that.

Whether such a painless transition to a lower-carbon economy is possible is yet to be proven. But that promise is one of the selling points of a market-based system over a more straightforward carbon tax.

Indeed, federal and provincial governments in Canada favour cap-and-trade systems, too. The first such market in North America was launched in Alberta; Ontario has joined a fledgling regional initiative; and the federal government released the regulatory framework for a national carbon market more than year ago, with an eye to initiating the system at the start of 2010.

The federal plan, however, is focused on reducing carbon intensity rather than absolute emission levels — an approach that is designed to ease the costs of such reductions on domestic firms, but one that would put it at odds with existing cap-and-trade schemes and the projected U.S. system. That will make it difficult to integrate into an emerging global carbon market and may also pose a problem for Canadian firms that do business in the U.S.

The draft U.S. legislation ensures that U.S. industries aren’t put at a competitive disadvantage as a result of the new climate policy. A possible “border adjustment” program, for example, could levy charges on foreign manufacturers and importers to offset the carbon in U.S.-bound products.

To avoid such charges, Canada may be forced to bring its emission-reduction plans in closer alignment with the new U.S. policy. Oslo-based research firm Point Carbon notes that there are signals that the Canadian government will revise its carbon market plans to make its system more compatible with the planned U.S. model. Indeed, Environment Minister Jim Prentice has signalled Canada’s desire to align itself with the U.S. in reducing auto emissions.

In early April, Prentice announced new automotive emission standards, citing the U.S. commitment to fighting climate change as one of the reasons for tightening pollution standards for an industry that is already fighting for survival. “Some people may say that this is the worst possible time to introduce new automobile emission standards,” Prentice admitted. But, he argued, for the North American car industry to survive, it must get on with the job of building more fuel-efficient vehicles.

“And while the economy — and the automotive industry, in particular — have been hit hard by the current economic turmoil, there are other developments that tell us that now is the time to act boldly on standards that will lead to more energy-efficient vehicles,” Prentice said. “One of those developments is the new and strong emphasis on an environmental agenda developed by our neighbours south of the border.”

Prentice has stressed Canada’s willingness to follow the U.S. lead, saying, “As the U.S. administration develops more stringent standards in future years, we will keep pace.”

As with ongoing efforts to combat the financial crisis, the progress of U.S. policy is one of the most important factors in the climate-change fight — not only in terms of regulating emissions but also when it comes to investing in technologies designed to increase energy efficiency and reduce pollution.

Not surprising, the recession has affected the fledgling clean-technology industry. On one hand, tightening credit and rising risk aversion has constrained the supply of financing for unproven technologies. On the other, many governments’ efforts to stimulate economic growth include large investments in cleantech.

According to Merrill Lynch & Co. Inc. research, revenue for the cleantech industry globally was flat year-over-year in the fourth quarter of 2008, the average operating margin was less than 2%, venture-capital investments in the sector declined to US$1 billion in first quarter of 2009, vs US$1.7 billion a year ago, and initial public offerings essentially disappeared. As a result, Merrill reduced its weighting in cleantech, saying that it doesn’t expect the business will improve much before 2010.

But the flip side of the economic crisis is that governments are trying to make up for the falloff in demand by increasing their spending — and much of that is directed at infrastructure projects, particularly cleantech.

“There is admittedly a convincing logic in spending money on sustainable and efficient growth,” notes the UBS report. “Governments are looking to stimulate demand to avoid a deeper recession, while also ensuring that the economy has a strong foundation after the crisis passes. A ‘green recovery,’ with a specific focus on energy, is a cost-efficient way to achieve three objectives, namely: job creation, energy security and climate change mitigation.”

Toronto-based Clarus Securities Inc. ’s research report estimates that fiscal stimulus packages worldwide include US$450 billion for cleantech investment — a spending surge led by China, South Korea and the U.S. Much of this investment, which is in addition to existing subsidies and government incentives for alternative energy projects, will probably be deployed in the second half of 2009 and into 2010.

The UBS report notes that increased government spending on cleantech sends an important signal: “Governments are ready to take more responsibility to tackle climate change and provide a regulatory environment that supports sustained long-term investments in improved energy efficiency and the development of renewable energy capacity.” However, the report counsels, long-term success will require a global price for carbon (through either taxes or trading), tougher emission standards and a more stable policy environment.

So far, the impetus to fight climate change has survived the global financial crisis. What remains to be seen is whether decisive policy action will solve either problem. IE