Climate talks must heed business, set binding caps

A bus with a picture promoting the use of biodiesel, transport delegates attending the U.N. Climate Change Conference COP16 in Cancun December 5, 2010.

CANCUN, Mexico (Reuters) - U.N. climate talks must heed investor demands for binding cuts in greenhouse gases to cement the financial returns that will support low-carbon energy, said the co-head of green investment at a $45 billion British pension fund.

Two weeks of international talks in the Mexican beach resort of Cancun are unlikely to produce a firm decision on emissions targets for developed countries after 2012, when the present round of the Kyoto Protocol ends.

One way governments could implement such targets is through carbon taxes or cap and trade schemes, which impose a cost on carbon emissions from burning fossil fuels. Investors say that would tilt the balance in favor of clean energy.

"Having an effective global cost of carbon will drive these markets," said David Russell, co-head of responsible investment at Britain's Universities Superannuation Scheme (USS).

Investors are hoping for progress at the next meeting in South Africa at the end of 2011 and complain that governments pay insufficient attention to them in the U.N. process.

"It's about setting a binding target, which won't happen at this conference, hopefully at the next, with a continuation of the Kyoto process which includes cap and trade globally. It isn't going to happen in the short term," Russell told Reuters at a business event near the talks that run through December 10.

A European Union cap and trade scheme is the hub of carbon trading globally but prospects for a U.S. market have dimmed significantly with a swing to the Republicans in November's congressional elections.

The U.N. climate talks barely engage business directly, convening government delegates from nearly 200 countries. Business and other observer groups meet on the fringes.

"The current process is set up so that it's a policymaker to policymaker discussion with very little input either from the business or investment community," said Russell.

"As providers of capital we have our own requirements on what we need from policy. It's critical we get those points across, and that we are heard."

Business leaders and investors last month delivered their fourth communique in three years ahead of the Cancun talks.

The Institutional Investors Group on Climate Change, whose members manage about 5 trillion euros ($6.63 billion) in assets, and other investor groups have delivered similar statements calling for a global climate deal at previous U.N. conferences.

Russell, whose USS pension fund devotes nearly 1 percent of its 29 billion pounds in assets to low-carbon technologies including renewable energy, said governments must be more direct about supporting clean technologies.

"If allocations are ever to get to the levels that we hear are required, the incentives need to be more explicit, the policy stability needs to be there," he said. "And, for investment in emerging markets, some of the risk has to be mitigated."

(Reporting by Gerard Wynn; Editing by John O'Callaghan)