John Connor is CEO of the Climate Institute.

As John Howard put it, the period from 2005 to 2007 represented a 'perfect storm' for climate action. Domestically, bushfires, water shortages in capital cities and calls from leading businesses for long, loud and legal carbon pricing built pressure. This combined with international work of World Bank Chief Economist Nick Stern and Al Gore to help blow in bipartisan support for carbon markets and make climate change a top tier issue in the 2007 election.

2008-2010 witnessed far more choppy conditions. The global financial crisis, the now discredited 'Climate-gate' and the disappointments of the UNFCCC Copenhagen meeting combined in the US and Australia to help defeat bipartisan efforts for carbon markets. In both countries, much more than in Europe or UK, climate protagonists dove into the deep trenches of ideological and cultural divides.

Arguably however, those choppy conditions masked underlying shifts. Fragile but important trends in carbon competitiveness and climate co-operation are now emerging.

Out of the disappointments of the 2009 Copenhagen conference came an Accord which has gradually, if delicately, been built on. Subsequent UN meetings agreed to avoid two degrees warming above pre-industrial levels (warming of over one degree is locked in from historic emissions) and to a single global treaty by 2015 with emission commitments from all major emitters. Current commitments from countries don't match that goal but it is now embedded as a reference point in international diplomacy.

The old 'treaty before action' global climate diplomacy is also being replaced by an 'action and agreement' approach. Domestic carbon laws are being implemented even as the final shape of an international treaty is in the process of being negotiated. These actions are critical confidence building measures as countries continue to make practical progress on detailed international agreement design.

The science has deepened and extended to more clearly link the 40% increase in carbon dioxide since pre-industrial times to unprecedented extreme weather events being experienced around the world. Carbon dioxide levels are now likely to be their highest in the last 15 million years. Climate change is not just warmer weather; it is wilder and more intense weather.

Last week John Kerry said 'climate change is coming back in a sense as a serious international issue because people are experiencing it firsthand. The science is screaming at us'. Business, the World Bank and the IMF are becoming increasingly urgent about the spiraling economic costs of inaction.

From the GFC come lessons that our financial systems are very poorly prepared for systemic risks. Key investor stakeholders are examining the 'sub-clime' risks of potentially 'unburnable carbon' assets held on global balance sheets should social, political or technological developments propel us toward that two degree target. The UK Central Bank, the International Energy Agency, HSBC, Standard & Poors and others have examined or are examining the financial impacts of stranding the two-thirds to 80% of fossil fuel reserves and associated infrastructure.

The flipside is potentially massive new markets in low carbon solutions. Combined with benefits in energy security, air pollution and resource efficiency, carbon action is building constituencies focused on sustainable prosperity. Even under current conditions, as UK Prime Minister David Cameron noted this year, the global low-carbon sector will be worth $4 trillion by 2015. Carbon competitiveness and carbon productivity are increasingly vital new terms in the global economy.

For several years the Climate Institute has been tracking the carbon competitiveness of G20 countries using London economics firm Vivid Economics. This index uses 19 indicators across all G20 countries and focuses on which countries are best placed for prosperity in a carbon constrained global economy. The latest update of that index, now prepared in partnership with global industrial giant GE, covers the period from 2008-2010 with data back to 1995. It reveals some profound changes.

The key finding is that the centre of gravity of carbon competitiveness has shifted from the US and more particularly Europe towards Asia.  China has leapt from 7th to 3rd, joining South Korea and Japan in the top 5 along with France and the UK. The most dramatic decline in performance is from the US, which is now 11th down from 8th. This is mainly due to lower public equity investment in clean energy, shrinking high-tech exports and a surge in reliance on emission-intensive air freight.

With its carbon intensive energy and export sectors, Australia is 17th but has, for the first time, improved its absolute score between 2008 and 2010. This is a fragile reversal driven by a number of factors along with relative good economic health, including:

  • Increased investment in infrastructure and to a lesser extent education.
  • A slight increase in energy efficiency in the transport sector.
  • An unusual but likely short-lived drop in the value of natural resources as a proportion of national income.

The update is from 2008-2010 because it takes time for all the data to become publicly available. However, information since that time indicates most of the trends in this data set will continue through 2011-2013.

China has continued to increase its clean energy investment and made explicit its desire to be a leader in the low carbon global economy. Low carbon sectors are targeted for growth in the 12th Five Year Plan. Drawing from experience in the oft maligned Kyoto Protocol and its Clean Development Mechanism, China is establishing pilot emissions trading schemes and has a clear road map to a national carbon market in 2015. Other countries from South Korea to South Africa are also focusing on low carbon economic growth and implementing or planning to implement carbon markets or prices.

The US may see a boost, with California's carbon market, post-GFC public funding of clean energy and stronger measures introduced and mooted by President Obama.

Should they remain, Australia's carbon laws and the still bipartisan 41,000 GWh large scale renewable energy target (RET) provide a strong platform for boosting Australia's performance, particularly from 2014-2016.

That period, 2014-2016, will be critical and perhaps just as surprising as the years since 2005 have been. Technology costs for clean energy and low carbon alternatives have plummeted and would be competitive if there was a true level playing field with high carbon alternatives. Wind is already cheaper than newly built coal, and solar PV costs have plummeted.

The 2015 target for China's national carbon market is also the timeline for the new UN climate agreement. Institutional investors with long term responsibilities are focused on that date as a milestone towards long term sustainability. Driven by better understanding of risks, clearer insights into fiduciary duties and by initiatives such as the Asset Owners Disclosure Project, some investors are slowly beginning to improve their own transparency and investments in low carbon solutions.

These trends have important implications for Australia's economy, politics and international diplomacy. They may yet emerge to supplant the current toxic and trench bound debate.

Photo by Flickr user Dietmar Temps