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Kyoto Shell Game

Author: David G. Victor, Adjunct Senior Fellow for Science and Technology
May 26, 1999
The Washington Post

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The two weeks of marathon negotiations just concluded in Buenos Aires did little to slow global warming. Delegates who met there adopted a road map for implementing last year's Kyoto Protocol, but the road leads nowhere, because the protocol will never work.

The Kyoto Protocol sets targets and timetables for all 38 industrialized countries to regulate emissions of six gases that cause global warming. If the United States ratifies the pact, for example, it must cut emissions 7 percent below 1990 levels by the years 2008 to 2012. Similar cuts are required in Western Europe and Japan. Russia and Ukraine must freeze emissions at 1990 levels.

In practice, it doesn't matter where on earth the reductions actually occur. Once the gases are emitted, air currents carry them worldwide. Thus the Kyoto Protocol also envisions a new currency -- greenhouse gas emission permits -- that might be traded like pork bellies or greenbacks.

The logic for emission trading is compelling. Regulating emissions in relatively efficient Western economies could be difficult and costly. But elsewhere, the fruits hang low, easy to pick. Projects to refurbish inefficient power plants in Poland, for example, have cut greenhouse gas emissions at one-tenth the cost in the West. Trading would let investors earn valuable emission permits while the Polish hosts get new technology.

Without trading, the United States alone could spend more than $100 billion to meet its Kyoto target, an amount comparable to the annual American spending on all federal clean-air and clean-water programs. With trading, the cost is lower by half or more.

Politically, however, the Kyoto trading system will fail, because it is a shell game. Most permits are likely to be sold by Russia and Ukraine. In these countries, combustion of fossil fuels, the main source of greenhouse gas emissions, has fallen steadily as the economies collapsed. Their emissions in 2008 to 2012 will be far below the Kyoto targets.

But declining living standards are not a sustainable way to slow global warming. When the economies rebound, so will emissions. Yet, by selling their excess permits in the interim, Russia and Ukraine might reap a $100 billion windfall while doing nothing to limit future emissions.

It's doubtful the Senate would ratify a $100 billion transfer that buys nothing. And absent America, no other major country will implement Kyoto's costly commitments.

Most disturbing is that Kyoto's enemies have attacked the protocol's strongest element. Automobile manufacturers, mining conglomerates and other carbon-spewing industrialists are bankrolling a venomous campaign to kill the Kyoto deal because it exempts developing countries. Last year the Senate resolved 95 to 0 to reject any pact that doesn't include meaningful participating by developing countries.

In response, the Clinton administration is wasting scarce political capital pressuring developing countries to make vague and irrelevant promises to regulate greenhouse emissions. Argentina was the first to cave; last week it announced it would pledge to slow growth in greenhouse gas emissions.

A more effective way to bring in developing countries is the protocol's "Clean Development Mechanism." Like emission trading, the mechanism allows industrialized countries to earn credits by investing in projects that lower the effluent from the developing world. Over time, developing countries can be urged to shoulder a rising share of the cost.

Swayed by special interests that want to block any global warming action, America's government has missed the point. It is only proper that developing countries get a free ride for now. The rich industrialized nations put this issue on the agenda, and they must lead. Per capita, the United States still vents greenhouse gases at 10 times the rate of China.

Thus, when the Kyoto pact is rejected in the Senate, the wrong lessons will be learned. Opponents of emission trading -- who fear it is a loophole for buying compliance rather than cutting emissions -- will claim that trading was unworkable. They will be wrong. A sensible trading system with fair permit allocations was never attempted.

Others will attribute Kyoto's failure to the industrialists' campaign. But that will wrongly result in even more pressure on developing countries to regulate emissions, which will deepen conflict between North and South and deadlock progress.

The first step out of this cul-de-sac is to recognize that the Kyoto Protocol, as it stands, is politically dead on arrival -- and should be. Russia and other reluctant countries must be compensated if we want them to participate in slowing global warming, but Kyoto's $100 billion is extreme. The only way to halt bogus permit trading is to reallocate the permits, and that requires renegotiating the whole Kyoto deal.

Second, full-blown emission trading should be attempted only when the necessary institutions are tested and in place. Particularly lacking are systems for monitoring and enforcement.

Creating a viable emission trading system is no less difficult than designing monetary union. Under the best conditions, a decade will be needed. The Buenos Aires road map allows only two years. That rapid timetable will yield a half-baked system that destroys the credibility of the trading concept for the future, when tighter and costlier regulations might be adopted and the benefits of trading would be greater.

Finally, future negotiations must focus on this key fact: Only new technology can solve the global warming problem. Technological change -- especially radical change, such as toward an economy that runs on hydrogen fuels and emits no greenhouse gases -- can't be planned according to Kyoto-like short-term binding emission targets. More effective agreements must reward long-term investment and be focused on policies that spawn new technologies, not just short-term emission trends.

America can lead the way by expanding the Clinton administration's plans for technological research and development. America also can organize credit guarantees or subsidies for the Clean Development Mechanism, which will preserve the incentive for firms to apply new technologies in the developing countries when the rest of the Kyoto pact dies.

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