Introduction: The Corporate Program will be with Senior Fellow, Dr. Victor. Last Friday in Bonn, senior diplomats concluded a high level meeting to work through the long list of issues that must be resolved before they can implement the 1997 Kyoto Protocal on Global Warming. Senior Fellow, David Victor was an observer at the Bonn meetings. In the conference call he will offer his prospective on what has been accomplished so far , what governments are trying to achieve under the Kyoto Protocol, and the chances of success. Dr. Victor is writing a book on technology, international law and global warming. The session will start with a short presentation by Dr. Victor followed by question and answer period. At that time instructions will be given as to the procedure to follow if you would like to ask a question. I now would like to turn the conference over to Dr. Victor. Sir, you may begin.
David Victor: In Kyoto, it was possible to agree to these targets because they deferred on all the decisions on whether and how these flexibility measures would operate. The issue right now, which was at the top of the agenda in Bonn, is how these flexibility measures would be designed, which kinds of activities would get credits, would it be long term. They also tried to work out a compliance mechanism which would deal with obligations with what would happen to it. These things are very, very difficult to settle. The fact that they are on the agenda and being negotiated seriously is a sign that that the Kyoto Protocol, on global warming, is being taken seriously as an issue.
Their goal is to finish designing all of these mechanisms by the end of next year. They are going to have another meeting in the Hague next year. They won't meet that goal, but the game, right now, is to try and get as much progress as possible so that the momentum is being built and eventually a year after, is settled. Let me just note that meeting next year is scheduled to begin a few days after the United States Presidential election which will result in a sort of odd situation that U.S. diplomats are going to be negotiating the U.S. position possibly without knowing who their boss is going to be. That will potentially result in a lot of strange behavior.
The second point that I want to make concerns what is going on at the national level. Very briefly, there is an enormous amount of activity and talk, some action, especially by leading firms and a few government organizations. For example: Ontario Power, a Canadian power company, pledged to stabilize it's emissions to near the 2000 levels. The firm is implementing various measures to improve its energy efficiencies and also buying credit from other firms, including firms in the United States.
But if you look broadly, I think it's actually surprising how little activity is underway given the magnitude of change in the economy that the Kyoto Protocol would require. Take the US for example; the U.S. emissions are probably going to rise about 25-30 per cent above 1990 levels, unless there is some action taken toward emissions. The obligation of Kyoto Protocol is to reduce its emission by 7 percent between the years 2008 and 2012.
So altogether the U.S. is going to have to cut its emissions by about a third over the next decade. That is extremely difficult to do because of the turnover of the capital stock that uses and supplies energy is very , very long. Canada is in the same situation; the European Union is in roughly the same situation.
There are a lot of governments talking about plans for controlling emissions, but very few of these plans have actually run the gauntlet of efforts to try and put them into practice.
One example is the United Kingdom, as it proposed attacks on emissions of greenhouse gases, and when it actually tried to put that pact into place it found huge oppositions, from truck drivers to rural motorists, because that would have increased the price of energy. The UK government had to cut its tax in half and it had to give exceptions for energy intensive industry. That affects its pact even if it put that smaller tax at a much lower level that it would have been.
My basic assessment is that I don't think the Kyoto Protocol is going to enter into force because when governments are looking at whether they comply they are going to find that it's very, very difficult to do that. That observation should be clear in the next few years. Then what is going to happen is there will be some kind of effort to stretch out the time table issue in the Protocol.
Let me just, to conclude here, talk a little bit on the third topic I want to raise, which is the effect of all of this on the firms and on the economy. It's a very difficult question to answer. A lot of economic models suggest that in the United States the economic cost of the Kyoto Protocol on the order of about one percent of the US economic output, would be about one percent of the economic output between the years 2008 and 2012. That would mean the annual cost of on the order of about 100 billion dollars. Now if the Kyoto Protocol targets were to be stretched out over a longer period of time, with long term targets set that would make it a lot cheaper because of what I raised earlier about the turnover of the capital. A lot of economic analysis is now showing that if you give long term incentive to firms, the new technology will lower the strain and give into place and with the turnover of the capital there will be a lot cheaper.
I have one question from one of the participants in the call about who might be hurt and who might benefit, and I'll close with that. Who is hurt by this? Who is hurt, are especially the users of high carbon fuel and in particular, coal. Per unit of energy released, coal has the highest emissions of carbon dioxide, which is the main cause of the greenhouse effect. So with the Kyoto Protocol you could have a very severe effect on coal, and that would hit economies such as the US potentially hard-about half of the U.S. electricity comes from coal. Let me just point out that the market is already hitting coal pretty hard. So I think that the market forces are already moving in this direction. The Kyoto Protocol might accelerate that, and that being true not only in the United States but also in other countries.
China, for example is now making a better effort to implement its pollution control laws. That is going to be bad for coal because all coal power plants are the main source of urban air pollution in China. China is looking for natural gas. Other countries are doing the same because natural gas is cleaner fuel. It emits about half as much carbon dioxide per unit of energy and it's cleaner in all kinds of other ways. Local air pollution from natural gas is lower.
Regarding oil firms and oil exporters, they may also be quite hard hit. Oil exporters, I think, will also be affected. I'm not sure about the oil multinational firms because they in general terms are already diversifying and more and more of them are investing in natural gas and even zero carbon fuels, like hydrogen. I think they understand that the market is already moving in that direction and they want to be energy companies and oil companies.
My last comment concerns who might benefit. This is difficult to pinpoint the chief beneficiaries are going to be the suppliers of the next generation of clean fuels and appliances that use those fuels. In the short term that is going to be natural gas and already natural gas is the fuel of choice, most effective is the new power plant. People worried about carbon dioxide and global warming is going to reinforce that trend already.
In the long run the action may be with fuel cells. The energy companies and car companies are already making fuel cells. The fuel cells could be a way to completely eliminate carbon from the economy and move the economy in the direction of one that uses hydrogen as it's energy source, where hydrogen is produced maybe by natural gas and nuclear power, maybe by solar power. That is still murky but that is pretty clear that the fuel cells, the cost of fuel cells has gone up a lot in the last decade and technology is very much on the upside. Let me close my opening comments with that and then we'll put it out to just questions.
First question from Alfred C. DeCrane of Texaco: Thank you very much for your comments. It's extremely helpful to be refreshed on some aspects of it and be brought up to speed. I would appreciate it very much if you could amplify the dichotomy that I detected in your remarks. That is that they are going to be meeting next year in November to try to push forward to try to set the goals and develop ways of implementing the goals through the training mechanisms and so on and the compliance approaches and the like. Why do you say they won't meet that target? You later on come back and say that you don't feel like the Kyoto standards will go into effect. When is your realism going to occupy a place on the forum so that a more realistic set of meetings that look at the reality is held and people stop making this into such a holy war?
Victor: Well I think there has been a huge investment in the Kyoto Protocol right now, and it's politically very, very costly for any government to walk away from that. The U.S. government, for example, is locked in right now. The Vice President has made this a major issue, but he has quieted on it in the last months-probably because disastrous outcome is becoming clearer. This is a potential liability in the general election, but I could never expect that he or the administration would walk away from it even if they knew that there was a train wreck on the near horizon. I think that the process has to go through another couple of years of efforts to really try to work out these mechanisms and to learn how difficult it's going to be to make the system actually work.
Let me just give one example: these clean development mechanism, which in principle is a really, really good idea because it allows the U.S. firms, for example, to invest in Tanzania, in a project that would capture waste gases from sewage facilities in Tanzania and reduce the emissions of greenhouse gases into the atmosphere. The Tanzanians get new technology and global warming is reduced. The U.S. company that makes that investment should get some kind of credit for it. The problem is how do you know whether or not that investment would have happened anyway? How do you do the counter factual analysis in order to determine how much credit would be issued? There has been very little effort to really grapple with those questions. These emission credits could be worth billions of dollars, so you need some serious rules. I think we are still very high on the learning curve with these mechanisms. I think the savvy diplomats know how difficult this is, but they also know that there is still no alternative.
So it seems to me that the constructive way to view what is going on here is that there are a lot of institutions, rules and procedures for the Kyoto Protocol that will turn out to be highly relevant, even though the Protocol itself is unlikely to actually take effect. The real question that we should be focused on is what can and should be salvaged in the effort, which will begin in a few years, to make the "son of Kyoto?" That debate can't be had openly in this country until after the U.S. presidential election-the issue is too politicized now. I would expect that sometime early in year 2001, that's going to be clear here in the United States because it is going to be mathematically impossible for the U.S. to comply with the targets given how high our emissions could have been and how deep the cuts would be. Does that answer your question?
DeCrane: Yes, unfortunately it does. It is impossible in the political climate that we've created to really get realistic and to try to approach if from a realistic point of view. It's cynical, and I don't accuse you of being a cynic. As a nation, we have this attitude we don't want to hear the facts and yet to try to find a real solution, or a logical solution one that makes most sense. Hopefully the work that you're doing and coming from the book that you're working on technology and so on, maybe you'll get some information out that people can point to and take the politician off the hook, so to speak. Because they really created, I think, a very different climate. No one can tell the truth, it's like "The Emperor's New Clothes," we can't really talk about the fact that these targets are something that will cripple this country, are totally unrealistic and try to deal with it in a realistic point of view. So that is kind of my speech and I'll set aside.
Victor: I suspect, just a brief reply, I suspect that if we view this, if we fast forward twenty years into the future and look back, that the net effect of all this right now, the economic consequences, are pretty low. What we need to do with the country and especially all the firms that have a stake here is to keep our eyes on the ball and to make sure that we protect those parts of Kyoto that are really important for any future scheme. Examples include the clean development mechanism-it must exist to engage the developing countries. We need to be sure that trial experiences are well documented and that we develop good rules and so on so that system is sort of ready to go when we come up with a more sensible scheme in the time down the road. The next question, I guess.
Our next question comes from Ms. Joanna Ritcey-Donohue of White & Case: Hi, thanks for being with us this morning. I thought you maybe you could elaborate a little bit more on the specifics of the Bonn meeting, in terms of what you felt were the priorities? Perhaps the biggest signs of contention, outside the kind of general things you laid out very well. Are there any things in particular that stick out in your mind from the meeting in particular?
Victor: Well, I can say that having been to a lot of these negations what's stuck out to me was actually how productive the meeting was and how many balls they advanced down the court. I think that's mostly because they didn't have to come to any decisions. They basically forwarded everything to next year's meeting and then next years meeting they are going to forward it to the next meeting in the future.
Regarding priorities, the list of priorities that they have is pretty long. It includes some fifty-three items-if I remember the number correctly. That list is so long-indeed, it's not even a list of priorities. The key things that I think everybody knows have to be addressed are: Rules for these flexibility's mechanism, that's the first thing. The second is compliance mechanisms. Let me just say a couple of words on each of those.
These flexibility mechanisms make such a large difference in the cost that a country, the United States, for example, would never be able to comply. Not I think, would even this administration dream of sending this treaty to the senate for ratification, or an efficient mechanism or too giving mission trading credit to developing countries. And more an and more countries are beginning to realize that's true. Though these mechanisms need to be developed and there is an enormous amount of work underway on that.
The second is this compliance mechanism. Going back to 1992, when the parent agreement of the Kyoto Protocol was established, there has been periodic discussion abut what would you do if a country didn't comply. But those discussions kept on being put in the background. Now it's front and center, and the reason is that if this emissions trading system goes forward then a serious compliance mechanism will be needed. The emissions permits worth two or three trillion dollars were allocated and then there is going to be a new monetary system.
The Kyoto agreement says if there is a compliance mechanism that has binding consequences-it is unclear what "binding consequences" means, but it's something like automatic and severe penalties-then the mechanism must be added to the Protocol in the form of a legal amendment. In other words, if there is a serious compliance mechanism then the Protocol must be reopened in order to put that compliance mechanism into place. As more countries realize this and also realize their many grievances against the Protocol then calls to reopen the Protocol will multiply. The next agreement might still be called the Kyoto Protocol but it will be a different agreement and one renegotiated with compliance mechanisms. Those I think are the two, the two top priorities.
There is one other issue let me just mention in passing, that is what is called "land use and forestry." The Kyoto Protocol doesn't just regulate emissions of carbon dioxide from burning fossil fuels, which is most of the cause of global warming, about 75 % of global warming. But it also regulates other gases and includes sinks or activities that suck carbon dioxide out of the atmosphere. For example: forests are growing in about all industrialized counties and these are net sinks for carbon dioxide. The question is do you give countries credit for that kind of activity? It's very difficult to monitor these sinks, it's difficult to know which kind of these sinks would get credit, which kinds wouldn't.
There is a very intense technical debate underway on that could have a very significant effect for the Protocol because by some peoples' accounting if you include sinks, the cost of complying with the he Kyoto Protocol could go down by say a quarter. But that's a big deal and an awful lot of carbon dioxide goes under these principally into forests. Does that answer your question?
Ritcey-Donohue: Yes, it's very helpful. One last bit in terms of the conference. Is there anything any of these drafts that came out that are available to the public and where could be get anything that is available to the public in terms of draft propositions, proposals, etc.?
Victor: Well there is on the website of the Climate Change Secretariat, which is www.unfccc.de. Go to that website then you'll be able to look at the documents. The document that is most important to look at is the final report from the conference in Bonn, which is conf. 5. You can find that these reports, I think I'm not looking at it right now, that report comes in two segments. One is the general report which is a lot of mostly beurocratic and incredibly boring stuff.
Then there is an appendix to that report. An Addendum ("add 1"). Which has all the decisions. The decisions are worth looking at if you want to follow the issues in some detail. Most of those decisions reveal that not much was resolved-they kicked the can down the street.
If there is an issue of particular interest you'll find at that same website documents the negotiating text where those decisions that were of more substantive. All are on the same website. If you have any problems getting that or would like more help going through those document just give me a call on the phone, I would be happy to..
Ritcey-Donohue: Thank you so much.
Victor: Okay, next question.
If we don't have any more questions, than we should adjourn. Does anyone have any other questions?
Okay, well excellent. I hope that was helpful.