Chandler: More Flexibility Needed for Effective Emissions Cap-and-Trade Policy

William Chandler, senior policy analyst for energy and climate at the Carnegie Endowment for International Peace, says that emissions-trading programs have achieved mixed results and should be readjusted.

September 13, 2007

To help readers better understand the nuances of foreign policy, CFR staff writers and Consulting Editor Bernard Gwertzman conduct in-depth interviews with a wide range of international experts, as well as newsmakers.

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Experts say that greenhouse-gas trading designed under the Kyoto Protocol was an important first step in reducing emissions increasingly linked to climate change. William Chandler, a senior policy analyst for energy and climate at the Carnegie Endowment for International Peace, says trading programs have achieved mixed results. Chandler argues that the United Nations should rethink how it implements its trading program to make it more effective. In the case of China, for instance, he says international loans are far more capable of achieving emissions reductions than Kyoto’s Clean Development Mechanism.

How has the Kyoto Protocol’s Clean Development Mechanism performed when compared to Europe’s emission trading system?

The flexible mechanisms under the UN free-market convention on climate change—also called the Kyoto mechanisms, the Clean Development Mechanism for developing countries and the program for transition economies—have achieved mixed results. In some cases they are resulting in real investment being made, particularly [in reducing] carbon dioxide from energy use. On the other hand it hasn’t been as effective or cost effective as many people had hoped. In any serious negotiated result, you should expect to find some form of flexible mechanism, some sort of emissions trading, because there are some parts of the economy where the market is really the most efficient. Finding ways of cutting emissions and trading greenhouse gases is the most effective way to get there.

What about voluntary trading programs, will they feature prominently in the next round of talks?

Voluntary trading is just that, voluntary, and so there is no strong incentive or requirement really to make the market work. I don’t expect it to have a big impact. You can see already that prices are lower in the voluntary markets than they are in the Kyoto market. That’s in part because people view them as not being as effective. Without a strong incentive to put money at risk, which a voluntary market [does not have], I don’t see it having the same result as a cap and trade system.

The Kyoto Protocol expires in 2012. How will the performance of these trading programs affect the next round of climate talks?

The Kyoto mechanisms are in place and mandatory for some countries from 2008 to 2012, and so given how long it takes for negotiations to be consummated, it’s certainty not too soon to start on negotiations. For the Clean Development Mechanism in particular to be a compelling result—a compelling solution to cost effective ways of cutting emissions—the United Nations needs to adjust the way it has implemented the program to date to make it more effective. Because, frankly, some of the measures used to determine whether credits can be awarded to buyers are not as well thought through as they should be and that’s partly a result of negotiations and partly a result of the way that the United Nations has decided to implement the program.

Could you talk a little about what the disparities are in some of these emissions-trading ideas?

It all boils down to the science, what is the result on the climate in the mechanism of “radiative forcing”—the amount of warming that actually occurs from putting a gas into the atmosphere. The basic notion of translating the effect of chlorofluorocarbons [CFCs] or methane or nitrous oxide into C02 equivalents is sound, it makes sense. What people have reacted to is that for some of the gases, like the CFCs, because the actual warming effect is on a molecule-per-molecule basis or on a weight basis thousands of time higher than it is for CO2, the rewards of buying emissions reductions and selling them [for] those gases has been very profitable for some companies.

Critics have argued that there are more cost-effective ways of getting those gases out of the atmosphere. Some experts say paying countries billions to reduce emissions for powerful greenhouse gases, such as trifluoromethane, could be accomplished more cheaply—for example, adopting a fund similar to the one created under the Montreal Protocol to compensate countries for phasing out ozone-depleting chemicals. In other words, you just require those gases to be reduced rather than paying people to reduce emissions of those kinds of gases. I am sympathetic to that argument. But we really need to come to grips with this question of what would have happened anyway without the purchase and sale of these credits [and] without the existence of the Clean Development Mechanism. The solutions imposed on markets—the oversight, the regulatory policies—had the effect in recent years of driving up the cost for producers of emissions reductions to achieve those reductions. The bureaucracy, the many consultants needed to approve a trade, the amount of review that’s involved, all those things increase the cost and the risks for developers for reducing emissions and they may in fact have a counterproductive result.

Where do you expect the conversation to go on the participation of large developing countries that are big emitters like China and India? Is it going to be business as usual as far as binding emissions targets where they are allowed to keep emitting? What about Russia? Do you think they are going to accept a new set of emissions caps?

Let me focus on China and then Russia. I actually frankly think there are barriers to investment in greenhouse-gas emissions in China which are bigger than the solution of offering credits for reducing emissions is going to be capable of solving. Ironically, despite the fact that China has so much money in the bank, if you will, the money for financing projects of this type is really difficult to obtain because of Chinese industrial policy on lending to major industries like the cement sector. The thing that has mattered more for reducing emissions in industry in China has been targeted policies like the International Finance Corporation’s loan guarantee programs, much more so I’d say than the Kyoto trading. Finding ways of reducing emissions is actually a bigger question in my mind than whether China takes on a cap or not.

That brings us to Russia. Russia could have a lot of emissions to sell under the Kyoto Protocol because the amount of emissions they were allowed to generate internally under the protocol through the year 2012 was benchmarked to 1990. Of course in 1990 that was before the Soviet economy collapsed and in fact reduced emissions 30 percent to 40 percent or so depending on the republic in the Soviet Union. Russia’s emissions are still essentially below that, so as a signatory to the Kyoto Protocol they can in fact sell credits under the Kyoto mechanisms. They haven’t effectively done so. They haven’t put into place the mechanisms to sell those credits. If they did so the price on the credits would come down substantially. But they haven’t expressed very much interest in doing so. The question really is if the science of the market is going to be efficient. In other words [if] the amount of caps imposed in countries is stringent enough [and] is going to generate enough interest to invest in reducing greenhouse-gas emissions.

What do you think that cap should be, or does it just depend based on the country?

Even though twenty years ago we were calling for action, we are still surprised to see how quickly the glaciers are melting and the ice cap in the Arctic is melting, so what does that mean? It probably means the scientific assessments, including the most recent one by the Intergovernmental Panel on Climate Change, have been more conservative than was warranted. So the problem is worse than we expected and therefore requires a more aggressive response than we anticipated having to make. That means a couple of things. It means not waiting till the end of the Kyoto period to determine what to do and how much emissions need to be reduced in each country; it means starting right away to find all the things that can cost effectively be done—and there are a lot of things—and then setting very ambitious targets, say 20 percent emissions reductions in the developed countries by 2020 to 2025; [it means] doing many of the U.S. states have agreed to do or have said they plan to do. In my state of Maryland, the governor there, [Martin] O’Malley, has announced he wants to reduce emissions in his state by 80 percent by 2050. Even though that sounds on the face of it very aggressive and unrealistic, it is in fact what is required if we are to avoid the more catastrophic effects of greenhouse emissions on climate change.